It was housing’s crash that laid waste to the U.S. economy five years ago, and housing that now underpins its recovery. Indicators from rebounding home prices to rising housing starts tell us the bottom is long past. The Case-Shiller national home price index, for example, is up 9.2% since June 2012. However, amid the positive data there are signs the housing rebound may be more protracted and rocky than many expect.
One factor that could limit further price rises is the large inventory of so-called vampire REOs—as many as 250,000—scattered across the country, RealtyTrac vice-president Daren Blomquist noted in an online post. These are “real-estate owned” homes on which the banks have foreclosed but where the original owners still live, usually rent-free. The banks have until now withheld that inventory from the market, which has created an artificial scarcity contributing to the rise in prices to date. However, as prices have increased and rising interest rates cut affordability, the banks may now sense an opportunity to unload these homes. “I think it will be a scenario where the influx of those homes will soften but not kill the market,” Blomquist predicts.
Another reality check came in the third-quarter earnings release from Wells Fargo, the nation’s largest home mortgage provider. Although executives talked up a “recovering” market (and record earnings per share), some of the key underlying data was curiously at odds with the upbeat assessment. For example, mortgage originations (which include refinancing) were down 42% year over year, to US$80 billion from US$139 billion. And over the past several months, the bank has cut more than 5,000 jobs from its home-loan unit. In July Wells Fargo discontinued its mortgage joint-ventures business, which was generating 3% of new mortgages.
Finally, an Oct. 9 report by Bloomberg and PMG Venture Group’s Kristin Bentz analyzed data that shows household refinancing activity to be still well below pre-recession peaks—US$18.7 billion in the second quarter compared to as much as US$90 billion in Q4 2006. This is constraining personal consumption, the authors wrote. “Even with the modest gains seen in the labour market, the median household is not in the financial condition to boost spending and growth above the 2% trend that defines the current expansion.”
Just as the U.S. Federal Reserve has put off tapering its US$40-billion -a-month mortgage-buying program, businesses and investors need to know that it’s not yet back to business as usual on the home front.