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HOUSING IN 2013 DEPENDS ON MANY MOVING PARTS By Mark Lieberman, Economist for the Five Star Institute No matter how foggy the haze, economists typically dust off their crystal balls in December. However, economic forecasts too often involve looking in a rearview mirror. Anticipating what might happen in the housing markets with so many moving parts can be the trickiest of all forecasts. Because housing is a unique expenditure—combining elements of investment and a service—it depends on a variety of elements: employment, income, interest rates, the regulatory environment, and even the weather. Equally important are demographics and, as with any purchase or investment decision, the cost of alternatives (in this case rental housing). The housing market is complicated further by second homes and investor properties, separate from the investment component of the purchase of a primary residence. The biggest question mark over the housing picture is the on-again, off-again negotiations to avoid a national financial calamity. As the wrangling ensues on Capitol Hill over spending cuts, the national debt, and whether Congress will pay its tab for money already spent, uncertainty percolates from Washington to the market on Wall Street and down to the small businesses on Main Street. And as we've seen play out before, this uncertainty is powerful enough to unravel the delicate beginnings of recovery. Uncertainty has the potential to undercut home values with a ripple effect for the rest of the economy. Reduced home values would hit older homeowners who looked to the investment component of their housing as a comfortable 38 nest egg for retirement. Lower values and prices could create some churn in the housing market and benefit buyers but without "willing" sellers, those buyers will be left holding onto their cash. Lower values will also increase foreclosures as more homeowners find themselves underwater. Foreclosures and short sales have helped lagging home sales. About 15 percent of existinghome sales each month last year were foreclosed homes and another 11 percent were short sales. That said, the trend in home sales is positive: Existing-home sales averaged an annual rate of 4.65 million over the first 11 months of 2012 compared with an average of just under 4.3 million in 2011 and 4.2 million in 2010. The upward trend delineated marked a turnaround as 2010 sales were weaker than 2009, which were, in turn, weaker than 2008. The last time existing-home sales showed back-to-back year-over-year gains was 2004–2005. It seems that now home sales have the momentum to continue to improve in 2013. The pattern is not quite the same for new home sales, which are on a trajectory to improve in 2012 from 2011, marking the first yearover-year increase since 2005. To the extent existing-home values are affected by recent tax law changes, creating a new class of reluctant sellers, homebuilders could benefit as would-be homeowners turn to new rather than "used" homes. There is, however, a price advantage to buying an existing home: The median price of an existing home in 2012 averaged about $175,000, while the median price of a new home averaged just under $239,000. Prices for both could potentially drop now that deductions for mortgage interest are curtailed as a result of efforts to deal with the nation's deficit. Any cuts to the price of a new home would be a strain on builders, so the likelihood new homes sales in 2013 will grow during 2012 remains uncertain. The most positive sign for housing to continue to ramp up in 2013 is the improvement in the labor market, but even those gains require an asterisk. The national unemployment rate has held below a still-high 8 percent from September to December, but the number of people counted as unemployed remained stubbornly high. The number of Americans counted as unemployed averaged more than 12.5 million per month in 2012 compared with a monthly average of 8.9 million in 2008, the first full year of the recession. The average shot up to 14.3 million per month in 2009 (the year the recession officially ended, according to the Business Cycle Dating Committee of the National Bureau of Economic Research). The reason the unemployment rate went down is a simple function of arithmetic: The labor force also came down. Nonetheless, jobs returned. Non-farm payrolls averaged 134 million per month during 2012, up from 131.5 million per month in 2011 and 130 million per month in 2010. In the year before the recession, the monthly average was 137.6 million. As Wall Street investors say, the "trend is your friend," and it is positive. That makes it a bit easier for lenders to approve mortgage applications even in a postDodd-Frank world designating some mortgages as "qualified." Recent reports suggest banks are relaxing—or at least no longer tightening— lending standards for residential mortgages. Whether that movement reflects easing or merely the fact that standards could not be tightened any further is up for debate. (Imagine a leaking faucet that you tighten and tighten until the leak stops. That you stop tightening it is not the same as loosening.) Perhaps the only constant in the mortgage picture these days is interest rates. The Federal Reserve maintained the low-rate policy it began in December 2008, resulting in record-low rates for mortgage loans. Although the Fed said at its last Federal Open Market Committee meeting that it would begin to increase rates if certain benchmarks are reached—an unemployment rate under 6.5 percent and inflation remains in check—its own forecasts show those milestones won't be hit until at least 2015, meaning low rates will remain in place this year. Taken together, the housing outlook for 2013 suggests a continued, painfully slow improvement, but we've distanced ourselves a long way from heady pre-recession days.

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