Summertime….Will the Home Buying be Easy?

By Lawrence Yun, Chief Economist, NAR Research

It was a good kick-off for the summer season. The pending home sales index figure that was released earlier this month marked a third straight month of rising pending sales. That is certainly welcome and encouraging news. It is fairly obvious that first-time buyers are responding to the incentives of rock-bottom mortgage rates and the first-time buyer tax credit to pick up relatively cheaply priced homes. Indeed, recent figures suggest about 45 percent of buyers have been first-timers – a higher proportion than the typical 35 to 40 percent during more normal years.

A high proportion of the transacted homes are distressed, either in foreclosure or requiring a lender approval short-sale, with deep discounted prices. By the fourth quarter, existing-home sales are projected to be about 15 percent higher compared to the comparable period the year before if all goes as planned. Some of the recent first-time buyer transactions will help existing homeowners to make the sale and then buy the next home. Other first-time buyers purchasing vacant home still are helping in terms of absorbing inventory.

Home sales in the hard-hit California market have recently reached levels that are nearly twice as high compared to when they were in the trough. Evidently the California housing market is experiencing a tipping-point phenomenon: potential buyers suddenly wanting to enter the market all at once. People have waited and waited for the best time to enter the market. Why buy now if prices will be lower later? After having tumbled from unsustainable heights, home prices there are highly attractive and within budget for many fence-sitters. So when some buyers started to enter the market, other bystanders just couldn’t let others take advantage of the great buying opportunity. Many are now fighting to jump into the market. Multiple-bidding on lower-priced homes are said to be common in California. People who “lose out” during a bidding war don’t simply go home and wipe away their tears — they come back with almost vengeance-like determination and hope their next bid will be the highest. What does that mean for home prices? Though the year-over-year price measurement will continue to show declines in California, probably for the remainder of the year, the month-to-month price trends will more likely be on an upswing. In short, people who buy in June 2009 will likely see a price gain in June 2010.

Will other parts of the country follow California and witness not a slow recovery, but a sharp upturn? We’ve seen evidence of that already occurring in Nevada, Arizona, and parts of Florida. The hard-hit parts of Washington D.C.’s outlying suburbs are also experiencing multiple biddings. But we shouldn’t expect to see the same trend in all markets. The sharp upturn is likely to occur in markets where home prices are overshooting downward (after having overshot way upwards during the boom years). Therefore, most of Middle America may not encounter any sharp upturn in housing because it never experienced the same exuberant big boom and big bust to begin with. And there still appears to be many hesitant fence-sitters in Middle America based on recent depressed home sales despite accumulated steady overall population gains in the country.

Some things will take a turn for the worse before improving. Employment conditions will certainly have an impact on any housing recovery. While May’s job cuts were the lowest since January, job losses will continue through the remainder of the year. Yes, we can expect some economic growth resulting from the massive stimulus package later in the year and into 2010. But the jobless rate will remain stubbornly high at near 10 percent for the next 18 months. Look for the unemployment rate to rise to 10.5 percent before all is done. People without a job or with financial capacity should not be entering the housing market. Foreclosures will rise as a result, putting additional downward pressure on prices (unless buyers quickly clear off these properties). Falling home values will in turn slow the economic recovery because of slowdown in consumer spending from further destruction in homeowners’ equity.

But even in the depth of the recession, nearly 90 percent of the U.S. workforce is employed. Discount perhaps 20 percent of those workers who have a part-time job – and worries about whether or not they will remain employed. That still puts a sizable 70 percent of the adult population with stable jobs and in a position to respond to home-buying incentives of low rates, low home prices, and tax benefits if they are first-time buyers. However, continued job losses will no doubt depress consumer confidence and the psychology factor is just as important in the current housing cycle as it has been in the past.

