Has America's Real Estate Market Turned A Corner?

Fiserv has now released its analysis of the United States housing market.  Here are a few of the salient points from their summary accompanied by my usual commentary.

Let's open by looking at the most recent Case-Shiller chart of national home price indices showing that things finally appear to be turning a corner:

Fiserv notes that the U.S. housing market is finally showing some signs of stabilizing.  Home prices in 151 markets or 39 percent of the 384 metropolitan areas tracked by Fiserv Case-Shiller showed an increase in the first quarter of 2012 compared to a year earlier.  That noted, price declines of 1.9 percent were noted on average across the U.S. and are forecast to decline another one percent over the next twelve months.  On the upside, prices are expected to appreciate by 5 percent between Q1 2013 and Q1 2014!

Price appreciation was noted in Detroit, and Michigan (up 8.6 percent) and Miami, Florida (up 6.4 percent), however, this has to be taken into context since these areas have seen peak to trough price declines well in excess of 50 percent.  In sharp contrast, double digit price decreases were noted in Atlanta, Georgia (down 17.4 percent), Las Vegas, Nevada (down 7.4 percent) and Memphis, Tennessee (down 4.7 percent), all on a year-over-year basis, largely because these markets are still flooded with foreclosure properties.

Fiserv notes that inventories of single-family homes has dropped below 2.5 million, the lowest level since 2004.  This shrinking supply is nudging prices upwards, however, the large number of homeowners with negative equity is impacting many markets.  Many markets that experienced price crashes are now seeing far lower inventories of foreclosures, putting modest upward pressure on prices.

The 35 to 40 percent drop in prices over the past 6 years has resulted in the ratio of the price of a median single family home to median family income at its lowest point since 1991.  In fact, for those lucky Americans that are not underemployed or unemployed, the mortgage payment for a median-priced home now consumes only 12 percent of a median family's income, the lowest percentage since record-keeping began in 1971.  From FRED, here is a graph showing housing affordability back to 1980, noting, of course, the recent drop in affordability:

So we can all better understand this graph, here's how FRED measures housing affordability:

"Value of 100 means that a family with the median income has exactly enough income to qualify for a mortgage on a median-priced home. An index above 100 signifies that family earning the median income has more than enough income to qualify for a mortgage loan on a median-priced home, assuming a 20 percent down payment. For example, a composite housing affordability index (COMPHAI) of 120.0 means a family earning the median family income has 120% of the income necessary to qualify for a conventional loan covering 80 percent of a median-priced existing single-family home. An increase in the COMPHAI then shows that this family is more able to afford the median priced home."

Fiserv notes that the biggest risk to the housing market is the stalling world economic recovery and the risk of another political impasse in Washington over debt and deficit reduction.

Fiserv suggests the following:

1.) Investors and buyers looking for home price appreciation should head west since eight of the top ten markets projected to grow fastest in the next year are located in Oregon, Idaho, California and Washington.  

2.) The housing market in Florida continues to be bleak with eleven of the 20 metro areas seeing home prices falling the most over the next year.  The state is home to four of the ten worst markets and four of the ten best markets based on projected changes in housing prices over the next five years.  Orlando is projected to see an additional 6.8 percent drop over the next year and Jacksonville will see an additional drop of 3.3 percent.

Fiserv projects that between the first quarter of 2013 and the first quarter of 2014, 358 of the 384 metropolitan housing markets (or 92 percent of the total) will see price increases.

Only time, the unemployment situation, interest rates, the political games in Washington, a slowing world economy and the debt crisis in Europe will tell whether Fiserv’s projections are wanting.