The Mortgage Corner

No, they are just catching up to 4 years of weak household formation and even weaker income growth. Home prices have been held down from a combination of government austerity policies and private sector hoarding since the Great Recession that has kept most homebuyers on the sidelines until this year.

Trulia chief economist Jeff Kolko estimates home prices are still 7 percent undervalued, as compared to pre-bubble levels.

“We estimate that national home prices are 7 percent undervalued in the second quarter of 2013 (2013 Q2),” said Kolko. “During last decade’s bubble, prices were as high as 39 percent overvalued in 2006 Q1, then during the bust, fell to 15 percent undervalued in 2011 Q4. Therefore, even with the recent price increases, home prices nationally remain undervalued relative to fundamentals and much lower than in the last bubble. That’s why today’s price gains are actually still a rebound, not a bubble.”

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Graph: WSJ Marketwatch

But the real culprit is income growth. The combination of Bush tax cuts and 2 recessions resulting in the largest budget deficits since WWII have suppressed employee income growth to the lowest level since WWII.

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Graph: WSJ Marketwatch

There has been a huge drop in household formation, so much so that the Cleveland Federal Reserve Bank reports compared to the previous 10 years, the growth rate in the number of households was cut by two-thirds between 2007 and 2010.

“This slowing in household formation reflects the overall weak economy,” says the Cleveland Fed, “but it has also negatively impacted the housing market, as lower household formation rates reduce housing demand.”

So 2013 is finally looking like a recovery year for housing. June existing-home sales are back above 5 million unit annually for only the second month since the 2009 first-time homebuyer tax break. Total existing-home sales, which are completed transactions that include single family, townhomes, condominiums and co-ops, dipped 1.2 percent to a seasonally adjusted annual rate of 5.08 million in June from a downwardly revised 5.14 million in May, but are 15.2 percent higher than the 4.41 million-unit level in June 2012.

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Graph: Calculated Risk

And inventory levels are improving, which will slow down price rises in some areas. Total housing inventory at the end of June rose 1.9 percent to 2.19 million existing homes available for sale, which represents a 5.2-month supply at the current sales pace, up from 5.0 months in May. Listed inventory remains 7.6 percent below a year ago, when there was a 6.4-month supply.

An interesting sidelight is that the percentage of distressed California sales is down sharply, reports DataQuick, an RE research company. Of the existing homes sold last month, 10.0 percent were properties that had been foreclosed on during the past year – the lowest level since foreclosure resales were 9.4 percent of the resale market in August 2007. Last month’s figure was down from a revised 11.3 percent in May and 24.9 percent a year earlier. Foreclosure resales peaked at 58.8 percent in February 2009.

And Short sales - transactions where the sale price fell short of what was owed on the property - made up an estimated 16.0 percent of the homes that resold last month. That was down from an estimated 16.8 percent the month before and 24.3 percent a year earlier. The key is the percentage of distressed sales is down significantly – while the number of conventional sales are up about 40 percent year-over-year, per DataQuick

Harlan Green © 2013

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