Wells Fargo Bank's
Economics Group has issued commentary on housing which updates
concerns it says it has raised over the past few month "that the influx of
investors into the housing market may be exaggerating the extent and magnitude
of the recovery in home sales and home prices." Much more has been made of this issue in
recent weeks, the commentary says, "and some headlines have even raised
the specter of another housing bubble."
While some markets
and submarkets have a bubble feel to them, a more likely outcome, the
commentary says, is a "bubble within a bust that supports a temporary
spike in home prices." As interest
rates move up the risk-adjusted returns for investors who convert single-family
homes to rentals will diminish as will investor purchases.
Wells Fargo cites a
number of reasons why, while it does see the housing recovery remaining on
course it does not see its bubbly aspects continuing and points to the cooling
of overall economic activity at the end of the first quarter. Most key economic indicators such as retail
sales, non-farm employment, and consumer confidence slowed growth or even
declined and economists have scaled back projections for the second quarter. The recovery, however, does remain on track.
The report cites
housing specific indicators that are showing signs that suggests that the
housing recovery will continue to proceed in periodic fits and starts.
home-buying season has gotten off to what the Commentary calls a "mediocre
start." While March housing data is
holding up relatively well and builders and real estate agents are busier than
they have been in several years it is apparent that there will not be a smooth
transition to a normal or new normal housing market. "Too much of the financial
infrastructure related to housing finance and new construction remains impaired
to clouded to allow sales or new construction to get ahead of
Despite the high
affordability of homes, traditional homebuyers face tight mortgage underwriting
guidelines and a large proportion of homeowners have little or no equity in
their current homes, constraining attempts to move up in the market. Consumer finances, while helped by the
rebound in the stock market and the recent rise in home prices, are still
fragile and gains have not accrued evenly across the country. The government's efforts to push mortgage
interest rates still lower have only partially offset other drags.
Association of Home Builders (NAHB)/Wells Fargo Home Builders Index, a measure
of builders' confidence in the market, has slid recently. The commentary says the frustration expressed
by builders likely reflects the shortage of available approved building sites,
sharply higher materials costs, and a shortage of skilled workers.
builder confidence, single family construction is improving due partially to an
increase in household formation at the labor market improves. Wells Fargo says it expects single-family
starts to pick up perhaps by as much as 25 percent this year and 24 percent
have seen a huge influx of investment and surge in both demand and supply in
recent years." The economists say
they expect this to be another good year for apartment developers but then
supply will begin to catch up with demand and construction should taper off
considerably next year.
affordability remains high with home prices well below their peak and interest
rates at record lows.
After a jump in January sales of
new homes lost ground in February, slowing in every region except the
Midwest. As some volatility is to be
expected in the winter months the report says it expects sales will remain on
an overall upward trend this year and will probably rise nearly 20 percent this
Sales of existing homes also
appear poised for stronger gains this year.
The uptick of 0.8 percent in February sales came entirely from
condominium and townhome sales but single family sales should pick up as the
market moves into the spring buying season.
Inventories are higher than a year ago and the recent rise in home prices
should encourage more owners to put their homes on the market. Fears of rising rates if the Federal Reserve
eases its efforts in the financial markets may push more people to purchase. Investors will also remain active although
institutional investors probably won't continue to raise as much capital and
their influence on the housing market may wane later this year, probably
slowing the pace of home price appreciation.
The Fed said its monetary policy is
likely to remain on track for some time but there is now more speculation that
the monthly MBS bond-buying program will begin to taper by the end of the year
removing some of the downward pressure on mortgage rates. While the low rates have encouraged refinancing,
the idea the era of ultra-low rates may be ending should increase the rate of
Home prices continue to move upward but
there is concern that much of the increase is being driven by investors. This, the report says, is partially true, but
inventories also remain tight and household formation is increasing. With all major
indices showing an increase in home prices over the past year, buyer confidence
should continue to improve. Well Fargo
says it expects price gains to moderate later this year as inventories rise and
the investor share of home sales declines.