Can Housing Build on Q2′s Hopeful Signs?

by Ethan Roberts | June 27, 2012 12:17 pm

Can Housing Build on Q2′s Hopeful Signs?

Binoculars185 Can Housing Build on Q2s Hopeful Signs?[1]I’ve been a bear for so long that it’s difficult to make the leap to a bullish perspective, but I have to concede that real estate has shown some real improvements in the second quarter of 2012.

However, the very weak job reports over the last few months make it even tougher to believe that the surge in home buying will continue for very long. And yet, despite the bad employment reports, for the first time in quite a while there’s good news across the board on the real estate front.

Go figure.

On Monday, the Commerce Department reported that single-family new-home sales[2] were up 7.6% from April to May. New-home sales jumped from 343,000 to 369,000 on an annualized basis. This is a 19.8% pop from last year — the highest reported level in more than two years. The Northeast was the strongest region, with a 36% improvement.

The S&P Case-Shiller home price index[3] for April was released on Tuesday, and it was quite positive. Home prices rose over the March numbers about 1.3% overall in 19 out of 20 major U.S. cities. Prices have now risen for two straight months in a majority of U.S. cities.

Only one city, Detroit, continues to lag. Motor City was down 3.6% as its economic woes continue to weigh heavily on its housing market.

The three cities with the largest increases were Phoenix, San Francisco and Washington, D.C. Phoenix’ gain was a robust 8.6%. Zillow.com is predicting that it will have the nation’s strongest rise because of its huge price decline during the bust, as well as strong demand from retiring seniors.

Another area Zillow predicts will come back strong is Miami-Fort Lauderdale, Fla., for much the same reasons as Phoenix.  Miami-Fort Lauderdale values have been crushed over the past five years and are now beginning to attract a great deal of foreign cash buyers[4].

Builder confidence was also up in June, according to the National Association of Home Builders/Wells Fargo builder-sentiment index. The index rose from 28 to 29, reaching its highest level since 2007. Builder permits rose to a more than three-year high.

Yet, as I have noted before, building permits are not as important as actual start[5]s, because not all permits lead to construction. It’s the equivalent of a pending home sale versus an actual closed sale. So, I still have to temper any bullish enthusiasm for that report.

Also, keep in mind that any reading below 50 on the NAHB index is considered weak. We still have a very long way to go before we can say the sentiment index is strong.

Also, despite the improvements noted, nationwide home prices continue to be lower than they were a year ago, and this helps explain why both owner-occupants and investors are rushing to pick up bargain-price homes across the country. Case-Shiller noted that home prices for all 20 cities fell 1.9% over the 12 months ending in April, suggesting that weaker markets may continue to weigh on national median values.

New Short-Sale Laws to the Rescue!

Another improvement in the real estate market stems from a change in the short-sale laws. On June 15, Freddie Mac and Fannie Mae initiated new rules that mandate a loan servicer to acknowledge a short-sale request from a seller within three days and to notify the borrower of any missing documentation within five days.

After this, the servicer is expected to reach a decision within 30 days. If that’s not possible for any reason, the servicer must update the borrower weekly on the negotiation status.

The new law is designed to speed up the short-sale process. Previously, lender decisions on short-sale offers could drag on for as long as six months or more. This was turning both buyers and Realtors off to making bids on these homes. The short-sale homes would then languish on the market and eventually be lost to foreclosure.

Interest rates are also helping as hover near historic lows, with the 30-year owner-occupant national average at  3.62% and the 15-year loan at a ridiculous 2.75%!

Tight supplies are another booster. However, if banks begin to unload more of their foreclosures, supply could increase, stalling any real price gains.

As a Realtor, I continue to advise all of my customers to take advantage of the 15-year loans right now since they’ll never again have an opportunity to pay off a home in that short a time with that low an interest rate. Note that the spread between the two loan terms continues to be around 0.75 percentage points. Therefore, one can save a great deal of money by taking a 15-year loan rather than a 30-year and then making extra principal payments to knock the term down to 15 years.

What’s Coming for Q3?

I think it’s likely that the gains made in Q2 2012 could continue into the third quarter. But several obstacles remain that chould temper any sales growth or price increases.

A massive number of foreclosures and short sales remain and will keep values depressed. The unemployment numbers aren’t getting any better, either, and the dismal job growth seen over the past two months will have to improve markedly before a true, sustained improvement can take hold in the real estate market.

Given these two problems, I think the best we can hope for are small gains — and let’s be glad we at least have those!

Endnotes:
  1. [Image]: http://investorplace.com/hot-topics/quarterly-review-outlook/
  2. single-family new-home sales: http://investorplace.com/2012/06/may-new-home-sales-top-expectations-prices-rise/
  3. S&P Case-Shiller home price index: http://investorplace.com/2012/06/sp-case-shiller-index-sees-april-home-prices-rise/
  4. foreign cash buyers: http://investorplace.com/2012/06/the-next-real-estate-bubble-rentals/
  5. building permits are not as important as actual start: http://investorplace.com/2012/01/housing-reports-real-estate-homes/

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