Jed Smith is managing director of quantitative research for the National Association of Realtors. He says that short sales and bank-owned homes will account for around 35% of U.S. housing deals for the next three years. We asked him how he sees the outlook for housing …
Us: What will the industry’s mood be in November when Realtors gather for NAR’s annual convention in Anaheim?
Jed: Realistic optimism in terms of sales and price expectations may be the important issues. Most sources appear to view the market at or near its bottom with modest recovery in a number of regions. People recognize that the economic and job recoveries are slow, but there is a general belief that we have already seen the worst of the bad news.
There is also recognition, however, that we really can’t predict anything — given that governmental, international, and consumer trends and actions have become increasingly unpredictable with the prolonged Great Recession. Unknown unknowns, frequently mentioned as Black Swans, are increasingly an important factor. Therefore, to the degree that we can foresee and predict, I think the outlook will be one of cautious optimism.
Us: The housing recovery is on anything but warp speed. How much longer will this downturn go on?
Jed: Sales have fluctuated, ranging on an overall yearly basis between 4.9 million and 5.2 million since 2008. As of May, home sales were in the 4.8 million range annualized, and we expect approximately 5.1 million existing home sales for 2011 and 5.3 million in 2012 as the economy continues to recover and create additional jobs.
Jobs are the key driver of sales, and the disappointing job market over the last few years appears to have impacted the existing home sales market. We now appear to be in a recovery mode.
It looks like home sales will be stronger in the second half of the year, but healthy job creation is necessary to ensure a solid recovery in both housing and the overall economy. The job market has sputtered recently, and because variations in local job creation impact housing demand, the housing markets will recover unevenly around the country.
Prices have been a major disappointment in recent years. Part of the price weakness in existing home sales has been to the overall deleveraging in the economy, and part of the price situation has been driven by the significant number of distressed home sales (foreclosures and short sales) that have driven the markets. Approximately 35% of existing home sales are distressed, and while the number will fluctuate from month to month, we expect to continue to have a distressed property situation for the next three years.
We expect price stabilization in the forthcoming years, with modest increases in areas where jobs are created and distressed inventories decrease. Absorption of inventory is the key to price improvement, and we expect this to occur in forthcoming months.
Us: What’s holding the housing market back?
Jed: As a result of the Great Recession we have issues of job creation and loan availability. We think that there is a significant level of pent-up demand given the overall growth in the number of households in the past 10 years, but pent-up demand can only be realized if there is a meaningful gain in jobs.
In addition, low interest rates are not particularly beneficial if financial institutions have unrealistically high credit standards due to excessive risk aversion. Finally, some additional recovery of consumer confidence, which will probably occur as people realize that the Great Recession is over, will help to facilitate the housing markets. We are already seeing modest improvements on a local basis in home sales and prices, and hopefully the recovery will gather steam.
Us: Can the market get back on its feet with so many underwater and defaulting homes out there?
Jed: The existing home sales market is absorbing distressed properties as they come onto the market. Unfortunately, distressed properties tend to sell at discounts of 20% to current market prices. The total level of foreclosures and short sales has been in the neighborhood of 35% of overall existing home sales for the past several years, sometimes more, sometimes less on a monthly basis.
The outlook for the immediate future is for moderately rising sales and increasing price stability, with modestly rising prices in areas with good job recovery and loan availability. We would like to be able to forecast a booming recovery; however, the realistic outlook is for modest improvements on a continuing basis.
Us: Most say the market is hampered by tight lending standards. Has the pendulum has swung too far?
Jed: Interest rates continue to be near historic lows, but credit availability is limited. Many consumers are simply unable to obtain loans — even with substantial down payments in hand and credit scores in the 800 range. We get approximately 1,000 comments every month in response to our Realtors Confidence Index survey, and our members cite numerous examples of responsible potential buyers being unable to get mortgages. Financial institutions appear to have become unduly risk averse. This has a major negative impact on the housing markets.
The pendulum has indeed swung too far. Dr. Bernanke has recently noted that credit availability is an issue — and he should know, being chairman of the Federal Reserve Board. Our view is that if banks would simply return to normal sound underwriting standards and begin lending to more creditworthy borrowers, we’d get a much faster recovery in the housing sector.
Us: Any final thoughts?
Jed: There is a tendency to focus on prices and housing as an investment when discussing the existing home sales markets. However, people buy houses because of lifestyle preferences — the desire to own a home for personal and family reasons.
In addition, NAR surveys indicate that homeowners currently own a home, on average, for approximately 8 years; monthly or even yearly fluctuations in value are actually of no significance to most homeowners.
Although there are clearly financial benefits to owning a home, the clear benefit of homeownership is the actual enjoyment of the home as a place to establish roots, build a future, and live your life — not the maximization of a financial portfolio strategy.
