Road to Housing Recovery will be ‘Longer and Bumpier’

foreclosureThe Wells Fargo Economics Group released its Housing Chartbook for May 2014. The group found that most markets are finding themselves “wildly out of balance” from inflated home prices driven by investor purchases, as well as exceptionally tight inventories that are well ahead of any improvement in demand.

The group said that the “lack of a rebound in home sales this spring has reinforced our view that there was more than harsh winter weather behind the recent slide in home sales and mortgage applications.” The group notes that the road to housing recovery will be longer—and much bumpier—than expected.

Housing demand is still reeling from last spring’s spike in mortgage rates. The Wells Fargo Economics Group commented that a 70-basis point rise in mortgage rates coupled with a 6.2 percent rise in prices resulted in a 17.1 percent jump in monthly principal and interest payments. Payments on an existing home, irrespective of a slight dip in home prices, have risen 11.9 percent. Consumer confidence in purchasing a new home within six months fell in May to 4.9 percent, below the 12-month moving average of 5.7 percent.

Overall economic growth will also hamper housing growth, according to the group from Wells Fargo. Real GDP is expected to rise just 2.0 percent in 2014, with new home sales and single-family housing starts expected to rise much more slowly. The group forecasts that new home sales will climb 8.4 percent to 465,000 units, while single-family housing starts will climb 10.9 percent. New home prices will moderate, rising just 2.6 percent to $276,000 in 2014.

Refinancing activity is also expected to slow down. “The refinancing share of mortgage activity rose to 52.2 percent, up from 48.7 in early May, which was the lowest share since July 2009. Recent gains in refinancing activity are not sustainable, however, as rates will eventually increase,” the group said. Mortgage applications also are down, falling in five of the past six weeks.

Housing starts continued to improve, rising for the third consecutive month in April and nearly offsetting the December and January weather-related drop. The improvement might be short-lived, however, as the level of permits is running well below starts. Permits rose just 0.3 percent in April, which will restrain future completions, further limiting inventory and exacerbating problems with affordability.

Existing home sales rallied slightly in April, up 1.3 percent after three consecutive months of decline. Distressed sales accounted for 15 percent of activity and all-cash transactions edged slightly higher to 18 percent. First-time home buyers have risen from recent lows, but remain well short of long-term trends. Easing of credit conditions and inventory remain the key factors for near-term sales, but the group doesn’t believe that credit conditions will ease up in the coming months.