Like storm clouds gathering in a relatively clear sky, the “sequester” is darkening what has been an increasingly sunny housing outlook.
The $1.2 trillion in automatic government spending cuts now taking effect will reduce federal budgets across-the-board, falling immediately and directly on housing assistance programs. Among the concerns: Staff reductions at the Federal Housing Administration (FHA) threaten to slow approvals for FHA loans, which now represent about 25 percent of single-family loan originations. Some analysts say the cuts could reduce home sales by as much as 2 percent this year.
“The FHA has been a critical support to the housing market, for first-time buyers and purchases of homes in general,” Mark Willis, a professor at New York University’s Furman Center for Real Estate and Urban Policy and a former economist at the Federal Reserve Bank of New York told Business Week. “Any decrease in the rate the FHA is able to ensure mortgages will clearly hurt housing,” he added.
Lower income families dependent on federal housing programs will be particularly hard-hit by the budget cuts. Programs to assist the homeless, foreclosure prevention initiatives and public housing maintenance efforts all will be affected, HUD Secretary Shaun Donovan has warned. His at-risk list includes about 125,000 families who stand to lose the Housing Choice Voucher benefits that are preventing many of them from becoming homeless.
Hitting the “Most Vulnerable”
While the reductions will hit some federal agencies gradually, the housing cuts “will hit the most vulnerable first and most immediately,” Saul Ramirez, CEO of the National Association of Housing and Redevelopment Officials, told Affordable Housing Finance.
The sequester aside – which is where most economists would like to see it –housing market reports for the past several months have been almost uniformly positive. A sample of recent headlines illustrates the point.
- “Rising Prices Shrink Ranks of Underwater Borrowers”
- “Housing: It’s Becoming a Seller’s Market”
- “New Home Sales Surge”
- “Tight Supply of Homes Got Even Tighter”
Foreclosure sales have been featured prominently in news reports, but in a good way. They reached a six-year low at the end of last year, as lenders and servicers made progress in clearing their backlogs, approved short sales in larger numbers and negotiated loan modifications enabling many troubled homeowners to hold on to their homes.
FNC reports that REO and foreclosure sales represented 18.1 percent of all home sales in the fourth quarter of last year compared with 24.2 percent in the same quarter of 2011. The foreclosure price discount has also declined from 25 percent at the peak of the housing crisis to 12 percent last year.
As the foreclosure rate has declined, fears that a “shadow inventory” of repossessed homes would swallow the housing recovery have also eased. Daren Blomquist, vice president of RealtyTrac, says foreclosures may actually be helping the market by bolstering an otherwise anemic inventory of homes available for sale, providing “more fuel to the fire that has been slowly building over the past year as more sales occur,” he suggested in a recent interview with MarketWatch.
The inventory of existing homes for sale has been reduced to a 4.2 month’s supply, down from 6.2 months a year ago and close to an eight-year low, according to the National Association of Realtors’ (NAR’s) January report. The 4.1 month inventory of new homes is also at an 8-year low.
Sales of existing homes actually slowed in January, rising by only 0.4 percent over the December volume, but the pace was still 9 percent above the year-ago level and the second-highest level in the past three years. Goldman Sachs analysts say sales could total 5.2 million units this year, exceeding the 2012 rate (4.92 million units) by 12 percent.
The NAR’s pending sales index, an indicator of future activity, jumped by 4.5 percent in January, blowing past the 1.5 percent increase economists had predicted and reaching the highest level since April 2010, when the looming expiration of homebuyer tax credits fueled a home buying surge. Sellers are apparently becoming more confident. Listing prices increased by 7 percent year-over year in February, according to a Trulia report.
One discordant note in an otherwise harmonious array of housing data has been the minimal representation of first-time buyers, who accounted for just 30 percent of January purchases – well below the 40 percent analysts view as necessary for a “healthy” market.
New home sales in January, meanwhile, hit their highest level in more than 4-1/2 years. The 437,000 annual pace beat the December total by 15.6 percent – the largest monthly gain since 1993.
New home starts slowed from December’s strong pace but the annual rate of 890,000 homes was still the third-highest in almost 5 years and 24 percent above the year-ago level. Significantly, all of the decline was in the multi-family sector; single-family starts increased by nearly 1 percent compared with the prior month, housing starts for the year were almost 30 percent higher than in 2011 and permits for single-family homes hit their highest level since June, 2008.
“The fact that single-family starts are up is very encouraging; it is more important to the economy in terms of employment and growth” than the multifamily area, Gus Faucher, a senior economist at PNC Financial Services Group Inc. , told Bloomberg News. “The housing market recovery is continuing and will be an important contributor to economic growth,” he added. Permits also “look very solid,” he said, “and that is a great sign.”
Home prices have also been trending steadily upward. The closely-watched S&P/Case-Shiller 20-city index of property values increased by 6.8 percent year-over-year in December, besting the 5.4 percent annual increase reported in November.
Broadly Based Gains
“The key here is it’s not as if we’re getting all the juice from one area, it’s broadly based across the country,” Brian Jones, a senior U.S. economist at Societe Generale, told Bloomberg News. “Rates are low, prices are attractive, so affordability is high, and the labor market is gradually healing as well.”
Zillow’s Home Value Index posted a 6.2 percent year-over-year gain, the 15th consecutive monthly increase for this index, pulling an estimated 2 million underwater homeowners above the negative equity line. Zillow estimates that nearly 14 million borrowers were in negative territory at the end of last year – about 12 percent fewer than the year before.
Lender Processing Services reports an even steeper 35 percent decline in underwater borrowers, putting the current total at 9.8 million. Analysts say the relatively modest gains in home prices triggered outsized declines in negative equity because the largest price increases were concentrated in areas where negative equity was most problematic. “If this correlation persists in the coming years, the underwater problem could fade much faster than implied by the speed of national house prices appreciation,” Goldman analysts predict.
Although most analysts find the price gains encouraging, some question whether they are sustainable. Robert Shiller, co-founder of the index that is triggering much of the optimism, is among the skeptics. “It may well be the turning point,” Shiller said of the recent year-over-year gains. “But I’m not sure of that,” he told the Wall Street Journal. The current turnaround, he fears, could prove to be as short-lived as the one in 2009-2010, that began when the homebuyer tax credit was instituted, but faded quickly when that incentive expired.
Prices could increase by 1 percent to 2 percent every year for the next five years, Shiller agrees. “That’s a reasonable scenario.” But it is by no means certain, he cautions. “This is a market with risk in it,” he said in the Wall Street Journal interview. “We don’t know the future. That’s the most important message to convey.”