No matter how foggy the haze is, economists typically dust off their crystal balls in December. However economic forecasts too often involve driving by looking in a rear-view mirror.
Anticipating what might happen in the housing markets, with so many moving parts involved, can be the trickiest of all forecasts.
Because housing is a unique expenditure—combining elements of investment and a service—it depends on a variety of elements: employment, income, interest rates, the regulatory environment, and even the weather. Equally important are demographics and, as with any purchase or investment decision, the cost of alternatives (in this case rental housing). The housing market is complicated further by second homes and investor properties, separate from the investment component of the purchase of a primary residence.
The biggest question mark over the housing picture, though, is the fiscal cliff and the on-again, off-again negotiations to avoid a national financial calamity.
There is more to the fiscal cliff deadline than just the expiration or continuation of the Bush-era tax rates and the automatic spending cuts Congress agreed to during the debate on increasing the debt ceiling. Indeed, there are two distinct housing related issues: a provision which makes mortgage insurance payments tax deductible and a tax provision which shields forgiven mortgage debt, both of which are set to expire at the end of 2012. The latter kicks in when a bank modifies a mortgage to reduce the principal; when a borrower sells her home in a short sale and the purchase price is less than the outstanding balance on the mortgage; or when a bank waives the portion of the mortgage balance it couldn’t recoup in a foreclosure.
If either provision is allowed to expire, the consequences for the housing market could be serious, overshadowing any other forecasts.
Then, there are the “solutions” to the fiscal cliff as they affect taxes, one of which is to eliminate or drastically reduce the mortgage interest tax deduction, which has the potential to undercut home values with a ripple effect for the rest of the economy. Reduced home values will hit older homeowners who have looked to the investment component of their housing as a comfortable best egg for retirement.
Lower values and prices could create some churn in the housing market and benefit buyers, but without “willing” sellers, those buyers will be left holding onto their cash. The lower values will also increase foreclosures as more homeowners find themselves underwater (and perhaps without the tax protection for a short sale).
Foreclosures and short sales have helped lagging home sales. About 15 percent of existing home sales each month this year have been foreclosed homes and another 11 percent short sales.
That said, the trend in home sales has been positive: Existing-home sales averaged 4.65 million per month in the first 11 months of 2012 compared with an average of just under 4.3 million in 2011 and a shade less than 4.2 million per month in 2010. That trend marked a turnaround, as 2010 sales were weaker than 2009, which were in turn weaker than 2008. The last time existing-home sales showed back-to-back year-over-year gains was 2004-5, so home sales have the momentum to continue to improve in 2013.
The pattern is not quite the same for new home sales which are on a trajectory to improve in 2012 from 2011—the first year-over-year increase since 2005. To the extent reduced values for existing homes are affected by tax law changes creating a new class of reluctant sellers, homebuilders could benefit as would-be homeowners turn to new, rather than “used” homes.
There is, however, a price advantage to buying an existing home: The median price of an existing home in 2012 averaged about $175,000, while the median price of a new home averaged just under $239,000. Prices for both would likely drop if the mortgage interest deduction disappears or is reduced, but any cuts to the price of a new home would be strain on builders, so the likelihood new homes sales in 2013 will grow over 2012 remains uncertain.
The most positive sign for housing to continue to ramp up in 2013 is the improvement in the labor market, though even those gains require an asterisk.
The unemployment rate has been below a still-high 8.0 percent for three straight months and is a full point better than it was in November 2011, but the number of people counted as unemployed has remained stubbornly high.
Unemployment averaged over 12.5 million per month in 2012 compared with a monthly average of 8.9 million in 2008, the first full year of the recession. The average shot up to 14.3 million per month in 2009, the year the recession officially ended (according to the Business Cycle Dating Committee of the National Bureau of Economic Research). That the unemployment rate has gone down is a function of arithmetic: The labor force has also come down.
Nonetheless, jobs have been returning. Non-far m payrolls averaged 134 million per month during 2012, up from just over 131.5 million per month in 2011 and just under 130 million per month in 2010. In the year before the recession began, the monthly average was 137.6 million. As Wall Street investors would say, the “trend is your friend,” and it is positive.
That makes it a bit easier for lenders to approve mortgage applications, even in a new post Dodd-Frank world designating some mortgages as “qualified.” Recent reports suggest banks are relaxing—or at least no longer tightening—lending standards for residential mortgages. Whether that movement reflects easing or merely the fact that standards could not be tightened any further is up for debate. (Imagine a leaking faucet which you tighten and tighten until the leak stops. That you have stopped tightening it is not the same as loosening.)
Perhaps the only constant in the mortgage picture would be interest rates. The Federal Reserve has maintained a low-rate policy it began in December 2008, resulting in record-low rates for mortgage loans. Although the Fed said at its last Federal Open Market Committee meeting it would begin to increase rates if certain benchmarks are reached—an unemployment rate under 6.5 percent and inflation remains in check—its own forecasts show those milestones won’t be hit until at least 2015, meaning low rates will remain in place next year.
Taken together, the housing outlook for 2013 suggests a continued, painfully slow improvement, but we’re still a long way from heady pre-recession days.
Hear Mark Lieberman every Friday on P.O.T.U.S. radio, Sirius-XM 124, at 6:40 am and again at 9:40 eastern time.