We are seeing more and more signs suggesting that home sales and new home construction have effectively found a bottom. Sales and new home construction have fluctuated a great deal during the past two years, soaring with the two tax-credit programs and then crashing afterward. The past nine months have largely been clear of these distortions and sales of existing homes have averaged a 4.3 million unit pace during the period, while sales of new homes have hovered around a 300,000-unit pace. Housing starts accelerated to a 629,000-unit pace in June and building permits rose 2.5 percent on the month. Residential construction spending grew at a solid 3.8 percent annual rate during the second quarter and, with building permits up solidly, appears poised for modest gains in the current period.
Our forecast for housing continues to portend a slow recovery, with housing starts not returning to their long-run trend until 2015. In the near term, we expect starts to rise 2 percent and 20 percent in 2011 and 2012, respectively. Much of the gains will be concentrated in the multifamily sector, where a robust apartment market continues to encourage builders to start new projects.
A recently released Federal Reserve Bank of San Francisco report encompasses a housing outlook similar to ours, with increasing household formations and steadily decreasing foreclosures helping housing starts return to normal levels by 2014.1 The key factor determining the pace of recovery will be how quickly the excess supply of existing homes clears. Foreclosure inventory continues to grow, and the inventory of homes likely to enter the foreclosure process over the next few years remains large. There are about 2.2 million properties waiting to enter the foreclosure process and another 1.9 million properties with mortgages 90 days or more delinquent.
The homeownership rate continues to fall, declining 1 percentage point over the past year to65.9 percent in the second quarter, and is now at its lowest level in 13 years. Tight underwriting standards and increased foreclosures account primarily for the decrease in homeownership. Even though affordability remains high, many would-be buyers are unable to qualify for new mortgages. Moreover, impending loan-limit drops for GSE and FHA mortgages could push financing costs higher, hurting affordability. There are also risks related to U.S. debt ceiling negotiations that are currently taking place on Capitol Hill. A potential U.S. credit downgrade could put upward pressure on mortgage rates in the coming months.
The housing story is not all negative, however. A handful of metro areas and a number of submarkets are actually performing quite well. For example, the demand for real estate has picked up noticeably in recent quarters in both Washington, D.C. and Silicon Valley. Since the start of the year, prices in both of these regions have fared much better than national home prices and sales continue to be driven by job and income growth, especially among highly skilled workers. Rents have also increased sharply in both markets.
Home prices of non-distressed properties have likely bottomed in many areas around the country, but falling prices for foreclosures and bank sales continue to drag overall home indices lower. According to CoreLogic, prices of single-family homes are down 7.4 percent over the past year. Excluding distressed transactions, however, prices are essentially flat, down just 0.4 percent. Moreover, prices have firmed in recent months, reflecting a slight pickup in arms-length transactions and a small decline in distressed sales. With the backlog of homes waiting to enter the foreclosure process full, the major home price indices are likely to weaken further over the next year. We expect prices to begin falling again in September or October and continue falling right up until the spring 2012 home buying season.
One factor that may help speed up the process is the return of international home buyers to many long depressed markets. Foreign buyers have been scooping up homes at rock bottom prices in recent months, particularly in coastal markets, such as Florida and California, where prices have likely overshot to the downside. Many of these buyers are from South America and Canada and are taking advantage of the weak U.S. dollar to purchase vacation homes, which can eventually be monetized through the rental process.
Another bright spot has been the recent pickup in remodeling activity. The BuildFax Residential Remodeling Index jumped 22 percent in May on a year-ago basis, driven by higher demand for replacement projects. Rebuilding activity tied to the string of deadly tornadoes that struck the
South and Midwest in April and May is also likely playing a role. The outlook for remodeling activity also remains favorable, with the Leading Indicator of Remodeling Activity published by the Joint Center for Housing Studies of Harvard University forecasting strong growth over the next few quarters.
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