DS News - Digital Archives

FUNDAMENTALS DON'T DRIVE PRICE GROWTH, FITCH ARGUES Despite the steady increase in home prices in 2012, Fitch Ratings says it "remains cautious" in its outlook on home values. According to a report from the ratings agency, home prices in the second quarter of last year rose "at their greatest pace since 2005." But in certain markets, Fitch warns that technical factors rather than fundamentals acted as the driving force behind price gains during the past few quarters. Fitch says technical factors such as low mortgage rates, the tight supply of existing homes for sale, and suppressed new home construction lead to high levels of affordability and driving demand while "offsetting weak fundamentals." Weak fundamentals include issues such as unemployment and unimpressive wage growth, the agency explained. In addition, Fitch says price movement is "highly dependent on the pace of distressed sales and liquidations." For example, states such as Michigan, Arizona, and Georgia disposed of their distressed inventory quickly and also saw "both steeper drops and quicker stabilization" in price movements, according to Fitch. On the other hand, states with long foreclosure timelines—New York, New Jersey, and Connecticut—may see price declines still. According to Fitch's report, Arizona currently liquidates nearly twice as many mortgages per month as New York and New Jersey combined. In order to determine sustainability, Fitch conducted an analysis using its Sustainable Home Price (SHP) model. The ratings agency found 22 metros out of 41 are currently "undervalued" or "sustainable" while five were 30 categorized as "overvalued" by 5 to 10 percent. In 2010, 23 metro areas were overvalued by 10 to 25 percent. The report highlighted hardest-hit metros such as Phoenix, Atlanta, and Riverside, noting they are recovering and currently considered "undervalued." New York and New Jersey, though, were categorized as overvalued by 10 to 15 percent, hindered by their large inventories of distressed properties and long foreclosure timelines, according to Fitch. In Union, New Jersey; and Los Angeles, high unemployment could also hurt prices, leading to roughly 10 percent declines. On a national level, Fitch admitted it holds a more somber view of prices and says price growth "is likely to be muted or even modestly negative in the near-term as liquidation volumes increase and expand supply, particularly in the lengthy judicial states where inventory has been off the market." Fitch warned "short-term price movements can be misleading when the impact of distressed properties has been withheld from the market . . . . While positive, the improvement masks those markets with disproportionately large inventories that have yet to be cleared and where double-digit price declines are projected." If liquidations continue at their Q2 2012 pace, Fitch estimates it will take 34 months to clear out the national inventory of serious delinquencies, down from 44 months the year prior. In states where the foreclosure process is elongated like New York and New Jersey, however, Fitch says it would take 10 years to clear out loans currently 90 days or more past due. FREDDIE MAC DETAILS WHAT TO EXPECT FROM HOUSING IN 2013 Freddie Mac made projections for housing in 2013 in its mid-December outlook report. Overall, the GSE expects to see a continuation of positive trends this year. For one, property values should still rise and are likely to increase by 2 to 3 percent in 2013, Freddie Mac said. The market should also see more households with household formation expected to expand from a net 1.2 million to 1.25 million. Long-term mortgage rates, which hover near record lows, are forecast to maintain this trend through the first half of this year but then rise in the second half. The GSE says rates will stay below 4 percent, however. The outlook for the rental industry is positive as well. Aggregate vacancy rates for the multifamily and single-family for-sale market are projected to come down to 2002–2003 levels as household formation outpaces new construction, the GSE says. Originations are expected to fall by 15 percent as refinances slow down compared with 2012. On the other hand, multifamily lending is expected to grow by about 5 percent. "The last few months have brought a spate of favorable news on the U.S. housing market with construction up, more home sales, and homevalue growth turning positive," said Frank Nothaft, Freddie Mac VP and chief economist. "This has been a big change from a year ago when some analysts worried that the looming 'shadow inventory' would keep the housing sector mired in an economic depression." Nothaft says instead, "the housing market is healing, is contributing positively to GDP, and is returning to its traditional role of supporting the economic recovery." KNOW THIS The construction sector had the fewest number of job openings of any major industry sector in November. According to the Bureau of Labor Statistics, there were 11.5 available workers for every open construction job.

• Cover