Strong Fundamentals Shore Up Home Sales

Daily Real Estate News | Friday, May 17, 2013

Uncertainty over federal actions remains a big hurdle
Home sales are on a sustained upswing, with solid gains in volume and price predicted for the next few years thanks to improved market fundamentals. But whether the federal government will derail further improvement remains a question, REALTORS® heard Thursday.
Existing-home sales are expected to hit 5 million at the end of this year and then grow to 5.3 million in 2014, up from 4.3 million in 2011, National Association of REALTORS® Chief Economist Lawrence Yun told a packed audience at his residential economic forum at the 2013 Midyear Legislative Meetings & Trade Expo in Washington.

View slides from Yun's presentation.

Price appreciation will be strong, too. Yun said he expects gains of 8 percent this year and 5 percent next year.
The strong price growth reflects the overly tight inventory conditions in many markets, Yun said. And that’s not a healthy condition. What’s needed is a return to the market by small builders, but they can’t get financing because community banks, leery of banking regulations coming out of Washington, aren’t lending.
Until that regulatory uncertainty clears up, only the country’s largest builders, which have access to Wall Street bond financing, will be building. As a result, although building has picked up in the last year after years of flat-lining, the number of new units is barely at replacement level. To meet the pent-up demand that’s in the market right now, builders need to get some 1.5 million units on the market. They’re only getting about 1 million right now.
The good news is that the housing recovery is based on deep-seated improvements in market fundamentals. So as long as the economy stays on track, which economists generally say will be the case, the housing market should continue to improve well into the future.
To the extent that there are market risks, they largely stem from the federal government, which continues to look at ways to reduce its budget deficit. Washington is also writing rules to protect against future mortgage market problems.
Will the government pare back the availability of Federal Housing Authority financing through tightened lending rules? Will it require banks to meet stringent capital standards and underwriting requirements under Dodd-Frank Wall Street reform rules?
Another unknown is whether the government will it impose strict limits on the points and fees lenders charge for loan originations–what Yun called a kind of price control that could end up dampening loan availability.
Until these and other uncertainties are cleared up, the improving market will face headwinds, Yun said. As a result, although the market should continue improving, its gains are unlikely to be as robust as they otherwise would be.

—Robert Freedman, REALTOR® Magazine