Following a devastating collapse, the rebound in the housing market has been gaining attention. While homeowners, banks, and investors are pleased to see increasing home prices, many fear another repeat of the housing crisis. Many analysts and commentators are concerned over the shadow inventory and its potential impact on home prices, should there be a large influx of listings.
With record low mortgage rates and bargain basement home prices, real estate has regained interest from investors and homeowners. On March 20, 2019, the National Association of Realtors (NAR) reported, "February existing-home sales and prices affirm a healthy recover is under way in the housing sector. Sales have been above year-ago levels for 20 consecutive months, while prices show 12 consecutive months of year-over-year price increases." Total existing-home sales increased to a seasonally adjusted rate of 4.98 million in February, which is a 10% increase from February 2012. As of the end of February, total housing inventory rose 9.6% to almost 2 million existing homes, representing an almost five-month supply.
The Federal Reserve (the Fed) is expected to continue purchasing $85 billion monthly in mortgage-backed securities through September 2013. The Fed's actions increased demand for mortgages resulting in lower interest rates for home buyers. The Fed expects to gradually reduce monthly purchases as the economy and unemployment improves. NAR President Gary Thomas noted, "In the history of mortgage interest rates since 1971, the 30-year fixed rate has been below 4 percent in only 15 months, and those have all been in the past 15 months."
Despite the improvement and continued recovery in the housing market, many believe that lending standards remain tight with banks reluctant to lend. Following massive foreclosures, record fines, and additional legislation, many banks are understandably cautious. Although the spread between deposit and lending rates remains positive, fear over the economy and current mortgage exposure deters banks from attracting more borrowers through relaxed lending standards. Faced with these strict lending standards, 32% of the transactions completed in February were on a cash basis and did not require a mortgage.
Although lending remains tight, investors are acquiring homes. During February, investors represented 22% of home sales, an increase of 23% from the previous year. Prior to a collapse in the housing market, investors were able to secure financing for home purchases. Today, investors have few opportunities to borrow and must commit to a substantial cash investment.
Following the collapse, many consumers and homeowners are concerned another bubble is forming. Although there has been positive activity in the housing market, a recovery appears to be occurring, rather than a bubble. Fed stimulus and consumer confidence are strengthening demand for homes. After the major decline in home prices, home affordability and unemployment have also improved. Real estate typically follows the normal market cycle, experiencing times of boom and bust. If the economy were to weaken, home prices could decline. Investors and homeowners should consider a long time horizon before committing to purchase any property.