Monday, May 13, 2013

Bubble or Recovery? by Rick Yost

There is much debate today about the real estate market. Are we in a recovery or experiencing another bubble? Is the uptick we are experiencing temporary with more bad news to follow? Yes, the market is up, but for how long? There are good arguments on both sides.

The most compelling of the bubble arguments are that the jobs are not back and jobs drive housing markets, and that banks still hold a huge shadow inventory of housing. Shadow inventory consists of homes that banks own or control and are not yet marketing. While these are valid points, I put more weight on other factors.
As a realtor with an economics background, I follow five indicators that I put my faith in as predictors of the health of the real estate market.

First is new households. According to JP Morgan, there will be one million new households formed this year and up to six million by 2017. While demand for housing is growing, inventory is actually shrinking. collects data across the US in 146 markets. According to their data, housing inventories are down in 134 of those markets and down 15.22 percent overall compared to the last year. More buyers and less inventory equals recovery.

 Second is affordability. The National Association of Realtors publishes a monthly housing affordability index. The index in Feb was 206.2 percent and that was the third month in a row that the index was over 200. This basically means that if you have the median US income of $62,254 you have 206 percent of the qualifying income needed to buy the median priced house in the US ($218,000 in Greater Portland) with 20 percent down and a 30 year mortgage. What all that gibberish means is that home ownership affordability is at an almost historic low. Affordability equals recovery.

 Third is lender trends. Mortgage lenders are getting healthier and trends are tracking positively. The latest Mortgage Monitor Report from Lender Processing Service shows delinquent mortgages in February at 6.8 percent compared to 7.28 percent last year. The percentage of homes in the foreclosure process fell from 4.2 percent to 3.38 percent over the last year also. Lenders are also tightening their belts to get even healthier. There are 90 percent less loans being written today for sub-prime borrowers than there were in 2007. Healthier lenders equal recovery.

 Forth is housing starts. There were a little over one million housing starts last year and that is up from a low of 500,000. While that seems like a lot of houses, the peak of 2006 was about 2.2 million per year. The average housing starts over the last 50 years are 1.46 million. So while housing starts are up, the market can certainly handle more construction activity. More housing starts equal recovery.

 Fifth is framing lumber prices. This is a bit more of an outside the box indicator, but I swear by it. Framing lumber price is at an eight year high. Demand is up and supply is shrinking. This indicates that the recovery is real. Framing lumber is a raw material. It is not an obscure financial number. The price is jumping and foreign suppliers are ramping up production to meet higher demand according to Wood Resources International. Demand for framing lumber equals recovery.

 As I always say, "numbers don't lie!" The recovery is real and going to last. React accordingly or miss out.
 Rick is a long- time Windham resident, realtor, and real estate author. You can reach Rick at for any of your real estate needs.

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