Housing Market Slowly Recovering, but is Another Bubble Pending?

by Madhusmita Bora

 

Pending Sales on the Wane

Rising mortgages and tightened inventory are pulling the brakes on the recovery momentum in the housing market. Last month, fewer buyers signed agreements to buy existing homes.

The pending home sales index slipped 1.6 percent. That’s after July’s revised 1.4 percent decline. Economists surveyed by Bloomberg had predicted a 1 percent loss in the gauge compared to the prior month.

The housing market has been in active recovery with mortgage rates hovering at the bottom for a while now. But, in August, rates started climbing upward. The average rate for a 30-year fixed mortgage was 4.58 percent in the week ended Aug. 22. That’s the highest level since July 2011. That, coupled with limited inventory, could be making buyers wary about investing in a home right now.

“We didn’t have a particularly good second quarter, we’re not producing big increases in payrolls, so that kind of supports a plateau,” Ken Mayland, president of ClearView Economics LLC, told Bloomberg. “There’s a little bit of indigestion on the part of potential homebuyers because mortgage rates have come up more than a percentage point. However, I think it’s only indigestion. I don’t think it’s anything fatal to the housing industry.”

Steady job gains and growth income are essential to keep the momentum going. According to the National Association of Realtors®, on an unadjusted basis purchases climbed 2.9 percent when compared to the previous year. While pending sales jumped 4 percent in the Northeast, they declined in the other regions of the country.

“Moving forward, we expect lower levels of existing-home sales, but tight inventory in many markets will continue to push up home prices in the months ahead,” NAR’s chief economist Lawrence Yun said in a statement.

Three of four regions showed a decrease from a month earlier, led by a 3.5 percent drop in the South. Pending sales climbed 4 percent in the Northeast.

Housing Market 67 Percent Back on Track

Despite the challenges with mortgage rates and inventory, the housing recovery is two-thirds of the way back to normal, according to Trulia’s Housing Barometer.

The Housing Barometer, since February 2012, has been tracking how quickly the market is moving back to “normal” by examining indicators such as construction starts, existing home sales, and delinquency plus foreclosure rates. For each indicator, Trulia compared the month’s data to the pre-bubble normal levels, and worst time during the bust.

Last month, all three measures showed positive signs, according to Trulia. Construction starts, the slowest recovering measure, are 40 percent back to normal, while existing home sales are 99 percent back to normal, despite foreclosures and short sales making up roughly one-eighth of all existing home sales. The good news is delinquency and foreclosure is 60 percent back to normal, dropping to 8.66 percent in August.

Is Another Bubble Forming in the Housing Market?

The much cited Standard & Poor’s/Case-Shiller home-price composite index of 20 metropolitan areas showed an increase of 0.6 percent in July on a seasonally adjusted basis. That’s lower than the 0.8 percent gain economists polled by Reuters were anticipating. Data from the U.S. Federal Housing Finance Agency showed U.S. home prices rose 1 percent the same month.

As mentioned earlier, rising mortgage rates could be creating roadblocks in price gains.

“Further rate increases are going to have an effect. That’s what’s on people’s minds now, it’s those rate increases,” Yale University economics professor Robert Shiller, who helped create the gauge, said in an interview.

“It may turn the market down,” he added.

Overall, home prices have skyrocketed since last year. Home prices in all 20 cities of the S&P/Case-Shiller data have gained. Las Vegas saw a whopping 27.5 percent increase in prices.

In a separate interview, Shiller said he’s concerned that there is an “irrational exuberance” injecting into the housing prices. With average home prices back to 2004 levels, Shiller fears thatanother bubble is in the making, especially in cities such as San Francisco, Las Vegas and Phoenix.