Archive for June, 2011

Housing market’s silver lining

Tuesday, June 21st, 2011

Amid the clouds of gloom hovering over the nation’s housing market there is a silver lining. Steven Liberati sees it. The 28-year old heating, ventilation and air conditioning systems salesman and his fiancĂ© are about to purchase their first home — a co-op apartment in White Plains, New York — for a fraction of what they thought it would cost just a couple of years ago.

“I’m always trying to take advantage of a situation. I feel like two years ago was a good time to rent,” said Liberati. “Now it seems very affordable. We had to jump on the situation.”

For much of the nation that silver lining remains invisible, as housing is stuck in its worst slump in decades. Each monthly data point — sinking home prices, slow sales, sluggish housing starts — has fallen like a hammer on the coffin nails of an industry that shows few signs of life.

But housing may soon rise from the dead, argue some economists. And, the severity of the slump may in fact accelerate the arrival of a recovery.

“The truth is the correction in house prices and the low level of home building is really the cure for the housing industry’s problems,” said Jim Glassman, senior economist at J.P. Morgan Chase & Co.

The lower prices fall the more affordable homes are becoming, even factoring in a decline in household income over the past few years due largely to the high level of unemployment.

In fact, home affordability has improved dramatically since the peak of the housing boom. A family earning the national median of $62,000 pays 13.5% of its monthly income for a mortgage payment on a median priced home ($163,000), according to the National Association of Realtors.

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The current year will achieve the highest affordability condition in 40 years,” said Lawrence Yun, chief economist of the National Association of Realtors.

Buying a home today looks even more affordable when compared to renting, which is becoming more expensive, as measured by the government’s Consumer Price Index. So, in theory, more potential buyers should start thinking like Steven Liberati.

Problem is, there’s a psychological “X” factor. Price declines convince many potential home buyers that they should keep waiting because they’ll get an even better bargain a year from now.

“We’re facing a lack of urgency on part of potential buyers,” said Chris Herbert, research director of the Joint Center for Housing Studies at Harvard University.

To stabilize prices, supply and demand need to come into balance. That’s where the lousy housing starts data can be helpful. While it’s true that homebuilders are suffering mightily, the last thing the housing market needs right now is an explosion of new home construction. The slower the pace of new home building, the faster the imbalance between supply and demand should be corrected.

“All the bad news isn’t bad news. Sometimes bad news is good news,” said Drew Matus, senior economist at UBS Securities. “You want to limit the amount of new supply coming on the market.”

In other words, today’s lousy headlines should be building the foundation for a recovery in housing. Matus predicts home prices will stabilize by the end of the year.