US Real Estate Market Has Biggest Increase Since 2006

The U.S. housing market continues to grow stronger, amidst modest economic growth. Demand is surging, construction activity is rising, and foreclosures and delinquency rates are falling. During the …

The U.S. housing market continues to grow stronger, amidst modest economic growth. Demand is surging, construction activity is rising, and foreclosures and delinquency rates are falling.

During the year to November 2013, the S&P/Case-Shiller seasonally-adjusted national home price index skyrocketed by 13.88% (12.49% inflation-adjusted), the biggest year-on-year increase since March 2006, based on the latest figures released by Standard & Poor’s. Quarter-on-quarter (q-o-q), the national home price index rose by 2.87% (3.25% inflation-adjusted) in November 2013.

All 20 U.S. major cities registered strong year-on-year house prices increases in November 2013. Pheonix recorded the highest annual house price increase of 27.34%, followed by San Francisco (23.28%), Las Vegas (21.71%), San Diego (18.66%) and Atlanta (18.6%).

The Federal Housing Finance Agency (FHFA)’s house price indices were also encouraging, though showed more conservative price increases. The U.S. seasonally-adjusted purchase-only house price index rose by 7.58% (6.27% inflation-adjusted) y-o-y to November 2013. On a quarterly basis, the index increased by 0.72% (1.1% inflation-adjusted) in November 2013.

During 2013, the median sales price of new homes sold in the U.S. increased by 8.4% y-o-y to US$265,800, according to the U.S. Census Bureau.

The total number of houses sold in the U.S. rose by 16.3% y-o-y to about 428,000 units in 2013, based on figures from the U.S. Census Bureau. After a six-year fall, demand started to pick up in 2012 when the number of houses sold increased by 20% to 368,000 units from the previous year.

Construction activity is also on the rise. In December 2013 from a year earlier:

  • The number of house building permits authorized increased by 4.6% to 986,000 units
  • The number of housing units started rose by 1.6% to 999,000 units
  • The total number of housing units under construction increased 28.3% to 707,000 units
  • The total number of housing units completed rose by 10.7% to 744,000 units

The U.S. home builder sentiment rose by 19.1% in January 2014 from the same period last year, but fell slightly by 1.8% from the previous month, according to the National Association of Home Builders (NAHB).

"Following an unexpected jump last month, builder confidence has essentially leveled out and is holding at a solid level," NAHB Chairman Rick Judson said. "Many markets continue to improve and this bodes well for future home sales."

Foreclosures and home repossessions are on their record lows. In 2013, the total number of foreclosure starts dropped by 33% from a year earlier, to 747,728 units—the lowest level since 2006, according to foreclosure listing firm, RealtyTrac Inc. Foreclosure starts fell in 37 states (including California, Arizona, Colorado, and Georgia) but increased in 13 states (including Maryland, Arkansas, New Jersey, Connecticut and New York). Foreclosures in the country peaked in 2010, at 1.05 million.

In December 2013, Florida remained the country’s foreclosure hub, with about 306,018 homes in some stage of foreclosure or owned by banks, about a quarter of the total number of foreclosures in the U.S.

Home repossessions in the U.S. were down by 31% from the previous year and the lowest level since 2007 at 462,970,  according to RealtyTrac Inc.

This is also in line with the data released by data analytics firm CoreLogic, which showed that completed foreclosures dropped by 24% y-o-y to 620,111 in 2013. The states with the highest number of completed foreclosures in 2013 included Florida, Michigan, California, Texas and Georgia. On the other hand, the states with the lowest foreclosures were District of Columbia, North Dakota, Hawaii, West Virginia, and Wyoming. Likewise, foreclosure inventory fell by 31% to 837,000 homes in 2013 from a year earlier.

The U.S. housing market is expected to remain strong in 2014. House prices will continue rising this year, albeit at a slower pace due to more supply coming into the market, higher mortgage interest rates, and more expensive home prices. Economist John Burns expect home prices to rise by 4% in 2014 while Zillow forecasts just a 3% rise.

During the fourth quarter of 2013, annualized real GDP growth stood at 3.2% from a growth rate of 4.1% in the previous quarter, according to the U.S. Bureau of Economic Analysis (BEA). Across the full year, the economy expanded by 1.9%, from growth rates of 2.8% in 2012, 1.8% in 2011, and 2.5% in 2010.

Phoenix leads the recovery!

During the U.S. housing boom (1996-Q1 2006), all 20 main U.S. cities experienced spectacular house price rises. Los Angeles registered the biggest house price rise of 268.1%, followed by San Diego (250.1%), San Francisco (227.8%), and Miami (214.6%).

