The U.S. housing market has hardly recovered four years after the housing bubble in 2006. Although home selling prices have dropped nearly 30% making houses affordable to more consumers, the housing market hasn’t shown signs of sustainable recovery. Besides, although mortgage financing has reached historic low rates (30-year fixed 4.62, 15-year fixed 4.09 as of 7/22/2010, from 5.37 and 4.8 respectively in 2009), the U.S. real estate market seems driven by stagnation that inhibits its quick recovery.
Some key factors that influence the recovery of the housing market are the following:
1. High unemployment rate
With unemployment rate being in 9.50, less and less consumers are able to afford or willing to buy a new house. This trend is unlikely to change unless unemployment rate drops. Because the real estate market and the job market are highly correlated, when unemployment increases, housing prices are likely to stagnate as consumers cannot afford or are reluctant to take mortgage loans or move in areas where there are no jobs. Therefore, for the housing market to recover, it is required that the job market shows signs of recovery first. Without job growth that will ensure a fixed income stream and consumer confidence, real estate is highly unlikely to recover soon because of low demand that cannot guarantee a sustained improvement in housing.
2. Credit Issues
Although 30-year mortgage fixed rates dropped to 4.57 which is an historic low since the 1950s (week ending July 15, 2010), consumers are not able to take advantage of these favorable terms. Because financial institutions have incurred huge losses on bad loans during the housing bubble, the lending standards have significantly raised and consumers need to have a really good credit history to get a mortgage. In particular, to be granted a mortgage loan, consumers need to have a FICO score of at least 720 of higher, be able to deposit a down-payment of 10% of the property value and have their income and assets fully documented. Even worse, for Jumbo mortgage loans, FICO score should be 740 and down-payment should be around 20% to 40% of the property value.
Consumers who meet these requirements and have good credit history could get a mortgage loan. But overall, under the current economic situation, with people losing their jobs and income shrinking, it becomes highly unlikely that they have money for down-payments. Therefore, with unemployment swelling and credit issues surging many potential homeowners are being kicked out of the marketplace.
3. Dropping Home Prices
The falling home prices have weakened the real estate market raising a barrier to its swift recovery. Consumers are scared to buy a property that they will have to sell significantly lower after a while. What is currently on in the housing market is “buying low – selling low”, which means that the only realistic scenario about homeownership is that benefits from real estate investments are more likely to be traded off by the property’s declining value after the closing of the deal.
4. New Construction
Along with falling home prices, the availability of new construction complicates things even further for potential homeowners. When consumers cannot afford new houses, new construction will remain unsold. And although it is a sign of recovery, at the end of the day it weakens the housing market even further.
For the near future, analysts expect that the housing market cannot recover. It will take some time for unemployment to be stabilized and for credit to be less tight so that consumers can start spending again and afford new homes. Therefore, at a fundamental level, jobs and credit issues are the two key factors to be taken into consideration before one can firmly suggest that the U.S. housing market is on an upward trend.
Sources:
http://www.bloomberg.com/markets/rates-bonds/key-rates/
http://www.forbes.com/2010/07/15/signs-housing-recovery-personal-finance-mortgages.html
http://www.cnbc.com/id/31567082/Five_Reasons_Housing_Market_Still_Hasn_t_Recovered_Yet
