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Residential Market Outlook: Virtuous or Vicious?

It’s slow. It’s uneven. But it’s there: the home sales recovery.

"There will be two steps forward, one step back, with sizable local market differences," says NATIONAL ASSOCIATION OF REALTORS® Chief Economist Lawrence Yun, " but the trend nevertheless will be a rise in home sale activity in the upcoming years."

Yun is forecasting 5.2 million existing-home sales in 2011, up from 4.8 million last year. He also expects modest improvement in prices—a rise of about 1 percent this year on a national basis. That would be the first in what Yun says will be a series of small but steady gains in the years ahead that will eventually bring home sales back to a period of normalcy.

At the root of these gains is continuing improvement in the overall economy. Yun is estimating modest 2.5 percent growth in the country’s gross domestic product in each of the next two years, job gains of about 1.5 million in the same time frame, and a slowly improving jobless rate, which he projects will dip from a stubbornly high 9.6 percent in the latter part of 2010 to a better but still-high 8 percent in 2012.

This is what Yun calls the "virtuous cycle" that residential real estate started entering a few months after the home buyer tax credit ended in the middle of 2010. At that time, home sales took a big hit, dropping 27 percent in July. But in August, sales picked up again, under their own steam, and have been gaining ever since without the aid of subsidy.

 

Low Prices Will Spur Recovery

Once businesses do pick up spending, job gains will quicken and home sales—fueled by strong affordability and plenty of pent-up demand—will rise.

Yun says all of the price excesses from the housing bubble have been squeezed out of the market and interest rates remain at historically low levels, making buying attractive now. In San Diego, for example, buyers at the end of 2010 would be paying $1,564 a month in mortgage payments for a median-priced house that at the height of the boom would have cost them $2,833 a month.

At the national level, the median home price at the end of 2010 was about $172,000, down roughly 30 percent from its $239,000 peak in early 2006 and, for the first time in a decade, less than its replacement cost.

"Home prices have overcorrected a bit," Yun says. "The cost of duplicating an existing home, when you factor in the expense of buying bricks and mortar and putting it all together, is going to be more expensive."

One reason that replacement costs are up is the large number of foreclosures that have to be worked through the market before existing-home prices can start to rise in any significant way. Yun expects foreclosed homes to account for a third of sales well into 2011, about the same as in 2010. "My best guess is that this year, people will be buying a lot of the foreclosed properties, but it will still take an additional one-and-a-half years to bring the inventory down to a more normal level."

Another sign that excesses have been removed from the housing market: an attractive ratio of home prices to income levels. The cost of homes peaked at almost 3.5 times their annual income during the boom. That ratio now stands at 2.4 times income, just below the more historically normal level of about 2.5.

In addition, the number of home sales compared with the size of the workforce peaked in 2005 (one home sale for every 20 employed persons). Now the ratio stands at just below 4:1 (one home sale for every 25 employed persons), in line with historical norms.

 

NOTE:  Every real estate market is local and different.  Contact Jon Becker - Century 21 Northland for information on the Traverse City area real estate market.

 

 

Posted: Wednesday, December 29, 2010 2:06 PM by Jon Becker

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