By Chris Farrell
April may not be the cruelest month, at least when it comes to housing. The data strongly suggest that after six dreadful years, the real estate market is stabilizing.
The April 2012 numbers tell the story. Sales of existing homes rose by 3.4%, to an annual rate of 4.62 million, according to the National Association of Realtors. The median price of an existing home, at $177,400, was 10% above last year’s level.
Purchases of new homes in April rose by 3.3%, to an annual rate of 343,000 — up 9.9% from a year ago. The median sale price of a new home increased by 4.9% from a year ago, to $235,700. Housing starts improved by 2.6%, to an annual rate of 717,000—up by 50% from their April 2009 low. And in the first quarter of 2012, home prices were up by 0.5% over the same period last year, according to the Federal Housing Finance Agency’s purchase-only house price index.
Of course, any expression of economic optimism has to be tempered these days.
Company managements, policymakers and investors fear that the worsening European economies have put us on the verge of another global catastrophe.
The Organisation for Economic Co-operation and Development (OECD)—the Paris-based think tank for developed nations—recently projected that the euro zone will contract by 0.1% in 2012. China’s economy appears to be losing momentum. Washington remains paralyzed as high-stakes elections loom. And foreclosures, short sales and a large “shadow inventory” of homes—ones held off the market but waiting to be sold—weigh on the housing recovery.
Still, the combination of a slowly improving labor market, moderate economic growth and record-low mortgage rates is finally shoring up the housing market.
Other factors are behind a renewed appreciation of owning. For instance, the monthly cost of owning is less than renting in a majority of cities. In fact, at current mortgage rates, home prices would have to rise by 35% to get back to their average historic relationship to rents, according to calculations by Segal Rogerscasey, a global investment advisory firm headquartered in New York City.
Demographics enter into the equation as well. Household formation is expected to increase from the low level of approximately 600,000 in 2011 to one million households a year — a number more consistent with the historical average.
“People may postpone hitching up during uncertain times, but eventually hormones take over,” writes Warren Buffett in his latest annual letter to Berkshire Hathaway shareholders. “And while ‘doubling-up’ may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure.” (Buffett thought the market would recover last year, a prediction he’s carried over to 2012.)
Want to buy? No need to rush
Despite all the housing-market turmoil, it seems that Americans still like the idea of owning a home. And there’s a lot to like, from the freedom that comes from a place to call your own to multiple tax breaks. Is it time to buy? Prospective buyers still have time to mull the question. The housing-market recovery is likely to be a long, drawn-out affair. Most people know the lesson from the boom and bust is that it doesn’t pay to buy and own without conservative financing. For example, the figures that show owning is cheaper than renting on a monthly basis are based on the assumption of a 20% down payment. Forget buying if you can’t stay in the home for a long time—at least 5 years.
But the answer really lies with how secure your job, your career and your household income are. The greater your financial insecurity, the higher the odds that you might have to pick up stakes and move to another part of the country for work. A classic way to slash expenses after losing income is to downsize into a smaller place. Taken together, the more your job and career are at risk, the more renting looks good—and vice versa.
The past five years have been brutal on family incomes. The unemployment rate peaked at 10% in October 2009, and 35 months after the recession was officially declared over the rate is still at 8.1%. Most of us have been affected by—or witnessed, through a neighbor or a colleague—unemployment, under-employment, pay cuts and reduced benefits. Little wonder so many people are struggling to pay down debts and boost their savings.
Financial insecurity isn’t just a result of the Great Recession and slow recovery; it’s been a trend over the past three decades. As Corporate America has downsized, outsourced, reengineered and restructured the workplace — the price tag for the economic and social benefits of technological innovation and increased global trade and investment—the odds of suffering a big drop in income have increased.
Research by Peter Gosselin and Seth Zimmerman, of the Urban Institute, found that from 1974 to 1983, about one in seven individuals, ages 35 to 55 who lost a job or experienced a comparable income-threatening event lost 50% or more of their income. The figure rose to one in five from 1994 to 2003.
The idea that the trajectory and security of jobs and careers is of paramount importance when it comes to investing isn’t new. But an investment approach that focuses on your earning power — the return on your human capital — needs to be pushed to the forefront when evaluating any investment — stocks, bonds and, yes, a home.
Chris Farrell is a contributing columnist for Kiplinger.com.
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