Interesting post over at the Progressive Policy Institute entitled “Rising Home Prices May Not Spell Recovery.” Interesting, but — to be overly blunt — wrong.
The argument by author Jason Gold is that, although it seems home prices have hit bottom, we may not be in a true recovery for several reasons, which he then explains.
And which I’m going to debunk. 🙂
1. Rising prices will drive investors out, and they’re a huge part of the market. Fueled by a lot of former owners who are now renting, Gold argues, investors have entered the market in a big way, and are today a major driving force. “As of May 2012, investor purchases made up 25.3% of all real estate transactions,” he writes. “That’s simply unsustainable,” he says, because rising prices will drive investors away from the market.
This may well be true, but Gold’s error (IMO) is not considering what other effects rising prices will have. And one of them, I would bet, is that it will bring more sellers off the sidelines — those people who have wanted to move (or move up) but have held back because of their homes have depreciated too much.
As rising prices push them into the market, low interest rates will still appeal to buyers — and as those homes are sold, the sellers will become buyers. In other words, as low prices brought investors in, higher prices will bring more sellers.
2. More mortgage applications doesn’t mean a better housing market. Refinancing constitutes 80% of total applications, Gold points out, and “the percentage of first-time homebuyers … is still far below the 40% of a normal housing market.”
Heck, that could more easily be construed as good news for the market. If we’re seeing sales and prices improve while four of five loans are re-fis, imagine what will happen as that gets back to a normal balance.
Further, re-fis mean more money in consumers’ pockets, which bodes well for the long term health of the economy.
3. Lots of wannabe homeowners can’t qualify for a loan because they’ve been “scarred by foreclosures and ‘short sales’.”
Put another way, Gold is saying that the market can’t recover if so many people no longer qualify for mortgages, even as lenders are loosening their purse strings.
This is something we’ve covered before. Yes, people who want to own are finding that a foreclosure or short sale has hurt their credit to the point of not qualifying. But those only stay on a credit report for three or seven years. And the housing crash is more than five years old. Ergo, there are these “shadow consumers” waiting for their credit to clear in the next year or two. (Click here for the more detailed post on that, “‘Shadow consumers’: Why the housing market is going to bounce back faster than people expect.”
4. Political confusion is keeping the market down. An uncertain regulatory environment means lenders don’t know what to expect not only in terms of loans, but in terms of the secondary market.
As with #2, so? If the market is doing this well with all the uncertainty, think of what it will do once Congress stops doing its impression of a whiny five year old. Sure, Congressional stonewalling is keeping the market from doing as well as it could, but it’s certainly not enough to stall the recovery.
All this isn’t to say that Gold doesn’t have some excellent points — the housing market an overall economy is recovering, not recovered. It could end up stalling or retreating; there are no guarantees. But there are certainly probabilities, and those still favor a recovery that continues.