Here
is an interesting picture. The S&P/Case-Shiller House Price index showed
prices in the 20 largest cities increased 13.3 percent annually in September,
the highest year-over-year increase since February 2006. Yet, existing home
sales have slowed a bit and pending home sales have been lower for several
months, according to the National Association of Realtors. How can home prices
be rising at a time in which home sales are slowing down? The answer is found
in two important numbers. For one, the percentage of distressed sales is
falling as the foreclosure inventory shrinks. LPS reports that the foreclosure
inventory is down 30% over the past year. Since distressed homes sell at a significant
discount over non-distressed sales, it makes sense that the average sale price
is rising. During the height of the housing crisis, the flood of foreclosed
homes exaggerated the drop in home prices and on the way out of the crisis, the
rise in home prices his now exaggerated by the lower numbers of these sales.
Secondly,
we still have a lack of inventory in many markets, especially at the lower end
of the market. Housing sales are being held back because of this lack of
inventory but at the same time we are not seeing slower housing sales cause
downward pressure on prices. If there is more demand than supply, prices will
be stable or rise regardless of the number of total sales. What does this mean
for the future? If demand continues to rise, housing prices will continue
rising or at least stabilize. The first factor -- distressed sales --- will
become less of a factor in the future as we approach normalized levels of
distressed sales.
The
key is demand. If the economy continues to produce jobs at a decent rate, then
we will have a greater demand for the real estate market. That is what makes
November's employment report interesting. Heading into December we had a series
of numbers which pointed to a stronger jobs market, including the lowest number
of first time claims for unemployment benefits since before the recession
started and a strong October employment report. This made the markets
optimistic before the numbers were released. And the numbers did not disappoint
as the economy once again created more than 200,000 jobs and the unemployment
rate dropped to 7.0%.
Mike Ervin
Mortgage Banker
NMLS #
252715
C: 650.766.8500
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