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The housing industry will continue to improve gradually over the next year, following three years of stagnation, with the recovery fueled primarily by strong activity in individual markets scattered across the country, according to economists speaking at the National Association of Real Estate Editors conference.
The recovery could be characterized by either a home price spike or an increase in supply, said National Association of Realtors Chief Economist Lawrence Yun at the June event. Given the increase in buyer demand and the declining inventory of homes, Yun said he “would not be surprised” to see home prices in some markets rise by 10 percent over the next year if housing starts do not rise substantially.
“Demand is up, sales are up, and the supply is falling,” Yun said, all of which points to a “brighter” year.
A significant jump in single-family starts is highly unlikely, said David Crowe, chief economist for the National Association of Home Builders. Currently NAHB expects single-family starts to reach about 500,000 this year —a third of what is needed to meet expected demand—and rise to nearly 670,000 next year. A larger increase is not likely because of the difficulty home builders are having obtaining financing and the lack of buildable land, he noted.
Single family starts have also been affected by a shift in the numbers of homeowners versus renters, Crowe pointed out. Since 2007, new household formations have consisted of far more renters than owners, due to young people choosing to rent or being unable to purchase and former owners who lost their homes to foreclosure. These factors have caused an acceleration in multifamily starts that is likely to catch up with demand within two to three years—far quicker than that for single family homes, Crowe noted.
Stan Humphries, chief economist for Zillow, said the housing market’s path is being affected by three factors: enormous price variations between and within individual markets; negative equity, which in some cases is causing unexpected price spikes; and the dynamics of the rental market. In terms of price variations, he pointed to Zillow’s March 2012-March 2013 forecast, which shows prices in Phoenix rising by 6.5 percent but falling in Atlanta by 4.1 percent. In addition, prices are rising dramatically in Miami, but declining in Chicago. “This is an uneven recovery with lots of mixed signals,” Humphries said.
While negative equity continues to have a significant impact on markets across the country, it has not had the expected effect of depressing prices in the hardest hit areas, he said. To the contrary, areas in which homeowners have lost the most equity are experiencing a severe shortage of homes for sale, since many owners are unable to sell their homes, Humphries explained. As a result, prices have jumped for homes that are available for sale in those markets, diminishing the equity loss and helping market conditions to improve, he said.
In terms of rental dynamics, the frothy market for apartments is likely headed toward a point—sooner rather than later—at which it will be less expensive to purchase than to rent, Humphries predicted. “The next bubble could be rental,” he said. With home values stabilizing and rents increasing in many markets, “this could lead to the smart money buying homes again.”