For the economy to recover, the housing market must recover. When consumers can barely pay their mortgages, they’re unlikely to spend money on other things – and when consumers don’t spend money, the economy stagnates.
There have been signs of recovery in the housing market in recent months, as we’ve reported, and now there’s more good news:
- The Case-Shiller Index, a composite of statistics from 20 cities, showed that housing prices rose 4.3% from October 2011 through October 2012.
- It appears that housing prices will see their first gain for the year since 2006.
- The National Association of Realtors’ Pending Home Sales Index is at its highest level in five years and has risen for 18 consecutive months. At the end of October, it was at 104.8, up 13.2% from a year earlier.
While these are positive trends, statistics can be misleading. Many current buyers are investors, who are purchasing homes to rent out, not to resell. If investors believed that housing prices were going to continue rising, they would buy and resell.
The investors are meeting a high demand for rental property, which is due in part to the high number of foreclosures that have taken place. Former homeowners who were foreclosed on are unlikely to qualify for a new mortgage, so they’re renting.
Likewise, many potential first-time homebuyers are renting instead of buying, because they expect to change jobs frequently in coming years and don’t what to have to sell a home when they relocate – especially in today’s still depressed housing market.
Finally, lenders are likely to add more inventory to the market as they continue to reduce their share of mortgages on distressed property.
In addition, lenders are reluctant to lend to all but the most qualified buyers, because of new legislative requirements. Under the Dodd-Frank regulations, if lenders provide mortgages to borrowers who are later determined to have been unqualified, lenders can be held liable and be sued for a lot more money than the mortgage amount. Given the risk, lenders are being especially careful when they approve new mortgages.
So the housing market may be improving, relative to where it was at a year ago. But it still has a long way to go before it returns to a healthy state.