As we wrap up 2011, Trulia’s Chief Economist looks ahead at what’s in store for the battered housing market and which cities have a big reason to celebrate the New Year.
My crystal ball is never as crystal-clear as I’d like, but I do think that we can expect a gradual economic recovery to move the housing market a few steps back toward normal in 2012. Even so, we still have a long ways to go. As we exit 2011, prices still not have rebounded after their huge declines, inventories are still well above normal, and the foreclosure rate is still far higher than before the bubble. Even the best possible 2012 won’t get us halfway back toward normal.
Before getting into the predictions, let me be upfront about what I’m assuming. After 14 months of job gains, I expect the economy to continue its slow but determined recovery. I don’t do my own macroeconomic forecasts, but every single one of the fifty-ish economic forecasters surveyed by the Wall Street Journal expects the economy to grow throughout 2012, and that makes sense to me. Of course, any unexpected severe political or financial crisis could tip us back into recession, and then all bets are off. Here’s to hoping that doesn’t happen.
My five predictions for housing in 2012:
1) Delinquencies will go down, but foreclosures will go up. Fewer borrowers will fall behind on their payments next year, thanks to the strengthening economy and refinancings. The share of delinquent borrowers is already down more than a quarter from the peak a couple of years ago. But many borrowers who fell behind on their payments during the housing crisis are still in limbo: last year’s robo-signing controversy threw a wrench in the gears of the foreclosure process. That means that some delinquent loans haven’t yet entered the foreclosure process, and even fewer moved all the way through foreclosure — especially in Florida and other states where foreclosures require a longer legal process. Once a settlement is reached with banks over robo-signing in those states, we’ll see a new wave of foreclosures and foreclosure sales that’s long overdue. It’s a necessary step in getting the housing market back to normal even though it will be painful for people who lose their homes — and will rattle American’s confidence in the housing recovery.
2) Rents will rise – which is a bad thing. With fewer people buying homes and more people losing their homes to foreclosures, the rental market is only going to get tighter especially in older, dense cities like New York, Washington DC and San Francisco. High rents will hold back economic growth if businesses can’t pay workers enough to have a roof over their heads. Squeezed city-dwellers won’t get relief until late 2012: that’s when a wave of new multi-unit construction projects that started late this year will be completed and available for rent. To tackle growth-killing high living costs in the priciest cities head on, local governments need to get rid of height restrictions and arduous permitting processes, which hold back urban construction and push development to the suburbs.
3) Mortgage rates will inch up – which will probably be a good thing. A stronger economy will push Treasury bonds and mortgage rates up because inflation becomes more likely and investors demand higher rates to hold bonds. The Fed’s “Operation Twist” will prevent rates from rising too much, but other forces could push rates up higher or, alternatively, send them falling. If investors think the U.S. government will have trouble paying its debt – which they might if the government can’t agree to raise the debt ceiling or narrow the deficit — they’ll demand higher rates because of that risk; but global economic uncertainty – even here at home — could lower American interest rates if investors think American bonds are safe relative to other investments. Got whiplash yet? You’re forgiven. Lots of factors can push rates up or down. For the housing market, which direction rates go is less important than why. Gradual economic recovery is good news for the housing market even if it means higher mortgage rates – that’s what I think will win out next year. We’ll have higher rates for a reason we can cheer.
4) Government will sit on its hands. In election years, politicians don’t take risks: they’re more talk and less action, so don’t expect any bold housing policy reforms next year. What’s more, with the housing market now recovering, we’re not in enough of a crisis to force political opponents together. The time has passed for bold government action on housing. We’ll look back wistfully on the modest policy wins of 2011: borrowers who’ve kept up their payments can now refinance under the expanded HARP program, and the government is planning ways to sell or rent out vacant homes it owns (which will probably be announced in early 2012). But these targeted policies won’t move the needle on national foreclosures, sales or prices.
5) Smart cities are hot. In 2012, the local housing markets that will enjoy rising prices, new construction or both, are those that start the year with stronger job growth and fewer empty homes holding back the market. Based on these factors, along with other leading indicators, here are my top five cities to watch:
—Austin, TX, and Houston, TX. The bloom’s not off the yellow rose of Texas. Steady job growth and a construction revival make Austin and Houston two of my five cities to watch. Texas isn’t hung over from the housing boom like the other big states of the South and West, so there’s little to hold back growth. Honorable mention to Fort Worth and San Antonio.
—San Jose, CA. Wasn’t California at the center of the foreclosure crisis? Didn’t prices there fall more than everywhere else in the country? Yup. But there’s no such thing as the California housing market: California is almost as diverse as the U.S. Even though prices plummeted and foreclosures skyrocketed in inland California, the coast is another world. San Jose’s perennially tight housing market makes it faster to bounce back. The San Jose market –which includes most of Silicon Valley – has rapid job growth and the lowest vacancy rate in the country.
