Real Estate Market Commentary - June 2013
by Peter L. Zachary, MAI, MRICS
The New York Times had an encouraging article on the front page of the May 29, 2013 issue. It said, “Home Prices Rise, Putting Country In a Buying Mood – Biggest Gain In 7 Years – Markets Are Heartened by Strong Consumer Indicators”. It continues: “Americans are in a buying mood, thanks largely to the housing recovery. The latest sign emerged Tuesday as the Standard & Poor’s Case-Shiller home price index posted the biggest gains in seven years. Housing prices rose in every one of the 20 cities tracked, continuing a trend that began three months ago. Similar strength has appeared in new and existing home sales and in building permits, as rising home prices are encouraging construction firms to accelerate building and hiring. The broad-based housing improvements appear to be buoying consumer confidence and spending, countering fears earlier this year that many consumers would pull back in response to government austerity measures.
In January, the two-year-old payroll tax holiday ended, stripping about $700 from the average household’s annual income, according to the nonpartisan Tax Policy Center. Federal government spending cuts that started in March are also serving as a drag on economic growth, economists say. And some recent data on other parts of the economy, like manufacturing and exports, have also disappointed. Yet consumer confidence reached a five-year high in May, according to a Conference Board report also released on Tuesday, with big improvements in Americans’ views about both the current economy and future economic conditions. Consumer spending has also been strikingly resilient so far this year, given the tax hikes.
“Five years after the start of the financial crisis in earnest, and four years and a week’s time from the beginning of the economic recovery, we’re finally starting to get
more of a pickup,” said John Ryding, chief economist at RDQ Economics. “It’s been a very drawn-out process, but you have to remember what we’ve been digging our way
out of.” The Case-Shiller 20-city composite index rose 10.9 percent over the last year, the biggest increase since April 2006. Several cities – Charlotte, N.C.; Los Angeles;
Portland, Ore.; Seattle; and Tampa, Fla. – had their largest month-over-month gains in more than seven years. Stock markets rose on the news, with the S. & P. 500-stock index up 10.46, or 0.63 percent, at 1,660.06 and the Dow up 106.29, or 0.69 percent, at 15,409.39 at the close on Tuesday. The Nasdaq was up 29.74, or 0.86 percent, at 3,488.89. The 10-year Treasury yield surged to 2.17 percent, it’s highest level in over a year.
The double-digit housing price increase is being driven by a confluence of factors. For one, employers have added jobs for 31 straight months, so families are willing to start buying again. At the same time, the inventory of homes available on the market remains unusually low, thanks to little new building in the last few years and the large number of homeowners who are still underwater on their mortgages, making them reluctant to sell at a cash loss.
Also pushing up home price measures are the declines in distressed sales – that is, foreclosures and short sales. Homes in foreclosure typically sell at bargain-basement
prices, which depresses the overall price levels reported. Finally, home prices in many areas experienced severe, unsustainable plunges during the recession. The recent increases are coming off a very low base, so the growth looks strong even if the level of prices is still well below the peaks of the housing boom in the middle of the last decade.
Economists generally expect home prices to continue rising, particularly as the economy improves and more young people move out of their parents’ homes and into homes of their own. And many dismiss concerns of a potential bubble, not only because household formation is growing but also because housing prices remain well below their highs. Even after 10 straight months of year-over-year gains, the 20-city Case-Shiller composite price index is 28 percent below its previous peak in July 2006, which is probably a good thing.
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