Looking Ahead: Housing Recovery Sluggishness Anticipated for 2013

Examining the Recent Housing Market and Upcoming Housing Trends in 2013

By Daniel Duffield

Concluding the 2012 calendar year, home prices have been growing at the most rapid pace since 2005, before the burst of the housing market bubble at the turn of the decade. With the housing market gaining strength, indicated by increased construction starts, increasing home purchases, and a noticeable decline in mortgage delinquencies, many would expect 2013 to be a prosperous and progressive year for U.S. real estate. While apprehension over the debt-crisis and the previously unresolved fiscal cliff diminished this optimism temporarily, confidence has returned now that the issue has been resolved. However, despite these positive indications of growth for U.S. housing, experts believe that the recovery of the housing market will slow down during 2013.

According to analysts at Fitch Ratings, a combination of the historically low mortgage rates, declining inventory of homes for sale (as a result of either fewer foreclosures being processed or the large amount of underwater borrowers who are unable to sell their properties), and weak levels of new home construction have created a dynamic of affordability that has boosted home demand. However, these analysts contend that these factors have contributed to a market in which the weaknesses, which would normally hinder housing price growth, have been artificially corrected, including high unemployment and weak growth in terms of wages.

Basically, Fitch argues that housing prices remain overestimated, despite the U.S. housing bubble burst, and that price growth has been artificially spurred by numerous factors that are subject to change. While an increasing number of homes move toward foreclosure, especially in states that mandate a judicial process for foreclosure which has delayed these proceedings, the housing inventory is predicted to grow, expanding more in some regions than others.

Additionally, mortgage rates may finally be set to increase this year. In a recent meeting, members of the Federal Reserve Open Market Committee (FOMC) commented that now may be the time to “slow or to stop purchases [of assets including mortgage-backed securities] well before the end of 2013.” As a result, interest rates would rise, reducing home affordability.

Despite these bleak concerns about the future of U.S. housing, Fitch analysts conceded that pricing recovery will be largely contingent on local markets. Despite this, several other voices have arisen in agreement with this negative outlook.

According to Stan Humphries, chief economist for Zillow, the rise in pricing for many housing markets can be attributable to a sparse housing inventory due to a large amount of negative equity. Humphries argues that these circumstances will shift once borrowers rise from negative equity and the market begins to flow naturally.

While the home value index calculated by Zillow demonstrated an annual increase for November of 5.2%, Humphries anticipates a minor increase this year, only amounting to 2.5%, citing a rise in employment, a rise in rent prices, growth of household formation, and what amounts to “a five-year hiatus” with respect to home building.

Regardless of these predictions, supply and demand will dictate the course of home prices as usual, although even these cannot be anticipated in the coming year, with too many complicated factors and facets to be interpreted accurately.

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