Photo: Bloomberg TV
The rapid decline in housing inventory and the upward momentum in prices have recently forced economists like Bank of America’s Michelle Meyer to raise their projections.But the housing market is still far from normal, and Meyer fully acknowledges that.
For a true recovery we need to see a “return of primary home buyers and exit of institutional investors,” wrote Meyer in a new note to clients.
In that note, she points out 4 “hot topics” in housing that will continue to play an important part in the conversation on the housing market.
One of the biggest talking points on the housing market in 2012 was the decline in inventory which is down 22 per cent from the end of 2011. 'The reduction in supply has underpinned home prices and created a need for construction yet again.'
Falling home prices, tighter credit, and negative equity all fed into the declining turnover i.e. selling a property to buy a different one. But as home prices increase and credit standards ease 'pent-up inventory will be unleashed'.
In 2013 however, inventory could increase a bit because of foreclosures that still need to go through judicial states. Moreover, inventory typically declines at the end of the year and rises again.
During the housing bust and in the recovery since, new home sales have been 'crowded out' by existing home sales. Since the peak, builders that couldn't sell their existing supply stopped construction, leading to an earlier decline in new home supply and causing a gap in new and existing inventory that impacted prices.
As existing inventory has declined, and homebuilder confidence has jumped, we should see opportunity for new home construction this year.
'Due to a better balanced market, we expect new home sales to pick up, likely outpacing the rise in existing home sales. Low inventory should prompt builders to respond more quickly to the rise in demand. This seems particularly likely given that homebuilders are gearing up for a stronger selling season.' Meyer has previously explained why overbuilding isn't a risk to the housing market.
Bank of America now sees home prices rising 4.7 per cent in 2013, and estimates that home prices climbed 6.4 per cent last year.
This upward revision to home prices was attributed to three key factors. First, momentum - the faster home prices turn, the more people believe they will continue to rise. Second, depleted inventory, and third, credit availability.
Over the past few years vacancy rates have plunged and rents have increased in the rental market. But the recovery in the housing market shouldn't prevent the rental market from doing well.
There are a few 'cyclical and structural factors' underpinning the rental market. 1. Credit conditions are expected to ease but are still historically tight. 2. The knowledge that home prices can and do fall. 3. Households looking for mobility prefer to rent. 4. 'Public policy is evolving to consider affordable renting options as well as affordable homeownership.' 5. 'ageing population supports rentals. 6. Investors have engaged in REO-to-rental programs'.
Business Insider Emails & Alerts
Site highlights each day to your inbox.