A report issued by Clear Capital early in February begins with a pretty strongly bullish comment about housing: “Fifteen years into the new millennium, we are finally seeing real potential that the market can support full buyer momentum.” It goes on to say that 2015 has the potential to be a transitional year when buyer momentum in the low and mid pricing tiers can reinforce a strong housing recovery.
Several data points are cited to support this bullish housing outlook:
• There has been sustained growth in the low tier price segment, which should encourage first time buyers to put a toe into the water. In the past, investors have driven this upward price movement, but more consumer buyers are expected to move it forward.
• Potential move-up buyers are being freed from their underwater mortgage positions by these price increases at an increasing rate.
• Top tier prices actually softened a bit, down 0.3% in the fourth quarter of 2014.
January data seems to indicate that the lower price tier is holding on to a double-digit annual price growth trend. In January, that rate was 10.2% higher year-over-year for the low tier market. The article implies a “trickle-down” or tiered staircase:
• The upper price tier has softening prices, encouraging mid-tier buyers to sell and move up.
• This upward movement out of the mid-tier will create opportunity for move-up of low-tier owners/buyers.
• This in turn creates confidence in first time buyers to enter the market, as their fear of buying and going backwards in equity are lessened.
The report goes on to break out data over regions, but all show positive movement. From my perspective the question remains as to whether all of the price encouragement will draw first time buyers into the market in significant numbers. They’ve been conspicuously absent since the crash. I’m not as excited as many about a surge in first time buying.
Home prices are just one leg of a three-legged table. The other two are jobs/wages and the economy as a whole. Job and wage gains are being reported as improving, which encourages consumers. However, they’re nominal, and consumers are expected to continue a trend toward demanding significant discounting before they’ll pull the trigger on larger purchases.
As long as discounting is the tool to build sales, businesses will not be showing the profit levels that fund growth and more job and wage improvement. The younger generations are by and large grouping up for renting or staying at home with parents. They’re trying to reach comfort in their job and wage prospects, and they need to build up down payment money before buying. That’s made more difficult with high student loan payments.
The Retail and First Time Buyer
In general, I think that move-up buying is going to see some healthy gains. I’m not as convinced about first time buyers. This is aggravated by the long term erosion of bilateral loyalty between employees and employers. When data shows you need to hold a home five to eight years to recoup your investment and before profit, you really want to feel comfortable in your current location and employment situation.
The Rental Home Investor
Here we have an interesting situation. While prices are higher, appreciation is better, so it could encourage some investors to buy and rent with lower rental cash flows than in the past. Calculating the overall return on investment with a nice profit at sale can help. Rising home prices are also often accompanied by rising rents, so the cash flow situation can be improved gradually.
It will be interesting next January or February in looking back at all of these early predictions versus actual housing market performance in 2015.