Economy, Affordability to Drive Home Sales
Home sales are on track to outperform
last year, even though the market doesn’t have the benefit of the home buyer tax
credit. This is thanks to sustained economic growth, the slowly recovering jobs
picture, and historically high affordability conditions, NAR Chief Economist
Lawrence Yun told a packed room on Thursday during the Residential Economic
Update at the 2011 REALTORS® Midyear Legislative Meetings.

Although unemployment
remains high at about 9 percent, the country is seeing steady job growth. More
than 100,000 jobs are being created a month, and the U.S. could see 1.5 million
net new jobs this year, Yun said.

Frank Nothaft, chief economist for
secondary mortgage market company Freddie Mac, who spoke later at the same
session, said he expects a bit more robust job growth, closer to 2 million, but
both economists said the unemployment rate will remain high despite the new jobs
because of the size of the hole that needs to be filled. More than 8 million
jobs were lost during the 2008-09 recession, and new entrants to the labor
force, such as recent college graduates, add another 2 million to the hole.

Both Yun
and Nothaft are predicting home sales a little higher than 5 million, which
would improve upon last year even though 2010 had the artificial stimulus of the
tax credit, they said.

Historically high affordability is one of the key drivers of
the improved sales performance. NAR’s affordability index is at its highest
level ever, at nearly 170, which means households earning the national median
income have 170 percent of the income needed to buy a home at the national
median price.

Behind the affordable conditions are low interest rates, which today
are below 5 percent, and home prices that, while rising in some areas (like
booming North Dakota), remain quite a bit below their peak during the housing
boom. The high number of distressed homes (those in which the value is below the
amount of equity the owners have in them) is one of the main reasons values are
struggling to get off the bottom.

Yun said that overly strict
lending standards are holding back more robust sales: 2010-vintage mortgage
originations have a lower serious delinquency rate than in 2002, when serious
delinquencies were barely above 1 percent, and 2011 is shaping up to be another
stellar year in delinquency rates, but lenders are still requiring
extraordinarily high credit scores and putting up other hurdles to obtaining
financing. “If lenders would just go back to the normal standards that were in
place prior to the boom years, sales might be 20 percent higher,” Yun said.

he’s seeing no signs of lenders opening up on lending yet, Yun said conditions
are in place for lenders to start easing up. They’re sitting on plenty of money,
and they could be reaching the point at which they can earn more revenues at
reasonable risk levels by making home loans than by doing other things with
their money. “I’m not seeing that yet, but that is a potential upside,” he

some ways, the heroes of housing today are the all-cash buyers. They’re 40
percent of the market now, so they’re helping to drive sales despite the tight
availability of financing. Yun thinks all-cash buyers are investors who either
can’t get financing or think they can get a better return on their cash by
putting it into real estate than they can in savings instruments or stocks,
particularly given the rock-bottom process of so many houses. He also thinks
some empty-nest baby boomers might be acting as the lender for their children,
buying a home for them on an all-cash basis and taking back a note. “I’m seeing
this anecdotally. I don’t know if it’s a trend,” he said.

Yun’s forecast: The U.S. economy
will grow about 2.5 percent this year, with between 1.5 and 2 million new jobs
added to the economy. Home sales will reach about 5.1 million, up 7-10 percent
from last year, with home values staying virtually unchanged. Nothaft had a
largely similar forecast.

— Robert
Freedman, REALTOR® Magazine