Is It a Housing Recovery or Housing Bubble?

Now that several years have passed since the start of the housing crisis, housing market conditions are looking much better. Slowing rising from the ashes during 2012, significant progress has emerged as almost all of the housing data reported has been of a positive nature and points to a continuation of the same. While everyone involved with this industry is looking forward to sustained progress, the questions remains, is it a housing recovery or housing bubble?

Several events led to the improvements which eventually led to where we are today. First, improvements were made to mortgage programs that were designed to help homeowners recover from the crisis. With most homes that were purchased during the housing boom suddenly underwater, Fannie Mae and Freddie Mac offered the HARP program which, until the end of 2011, was not overly successful because of too many restrictions. When opening the program to severely underwater homeowners, the HARP 2.0 refinance program took off in 2012 and reached nearly 1 million homeowners in that year alone. Then FHA, the Federal Housing Administration, followed with their own offer of reduced fees for the FHA streamline program (with no cash out) to entice more homeowners to refinance. Both programs, which were strictly for loans made prior to June 1, 2009, were a success and saved many homes from being abandoned while giving homeowners a well needed break.

The next major event was the Federal Reserve monetary policy which, in September 2012, was expanded to QE3. This move has the Feds purchasing $40 billion of mortgage backed securities in order to keep mortgage rates low. Needless to say, it has worked, rates are low and homeowners are responding, although not necessarily at the pace that many thought would happen. Mortgage business has been up and down and significantly affected by the slightest change in rates. Once mortgage rates increase, the future of the mortgage market will lie mainly in home purchase loans. Most homeowners who already refinanced at historically low rates will most likely not refinance again once rates increase.

Another significant move has been the large number of short sales being offered instead of having homes in foreclosure. This move has helped to keep home values, especially in hard hit areas, from crashing. To add to this, investors are scooping up low priced homes by the thousands which is creating the low inventory that has now become an issue. Large companies are now becoming property managers with the intention of renting out these homes. According to Bloomberg, Blackstone Group LP, the world's largest private equity firm, has put over $3.5 billion into the housing market for 20,000 vacant and foreclosed single family homes. While this action and low inventory is making home prices rise, the regular home buyer is having a difficult time purchasing a low priced home or even finding a home to buy. According to the S&P/Case-Shiller Home Price Index, average home prices increased in all 20 cities tracked over the 12 month period ending in January. With investors involved in home buying, cash sales are beating out those who need to carry a mortgage. These events are also leading to an increase in the construction of new homes, of course, at a higher price. According to the Commerce Department, Building Permits, which are reflection of future construction, rose 4.6% to 946,000 in February, the highest since June 2008. However, the U.S. Census Bureau and the Department of Housing and Urban Development released their latest new home sales report that shows a drop of 4.6% in February (12.3% above February of 2012). In February, the median price of homes sold was $246,000 and the average price was $313,700 as compared to $239,900 and $274,000 last year at the same time.

A true housing recovery may take longer as jobs slowly increase and consumers once again become able to purchase a home for the long term. While the current recovery is creating jobs, consumers are now faced with paying higher prices for homes, as well as, dealing with tight credit and stricter guidelines. As these consumers become eligible to purchase, the need for rentals purchased on a large scale by investors will begin to dwindle. Any mass sale of homes by large investment companies can once again send home prices plummeting. The evolving housing bubble created by these events that have led to low inventory may just burst again in the near future. While the former housing bubble involved mostly individual investors, this one is being created by companies and on a larger scale. Regardless of reports, the housing market remains fragile and will continue to be so until a sustained recovery occurs through consumer oriented single family residential homeownership that includes both purchases and refinances.

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