We also need to remember that conditions are not static. For instance, one home-buying incentive that could disappear is current rock-bottom rates. The Federal Reserve has been actively trying to push down mortgage rates by keeping the short-term Federal Funds rate at near zero and buying up mortgage-backed securities. But the fast rising budget deficit and the printing of money to partly finance that debt is raising concerns. The U.S. budget deficit in the current fiscal year is likely to hit $2 trillion. The largest deficit prior to this year was less than half a trillion dollars. In relation to GDP (that is, in relation to overall U.S. income), the current year’s deficit will be the highest since World War II. Partly as a result, the yield on the 10-year Treasury, the benchmark rate against which mortgage rates are pegged, has risen significantly over the past month from under 3 percent and currently closely approaching 4 percent. Therefore, the average mortgage rate on a 30-year fixed loan will likely rise to about 5.5 percent in the second half of 2009. It’s important to realize that 5.5 percent is still an amazingly attractive interest rate for a mortgage. But if the rate tops 6 percent then expect a significant setback not only for a housing market recovery, but also for an economic recovery.

Another potential change down the road: the first-time buyer tax credit is scheduled to expire by November 30th. That means trying to entice buyers to sign contracts by early October in order to get the mortgage underwritten by November. Some ready buyers unable to get out of a longer-term rental contract may not make the deadline. At the same time, unexpected delays are popping up. Appraisals with outside management companies are now becoming more active due to a regulatory rule change; that is costing consumers more fees with less reliable assessment.

But NAR is involved in efforts to insure that home-buying incentives continue. For instance, the Association is working to extend the tax credit deadline and make some changes to the program. Extending the deadline would make the tax credit available to more potential buyers. NAR is also looking to expand the tax credit to repeat buyers and lessen the income restrictions. We are also pushing to make sure appraisals include local experts and not solely be determined by national appraisal management companies that are owned by national banks. NAR is raising concerns with policymakers regarding issues such as the 90-day rule that are limiting appraisals to only non-comparable properties.

So, while you are making plans for your summer vacation, don’t forget to work with your local REALTOR® association to support NAR’s efforts to make sure Congress extends and maintains
federal home-buying programs. Write your Congressional representatives and let them know a true economic recovery won’t happen to any significant degree unless the housing market fully recovers. Home-buying is crucial to that recovery.

And I have a final thought for readers of this column to consider as they think about summer vacation. It’s about politics (not economics). For the most part, incumbent parties have been kicked out in nearly every recent election. The U.S. witnessed it in November and the European Parliamentary members saw it in early June. Brits look eager to shore away Gordon Brown and his Labour Party if given a chance. (As of the writing of this column, Mr. Brown has yet to announce when the next election will take place.) Europe has voted to free itself from suffocating government bureaucracy, while the American electorate seems to have moved away from wild scary rides of free market uncertainties.

But not every incumbent went home. U.S. government spending and budget deficits are not just a President’s doing – Congress is accountable as well. Before leaving office, President George W. Bush had the worst presidential approval ratings in modern history. But the “approval” rating for Congress was even worse. Presidents, though, are term limited; incumbent members of Congress keep getting re-elected and in some cases by wide margins. It’s an interesting conundrum — people evidently hate Congress as a whole, but generally love their specific Congressional representatives and senators. Political theorists would say there are many hidden but legally permissible political tricks-and-treats in place to keep incumbents in power.

So I have a radical, but potentially very satisfying, proposal to unlock the power of Congressional incumbency. How about every 2 or 3 election cycles, voters are permitted to vote out the whole Congress in one fell scoop. In short, people could choose between “delete all” or “keep the same local vote system”. For instance, voters in Alabama could decide to remove senators and representatives that they don’t like with one single click, but understand that Alabama’s senators would also be removed.

Likewise, New Yorkers could vote to kick out non-New York senators and representatives that they may not like, but their representatives who they like would also get the boot. Those “kicked out” would be allowed to re-enter the race in the next election cycle, but they would no longer have the power of incumbency. Such a new system will force the members of Congress to focus not only on their own district, but also about what is in the best interests of the country.

Of course, I realize that such a radical change would require an amendment to the U.S. Constitution – and it would certainly never happen. But I offer it as a “fun mental exercise” for the summer. It may also perhaps be a way to let Congress know it should serve the public and not themselves.