December 6, 2012
Five years and 16 million foreclosures after the 2008 housing crash, most Americans have not lost faith in real estate. In a survey this summer of more than 2,000 adults by home buyer website Trulia, 61 percent of respondents predicted that prices in their local market would rise next year, 58 percent thought prices would take 10 years or less to get back to their pre-crash peak, and almost 80 percent of current renters said they plan to buy a home someday.
Whether or not that enthusiasm has merit, the signs of a turnaround are hard to ignore. National home prices have been on the uptick for eight straight months and jumped 6.3 percent year-over-year in October – the largest increase since June 2006, according to CoreLogic. In California, one of the hardest-hit states, 57 percent of homes for sale have attracted multiple offers this year. Bidding wars on houses are making a comeback in Florida, and in Phoenix, realtor Marge Peck says that “everything under $150,000 sells in a heartbeat.”
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Will that pattern hold in 2013? To find out, we talked to real estate economists and insiders and reviewed industry reports that assess next year’s outlook. Most experts said their predictions depend on the mainstream forecasts of economic growth next year being correct and assume that the economy won’t experience an earthquake from falling off the fiscal cliff. Others emphasized that all markets are local—real estate conditions in coastal metro areas vary wildly from those in mid-sized Midwestern towns. Those caveats aside, here are 10 real estate trends they forecast for next year.
1. Rising home prices. The slow pace of new-home construction is pushing prices up, a pattern that will continue in 2012, according to several sources. Calvin Schnure, an economist at the National Association of Real Estate Investment Trusts, says construction of new homes and apartments needs to be between 1.25 and 1.5 million a year just to keep up with population growth. But since the housing crash, new construction has been at 500,000 units or fewer for 6 years running—that’s actually created a shortfall in available homes. A National Association of Realtors (NAR) report in October showed a 5.4 months’ inventory of homes for sale at the current pace, 22 percent below where it was a year ago and the lowest inventory since February 2006. (A 6-month inventory is generally considered the sign of a healthy market).
“I think we’re going to look back three years from now and say that 2012 was the year the housing market turned the corner in America, says Mark Dotzour, chief economist at Texas A&M’s Real Estate Center. Overall, the NAR forecasts average home prices to rise 5 percent next year, after a projected increase of 6 percent this year.
2. Rising rents as more young people enter the market. Schnure says there’s a shadow demand in the rental market—the 3 to 5 million people, most in their twenties and thirties, who have been riding out the shaky economy by moving back in with their parents or staying with friends. Now, as they start to get jobs, they’re looking for their own apartments. Schnure says they represent a pent-up demand for rentals that’s twice as big in percentage terms as the country has ever seen. For next year, “that means that for people looking to rent, good luck… it’s going to be a challenge,” he says. This year, average rents have been rising nationally at about 4 percent a year and in many metro areas by 7 to 9 percent, says Barry Habib, chief market strategist for mortgage lender Residential Finance Corporation. A recent Zillow analysis also found that buying beats renting in 59 percent of markets after three years or less.
3. Fewer foreclosure bargains. The chance to snap up a bargain-basement foreclosure could be fading. Sales of those homes fell to about 11 percent of all sales in June 2012, down from about 28 percent in March 2011. In part that’s because the Federal Housing Finance Agency (FHFA), the Federal Deposit Insurance Corporation, and banks have been selling off hundreds of distressed home loans in bulk to purchasers who agree to work out new terms with borrowers rather than simply foreclosing, says Philip Feder, chair of real estate practice at global law firm Paul Hastings. Foreclosures have also dropped because the equity position of thousands of borrowers has improved with rising home prices, righting many upside-down loans.
4. More short sales. Short sales are deals in which a home sells for less than what the borrower owes on the mortgage, with the bank agreeing to accept the sale in lieu of going through an expensive and time-consuming foreclosure. On November 1, the FHFA issued new rules on short sales for Fannie Mae and Freddie Mac—among other measures, those reduce the documentation that borrowers have to show to demonstrate hardship, and borrowers now aren’t necessarily required to pay the difference between what they owe on the mortgage and the final sales price. So while foreclosure sales will keep falling, the number of short sales should rise, says Polyana da Costa, senior mortgage analyst at Bankrate.com.
5. More first-time home buyers. A report from consulting firm Deloitte & Touche on key issues in commercial real estate for 2013 predicts that growth in demand for single-family homes next year will likely be driven by first-time home buyers. That trend is visible in an NAR survey of buyers and sellers released in November—39 percent of borrowers were first-timers, up from 37 percent in the 2011 survey.
6. Higher home construction costs. Building materials like sheet rock, lumber, and copper are at high prices even though levels of home construction remain low, says Dotzour. The same is true for construction labor costs—after the crash, many qualified construction workers migrated out of the country or into other industries, he says. As a result, “you’ve got the possibility of some pretty potent price increases in [the cost of constructing] new homes,” Dotzour says.
7. Property management boom. It’s a great time to be a property manager. Earlier this year, the FHFA began selling foreclosed properties in bulk to large institutional investors who agree to hold and manage them as rentals. That intensified the trend already underway toward investors snapping up distressed properties to rent--the number of homes purchased as investments rose 65 percent in 2011 over 2010, according to real estate data provider RealtyTrac. Many of those investors are now using professional property management companies to rent and maintain their purchases, which has created huge demand for their services, according to a July story by UPI.
8. Rising mortgage interest rates. Mortgage rates have been at historic lows this year, so there’s only one direction for them to go. The NAR predicts that rates will gradually rise to average 4 percent next year, up from about 3.5 percent in September of this year. The Urban Land Institute’s 2013 Emerging Trends report, which surveys industry experts, concludes that “’there’s no way the low-interest-rate environment lasts,’ and your low-rate mortgage could be a ‘huge future asset’ as soon as interest rates begin to pop.” Greg McBride, senior financial analyst at Bankrate.com, agrees there could be minor increases in the coming year since the market drives rates, and economic growth or rising inflation would allow bond holders to command higher rates, but “I don’t think anybody is expecting a shoot-the-lights out type of economic environment that would cause a more pronounced increase.”
9. Easier credit standards. On average, would-be borrowers now need a FICO credit score in the 760s to get a mortgage, much higher even than the years before the easy-credit housing boom began, according to the FHFA. That should start changing next year--qualifying scores will start dropping as more qualified buyers come into the market and lenders compete to offer them loans, says Luis Vergara of Mission Capital Advisors in New York City. That downward shift in standards will be strengthened if the Obama administration, as has been rumored, replaces FHFA head Ed DeMarco, a Bush-era holdover and advocate of tight credit standards, says Richard Green, head of the University of Southern California’s Lusk Center for Real Estate.
10. Two-tiered home-building industry. Banks have been reluctant to make construction loans—only 22 percent of the country’s largest banks are making them, according to a 2012 survey by the Office of Comptroller of the Currency. That, says Dotzour, is producing a “bifurcated market”—a few publicly traded large builders with access to capital who are able to tackle big projects, and many medium and small builders who rely on loans from regional and community banks but aren’t getting the capital they need to launch projects. The result could be more consolidation in the home building industry next year and, ultimately, less competition and higher prices for everyone.
This piece was updated at 1:35pm on December 6, 2012 with additional information on rising mortgage rates.