Home Prices Growing at Pre-Bubble Rates on Bernanke Boost, But Shadow Inventory Lurks…
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Article by, Agustino Fontevecchia, Forbes Staff
Boosted by Ben Bernanke and turbocharged by tight inventories and strong recoveries in the worst hit cities, home prices continue to grow strongly. The widely followed Case-Shiller indexes showed the price of single-family homes across 20 of the most important U.S. cities grew 9.3% in February, its fastest rate since May of 2006 before the collapse of the housing bubble and subsequent financial crisis. The housing recovery is already having a positive impact on growth, pushing GDP up as residential investment accelerates, but with more than 1.1 million homes in some state of foreclosure and a shadow inventory that tops 2 million units, it will take some time for the market to truly heal, while the risk of slowdown and a reversal remains a possibility.
It comes as no surprise that the housing market is firing on all cylinders, but the February data, released on Wednesday, was quite encouraging. The 10- and 20-city composites gained 8.6% and 9.3% on a year-over-year basis, with every metropolitan area clocking in a second consecutive month of positive growth for the first time since early 2005. Phoenix was the strongest performer, growing at an impressive 23% and joining the likes of Las Vegas, Atlanta, and San Francisco, some of the worst-hit cities in the crisis, in their rapid pace.
Prices have now climbed back to their autumn 2003 levels, prompting index chairman David Blitzer to say “despite some recent mixed economic reports for March, housing continues to be one of the brighter spots in the economy.” Housing has been additive to growth for some time now, as Blitzer explained, “the 2013 first quarter GDP report shows that residential investment accelerated from the 2012 fourth quarter and made a positive contribution to growth.”
Few would venture to say that housing isn’t on the mend right now. Over the past several months prices have increased on the back of incredible support by the Federal Reserve, which has taken its balance sheet north of $3.3 trillion, buying more than $1 trillion in mortgage-backed securities. Investor demand for housing assets has skyrocketed, taking homebuilders’ stocks to multi-year highs. KB Home, Lennar LEN -0.21%, and Toll Brothers TOL -0.11%, for example, are sitting close to their 52-week highs. Hedge funds have jumped in the game as well, with the best performers of 2012, including Deepak Narula’s Metacapital and Steve Kuhn’s Pine River, which made bank trading mortgage-backed securities.
Yet residential real estate markets remain deeply depressed, and those opportunities are a reflection of that. Home prices are still 29% to 30% off their mid-2006 peaks, Case-Shiller shows, while CoreLogic CLGX +0.87% data shows the number of foreclosed homes and the size of the shadow inventory is massive.
Prior to the housing collapse, monthly foreclosures averaged 21,000, while in Martch 2013 they stood at 55,000. And while that’s a 16% decline on a yearly basis, it’s up 6% from the February numbers, which could put downward pressure on next month’s Case-Shiller as the share of distressed homes may be higher.
Approximately 1.1 million homes remain in some state of foreclosure, while the shadow inventory, which also includes properties that are seriously delinquent and/or held as real estate owned by mortgage servicers, stood at 2.2 million units. While that’s down from the January 2010 peak of 3 million, it still represents 9 months of supply and is worth about $350 billion, according to CoreLogic.
The housing collapse that precipitated the financial crisis is still reverberating through the system. Last year, a few of the major actors including Bank of America, Wells Fargo, JPMorgan Chase, Citigroup, and Ally/GMAC reached a record $19 billion settlement with the Attorneys General of 49 state to provide mortgage relief. As of February, only Ally, the smallest one in the group, had fulfilled its obligations.
The housing recovery is expected to slow down according to Barclays, as the distressed and foreclosed properties run through the pipeline and enter the market. Price action is expected to moderate around mid-year, and should grow 6% to 7% in 2013. At the same time, rising home prices and constrained inventories in the single-family market will put upward pressure on rental prices, hurting consumers.
There is also the question of the Fed’s involvement in the housing market. Bernanke has admitted the Fed may distort markets, particularly Treasuries where it is by and far the largest player. Some, like Peter Schiff, suggest the Fed will cause a huge dislocation in mortgage markets as well once it begins to unwind its massive portfolio. This, Schiff said, could cause a second real estate crash if rates rise too quickly.
For now, it’s steady as she goes. Home prices are rising across the country and are helping consumers, banks, and the economy. The health of the market will depend on how fast those foreclosures feed through the pipeline, the general strength of the consumer and the economy, and the Fed’s exit strategy.
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