Existing-home sales, new-home sales and housing starts are all recording notable gains this year in contrast with suppressed activity in the previous four years, and all of the major home-price measures are showing sustained increases.
Disruption from Hurricane Sandy likely will be temporary, notably in New Jersey and New York, but the market is likely to pick up speed within a few months with the need to build new homes in damaged areas. There are no threatening signs for inflation in 2013, which is projected by experts to be in the range of 4 percent to 6 percent by 2015. The huge federal budget deficit is likely to push up borrowing costs and raise inflation well above 2 percent.
Rising rents, quantitative easing (the printing of money), federal spending outpacing revenue, and a national debt equal to roughly 10 percent of Gross Domestic Product are all raising inflationary pressures.
Mortgage interest rates are forecast to gradually rise and to average 4 percent next year, and 4.6 percent in 2014 from the inflationary pressure. With rising demand and an ongoing decline in housing inventory, experts predict meaningfully higher home prices. The national median existing-home price should rise 6 percent to $176,100 for all of 2012 and increase another 5.1 percent next year to $185,200; comparable gains are expected in 2014.
Real estate will be a hedge against inflation, with values rising 15 percent cumulatively over the next three years, which also means there will be fewer upside-down homeowners. Today is a perfect opportunity for moderate-income renters to become successful homeowners, but stringent mortgagecredit conditions are holding them back.
Existing-home sales this year are forecast to rise 9 percent to 4.64 million, followed by an 8.7-percent increase to 5.05 million in 2013; a total of about 5.3 million are expected in 2014. New-home sales are expected to increase to 368,000 this year from a record low of 301,000 in 2011 and grow strongly to 575,000 in 2013. Housing starts are forecast to rise to 776,000 in 2012 from 612,000 last year and reach 1.13 million next year.
The growth in new construction sounds very impressive and does mark a genuine recovery, but it must be kept in mind that the anticipated volume remains below long-term underlying demand. Unless building activity returns to normal levels in the next couple years, housing shortages could cause home prices to accelerate; the movement of home prices will be closely tied to the level of housing starts. Home sales and construction activity depend on steady job growth, which we are seeing, but thus far, we’ve only regained half of the jobs lost during the recession.
Experts project growth in Gross Domestic Product to be 2.1 percent this year and 2.5 percent in 2013. The unemployment rate is showing slow, steady progress and is expected to decline to about 7.6 percent around the end of 2013. Of course these projections assume Congress will largely avoid the ‘fiscal cliff’ scenario. While we’re hopeful something can be accomplished, the alternative would likely be a recession, so automatic spending cuts and tax increases need to be addressed quickly.
Regardless, four years from now there will be an even greater disparity in wealth distribution. People who bought homes at low prices in the past couple years, including many investors, can expect healthy growth in home equity over the next four years, while renters who were unable to get into the market will be in a weaker position because they are unable to accumulate wealth. Not only will renters miss out on the price gains, but they’ll also face rents rising at faster rates.
Housing will strengthen in 2013 even if the economy weakens because there is a demand for more construction, and the demand for apartments is rising at a faster rate than the need for more single-family homes; unfortunately, apartment construction is focused on about 15 submarkets, so additions to supply will be uneven, even with declining market shares of foreclosures and short sales.
Right now, distressed homes are like an after-Christmas sale: Most of the best stuff has been picked over, but make no mistake: They’ll be with us for a while. Experts project the market share of distressed sales will decline from about 25 percent in 2012 to 8 percent in 2014.
