This Hypothesis is One of Many Espoused in the Investment Industry and is Presented for Your Consideration.
The Release of the Case-Schiller Home Index Showed a 10.9% Increase. This was Followed by a Year Over Year Increase in the Price of Homes. The Median Price of a Home Now Stands at $271,600. However, the Real Story in Residential Real Estate is Told by Homeowners Equity. Homeowner Equity has a lot to do with Consumer Spending and the Perceived Wealth of Homeowners.
The Wealth Effect is Created When an Asset Owned by a Consumer or Investor Rises in Value. This Could be Stocks, Bonds Mutual Funds or Real Estate. The Markets Rise in 2013 Has Helped Investors. This May Have Helped Consumer Spending so Far This Year. However, the Clouds on the Horizon Relating to the Pullback in Government Spending Vis a Vie the Sequester, the Markets Skittishness Over the Possible Unwinding of Quantitative Easing, the Lack of Approval of a Permanent Raise in the Debt Ceiling and Gridlock in the Federal Government are Still Fueling Uncertainty.
Residential Real Estate has Indeed Risen. It was Reported Earlier This Year by Economists and Pundits Who Saw Real Estate Contributing About .5 or ½ of 1% to Gross Domestic Product (GDP) in 2013. This is Not Only Due to the Rise in Home Values but Includes all the Related Purchases People Make When Buying a Home Such As Furniture, Appliances, Home Improvements and the Like.
Zillow Real Estate Research Has Recently Published Their Negative Equity Report. Negative Equity is the Amount by Which a Home is Worth Less Than the Value of the Loan Used to Buy it. The Report Finds that Negative Equity Rate Fell From 27.5% in 2012 to 25.4% in the First Quarter of 2013. It Also Showed a Sequential Year Over Year Decrease From the First Quarter of 2012 to the First Quarter of 2013 Falling 31.4% to 25.4% Respectively.
The Street.com Reported:
“About 44% of Homeowners With Mortgages Cannot Afford to Sell Their Homes”, according to Zillow.
“Despite a Recovery in Prices, Over a Quarter of Homeowners With Mortgage Loans Still Owe More Than Their Homes are Worth. But another 18.2 percent of Homeowners with Mortgages, While Not Technically Underwater, Likely Do Not Have Enough Equity to Afford to Move,”
“43.6% of Homeowners Have Less Than 20% Equity in Their Homes. That Makes it Hard for Them to Move or Trade-Up, Given the Considerable Costs Involved in Buying and Selling a Home, Including the Cost of a Down Payment for the Next Mortgage.”
“This Inability to Sell is One of the Big Factors Behind the Acute Shortage of Existing Homes for Resale in the Country. Strong Investor Demand for Foreclosed Homes is Another Reason.”
Zillow’s Negative Equity Report States:
“In the First Quarter of 2013, More Than 730,000 American Homeowners Were Freed From Negative Equity. However, 13 Million Homeowners with a Mortgage Remain Underwater. Moreover, the Effective Negative Equity Rate Nationally —Where the Loan-to-Value Ratio is more than 80%, Making it Difficult for a Homeowner to Afford the Down Payment on Another Home — is 43.6% of Homeowners With a Mortgage. Home Value Appreciation Across the Nation Has Been the Main Factor Reducing Negative Equity Levels. Some Markets, Such as Phoenix (25.5%), Las Vegas (23%) and Several California markets, Such as San Francisco (24.8%), Los Angeles (17.9%) and Sacramento (25.4%), are Experiencing Very Strong Appreciation. Furthermore, Continued Foreclosure Liquidations are Also Driving Down the Negative Equity Rate. Despite These High Rates of Appreciation, Negative Equity is Still Very High and Will Remain High as Deeply Underwater Homeowners are Slowly Being Lifted Toward Positive Equity. However, the Effective Negative Equity Rate Remains Very High at 43.6%. In a Move-Up-Market, Homeowners with Less Than 20% Equity Will Effectively Still be “Locked” Into Negative Equity. On average, a U.S. Homeowner in Negative Equity Owes $73,059 More Than What Their House is Worth, or 42% More Than the Home’s Value. While Roughly a Quarter of Homeowners With a Mortgage are Underwater, 91% of These Homeowners are Current on Their mortgage and Continue to Make Payments.”
