Is the Housing Market Beginning to Cool Down?

The latest report from the National Association of Realtors shows that Pending Home Sales, which represents signed contracts, rose for the month of March to the highest level in three years. The seasonally adjusted index increased 1.5% to 105.7 and is the highest since April 2010 and 7% higher than the same time last year. According to Lawrence Yun, Chief Economist of NAR, there are signs that the housing market is beginning to cool down due to limited supply, not demand. Case-Shiller reported that the price of single family homes across the country rose 9.3% through February and was the biggest increase since May 2006. Higher home prices may be wiping out the affordability factor that home buyers would normally see along with low mortgage rates.

In another report, Personal Income climbed 0.2% in March, according to the Commerce Department. This was a drop from 1.1% in February. Consequences of the sequestration are only beginning to appear. The Bureau of Economic Analysis also reported that U.S. personal spending increased 0.2% in March which was down from 0.7% in February. It appears that consumers are feeling the affects of the increased payroll tax that took place in January. Consumer spending is the biggest source of U.S. economic growth and accounts for approximately two-thirds of economic activity.

The Conference Board reported that the consumer confidence index climbed to 68.1 this month from 61.9 in March. However, on the down side, consumers were less hopeful about the ability to find another job. This index is a long term indication of where the economy is headed. Before the recession, the index was around the 100 mark. The present situation index, which measures how consumers feel at the current time, hardly changed due to less optimism about the labor market.

Is housing cooling down because of inventory or other economic factors? Savings remains scarce and fell to 2.6% from 4.7% in the fourth quarter. "The strong first quarter gains in consumer spending...are not sustainable, given the draw-down of personal savings," Nariman Behravesh, chief economist at IHS, said ahead of Monday's release. Personal consumption expenditures (PCE) grew 0.2% in March which was down from 0.7% in February. The small increase was due to fuel. The price index for PCE is one of the Fed's preferred measures of inflation, which they aim for at 2%, and was up 1.0% year over year in March. The index actually fell 0.1% on a monthly basis.

With this in mind, it seems inevitable that the Feds will continue with quantitative easing (purchase of $85 billion in Treasuries and mortgages a month) in order to provide stimulus. This stimulus is keeping mortgage rates down which is making it possible for many homeowners to refinance through traditional mortgages or through the Home Affordable Refinance Program (HARP). Expanding HARP for everyone, which has not been approved, would at least help those who are being locked out of refinancing due to tight lending guidelines. Home purchases may be suffering because of low inventory, but consumers personal finances may also be a factor. Incomes are not increasing in any significant way, yet home prices have been going up. At the same time, the popular first time home buyer program, FHA loans, has made it more difficult for consumers to purchase a home. With incomes flat and savings down, even the low 3.5% down payment requirement is becoming difficult to achieve.

The Feds have good intentions through quantitative easing; keep rates down, let homeowners refinance and put money back in their pockets, improve the housing market so that more consumers will want to purchase homes which will increase the need for jobs. Instead, jobs in housing industry, which includes construction and special trades, are limited; banks haven't gone along with the program and still have tight lending standards; and cash deals by investors have been driving home prices up to a point that many residential home buyers may no longer be able to afford homeownership. According to the Census Bureau, the rate of homeownership declined to 65.2 in the first quarter of 2013 from 65.6 in the fourth quarter of 2012 and hit the lowest level in 17 years (first quarter of 1995). The vacancy rate also declined 0.2% from a year ago and 0.1% from the fourth quarter of 2012. Now that corporations have begun investing in homes, are we going to become a nation of renters? Are we heading for another housing crisis if these major investors decide to get rid of these homes?

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