There are signs that the housing market is rebounding. New construction nationally is the highest it has been since 2008. In the Triangle, sales were up 24 percent in the third quarter over a year ago. Bank of America said housing has turned the corner.
Activity is still well below the peaks of 5-6 years ago. But a sector that seems to be slowly headed up is better than a sector that, at the depths of the recession, was falling off a cliff. I just edited and posted online David Bracken's Real Deals column, which focuses on an increase in sales in Flowers Plantation, the massive residential development in my neck of the woods, Johnston County.
These are good signs, because the homebuilding industry is very important to the health of the overall economy. It employs lots of people, and used to employ many more. When people buy homes, they buy furniture, TV sets, riding lawn mowers. Settlement attorneys get paid. Realtors get paid. Money ripples through the economy. Contractors take on extra help.
In the Triangle, the average price of a home sold in the 3rd quarter was $239,000, up 1 percent from a year ago, according to Triangle Multiple Listing Services data. This, despite the fact that sales were up 24 percent in the quarter, continuing a string of double-digit sales increases, year over year. And despite the fact that the inventory of homes for sale dropped 21 percent.
So why isn't the sales price going up more, if demand is up and supply is down?
Here are several possibilities:
1. Demand isn't up enough. A. People who would like to buy a home may be holding off until the economy strengthens, and their concerns about possible layoffs ease. No sane person is going to buy a home if they are worried about their job. B. There is probably a backlog of people in their 20s who are living with their folks. Maybe they don't have a good job. Maybe they can't come up with a down-payment because of tougher lending requirements. C. People who would normally be moving up from a starter home to a bigger home may not be in a position to do that because they don't have much equity because prices have been flat. Or they may actually be under water, owing more money than their home is worth.
2. Supply isn't down enough. There are 8,825 homes for sale in the Triangle, a five-month supply. That is better than a year or two ago. But it is obviously too many homes for the level of demand.
Potential buyers are facing an interesting question. They have to guess what is going to happen to the demand and supply curves. It is tricky. If the economy picks up, more buyers will come into the market, and prices could be bid up. That house you could get for $260,000 today may be $280,000 a year from now.
But the supply side could kick in. Once homeowners see that prices are going up, they may put more homes on the market. Once-underwater homeowners may see an opportunity to break even, and list their homes. Builders may respond to the favorable price signals by increasing the pace of construction. All this would have a tendency to restrain the upward pressure on prices.
Then there is the X Factor of Washington. After the election, there is going to be a lot of urgency about reaching some kind of deal to shrink the deficit. One of the ideas that is always being kicked around is placing limits on the mortgage interest deduction, which costs the Treasury about $90 billion a year.
There are all kinds of theories about how much housing prices would dip if the deduction was eliminated completely. Certainly, if I'm in the market to buy a home, I have to be doing the math. If the government isn't going to let me knock down my taxable income by thousands of dollars through the interest deduction, then I'm going to be paying higher taxes. You can do all sorts of present value analysis to figure out what the hit is on a 15 or 30-year mortgage, but basically it means that the implicit tax benefit of a home purchase goes away, in whole or in part, and that should knock down some of what I'm willing to pay. Because the marketplace for homes bakes in the value of the deduction into housing prices.
I can't imagine that Congress would completely do away with it, because homeowners vote like crazy, and Realtors and home builders have phenomenal lobbyists and political action committees. Still...... Congress might decide to phase out the deduction for people making oh, over $250,000. Whatever the budget deal is, I can't imagine that it isn't going to at least nick the mortgage deduction somehow. Maybe just for rich folks. Of course, these days, politicians have a pretty elastic idea of who is rich.