US realty to recover

Prices stabilise in the US property sector as 2012 promises growth


The chief economist of the National Association of Realtors is very upbeat about the US real estate market for 2012. In fact he predicts an across the board increase of two percent in house prices for the year. Lawrence Yun was addressing the NAR annual conference in November when he predicted the start of a ‘modest recovery’ in 2012.

He said, “Tight mortgage credit conditions have been holding back homebuyers all year and consumer confidence has been shaky recently. Nonetheless, there is a sizable pent-up demand based on population growth, employment levels and a doubling-up phenomenon that can’t continue indefinitely.”

Yun further predicts that rents could increase by as much as three percent and mortgage rates might go up by 4.5 percent next year.  

His forecast for 2013 is even rosier, when he predicts that home sales will grow by six percent and that house prices will on average increase by three percent. Rents, he says, will increase by 3.5 percent in 2013 and the mortgage rate will creep up to 4.8 percent.

In 2014, says Yun, there will be a six percent increase in home sales. Prices will go up by four percent, rents will increase by 3.5 percent and the mortgage rate will stand at 5.5 percent.

These are averages for the country as a whole. Conditions in specific areas or cities will vary, with some being better off and some faring worse. If mortgage standards are loosened or tightened in the meantime, the situation could look quite different added Yun. The so-called ‘shadow inventory’ will also play a significant role here.

Yun is of the opinion that once real estate prices start to consistently show a positive return, it will restore consumer confidence and the broader economy will also improve. Mortgage-underwriting standards, he says, should be ‘sound and reasonable’. He described the current standards as ‘overly stringent’.

Yun also cited a number of additional reasons for his positive outlook. Among them being the fact that house prices have stabilised, that houses have once again become very affordable and that there is a low inventory of new property.

Whether one should take Yun’s predictions seriously or not is a matter for debate. It sounds quite similar to statements made by David Crowe, Chief Economist of the National Association of Homebuilders in January 2011. He predicted that there would be 575,000 housing starts during this year, a 21 percent increase over the figure for 2010. His forecasts were based on the assumption that the US jobless rate will not increase and that 200,000 new jobs would be created every month.

It has to be remembered that there are still a large number of unsold properties already on the market. There is also a large backlog of foreclosed homes, which will only worsen if jobless figures increase further.

Non-distressed properties have also built up a considerable backlog. Add to that the anti-inflationary actions by the Fed, which have done nothing to stimulate the economy and it is indeed hard to see the reasons for Yun’s optimism.