When a bunch of New England banking industry employees got together for a conference this spring, an illusionist entertained them. He read their minds. He made silverware melt before their eyes. He took solid wedding rings and made a chain out of them by sliding them down a pencil. And throughout his performance, everyone in the audience was trying to pierce through the illusion. They knew they were being fooled somehow.
And that was for parlor tricks. Shouldn’t we be doing the same thing with the real estate market?
The bell is being rung that the housing downturn has ended, and that we’re on our way to a real recovery. But is this an illusion? Are we fooling ourselves about what’s happening?
There is indeed a spark in the housing market, but it’s a lot like trying to turn a car on with a drained battery. Sure, you can hear a “tick, tick, tick” noise when you turn the ignition key. So there’s a spark in the battery. But it’s not enough to get the engine roaring.
Little Changes
The housing market in Massachusetts feels like its engine is turning over. Home sales for the first five months of the year are up 23 percent over last year, with improvement shown in every month, according to data from The Warren Group, publisher of Banker & Tradesman. Through April, the number of mortgages made to purchase homes is up 13 percent, The Warren Group said.
After five years of distress, we’re in an Alka-Seltzer moment. Any relief is welcome, and there’s no reason not to feel good that the numbers have finally turned positive. But it’s important to put those positive numbers into context. Sure, home sales are up over last year. But last year’s sales and mortgage originations were the worst recorded in a generation. Being higher than that is like being six inches off the ground in a pole vault competition.
A housing recovery that’s not smoke-and-mirrors will need significantly more property changing hands, and at higher prices. Despite the run-up in sales so far this year, sellers on the whole are still seeing their values drop. The Warren Group’s data show median prices for single-family homes in Massachusetts sliding 1.8 percent for the first five months of the year.
With the surge in demand, prices should be rising. That they’re not points to several large areas of weakness that remain in the marketplace.
The biggest weakness is the number of people who own homes but are trapped in them because they owe more on their mortgage than the house is worth. Corelogic, a national real estate information company, says Massachusetts falls in the middle of all states when it comes to the problem of negative equity. But that still leaves the commonwealth with nearly 25 percent of mortgage holders unable to change homes (or get home equity loans). Most industries don’t do well when one out of four customers has been locked out of the market. And since median home prices continue to swoon, that number is likely to get larger. It’s certainly not going to get smaller with any speed.
There is also a dearth of first-time homebuyers. It’s not because they don’t want to grab their piece of the American dream. It’s that underwriting mortgages has become incredibly strict. Mortgage professionals in the region say nearly a third of real estate transactions are falling apart before closing. According to the Ellie Mae Mortgage Insight Report, most of the people who are able to actually close a purchase are coming up with nearly 20 percent down payments, and have nearly perfect credit scores. That’s not the usual profile for the first-time buyer, who is often young, saddled with college loan debt, and working in lower-level jobs that don’t allow for big bucks going into the savings account.
Meanwhile, of course, Washington is looking at new rules under its “Qualified Mortgage” initiative that would force more risk onto lenders. That will lead to even more tightening of underwriting in the next few months, just when we need the flow of lending to loosen.
Another critical element is the one-two punch of continued high unemployment, and lackluster or non-existent income growth for most of those who are employed. Without income growth, getting growth in home values is going to be tremendously difficult.
“If there is an increase in home prices [over the next five years], it’s modest,” Robert Shiller, a Yale economist and co-founder of the influential Case-Shiller Index, told Reuters news service last week.
Happy Numbers
The next few days should see the release of more housing data, and those will likely be happy numbers. One of the things about reporting real estate numbers is the lag time. When the numbers come out, they will be reporting what happened in June, which is the closing period for the spring buying market. It’s likely the sales numbers will look good. It’s even possible that median prices might jump here or there.
But don’t be fooled. When subprime lending went away, a third of the market went with it. A quarter of the market in Massachusetts is locked up in an underwater real estate prison. Young couples are suffering under collegiate penury. So, yes, we may sell more homes this year than last year. We may make more mortgages, too. But we’re a far cry from a market that’s in balance between buyers and sellers. You can’t always trust what seems to be plainly in front of you. Ask any illusionist.