In Q2 2006, house prices started to fall. From Q2 2006 to Q4 2011, the S&P/Case-Shiller composite-10 home price index plunged 34%. Of the ten largest U.S. metro areas, Phoenix registered the biggest drop (down 55.5%), followed by Detroit (-44.4%), San Francisco (-41%), Los Angeles (-40.6%), and San Diego (-39.9%).

Now Phoenix is leading the recovery. Phoenix house prices rose 18.8% y-o-y to August 2012, its fourth consecutive month of double-digit y-o-y house price increases. Seventeen of the 20 largest cities in the U.S. saw house price rises in August, from a year earlier. Only three cities have seen their house prices fall during the year to August 2012—Atlanta (-6.1%); New York (-2.3%); and Chicago (-1.6%).


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Housing boom
(Jan 1996 – Mar 2006)
Housing crash, global crisis
(Apr 2006 – Dec 2011)
August 2012
New York
Los Angeles
San Diego
San Francisco
Source: S&P

During the year to August 2012, the Mountain region registering the biggest house price increase of 11.4%. Other strong regions include the Pacific (8.1% y-o-y), West South Central region (5.3%), South Atlantic region (4.6%) and the West North Central region (4.4%).

Demand rising again fast

Demand for houses is rising. The number of houses sold (seasonally-adjusted) during the first eight months of 2012 rose 20.8% compared with the same period last year, according to the U.S. Census Bureau.

January to August 2012 houses sales (compared to same period last year):

  • Western region: sales up 37.6%
  • Northeast: sales up 27.1%
  • Midwest: sales up 18%
  • South: sales up 13.5%

The ratio of houses for sale to houses sold in August 2012 was 4.6 – down from 6.6 the same month last year.

The total number of new houses for sale was at a record low at the end of August 2012, at 143,000 units. About 55.9% of the new houses for sale are in the Southern region, 19.6% in the West, 13.3% in the Midwest, and 11.2% in the Northeast.

Residential construction strongly rising

Residential construction has begun to turn around.

  • For the first three quarters of 2012, the total number of new privately owned housing units completed increased 8.9% from the same period last year, to 462,100 units, according to the US Census Bureau.
  • The total number of housing starts increased 26.7%, to 582,500 units during the year to September 2012.
  • The total number of houses under construction rose by 13.2% y-o-y to 4,275,300 units during the first nine months of 2012.

From 1990 to 2007, the total number of housing starts averaged 1.5 million units per year. However due to the global crisis, housing starts fell to 1.1 million units in 2008, 794,400 units in 2009, 651,700 units in 2010 and 584,900 units in 2011.

In the second quarter of 2012, the U.S. housing inventory increased 0.4% to reach 132.72 million. Of these, 86% were occupied, and the remaining 14% were vacant. About 66% of the occupied housing units were owner-occupied; the other 34% were rented.

Delinquency rate stabilizing, foreclosures falling

The residential real estate delinquency rate has stabilized, another clear signal of a housing market recovery. In Q3 2012, 42 U.S. states showed a drop in delinquency rates. California and Arizona, two of the hardest hit by the global financial and economic crisis, showed the best year-on-year results. However, the national delinquency is still exceptionally high compared to the 1.39% delinquency rate registered in Q4 2004. The delinquency rate of outstanding residential real estate loans was 10.61% in Q2 2012, down from 10.69% in Q2 2011, according to the US Federal Reserve System.

In addition, the total number of foreclosures (default notices, scheduled auctions, and bank repossessions combined) in September 2012 fell to their lowest level in five years, at 180,427 units, according to RealtyTrac.

"The five-year low, combined with the fact that the year-over-year decrease in foreclosures was in its twenty-fourth straight month, is evidence that we´re past the worst of the foreclosure crisis," said RealtyTrac vice president Daren Blomquist.

In Q3 2012, San Francisco had seen the biggest drop (-36%) in foreclosure activity from a year earlier, followed by Detroit (-31%), Los Angeles (-29%), Phoenix (-27%) and San Diego (-26%).

“Two-thirds of the nation’s largest metros posted decreases in foreclosure activity in the third quarter,” said Blomquist.

Mortgage interest rates falling

The U.S. Fed’s key rate remained unchanged at 0.13% in October 2012, having been cut in December 2008. The rate can hardly fall further.

The fed funds rate peaked at 5.25% in August 2007.

As of October 2012, the average interest rate for 30-year Fixed Rate Mortgages (FRMs) was 3.38%, down from 4.07% the same month last year, based on figures released by Freddie Mac. Likewise, the average rate for 15 year FRMs fell from 3.35% to 3.69%, while the average rate for 5 year FRMs fell from 3.03% to 2.74%.

