By Morgan Brennan, Forbes Staff
The lion’s share of home sales typically come in the spring and early summer. April, May, June and July account for more than 40% of all housing transactions annually, in large part thanks to weather. Economists, realtors and Wall Streeters have been quick to surmise that 2012 will be the year of the market bottom, and with that prognosis circulating, it begs the question of what sellers and buyers can expect in housing as that high season nears.
“The spring home buying season looks bright because of an elevated level of contract offers so far this year,” Lawrence Yun, chief economist of NAR, said in a statement earlier this week. February home sales, despite a slight dip from January to February, remain well above 2011 numbers. The Pending Home Sales Index, which reflects signed contracts that have yet to close, from the National Association of Realtors (NAR) was 9.2% higher than February of 2011 and existing-homes sales, or closed contracts, were 8.8% higher than last year.
That increased demand from buyers has pushed inventory levels 19% lower than they were this time last year, with an estimated 2.43 million homes available for sale. In fact, housing inventory is at a five-year low nationally right now. It means owners tinkering with the thought of selling have less competition to contend with, compared to the past five years. It also means housing may be inching toward a long-awaited recovery.
Here are five factors that will affect what the spring season brings and ultimately, whether 2012 is truly the year of recovery.
The mild winter weather played a big role in the relatively strong sales numbers with which 2012 has kicked off. ”Right now it’s hard to say whether the housing market is recovering or whether it’s warm weather,” asserts John Canally, an economist and investment strategist for LPL Financial. “But there are a couple factors that suggest the rising number of home sales are indeed for real: home builder stocks are way up since last October, lumber prices are higher, and home builder sentiment is getting higher.”
(Building permits, which rose 5.1% from January to February, were 34.3% higher than February of 2011, according to the U.S. Census and Department of Housing and Urban Development. Housing starts were 34.7% higher than last year.)
The Midwest has welcomed the most sales activity since 2012 commenced. The region clocked the most newly signed contracts, jumping 6.5% from January to February, with a 19% increase year-over-year. It was also one of only two regions that welcomed an uptick in completed sales as well.
“If it’s 30 below and snowy that doesn’t inspire people to go look at houses, but this year it has been so mild that our market didn’t slow down,” says Ellen DeHaven, a Realtor with Coldwell Banker Burnet in Minnesota. ”So we’ve been selling many more houses this year than we typically would at this time and it’s brought down our inventory levels both in foreclosures and in general.” DeHaven expects that sales surge to only grow as the year unfolds.
One concern may be whether the warm winter’s relatively strong sales have been pulling activity forward, meaning whether buyers who would typically have purchased in the spring have done so already, translating into less sales later on. Canally and others suspect that that’s not the case. NAR predicts sales will rise 7% to 10% this year, reaching the highest numbers seen since the housing bust began five years ago.
Interest rates hover at record lows. Housing affordability is at record highs. However, lending remains tight. NAR estimates that 31% of all pending contracts collapsed in February due to failed financing. Compare that to a 9% cancellation rate in February 2011.
Jed Smith, managing director for quantitative research at NAR, says stringent lending practices are a reflection of two things: either a potential buyer whose credit may not be strong enough according to post-bubble standards or a lending institution whose portfolio remains bogged down by poorly underwritten mortgages in years past. He notes that many of the larger lending institutions, like Bank of America for example, suffer from this, whereas the smaller, community banks and savings and loan associations may be more willing to underwrite mortgages.
Tight lending has led many buyers to pay in cash (approximately 30% of all buyers), a purchasing method that may have more benefits than taking out a mortgage. This is especially true of investors, who have been successfully using cash to land accepted offers, even if it means the seller accepts less money. This cash-is-king phenomenon has caused many a mortgage pre-qualified first-time home buyer to lose out on properties, as investors and first-time buyers tend to compete for lower priced homes in a market.
“The single biggest obstacle for a home buyer right now is availability of credit,” asserts Canally. If prospective buyers can find a way to finance their purchases, sales will arguably continue to grow. Smith estimates 500,000 more sales would be completed this year than projected if lending standards eased even just a little bit.
A Flood Of Foreclosure Sales
Now that the $25 billion foreclosure settlement has been reached, the uncertainty banks have felt about processing foreclosures is expected to subside. RealtyTrac estimates that there will be one million completed foreclosures, or REOs, in 2012 — a 25% increase from 2011.
That doesn’t mean we will see 25% more homes slide into default; it means the foreclosures that stalled in the processing pipeline after 2010′s robo-signing debacle will finally make their way into the hands of buyers in short sales and onto bank books as REOs (bank-owned properties).
“We will see more foreclosed homes come to the market later this year,” predicts Jed Kolko, chief economist at Trulia. He and Canally both think banks will list larger percentages of their REO inventory this year, a move that, depite being a long-term positive for housing, could further depress home prices in the immediate future. Since distressed property sells for about 30% less than non-distressed property on average, those discounts pull both listing prices and appraisal numbers down on non-distressed property in response.
However, investors have been eagerly snatching up distressed properties, which typically account for one third of all sales each month. So even if more short sales and foreclosures make their way to the sale block, there may be a market for them. The sooner they are cleared from banks’ books, the sooner prices can stabilize and begin an upward march.
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