Home Prices Hit a Milestone
Growing Demand, Shrinking Supply Buoy Housing Market; 'Tide Has Changed'
Home prices are on track to notch their first yearly
gain since 2006, the strongest performance since the housing bust and a
development that could accelerate the real-estate rebound even as the
broader economy stutters.
The housing market's revival has had several false dawns in recent
years, but a recovery that began in the spring has strengthened
throughout the summer and fall. The latest confirmation came on
Wednesday, when the Standard & Poor's/Case-Shiller 20-city index
showed that prices rose by 4.3% from a year ago in October. Since
January, prices are up 6.9% so far this year, the largest year-to-date
gain since 2005. A separate index released Wednesday by
Lender Processing Services Inc.
LPS +3.86%
showed that national home prices were up by 5.2% this year through October.
U.S. home prices slipped in October from a
month earlier amid expected seasonal weakness but were up from a year
earlier, according to Standard & Poor's Case-Shiller home-price
indexes. WSJ's Nick Timiraos analyzes the data and looks ahead to 2013.
"The tide has changed," said Ivy Zelman,
chief executive of research firm Zelman & Associates. "People feel
it's OK to go back into residential real estate—it's no longer taboo—and
that change in sentiment could have a very powerful effect."
Prices have risen this year amid stronger demand and sharp declines
in the number of homes for sale. Banks slowed down foreclosures after
abuses in processing paperwork surfaced two years ago. Since then, banks
have become more aggressive at modifying loans or approving short
sales, where the home is sold for less than the amount owed. The decline
in new foreclosures has reduced the number of homes on the market that
sell for large discounts.
Homeowners who normally would sell their properties
have been holding them off the market rather than sell at what they
perceive to be a lowball prices, leaving inventories of previously owned
homes at an 11-year low.
Weak home construction in past years also is a factor and has left
inventories of new homes for sale near the lowest levels in at least 50
years.
Demand, meanwhile, has picked up, first as investors scooped up
perceived discounts on properties that can be rented out or resold
quickly for a profit. Traditional buyers—those planning to live in the
property and not flip it—also returned to the market, drawn by
record-low mortgage rates, rising rents and steady job gains that are
increasing household formation.
"People got tired of living in mom and dad's basement, and rents have
gotten much higher than your mortgage payment," said Glenn Kelman,
chief executive of Redfin, a real-estate brokerage. To be sure, housing markets are still
fragile and face stiff headwinds. Mortgage lending standards are still
strict, as lenders scrutinize appraisals and borrowers' income history
to make bulletproof mortgages. Millions of borrowers owe more than their
homes are worth or don't have enough equity to sell their home and make
a down payment on a comparable property.
Median sales prices of previously owned homes stood at $180,600 in
November, according to the National Association of Realtors, and have
posted year-over-year gains for nine months, the longest such streak
since May 2006, when home prices peaked.
Still, sales of existing homes in November were up 14.5% from a year
earlier, putting them on pace to reach their highest level since 2007.
On Thursday, the Census Bureau is set to report new-home sales for
November.
The upshot is that more buyers have been chasing fewer homes for
sale, putting upward pressure on prices. "We've been seeing just crazy
competition. Supply and demand has tipped in the seller's favor," said
Nani Luculescu, a real-estate agent in Anaheim, Calif.
Last month, she
represented a buyer who made the winning bid—among 52 offers—for a
$320,000 four-bedroom home in Garden Grove, Calif., that sold for 10%
more than the asking price. Although the home drew better offers, the
owner sold to her clients, a newlywed couple buying their first home,
after they included pictures of themselves and their pet dogs—two
Pugs—in a cover letter.
Some buyers aren't only bidding above
the list price, but also are making all-cash offers and forgoing home
inspections in an effort to make the sale as easy as possible for the
seller.
Frustrated by a lack of inventory,
others are instead purchasing new homes. Sonal Basu, a real-estate agent
in San Francisco's East Bay, said in August she noticed that
prospective buyers began camping out in tents at the new-home
development where she lives in San Ramon, Calif. Some of the "campers,"
she says, are being paid $250 a day by buyers to wait in line for them.
Since August, every area new-home
development has also had campers waiting in line to buy homes, she said.
"A year and a half ago, nobody wanted to move out here because they
felt it was the boonies," Ms. Basu said. "Now, they're not hesitating
with this commute."
Prices
are rising in part because the share of "distressed" homes—those selling
out of foreclosure or in short sales—has dropped. While 18 of 20 cities
posted year-over-year price gains in October, the largest increases
have taken hold in some cities hit hard by the housing bust. In Phoenix,
for example, prices have jumped by 21.7% over the past year. Prices
gained by 10% in Detroit and 8.5% in Miami.
Economists say many such gains aren't
sustainable and instead reflect prices rebounding from very low levels.
"They're not going to continue at that pace," said Thomas Lawler, an
independent housing economist in Leesburg, Va. He said he expected
prices to go up next year, but at a slower pace than this year.
Also, some states where banks have
struggled to follow court-administered foreclosure processes have large
overhangs of mortgages where borrowers haven't made any payments in at
least a year. Those homes could eventually hit the market, putting
pressure on prices if demand isn't strong. Prices in New York and
Chicago, which both have large overhangs, saw prices decline by 1.2% and
1.3% in October from one year ago.
A more immediate concern is how
consumer confidence might fare if lawmakers don't reach a solution to
avoid the "fiscal cliff," a raft of automatic tax increases and spending
cuts set to take place in early 2013.
For now, low inventories of distressed
properties are finally boosting the fortunes of the nation's home
builders that have long been sidelined by competition from cheap
bank-owned properties.
The stock prices of U.S. home builders,
as measured by the Dow Jones home construction index, were up more than
75% year-to-date as investors are betting that the housing recovery
could be sustainable. Others are plowing money into startups that invest
in single-family homes as rentals. That, in turn, is ramping up
construction hiring and spending on everything from lumber to cement to
air-conditioning units.
"It hasn't gotten to any big level yet, but our carpet businesses and
brick businesses and all of that will come on with residential
construction, and that has turned," said Warren Buffett, chief executive
of Berkshire Hathaway, in an interview last month with CNBC.
Real-estate executives say their biggest worry right now is that more
homes aren't available to meet demand. Mr. Kelman says he is looking to
increase Redfin's workforce of 400 agents nationally by 50% by the end
of January. "I'm going across the country meeting with managers, and the
only topic we're talking about is hiring," he said.
Earlier this year, the company ended up referring about half of its
potential customers to other companies because "demand outstripped the
supply of agents," he said. Redfin is unusual among real-estate
companies because it pays a salary and benefits to its agents instead of
commissions. "Our model means we have to go long on real estate," Mr.
Kelman said, "and we did not go long enough."
