Harrisburg PA Mortgage Matters- June 2011
When transactions are your livelihood, it can be difficult to muster a smile when there are fewer of them. There were fewer transactions in existing-home sales, which fell 3.8 percent to a 4.8 million annualized rate in May. Supply on the market, at 3.72 million units, is falling, but not enough relative to the sales pace, as inventory rose to 9.3 months versus April's 9.0 months.
Price stabilization was the positive takeaway, with the median sales price rising to $166,500. Another plus is that sales of single-family homes, the central component in the report, fell at a slower rate at 3.2 percent. Floods and tornado-ravaging storms in the Midwest were mitigating factors. Blaming the weather is often the easy way out, but this time it appears valid.
Sales of new houses also fell for the first time in three months, by 2.1 percent to a 319,000-unit annualized pace in May, showing that the industry continues to struggle to gain momentum. The good news is that prices continue to rise, with the median price inching up to $222,600 from $217,000 in April, while inventory continues to fall, with supply dipping to 6.2 months from 6.3 months.
Sales are down, but prices are up, which suggests to us that the days of simply giving away homes are over (even with the putative 1.8 million homes in shadow inventory). MacroMarkets, an economic data compiler, surveyed real estate experts on home-price trends. The consensus estimate was for an average annual growth rate of 2 percent, which MacroMarkets co-founder Robert Shiller opined “will not inspire a lot of consumer confidence.”
We disagree, because price growth isn't price contraction. Two percent average-annual growth on a $200,000 home means the home is worth more than $220,000 after five years. What's more, home equity will grow as the mortgage is amortized. Five years is a long time, and no one can know with certainty what the average annual rate of appreciation will be. Given the low price of homes today, though, we would not be surprised to see homes appreciate at a rate greater than 2 percent annually.
Now, we would like to see mortgage rates start to rise. Without artificial support from the Federal Reserve, interest rates would naturally move higher. That's not bad; the market needs to get back to equilibrium – with more private mortgage money and private mortgage-backed securities, so we can have more choices and more lending alternatives. A rising-rate environment also implies that there are other positive things happening in the economy.
Mortgage rates continue to hold historical lows. Low rates coupled with stable-to-rising prices in many parts of the country point to a near-perfect storm of a market for buying residential or investment real estate.
