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Here Comes the Chill in Real Estate

The hot winds of early 2013 are cooling off for autumn and winter

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The U.S. real estate market has seen a strong rebound in both new home sales and resales for the past two years, with prices up more than 12% nationwide in 2013. This rebound in housing has been fueled by lower prices, miniscule interest rates, hedge fund investors and foreigner buyers with cash, small improvements in the labor force, and buyers with previous foreclosures or short sales qualifying to purchase homes once again.

It was a perfect storm of bullishness for a sector that had been all been left for dead in the wake of the 2007-11 meltdown.

But as I hinted at previously, signs that a new slowdown in the real estate sector might be upon us have already begun to emerge.

Last week, the Commerce Department reported a 13.4% decline in its July new home sales report — a much-greater-than-expected drop, and the lowest reading since October 2012. A spike in interest rates to two-year highs from May through July was blamed for the bad report.

Then yesterday’s S&P Case-Shiller report showed that although June prices were up 0.9% from a year ago, there was a slight slowing of price increases from the May report. Although the report cited continued strength in the housing markets, Robert Shiller had this to say:

“In the single family realm, I think that there is a chance that there is weakening. The housing market has gotten very speculative and it goes through big cycles … It’s a rollercoaster, that’s what these markets have become.”

Shiller added that when the large hedge funds begin to sell the homes they purchased cheaply a year or two ago, the added inventory will also depress market values. While that is true, national inventory levels are at a five-month supply, which by historical standards is still below average.

But now comes word from the National Association of Realtors (NAR) that even though July pending sales were up 6.7% from a year ago, they were 1.3% lower than in June. That will translate to fewer closed sales this month and next.

And worse, there are more signs of weakening down the road for the housing market. A number of fees and other increases are going to make it more difficult for borderline borrowers to qualify for loans. These include:

  • Higher interest rates from expectations of a Fed tapering are already here, and they’ll continue creeping up. Higher rates equate to higher payments on a mortgage, which discourages consumers from paying higher prices for homes.
  • The Biggert-Waters Flood Insurance Reform and Modernization Act of 2012, in an effort to raise reserves for FEMA, will increase the annual limitation on flood insurance premium increases from 10% to 20% starting this October. This will raise prices for homeowners who are mandated to purchase flood insurance in certain flood-prone areas. In addition, redrawn flood maps could increase the number of homes that are determined to be at risk.

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