Although the housing market seems to be on the upswing in many parts of the country, investors aren’t ready to fully jump back into the sector over recovery concerns and worries over another bubble forming.

The S&P/Case-Shiller index, covering approximately half of U.S. homes and measuring prices compared with those in January 2000 creating a three-month moving average, found prices rose in the largest 20 markets by 8.1% in January compared to a year ago, and up from a 6.8% annual gain in December. 

 The index shows that U.S. home prices rose in January at the quickest annual pace since 2006 right before the bubble burst, yet homeowners may be fearful that the existing market conditions are growing at an unsustainable pace.

While the economy and job market show slow improvements, the housing market has been a bright spot over the last year. The housing market, according to Russell Price, an economist for Ameriprise Financial, provides a significant point of fundamental support for economic growth with a variety of factors (unemployment, interest rates, mortgage availability) and is suggesting the recovery will continue.

 “All of those factors are improving at a modest pace, but they’re not improving at a pace that would make me fearful of another bubble being developed and quite frankly, I see that as very healthy,” he says.

“Rather than getting big 20% to 30% gains on either sales or prices any one year, we’re going to get a gradual improvement process that is much healthier for the economy rather than a sharp rebound.”

Despite the improvements, there are still challenges to be addressed, says Shah Tehrany, managing director at Franklin First Financial

“There is still a lot of stalled inventory so there are a multitude of people out there who are incapable of making their mortgage payments or delinquent on their mortgages and that still has to be flushed out,” he says. “The big banks in my opinion aren’t moving efficiently enough to try to rectify those situations and that process will just take time.”

Impact of Low Interest Rates

Historically-low interest rates are making it more it more affordable to become a homeowner, but that doesn’t necessarily mean the market is standing on its own. Tehrany says the low rates are part of an artificial rate environment and a function of the federal government buying mortgage-backed securities.

“They’re trying to intentionally keep rates low so they’re stimulating housing--you can go out there and purchase a home with a 3.25% interest rate with 3.5% down using an FHA loan.”

Joe Gross, national mortgage expert and author, cites low interest rates as a driving factor that has “kept the market alive.” 

“If rates would have been at a higher number, if they would have been at 6.5% or 7%, I think it would have been much worse,” he says. “The fact that the rates are low, so you can get a rate at 3.5% or 4%, makes it much more affordable from a payment perspective.”

Fewer Foreclosures

Experts say that the inventory of foreclosed properties has been steadily decreasing. What’s more, as homes are rehabilitated and sold at higher prices, surrounding home prices are rising as well.

“Foreclosures and short sales have pressured prices a little bit because people are looking for that better deal, they probably wait on total price growth by selling at 4% to 5% nationwide average basis,” says Price. “As that pipeline of distressed properties coming back into the market further erodes, we should see some further price gains.”

Unemployment

While unemployment only dropped slightly from 7.9% in January to 7.6% in March, experts say that consumer confidence in the job market is rising. 

“The economy has stabilized and probably even better, it is growing a little bit although certainly less than what we would all like to see--we’re getting employment growth, we’re seeing recovery in home prices and in the stock markets, so we’re getting positive net wealth benefit,” says Price.

Availability of Mortgage Lending

Although lenders are inclined to be more intensive with their due diligence and documentation process than in the past, Tehrany maintains that it is possible to qualify for a mortgage in the current environment.

“You can get 96.5% financing on a house, you could buy a $300,000 house with $10,000 down—that’s pretty good,” he says. “The lending is out there, it’s about consumers being smart and going to a good bank and understanding their preapproval process… evaluating their options and understanding their loan and what it’s going to cost them monthly.”

Projected Market Conditions

The continuing pace of economic recovery and an increase in consumer confidence is essential for the housing market’s sustainable success, says Price.

“We have population growth and we have some pent up demand in household formation that is now occurring, so that’s a positive and it would also be favorable to see interest rates remain relatively low and when they do rise, to rise at a steady pace rather than a jump higher,” he says. 

“It would take a double dip recession to really offset the housing recovery at this point and I don’t think that just a lingering slow pace in growth will be enough to knock it off its tracks. “

Consumers may be able to see indications of sustained market growth in as little as the next few months, predicts Gross.

“We’ll see how the summer goes and that will be a little bit of an indicator but my estimate would be another year until we have a good housing market,” he says. “If employment goes down, within the year the housing market should be in a much better position than we are today.”

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