The US Housing Market in Review: What to Watch for in 2013

The US Housing Market in Review: What to Watch for in 2013The US housing market has experienced a dramatic impact over the past three years. Recent economic collapses have changed the market forever. For planners and developers, the reality is just now sinking in. From the buyer’s perspective, a home generally represents a family’s biggest expenditure, but for homeowners it also represents a significant source of wealth. The lack of available credit to home buyers and the lack of a national database for property appraisal are the biggest concerns in the sometimes volatile U.S. housing market.

In the meantime, home prices are rising. U.S. home prices jumped 5 percent, the largest increase since 2006. The cost of single-family homes increased as the real estate market extends the recovery period from the housing crash. The National Association of Realtors stated in a recent report that over 100 US Metropolitan areas showed significant gain. Home values are up after a 6 decline as buyers compete for a dwindling supply of homes listed for sale. The housing recovery is still faced with a number of obstacles. However, tight supply conditions should cause home prices to continually rise next year.

Over the last two years, the national average price for single-family homes was $186,100, a 7% increase from last year. Short-sales and foreclosures, in which the price of the home is less than the balance of the mortgage, are also down from last year. All-cash home purchases are also down 2%. Investors make up the majority of cash purchasers and generally compete with first-time homebuyers. The largest market gain in a metro area was in Phoenix, AZ where prices increased 35% from last year. In Cape Coral, Florida prices went up 28% and in Akron, Ohio the prices rose 27%. Raleigh, North Carolina showed the biggest decline, with the average selling price falling 16%, followed by York, Pennsylvania, down 9% and Binghamton, New York, with a 6% decline. A recent Fannie May survey showed Americans expect home prices to increase over the next year. People who expect home prices to decrease fell to 10%.

So is the market is shifting towards a sellers’ market for 2013? Over the next few years, most areas will have more people selling homes than buying them. Most people will abandon or walk away from their homes. For example, Metro Atlanta experienced extraordinary housing growth for decades. As a result, they have suffered the most due to the recent recession. But the decline in home values is not universal. Since 2007 the average value of homes declined by 30% in the inner city markets. Outside the city, a 40% decline in home values shows that they are recovering slower. In the surrounding suburban areas home values have fallen by 50%.

Some homes in these areas may never return to their previous value.

The observations have been apparent in an anecdotal manner as well.  Affordable housing consultant Felicia Ramirez works with rent to own homes listing aggregator, HomeStarSearch. In her capacity, she consults with individuals seeking cost-attainable housing. She observes, “a lot of people are waiting out this market. We actually have found that some of the people renting to own simply don’t want to commit to a neighborhood due to home value volatility. We’ve seen this trend especially take foot in suburban communities.”

However, a few of the 6,000+ square-foot homes built in the suburbs could be transformed into several units that could accommodate three or more families. According to recent University studies, more people want to live in a walkable community. The trend is toward neighborhoods in which people can ride bicycles or mass transit to their destination. This dynamic changes the entire market. Nowadays, most home buying professionals are freelancers or contractors instead of employees. This new style of professional normally requires a shorter commute. Urban communities are more in demand where the option exists to either buy or rent a home. Future housing markets will see little demand for new single-family homes on large lots. New homes will be built near transit stations. There will be a sizable premium for more walkable and mixed transit areas that offer more options for transportation and mobility.

Another looming question is about property values increasing due to lowered interest rates. Interest rates always have a substantial effect on the value of real estate. The influence of interest rates on our ability to purchase property by affecting the cost of mortgage capital is extremely important. Most people assume that the key factor in real estate value is the mortgage rate. However, mortgage rates are only one of the interest-related factors which determines property values. Interest rates also affect capital flow. The supply and demand for capital and the required return on investment will influence prices in a number of ways.

The housing market is changing generationally. The statistical housing profile is changing day by day. In 1970, 45% of U.S. households included children. In 2000, there were only 33%. By the year 2030, a mere 29% of homes are estimated to include children. The average household is stabilizing. The average number of occupants has gone from 4.6 in 1900 to 2.75 in 2000. At the same time, more households have returned to being multi-generational. More young adults are living with their parents and elderly parents are moving in with their children. This is a trend that has been driven by the economic recession and greatly decreases the demand for new housing. After WWII, there was a huge demand for housing as the “baby boom” continued and families required new homes. Today, baby boomers are now seniors. We have rapidly become an aging population. Adults age 65+ will account for over 75% of the housing demand over the next 20 years. 90% of housing market growth will be homes without children.

American households are also getting more diverse. 75% of population growth in the next 20 years will be minorities. All of these factors will contribute to fewer people owning homes and more people renting them. The largest demand in the years to come will be for rental housing. Many developers believe we may not be able to build apartments and condominiums fast enough to meet the new demand. On the other hand, there will be an increase of homes on the market, due to seniors selling their homes. Today, 80% of adults age 65 or older own their home. However, when seniors move out of their homes, 60% of them decide to rent rather than buy. Economic growth and interest rates account for almost half of the variations in the buy/rent ratio. The other half is calculated by risk premium and pricing error. There is evidence that suggests that pricing error is related to fears about inflationary currency in light of the burst of the housing market bubble, which caused both a rise in home prices and an increase in interest rates. Prior to the financial crisis in 2008, the market experienced a sharp rise in housing prices due to an increase in the pricing error and a decrease in the housing market risk premium.