As we enter into the busiest selling season of the housing market (March – June), we are seeing signs of improvement within the housing industry as a whole. While many believe that the housing market is sustainable, it has not been a “V-shaped” recovery. Instead, it may be a long, slow road as the effects of the 2008 housing crisis are still fresh in everyone’s mind.
Positive signs for the housing industry:
- Mortgage delinquency rates are trending down, which is a positive for the economy.
- Home prices are firming and increasing in some areas. The S&P/Case-Shiller Home Price Index increased +13% over the last 12 months.
- Overall consumer confidence is increasing, and potential homebuyers are feeling better about buying a home.
- Pent-up demand–we are well below the average of household formation since the 2008 crisis. Kids are living on the couch versus moving out.
What is different with this recovery?
Developers are much more strategic than what they were in 2006/2007. They are making purposeful, strategic decisions and are concentrating. Developers are focused on the A-market where the focus is on move-up buyers that are less sensitive to price and who have acceptable credit scores. Within the A-market, developers have flexibility with the price of the home. Slightly higher prices help to drive steady volume, which helps control inventory levels and provides steady work for the construction crews. The slightly higher home prices also give a lift to the developers’ operating margins.
Credit is still tight. The average FICO score for approved mortgage loans is 737, well above the 690 average we saw in the 2004-2007 period.
Potential homebuyers enter the housing market cautiously. With home prices on the rise again, they have concerns that their newly-purchased home value may fall sharply. 2008 clearly showed the world that there is no guarantee of generating a profit on the investment of a home. That being said, with interest rates at historic lows and with the cost of buying more advantageous than renting, we will see more people tiptoe their way back into the housing market.
Things to watch:
- Does credit remain tight? Currently credit is tight. Wells Fargo* announced on 2/26/14 that they dropped their FICO minimum on FHA Loans to 600; Will other lenders follow Wells Fargo’s lead in lowering FICO minimums? If they do, we may see an increase in potential homebuyers.
- Mortgage delinquency rates. Do they continue to trend down? If so, banks may be willing to lend.
- Interest rate increase – gradual or sharp? The Housing market can absorb gradual interest rate increases, however; if we see another sharp increase like we did last summer, it will definitely have a negative impact on the housing market as a sharp increase in interest rates creates concern among potential homebuyers.
- Monthly jobs report is trending up. As employment increases, the perceived pent-up demand will gradually bring more homebuyers to the market.
- Supply. Housing supply has been low. Will there be an increase in supply for the spring selling season? Will it be met with increased demand to keep prices up?
Source: “Wells Fargo Lowers Credit Scores for FHA Loans,” National Mortgage News (Feb. 6, 2014)
The views expressed are those of Brinker Capital and are for informational purposes only. Holdings are subject to change.