—Suburbs of Boston, MA. This Cambridge-Newton-Framingham market just west of Boston has a strong jobs engine and, like most of New England, missed the worst of the housing bubble. Honorable mention goes to Worcester, one step further west, and Boston’s northern suburbs around Peabody. These areas all benefit from offering more bang for the buck than crowded, expensive Boston: this is because most people looking to move are searching in more suburban or smaller areas than where they live now.
—Rochester, NY. That’s my hometown, and knowing what’s happened to Kodak and other pillars of the local economy, I was surprised when Rochester scored on the top 5 list. (I applied the same formula to all cities and did not have my thumb on the scale.) Prices – which fell little during the boom – are stable, and the economy has weathered blow after blow and is expanding.
What do these markets have in common? Three – Austin, San Jose, and the area west of Boston – are technology centers. In those three metros, as well as in Rochester, a center of high-skill manufacturing industries, education levels are well above the national average. As the recovery proceeds, smart cities are leading the way. During the housing boom, the go-go cities tended to be lower-skill, lower-education metros. But in 2012, smart is hot: it’ll be the revenge of the nerds.
Links to Trulia Insights blog posts:
Some mixed news on construction trends, good news on the number of home loan delinquencies and how to price your home to sell
Housing data from the 2010 Census came out this week: yesterday’s blog post on where vacancies are high showed which markets are tightening and which are still weighed down by lots of vacant homes. Today, some mixed news on construction trends, good news on the number of home loan delinquencies and news you can use when you price your home to sell.
Construction Spending Favors Renters
What happens to the construction industry matters for builders and construction workers – especially with the unemployment rate for construction workers at 13.3% (which is several points higher than the overall unemployment rate). But construction trends also matter for all of us. Although construction employment and investment are up only minimally in the past year, new Census construction spending data show two key trends. First, construction spending on new multi-family homes – that’s apartments, condos, and so on – is 13% higher than a year ago. This is a reaction to rising rents and falling homeownership rates, and when this new construction becomes available, it will lower the cost of renting versus buying. But the second trend is the decline in government construction projects – especially roads and schools. Unlike the worst years of the housing crash, when the federal stimulus kept public construction projects going, state and local budget cuts are taking their toll. In the last year, public spending on roads is down 4.0% and on school construction is down 4.5%. Until this turns around, the infrastructure we rely on will suffer.
You Can’t Pay Your Mortgage If You Don’t Have a Job
A positive sign from this week is that delinquencies – homes with mortgages that are at least 30 days behind on their payments – are down almost 12% in August versus a year earlier, according to the LPS Mortgage Monitor. Meanwhile, foreclosures rose over the same period by 8%. What gives? Delinquencies and foreclosures are part of the same overall process. Some of those homes with late mortgage payments moved into the foreclosure stage, lowering the number of delinquencies and raising the number in foreclosure at the same time. Nationally, 12.2% of all loans – that’s one-eighth — are delinquent or in foreclosure. But this can be as high as 22.8% in Florida to just 4.5% in North Dakota. One reason for this discrepancy is that the relationship between the job market and the housing market is very strong. It’s a lot easier to pay your mortgage if you’ve got a job, and because a struggling housing market kills construction jobs. As you can see from the chart that we made below, all of the states where unemployment is low have below-average delinquencies and foreclosures. Meanwhile the states where homeowners struggle most to make their payments and keep their homes all have high or very high unemployment. The bottom line: the housing market won’t recover without a healthy job market.
How to Price Your Home to Sell
Time for some news you can really use. The burning question on the minds of home sellers everywhere is price – how much should sell your home for? Should you set a high listing price to give yourself a better starting point for negotiations, or should you set a low listing price to draw in lots of prospective buyers and generate a ton of competing bids to push up the final offer? According to new unpublished academic research, you should price your home high, even though many real estate pros often recommend that you list low. This is because high list prices tend to lead to higher sales prices, even after taking into account details about the house, the neighborhood and time on the market. In fact, listing high is the right strategy – even in markets with lots of sales where you’d think listing low is the right call because it will spark a bidding war – because the high listing price will boosts the final sales price. This is even true in local markets with lots of foreclosures. Of course, if you need to sell quickly, a low listing price should get you out faster than a high listing price, but if you want the best price, even in today’s market, list high.
