MarketWatch headlined this week that “U.S. home values rose in September for the sixth consecutive month, signaling that there is a recovery in the housing market.” There has been some good news lately for housing. In addition to rising home sales, prices have been falling and foreclosures are down. Homebuilder stocks have performed well this year. There have been many stories about bidding wars, sellers’ markets and rising prices in Phoenix and other coastal areas of California and Florida.
In addition, consumer confidence has reached new heights. Most economists see housing as a benefit rather than a hindrance in the overall economy. One financial institution predicts that home prices will rise by 4-5% per year over the next few years. Some of my fellow mortgage note buyers are acting as if we have returned to 2005 and 2006. Evidently, many experts and the media believe that the real estate market is on the rise.
Are the housing recovery’s prospects for sustainability in the medium-term (2 years) or long-term (5 years)? Anything is possible in the short-term, so I wouldn’t even attempt to guess unless I had the ability to read the minds and plans of politicians (though I am sure I would not enjoy what I would find). Any recovery in the medium-term is vulnerable to headwinds.
1. A combination of low household incomes, high household debt and a high unemployment rate means most families cannot afford to buy a home. Real estate loans are also being held up by banks.
2. A large number of homebuyers are either investors (27% in 2011), or foreigners (including Chinese who want a safe place to store their money). These groups are more volatile than average homeowners and are more likely to leave at the first sign that trouble is coming.
3. Many mortgages are still in difficulty. There are currently 1.6 million properties in foreclosure (per RealtyTrac), 2,000,000 foreclosures in process, 1.5 million to 4 million homes that are at least three months behind in their payments (per Barclays Capital Research), 10 million underwater mortgages (per Barclays Capital Research). Out of 50 million mortgage-bearing households, 5 million have had their foreclosures completed since 2006.
4. The Fed has kept interest rates at 3.5% for a 30-year fixed loan unnaturally low. These rates will rise, making it more difficult to pay your loan payments.
5. Nearly every mortgage loan is backed by the federal government. This is the same government that has trillions in debt and cannot pay back. The Federal Housing Administration will soon require a bailout. A modification to the mortgage interest deduction is also being considered. However, I doubt the deduction will be changed much.
Indirectly related factors and other investments must be considered when assessing the future of the U.S. property market. These include the stock market, real-estate trends in other countries, global economies and similar characteristics. It is difficult to believe that most investment types will be successful if you consider the structural problems facing the U.S., other major economies, and the ineptness of politicians, bureaucrats, and others. I will venture to say that the current recovery will not last and that housing prices in five years will be at least 10% less than they are today. You can call me at 2017’s end to congratulate or mock me for this prediction.