The Housing Recovery

The Pieces are There, But the Certainty Isn’t

Pieces are in place for housing to continue on its road to recovery but there remain plenty of uncertainties that can derail the market, NAR Chief Economist Lawrence Yun said at a conference earlier this week.

Sales flat.

Yun told more than 800 attendees at the CRE Finance Council annual conference in Washington on Tuesday that for the last four years home sales have been essentially flat, at roughly 4.2 million homes, but NAR is forecasting a solid increase by the end of this year to about 4.6 million sales.

High affordability.

The reason: affordability remains at an all-time high, interest rates remain low, foreign buyers and investors remain interested in residential real estate, and the U.S. economy is strengthening, albeit modestly.

At the same time, corporations continue to sit on strong profits, the stock market is still heading up, and inflation remains relatively subdued. What’s more, pent-up demand continues to build and rentals are getting pricier. Home prices nationally have appeared to stabilize and all major home price trackers show prices going up in many areas, a trend that should help boost confidence among buyers and sellers.

Hefty profits.

All of these are positives, but there remain challenges holding back a more robust recovery in the housing market. Aside from continuing concerns over the financial health of Europe and other parts of the world, the improvement in the U.S. economy remains modest at best, job gains still have a long way to go before the U.S. makes up for the 8 million jobs lost during the recession, home mortgage lending remains tight, and the federal budget deficit continues to weigh down on the country’s prospects.

Risks to growth.

The other area of uncertainty is what Washington will do. Until the real estate industry gets clarity on the rules and legislation coming down the pike in the next year, lenders are unlikely to restore their underwriting standards to something more normal. 

For example, the qualified residential mortgage (QRM) rule: will regulators publish a rule next year with a minimum downpayment requirement on “safe” loans? Will other provisions implementing the massive Dodd-Frank Wall Street reform law from two years ago chill lenders’ willingness to lend? What tax law changes, if any, will Congress talk about over the next year?

Then there’s the massive federal tax expenditures expiring at the end of this year. How Congress handles these $4 trillion or so in provisions could have a major impact on how well the economy does.

The bottom line: Despite all the favorable pieces in place for a meaningful housing recovery, the economy continues to be beset by uncertainty, and that’s leaving it an open question how much the housing market can recover in the next year.

Access all of the slides Yun presented at the conference.