Several key housing market indicators suggest that the economy is primed for a recovery. Both sales and prices have increased after bottoming out in 2010. The country, as a whole, has witnessed a modest decrease in foreclosures and mortgage delinquencies. Housing affordability continues, as record-low interest rates facilitate prospective purchases.
Despite encouraging trends, the housing sector remains unstable. According to several panelists at the Milken Institute Global Conference in Beverly Hills, housing market indicators suggest we temper our expectations. They are as follows:
- Good land is scarce
- Interest rates may increase
- Dependence on government aid
- Foreign buyers
- Wide spectrum of recovery rates
A primary concern of the Beverly Hills panel, regarding the current recovery, is a distinct lack of desirable land. According to developers, it is becoming increasingly difficult to find regions to break ground on new projects. Contributing to the already volatile situation, are lots that have been seized by banks as a result of foreclosure. The acquired land has decreased in value significantly, meaning the banks have been forced to absorb losses during sales.
Significant bank write-offs result in a reluctance to facilitate land purchases. “Land is a defining element right now,” said Emile Haddad, CEO of the real-estate management firm FivePoint Communities. “A lot of land is hidden in drawers right now.” The supply of new homes for purchase is then constricted and job growth in the construction industry may become stagnant.
In addition to the scarcity of desirable land, mortgage rates are expected to increase. “Buyers should be very cautious,” said Jeff Greene, president of Florida Sunshine Investments.
“No doubt you can buy a house today and get a really good price and a low-interest loan. But if you want to sell that house to somebody two or three years later and rates go up to 5 or 6 percent, how much is he going to pay for that house?” Residential investors should be cautions. The enticing interest rates we see today could easily double in the coming years, placing a burden on those who purchased for investment purposes.
Foreign investors continue to take advantage of our low interest rates in top markets such as Miami, Los Angeles and New York. Their presence has no doubt been felt in the current recovery. However, foreign investment drives up the prices of nearby homes, making it more difficult for prospective homeowners to buy. If prices continue to rise, in association with interest rates, we could experience another bubble crisis.
As home prices continue to rise, housing market indicators suggest that our expectations should be reserved. There are still a number of regions in which the housing slump still hasn’t subsided. According to Greene, certain geographical regions are experiencing the current recovery at a variety of rates. While the Miami market is on Fire, Palm Beach County remains void of economic growth. A variation, such as this, alludes to a fragile situation.