—“Listing Behaviors and Housing Market Outcomes,” Grace Wong Bucchianeri and Julia Minson
Welcome. Now that I’m getting settled in my role as Chief Economist at Trulia, I’m kicking off a series of blog posts on Trulia Insights that will sift through the week’s news and explain what really mattered. Different news matters to different people: a trader dealing in real estate investment trusts (REITs) follows every fluctuation in every market indicator, but most of us only care about our local housing market and about the trends that are here to stay. I’ll look back at the week and point to new housing market and economic data that were especially surprising or important, and put it into context. I’ll also highlight insights that are under-the-radar but say something important about housing today and in the future. I’d love your feedback on these posts and any findings you come across that you think are worth discussing.
This week, some thoughts on the latest Case-Shiller home price index and shadow inventory data, as well as new findings that caught my eye about traffic congestion and the mortgage interest deduction:
First up: the S&P Case-Shiller index, an important measure of home price changes, increased for the fourth straight month. Celebrate? Not so fast. Prices usually rise more in these months than at others times of the year. From March to July (this week’s release was the July numbers), the index went up a total of 3.7% – that’s pretty good – but the seasonally adjusted index went up only 0.2%. This means that the 3.7% increase was almost all about the spring/summer bounce that happens most years rather than the beginning of a real long-term trend. One way to take out seasonality is to compare the index to the same time last year, and by that measure home prices fell 4.1%. Not so good.
Next up is the decline in shadow inventory. When there are more homes for sale than there are buyers in a market, prices stay low. But in addition to homes actually on the market, there’s also the “shadow inventory”: homes that aren’t on the market today but probably will be because the homeowner is seriously behind on mortgage payments or the home is in foreclosure or has been taken back by the bank. A large shadow inventory, like a large listed inventory, keeps pressure on prices from rising. CoreLogic reported this week that the shadow inventory is down over 15% in July 2011 versus July 2010. But the current shadow inventory of 1.6 million is still much higher than before the housing crisis, when it was regularly under 500,000. This shadow inventory will have to shrink a lot more before prices really start moving up.
The Texas Transportation Institute published its annual report on traffic congestion. Having a short commute is a key factor in where people want to live. If you’re moving someplace new, you should know how much time you’ll spend in traffic; even if you’re not moving, trends in traffic congestion could affect your home’s value. So what happened to traffic last year? High unemployment means fewer commuters on the road and less congestion: the average commuter lost 34 hours in 2010 from being stuck in traffic, down from 39 hours in 2005. Commuters in Washington DC, Chicago and Los Angeles lost the most time due to traffic jams. Meanwhile, the folks who lost the least amount of time live in places with newer infrastructure, like Phoenix, or slower growth, like Detroit.
|Rank||Metro Area||Hours Stuck in Traffic in 2010|
|3||Los Angeles-Long Beach-Santa Ana, CA||64|
|5||New York-Newark, NY-NJ-CT||54|
|6||San Francisco-Oakland, CA||50|
|8||Dallas-Fort Worth-Arlington, TX||45|
|13||San Diego, CA||38|
But if you can’t stomach listening to the traffic report and brake lights give you road rage, move to a smaller city: commuters in my hometown of Rochester NY spend only 13 hours a year in traffic, and those in McAllen TX, Stockton CA, and Eugene OR spend fewer than 10. And for those of you who can pick and choose your driving times, work from home on Friday and stay off the roads between 5-6 pm.
As the government fights over the federal budget deficit, the mortgage interest deduction – the ability to deduct your mortgage interest payments from your taxable income if you choose to itemize — is a tempting target for politicians: it lowers annual tax revenue by roughly $100 billion, and fewer than 30% of taxpayers even itemize their deductions in the first place. So who takes this benefit? This week, new research shows how much of this tax deduction goes to people in different parts of the country. The differences are huge: in high-income places with high homeownership rates, like the suburbs of Denver, Washington DC and Minneapolis, over 40% of filers claim the deduction, but fewer than 10% in places with low income or low homeownership, like parts of rural Texas and the poorer parts of New York City. Of those who do claim the deduction, the average amount ranges from over $20,000 in coastal California, where homes are expensive, to around $6,000 in rural upstate and western New York. Do these inequities mean that the mortgage interest deduction is doomed, and you itemizers will be paying more tax? No. Because politicians represent geographic areas, the concentration of the mortgage deduction benefits in specific areas means that representatives in those areas will fight hard to preserve the deduction: the mortgage interest deduction would be in greater danger if the same overall benefits were spread evenly across the country. Ironically, the inequity of the mortgage interest deduction boosts its chances for political survival.
– S&P/Case-Shiller index, September 2011 release
– CoreLogic shadow inventory report, September 2011
– Texas Transportation Institute’s 2011 Urban Mobility Report
– “The Geographic (and Political) Distribution of Mortgage Interest Deduction Benefits”, by Ike Brannon, Andrew Hanson, and Zackary Hawley