Orange, CA (PRWEB) March 19, 2014
Rising home prices can be partially attributed to investor activity. The Demand Institute, an organization that helps companies “align strategies and investments to where consumer demand is headed across industries, countries, and markets”, published a 96-page report including current mortgage industry trends. The Report is entitled, A Tale of 2000 Cities.
One of the key conclusions that the report came out with was that the home prices in the United States over the past two years are a product of investors buying up large amounts of distressed homes to meet the growing demand of rentals. Similar to investor activity masking true economic recovery, the Federal Reserve has been purchasing Treasury securities so that long-term mortgage rates could remain low. This was their response to the financial crisis aimed to help households and businesses finance more spending as well as support the prices of other assets including stocks and housing. However, in 2014 the Federal Reserve announced that it would begin to decrease their spending in efforts to keep the mortgage interest rates low. These factors make it difficult to measure whether Americans are able to get on their feet financially without assistance from multiple other ‘finite’ factors.
Perhaps the investor activity and ability to drive up home prices explains the reasoning behind the fact that four million homes returned to positive equity in 2013. The additional four million homes bring the total mortgage residential properties in the Unites States with equity to a total of 42.7 million. Out of the 42.7 million, 10 million have under 20 percent positive equity, meaning that they might have a bit more difficulty refinancing their homes under new underwriting rules, and are certainly at risk if home prices fall.
Chief Economist at Zillow, Dr. Stan Humphries commented on the equity levels in America stating, “We’ve reached an important milestone as negative equity has fallen below 20 percent nationwide, which has helped free up marginally more inventory and contribute to further stabilization of the market. But a number of headwinds will prevent negative equity falling at the kind of sustained, rapid pace we need before the market can completely return to normal, and it remains roughly four times what it is in a healthier market. High negative equity is just another sign of how distorted the market continues to be, and how far we still have to go on the road back to normal”. Dr. Stan Humphries uses the perfect word to describe the picture that is painted of economic recovery; “distorted”. Even though more positive equity has been observed, the levels of negative equity does not pose as a healthy indicator of the direction which the market is heading.
This key point is a factor when considering the outlook of the next five years. The report concludes that over these next five years, prices will grow at a much slower rate than they have in the past few years due to investors inflating home prices, and the Federal Reserve pulling back on their efforts to create artificially low interest rates in the housing market. Instead, the report forecasts that the annual growth rate of a single-family median home to be 2.1 percent between 2015 and 2018 due to the supply and demand reaching equilibrium. It appears that the market will grow at a rate that is slow but sure, but at least we can count on the fact that it is projected to be “sure”. A steady recovery is more comforting than no recovery at all.
The study also determined that out of the sample that they studied, about 50% of American communities (communities range from affluent to financially troubled communities) are still struggling to find their path to move forward after the Great Recession. This could be due to the massive gap between the rich and the poor that is prominent in the United States. The report supported this when it deduced that a large proportion of housing wealth is heavily concentrated in a small portion of the United States. The report contends that, “of the 2,200 we analyzed, the top 10 percent ranked by the aggregate value of their owner-occupied homes held 52 percent ($4.4 trillion) of the total housing wealth. The bottom 40 percent had just 8 percent ($700 billion).” These figures highlight the idea that the middle class is fading away in America, turning it into a dichotomy of rich and poor communities.
The gap between the rich and the poor will also be prominent in the market for the years to come. The stronger markets will be greatly differentiated against the weaker markets when it comes to price fluctuations. The projection made by the Demand Institute is that among the largest metropolitan areas across the country, price rises will be far more significant in the strongest markets than the weakest ones. The strongest markets may experience up to three times greater prices rises than the weakest ones.
However, the report did not present all dire conditions. It included that the housing market, which is the most “valuable and visible” asset for United States households which also provides an “incredibly powerful and accurate lens through which to assess the state of American communities”, is experiencing recovery in the broader economy due to home prices, existing home sales, and new home construction. The very last key point of the report maintained that there are in fact opportunities for the government and big business to strengthen American communities struggling in the housing market.
At this point, according the study conducted by the Demand Institute, the economic growth forecast has strengthened and people are encouraged to go get out of their parents’ home or rented apartment and venture to a home of their own. The 2014 projected outlook for household formation is 1.3 million net new households. This is a rebound from the collapse of the great recession.
California is expected to capture one of the highest proportions of single-family home sales, as it is one of the most populated states in America. The state of California’s forecasted median home price for 2015 is $363,000 and for 2018 is $397,000 compared to 2012’s actual median home price of $345,000. Between 2012 and 2018, the home prices are projected to rise and overall average of 15%.
In terms of metropolitan areas:
-The San Diego/Carlsbad/San Marcos areas forecasted a median home price for 2015 as $451,000 and $488,000 in 2018 compared with the actual median price of $408,000. These areas exhibit a 20% increase in median price between 2012 to 2018.
-The Los Angeles/Long Beach/Santa Ana areas are forecasted to have median prices of $449,000 in 2015, and $459,000 in 2018, compared to the actual median price in 2012 of $404,000. Between 2012 and 2018, the home prices in this metropolitan area are projected to rise 13%.
-The Riverside/San Bernadino/Ontario areas are forecasted to have median prices of $224,000 for 2015, and $248,000 for 2018 as compared to the actual median price of $208,000. This is a 19% increase in median home price between 2012 and 2018.
-The Sacramento/Arden/Arcade/Roseville areas demonstrate the most significant (projected) increase in all of California. The median price of a home is forecasted to be $219,000 for 2015 and $241,000 for 2018. That is a 25% increase since the actual median value reported in 2012 of $194,000.
-The San Jose/Sunnyvale/Santa Clara areas have a forecasted median price of $780,000 in 2015 and $804,000 in 2018, compared with the actual median price in 2012 of $701,000. This is a 15% increase between 2012 to 2018.
-As for the San Francisco/Oakland/Fremont areas, the forecasted median price for 2015 is $776,000, and for 2018 is $814,000 compared to 2012’s actual median price of $670,000. This is a 22% increase between 2012 to 2018.
Broadview Mortgage values the opportunity to educate consumers to understand which direction that their current or future mortgage is taking them in. If you have any questions about the information herein, feel free to reach out to the Author, Brittany Williams, at Brittany.williams(at)broadviewmortgage(dot)com. If you would like a quick pre-approval click here, and for assistance with down payment or buyer assistance, click here. You are also always free to give us a call toll free at (855) 692-7623.
Sources: Keely, Louise, and Kathy Bostjancic. "A Tale of 2000 Cities." The Demand Institute. The Demand Institute, Feb. 2014.
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