NEW YORK CITY—The economic news for August appeared to contain dismal news for the housing market with existing home sales down 5.3% from a year ago and down 1.8% from July, but the opposite is the case. August's numbers demonstrate that the housing market is improving and that the low hanging fruit (i.e. below market units) is gone and that investors are leaving the housing market because the ability to turn a quick profit had ended. The foregoing premise is supported by the fact that the sale of distressed homes declined for the second straight month and, for the first time since October, 2008, is in single digits.
Economists caution that you cannot tell that the economy is in a recession until there has been negative growth for two quarters, the confirmation of which sometimes takes another two quarters to confirm because the estimates of various numbers need to be adjusted. Conversely, it can take years to know that a recession has ended and this is particularly true of real estate recessions. In fact, there has been incredible growth in Boston, New York, Washington and Miami for several years, while the housing market elsewhere has continued to be moribund. However, a great deal of the soft market around the country has been caused by two factors: a glacially slow recovery and a huge supply of available houses and apartments that included homes that were being foreclosed and subject to short sales. These factors have prevented the recovery from being felt by the average homeowner, which further eroded the confidence needed to purchase a new home.
This improvement in the housing market is confirmed by one of the two factors that have the greatest influence on home sales—increasing apartment rents. The third quarter reports of the rental market indicate a 1% increase in rents during the quarter, caused in large part by the low inventory reflecting the dearth of construction from 2010 and 2012. Nationally, only 4.2% of apartments were vacant in the quarter, which is down from 4.3% a year ago and an average of 5.5% since 1999. As most investors know, there is a direct correlation between apartment availability and home sales, the lower the number of available apartments, the higher the rent, the more it makes sense to invest in purchasing a home.
Conversely, the larger number of available apartments, the lower the rents, the more sense it makes for individuals to rent rather to buy. The other factor affecting homes sales is a strong job market, which we have not yet seen and is the reason the recovery has been so long in coming. Of course, with positive signs that the recovery is holding and the huge inventory of unsold homes is shrinking, the more comfortable employers will be in increasing production and staffing.
The other important housing indicator is that existing home prices are up 4.8% from a year ago, the thirtieth month of price increases. Inventory levels have declined in the last month from 2.37 million homes to 2.31 million which is a 5.5 month supply; a number that is below the six million homes that need to be available for sale in a balanced market. This shrinkage in the supply of housing is also causing those sitting on the sidelines to wade into the housing market and buy before the prices begin to spiral out of control which is what happens when potential home buyers believe that housing will soon be unaffordable.
Of course, as the following chart demonstrates, not every market is the same, but the trend is improving:
Locale Change from Aug 2013
Sales Avg. Price
Northeast -4.3% -.8%
Midwest -3.9% +5.9%
South -4.2% +4.7%
West -9.8% +5.4%
The chart tells the entire story. Sales are down but prices are up (or, at least flat in the northeast).
Since 2009 all cash sales have been an important factor in the housing market, because investors use funds from sources other than the traditional 15 or 30 year home financing that individual purchasers seek. Since the recession, investors absorbed a large portion of the oversupply at bargain prices, which made the limited availability of traditional home financing not as obvious. Now, however, with investors leaving the market to the home buyers for use, whether the housing market will continue to improve depends heavily on mortgage lenders and, of course, the secondary market. The question now is whether Fannie and Freddie will support housing as they have done in the past?
Although Fannie and Freddie were bailed out by the government and blamed by Congress for the housing collapse, the truth is that without something or someone to play the role Fannie has played since the 1930s and Freddie since the 1970s, the housing market will be stuck in second gear. Unfortunately, notwithstanding all the books and articles written on The Great Recession and, of course, the finger pointing, no one has solved the problem of who is going to play the role of Fannie and Freddie now that we have reached the point where they are needed to provide liquidity to an important sector of the economy that is illiquid. August's numbers tell us that the housing market has recovered, now financing has to be made readily available in order to keep it growing and again making home owners and buyers optimistic.
Stuart Saft is a partner at Holland & Knight LLP. The views expressed in this column are the author's own.
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