There Has Been a Negative Equity Feedback Loop, as Regions With High Negative Equity Have Experienced Acute Inventory Shortages Brought on in Part by Locked-in Underwater Homeowners, and These Shortages in Turn Have Produced Home Value Appreciation Spikes, Which Have Been Reducing Negative Equity at a Fast Pace. The Zillow Negative Equity Forecast Predicts the Negative Equity Rate Among all Homeowners with a Mortgage Will Fall to at Least 23.5% by the first Quarter of 2014, Freeing More Than 1.4 Million Additional Underwater Homeowners Nationwide.
Negative Equity Will Continue to Impact the Real Estate Market, Even Though the Negative Equity Rate is Continuing to Drop Relatively Quickly, and the Depth of Negative Equity is Falling Significantly. However, as Home Values Continue to Appreciate and Mortgage Rates Increase Homes Will Become Increasingly More Expensive, Leading to Slowing Demand Which, in Some Markets, Will Lead to Stagnant Home Values or Even Home Value Depreciation. Once That Occurs, Negative Equity Will be Reduced at a Much Slower Pace and Might Even Increase Again. We Expect These Dynamics to Unfold in Two to Three years From Now Once Mortgage Rates Begin to Return to Normal Levels. In the Short Term, Home Values are up 5.2 % on a year-over-year basis in April 2013, and Given our Forecast of an Additional 4% Home Value Appreciation over the Next Year (April 2013 to April 2014), We Expect That Negative Equity Rates Will Continue to Decrease in the Next Year to a Rate of, at Most of 23.5% by the first quarter of 2014. Next year (April 2013 to April 2014), We Expect That Negative Equity Rates Will Continue to Decrease in the Next Year to a Rate of, at Most, 23.5% by the First Quarter of 2014.”
So Real Estate is on the Mend. At Least Until Mortgage Rates Return to More Historically Normal Levels. As a Sign the Economy is Improving There Appears to be Concern by Some Federal Reserve Governors That it May be Time to Consider Scaling Back or Perhaps Eliminating Quantitative Easing. Rising Interest Rates and Falling Unemployment are Both Signals the Economy is Improving. As Evidence the Yield on the 10 year Bond has Recently Spiked Just above 2% and Unemployment has Fallen to 7.5%. The Fed’s Targets for Elimination of Quantitative Easing is an Inflation Rate of 2.5% or an Unemployment Rate of 6.5%.
It is Most Likely a Reduction in Quantitative Easing Would Create an Initial Knee Jerk Reaction in the Markets to the Downside. However, the Corresponding Increase in Economic Activity Fueled by the Real Economy Such as a Decrease in Negative Equity Could Create a Consumer Wealth Effect that May Facilitate a Continued Upward Movement in the Markets as Bond Prices Fall.
Equities and Real Estate Assets are Pivotal in Creating the Wealth Effect.
Based on Recent Comments by Several Federal Reserve Governors and Ben Bernanke’s Remarks in Front of Congress the Federal Open Market Committee (FOMC) Will be Watching Economic Reports for Further Economic Strength. Should Such Strength Appear and Become Consistent the Likelihood of a Reduction in Quantitative Easing Increases. At Least One Fed Governor Has Suggested a Clearer Picture of the Health of the Economy May Emerge in Three to Four Months.
The Zillow Report Suggests There May be an Intermediate Term Cap on the Rise in Real Estate Within Two to Three years as Rates Rise with the Broader Economy.
Shorter Term Real Estate Seems to be Leading the Real Economy Higher Fueling Employment, the Market and Leading to a Rise in Interest Rates. Real Estate Got Us Into the Financial Crises and the Federal Reserve has Thrown Everything at it From Quantitative Easing to Historically Low Short Term Interest Rates. Government Programs Such as Mortgage Modifications and Block Sales of Foreclosed Homes to Investors Seems to be Having a Positive Effect.
The Question That Remains is at What Point Does the Economy Move Past Slow Growth to a Meaningful Recovery. The Zillow Report Suggests Real Estate as Historical Driver of the U.S Economy Will Continue to Grow for Two or Three More Years. This is Positive for the Markets and the Real Economy. It Also Creates a Counter Argument to the Recent Debate that the Markets Rise in 2013 is Disconnected From the Real Economy and Begins to Show a Connection Between the Two. The Negative Equity Feedback Loop Zillow Points Out Represents an Engine Upon Which Real Estate Can Grow. This May Represent a Fundamental Paradigm Shift Leading to Higher and Self Sustaining Economic Growth. Now May be the Time to Position Your Portfolio for This Fundamental Shift.
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