May212013

Corelogic: home price appreciation to wane in 2013

Despite speculators hopes to the contrary, home price appreciation is expected to slow down in 2013 according to a new forecast from Corelogic. So far the rapid increase in prices is due to a small uptick in demand, entirely from investors, and a dramatic decrease in MLS inventory. Both of these factors are likely to change in ways that limit future price increases.

In the short term, prices of any asset are determined by fluctuations in the balance between supply and demand. The manipulation of the housing market by lenders is taking advantage of this phenomenon by restricting supply and forcing the demand from buyers to be concentrated on fewer properties thus bidding up their value. This can only continue as long as supply can be controlled and restricted. In a normal market supply is controlled by millions of individual sellers operating without a collective will. In our current market, millions of sellers are unable or unwilling to sell due to circumstances related to their mortgages. For various reasons, loanowners are in no hurry to list and sell their houses. This leaves the banks in charge, and they are intent on restricting inventory to drive up prices.

The short-term uptick in demand is being driven by investors. We know from the oft-repeated chart on new mortgage originations that owner occupants are not big participants in the current housing rally. Some of the investors are speculators, but most of them are hedge funds buying for cashflow. Investors focused on cash returns will only pay so much, and when prices push beyond what they are willing to pay, they stop buying. Corelogic anticipates this threshold price will be reached in many markets in 2013 where hedge funds are currently active.

In the long term, house prices are driven by wage growth and household formation. As I pointed out last week in Can a housing market rally by sustained with fewer homeowners?, wage growth and household formation are very weak. The banks are praying that their short-term manipulations can carry them through until the long-term factors favor continued price increases. It may or may not work out that way.

Housing Bubble Unlikely, Home Price Appreciation Should Slow – CoreLogic

by Jann Swanson — May 16 2013, 11:10AM

CoreLogic said today that home prices are projected to increase 3.9 percent on an annualized basis between the fourth quarter of 2012 and the same quarter in 2017.  However, a new housing bubble is not likely as market dynamics shift for both supply and demand.  Prices rose 7.3 percent in 2012.

The CoreLogic Case-Shiller Index report notes that the increase in 2012 was the strongest rate of appreciation in nearly seven years and projected that prices will continue to improve in 2013 and beyond in the more than 380 U.S. markets it tracks.  The company’s current analysis says that, “Cities at epicenter of housing bubble/crash are clocking highest rate of appreciation, largely driven by investor demand.”

“Home prices were up in seven out of every 10 metro areas in 2012.  By comparison, in 2011 prices appreciated in fewer than one-in-five markets,” said Dr. David Stiff, chief economist for CoreLogic Case-Shiller. “We expect strong buying activity this spring will lead to stabilization of home prices in most lagging markets, resulting in rising home prices in nearly every metro area by the end of 2013.”

I think the markets of the Northeast where foreclosure processing is increasing will see continued weakness. The bubble was not allowed to deflate through foreclosure there, and as a result, millions of squatters are getting free housing until lenders get around to booting them out.

Some of the cities that were hit the hardest by the housing crash and resulting foreclosure epidemic are also recovering the fastest.  Phoenix saw a year over year price gain of 24 percent, Miami 14 percent, and Las Vegas 13 percent. Dr. Stiff observed that demand in Phoenix is being driven primarily by investors. As prices rise, the profitability of investment properties will erode, dragging down investor demand.

Some areas which have lagged in their recovery saw price declines slow.  These included Long Island, (-4 percent), Virginia Beach, Virginia (-2 percent), and Philadelphia (-1 percent).

CoreLogic said that while the data point to continuing price appreciation, the overall national rate of home price increases is projected to decelerate in 2013 from 2012 levels. The CoreLogic Case-Shiller Indexes project a 2.5 percent home price increase in 2013, as the market dynamic shifts again in bubble/crash metro areas. While homes in these markets are still significantly undervalued, the strong investor demand for foreclosed properties, record levels of housing affordability and other demand factors that have driven recent double-digit price gains are unlikely to persist throughout the year.

Anecdotal reports of investor demand will persist much longer than the actual demand from cashflow investors is really there. Once the market starts to have momentum, the foolish amateurs enter the game, and coffee shop discussions of these blowhards will drown out everything else. As cashflow investor demand weakens, owner occupants will need to step up to replace this lost demand. With prices 20% to 30% higher in some of these markets, and with continuing weakness in the economy, this new demand may not materialize, and price appreciation may slow significantly.

Price appreciation is also expected to contribute to an increased supply of available homes as owners who have been locked into their current homes due to negative equity or were just unwilling to sell at existing prices begin to list their homes for sale.  This will tend to curtail the portion of price increases that have been fed by unmet demand.

The appearance of this new supply is a wildcard. It may or may not appear. As I pointed out last weak, just getting back above water is not enough to prompt owners to list. Until the cost of ownership for these borrowers goes up, which it will when the temporary conditions of their loan modifications expire, there is nothing pushing these people to sell. New supply will come back in a trice, not an avalanche.

Dr. Stiff tamped down concerns of another housing bubble.”Even if double-digit price appreciation were to continue in the former bubble metro areas, there is no reason to believe that new home price bubbles are forming. That’s because single-family homes in these markets are still very affordable, even after last year’s large price gains. Consider Phoenix, where home prices rose 27 percent since the market hit bottom in 2011, making it the strongest residential real estate market in the U.S. Yet, home prices there are still 45 percent below their 2006 peak,” Stiff continued.

To say there is no reason to believe this is another bubble is overstating his case. The only reason affordability is so good is because interest rates dropped from the 6.5% of the bubble to 3.5% today. This is an artificial stimulus engineered by the federal reserve. It’s not the conditions of a free market. This price rally today could easily turn out to be another bubble if interest rates were allowed to rise.

Stiff said some of the rebounding areas like Phoenix will likely see price volatility as all cash sales and investor demand retreat.  “It is not clear if demand from first-time and trade-up buyers will immediately fill the void,” he said, “as mortgage lending standards are still very strict and many consumers remain risk-averse. If non-investor demand ramps up too slowly, then recent double-digit price appreciation could decelerate suddenly or even turn negative for a few months.

That is exactly right. Owner occupants must step into the void if price appreciation is to continue.

Most market forecasters were caught by surprise with the sharp reversal in 2013. Even those who thought 2012 would be the bottom didn’t anticipate it would reverse so strongly and post double digit price increases. Perhaps 2013 will also be a surprise. Conditions today favor a continued rally in prices, but if Corelogic is correct, and I think they will be, then the price appreciation should moderate in 2013.