What’s slowing the housing recovery?

August 19th, 2014

The imbalance in the housing recovery is one of the factors holding back the U.S. real estate industry's return to normalcy.

Since the housing recovery began in 2009, the national real estate market has shown significant improvement in regard to home values, price appreciation and sales.

Following rapid growth on various fronts in 2012 and the earlier part of 2013, 2014 has been characterized as slow in many regards. Home prices are still going up, fewer properties are underwater and entering the foreclosure process and sales are still performing at positive levels. However, these and other factors are no longer improving as economists expected.

Tom Showalter, chief analytics officer for Digital Risk, a company that provides quality control, due diligence and valuations services for the financial market, told MarketWatch there are four factors that will drive the continued sluggishness of the housing recovery:

1. The economy isn’t keeping pace with housing

Showalter said recent declines for pending and new home sales were the result of the economy. In June, for instance, sales of new single-family homes were at a seasonally adjusted annual rate of 406,000, down 8.1 percent from May and 11.5 percent from June 2013, the Census Bureau reported.

“When I see the numbers get volatile, I suspect that the economy isn’t [recovering] enough to support a sustaining trend,” Showalter said.

He also noted the need for consistent growth in the job market if the housing recovery is to continue.

2. The recovery is unbalanced
Since the U.S. housing market began climbing back from the Great Recession, economists have seen some local metro markets return to normalcy faster than others. This is because some regions weren’t hit as hard by the crisis. Those markets that suffered the most during the recession are improving, but it will take longer before they reach precrisis activity. Florida, for example, is still experiencing problems with foreclosures, which result from the state’s judicial foreclosure process and high inventory of vacant homes, some of which still stem from the crisis.

Micro economies, which include major metro areas such as New York, Miami, Dallas and Washington D.C., are expected to drive the recovery, according to Showalter. Investors are focusing their attention on these markets, while the rest of the country has not been as attractive. Furthermore, owner occupant buyers aren’t filling the gap left by investors, and prices are suffering as a result.

3. Home price appreciation is sluggish
As wage and income growth aren’t posting significant gains, home prices are also increasing at a slow pace. Earlier in the recovery, appreciation was moving much faster than income and wage inflation, making it difficult for some potential home buyers to afford a home. Now, weaker price activity is creating a more affordable market for many consumers. In fact, RE/MAX’s July National Housing Report recorded a 2.4 percent decline for median sales price between June and July.

Although some economists would see home price growth deceleration as a sign of another housing bubble, Showalter believes there is nothing to worry about due to tight underwriting standards that protect borrowers and lenders.

Three buyer groups are facing unique obstacles
The final factor constraining the housing recovery is a combination of problems faced by three groups of potential homebuyers: baby boomer, trade-up and first-time buyers. Boomer household sizes are shrinking as their kids are moving out and they are retiring, but many are reluctant to sell their single-family homes while they wait for values to rise more. Meanwhile, first-time buyers are saddled with large amounts of student debt and trade-up buyers can’t find affordable properties.