One-year adjustable rate mortgages (ARM) had an average lending rate of 2.59% in October 2012, down from 2.92% in October 2011.

Stimulating the housing market

A new mortgage relief plan, actually a revamp of the existing Home Affordable Refinance Program (HARP), was announced by President Barack Obama in October 2011, to stimulate the economy and to revitalize the housing sector.

HARP’s previous maximum loan-to-value (LTV) ratio has now been scrapped, and the 2% fees paid by some high-risk borrowers have been reduced or abolished, while HARP’s deadline has been extended to December 31, 2012.

To be eligible for the HARP refinance program:

  • The mortgage must be owned or guaranteed by Freddie Mac or Fannie Mae.
  • The mortgage must have been sold to Freddie Mac or Fannie Mae on or before May 31, 2009.
  • The mortgage cannot have been refinanced under HARP previously, unless it is a Fannie Mae loan refinanced under HARP from March-May 2009.
  • The current LTV ratio must be higher than 80%.
  • The borrower must have no late payment in the past six months, and no more than one late payment in the past 12 months.

In another stimulus measure, the Federal Reserve Board said in September 2012 that every month, it would buy US$40 billion in mortgage-backed securities.

Mortgage market still shrinking

The U.S. mortgage market has been shrinking. In Q2 2012, the size of the mortgage market was equivalent to 84.4% of GDP, down from 103% of GDP in 2009, according to the Fed.

The total mortgage debt outstanding fell by 2.4% to US$13.216 trillion in Q2 2012, from the same period last year.

In Q2 2012, the homeownership rate (seasonally-adjusted) in the U.S. was 65.6%, the lowest since Q1 1997.

Rental vacancies falling

The median asking rent in the U.S. fell by 0.7% to US$716 per month from the previous quarter in Q2 2012, but was still 4.7% higher than the same period last year, according to the U.S. Census Bureau’s Housing Vacancy Survey.

In Q2 2012:

  • In the Northeast region, the median asking rent was 5.8% lower the previous quarter – but 1.5% higher than a year ago, at US$878 per month.
  • In the Midwest, the median asking rent fell by 1.3% q-o-q, but rose by 2% y-o-y to US$599 per month.
  • In the Southern region, the median asking rent rose by 1.4% q-o-q, and was also up 3.4% y-o-y, to US$669 per month.
  • In the West, the median asking rent rose by 6.5% q-o-q, and was also up 7.3% y-o-y, to US$911 per month.

The rental vacancy rate in the U.S. fell to 8.6% in Q2 2012, from 9.2% in Q2 2011, according to the U.S. Census Bureau.

Rents rising faster than house prices

The house price-to-rent ratio has been falling since 2008. From 2008 to Q2 2012, house prices have plunged deeply, while median rents have been more or less static, according to the U.S. Census Bureau.

A falling price-to-rent ratio is a signal that the market has good potential for recovery, in the long term.

Slowing economic growth

During the fourth quarter of 2013, the economy expanded by 3.2% from a growth rate of 4.1% in the previous quarter, mainly due to increases in personal consumption expenditures, exports and fixed investment, according to the U.S. Bureau of Economic Analysis (BEA).

The economy expanded by 1.9% in 2013, from growth rates of 2.8% in 2012, 1.8% in 2011, and 2.5% in 2010.

The world’s largest economy is expected to grow by 2.8% in 2014, mainly due to strong domestic demand, supported by a reduction in the fiscal drag as a result of the recent budget agreement, according to the International Monetary Fund (IMF).

In January 2014, the U.S. Congress halted the implementation of tens of billions in additional spending cuts that were supposedly be executed this year.

“Economic activity will expand at a solid pace in 2014 and the next few years,” said  the Congressional Budget Office (CBO).

The federal budget deficit is expected to narrow to US$514 billion in 2014, down from US$680 billion in the previous year and the lowest level in seven years, according to the CBO. As a result, the shortfall is projected to drop from 10.1% of GDP in 2009 to about 3% of GDP for this year.

With increasing investor confidence, the national jobless rate dropped to a five-year low of 6.7% in December 2013, based on figures released by CBO.

The overall inflation rate stood at 1.5% in December 2013, according to the U.S. Department of Labor, well below the Fed’s 2% target, and below the 2012 inflation rate of 2.1%, and 2011 rate of 3.1%. The muted inflation is expected to continue in 2014 and could bolster the case for the Fed to continue its monetary easing.

This article was republished with permission from Global Property Guide.


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