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According to the Case-Shiller home price index, the sales of new and existing homes appear to be gradually going up. The inventories are also going down, while the prices seem to be stabilizing, an indication of a probable housing rebound. This could signal some light at the end of a tunnel. Since the crash in the housing sector largely contributed to the global economic recession, a housing rebound is vital in fixing the financial markets.
Recent research by The National Association of Home Builders (NAHB) which is a Washington-based trade organization revealed an index indicating that the housing market is an area where economic upturn is ongoing. To come up with these results, the index made use of three categories of monthly data that are independently collected and indicative of economic improvement. The data included house prices, single-family housing, and employment. According to this research, the improvement of the housing sector can be largely attributed to a well-diversified economy based on improved healthcare, a high level of education as well as adequate retirees.
Since November last year, the sales of homes appear to be steadily rising. The demand for houses seems to have gone up, something that is believed to counter the economic slump caused by the foreclosures, low mortgage rates, and the tax credit program for first-time homebuyers among other distressed sales. In addition, there is an impression of progress in lowering the inventories which are vital in controlling the prices of homes. Some analysts indicate an impressive improvement for new home inventories with the supply of the homes for sale has gone down (Cooper par 5).
On the other hand, the validity of this data is highly disputed and the hope of a housing rebound could soon be over. For instance, an American government program that volunteers to give $ 8,000 to new homeowners is set to expire in November this year. For this reason, there has been a lot of false demand for homes during this year before the expiry date of this program. One of the owners of a real estate agency, The Norris Group warns people about having too much expectation into the increased sales of homes. Furthermore, the foreclosure moratoriums are artificially lowering their inventories and thus, these could be false indicators of a housing rebound.
Even though homebuyers could be plentiful at present, the supply of houses is also likely to increase thus reducing the prices of homes.
According to the National Association of Realtors, during the period that their home sales were at their peak, they recorded a surplus of foreclosed homes and also in their adjustable-rate mortgages.
Moreover, an influx of newly-built houses has invaded the housing market, reducing the number of homes that are likely to be bought by people enticed by the low mortgage rates. Since February last year, a lot of single-family homes have been constructed. Recently, home builders have considerably reduced the prices of constructing single-family homes so much that their inventories are likely to keep on going down even as they continue to construct more homes. Nonetheless, single-family home builders are likely to face stiff opposition from other home markets. This is because most home buyers are easily enticed by the profoundly discounted costs of distressed homes.
The payments of The Adjustable Rate Mortgages are projected to go up by the end of this year. These types of mortgages were more profound from 2004 to 2008. In these types of mortgages, one is presented with options of the payment duration, where he/she is expected to choose the most favorable payment period. Conversely, the value of properties is gradually dropping, the rate of unemployment is still on the rise, more families are faced with underwater mortgages and the adjustable-rate in the housing market is likely to inflate. For this reason, a good number of people may not manage to pay their mortgages as required. Consequently, lenders should unload their inventories and permit the investors to buy and repair the properties (Madura 133). This is because loan modifications are usually unsuccessful as they often result in foreclosures (Cooper par 3).
According to recent research conducted by RealtyTrac, there were about 3 million foreclosures recorded in 2010 and an at least 50,000 foreclosures actions are instigated weekly. Moreover, about 2 million homeowners do not adhere to the mortgage payments and are therefore potential victims of foreclosure. The increasing rate of foreclosures is also likely to impact negatively on the housing sector as the outlook is gradually reducing the confidence of several prospective home buyers.
Even though there has been a noticeable demand for houses, there are several hindrances that are distressing the housing market. For instance, the restrictions put by the banks are too much for some home buyers. In some cases, you find people who are eligible to buy homes being disqualified as a result of petty requirements. Imposing tougher policies while lending and increasing the down payments when buying homes are also likely to affect the housing sector negatively.
Moreover, the appraisal process has been broken. Earlier, a property’s value depended on the consent between the buyer and the seller. This is not the case today as the decision on the property value is continually being influenced by an intense valuation procedure, often controlled through the automation process, which functions through the use of formulas and codes. Since the national lenders cannot uphold a database of appraisals in every market, the computerized valuation system has thrived. The system cannot differentiate between an empty house in need of refurbishing and one that is already renovated and thus may not be fit to give the correct value of a home.
In addition, the mortgage modification program by the American government will also hurt the housing outlook. This is because, the Home Affordable Mortgage Program, has only facilitated about 240,000 home modifications since July while it was projected to facilitate the progress of at least 3 million home modifications within the next three years. For that reason, even though the housing outlook is progressing, the rate of improvement is likely to go down shortly.
Stabilizing the home prices is fundamental in achieving the housing upsurge.
The Case Shiller index indicated a rise in May for the first time in almost three years. This index is greatly influenced by foreclosure sales. In addition, the price index from the Federal Housing Finance Agency, which is regularly adjusted also rose in May and had indicated signs of stabilizing during the preceding months (Cooper par 4). This notwithstanding, the home valuation code was recently amended to indicate that brokers, as well as real estate agents, are not allowed to order appraisals. The code specified that appraisal orders should only come from the lenders.
Several banks are also reducing the interest rates of the mortgages in an attempt to maximize the growth of the housing sector. However, the move to lower the lending interest rates could be understood in two ways. On one hand, the reduction could be an indication that the banks are gradually gaining confidence in the quality of their homes. On the other hand, the reduction could be viewed as an indication that the banks are under pressure to sell their houses (Cooper par 3).
In conclusion, even though the housing rebound may be at hand, this might just be a short-term spring back. Several analysts argue that the demand for houses is still too low, while the supply of houses is far too high. In addition, the jobs picture is still not bright enough and more foreclosures are still being witnessed. Several homes in the market are not worth the loans and applications for Mortgages continue to drop, even though the mortgage rates are as low as 5 percent. There are several vacant homes and surplus inventories in the system Moreover, the loan amendment programs do not seem to be working. For this reason, several pressing issues need to be addressed. For instance, lenders should improve in filing foreclosures and adjusting mortgages. The valuation process should also be regularly checked and government programs that have long-term positive consequences should be introduced (Madura 122). Consequently, even though we are making progress towards the largest real estate explosion in history, we still have a long way to go.
Works Cited
Cooper James. Vital Signs: Is Housing Rebound at Hand? 2009. Web.
Madura, Jeff. Financial Market and Institutions. Cengage Learning, 2009. Print.
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