Is the Housing Market Out of the Woods?

By TJ Kim

October 4, 2012

With the recent improvement in signs for the housing market, prices have been edging up in a sustainable manner. All major housing price indices showed year-over-year increase in home prices for the first time in two years.  Morgan Stanley research team, Vishwanath Tirupattur, James Egan and Jose Cambronero expressed an optimistic view on US housing in Housing Market Insights.

“A number of factors have contributed to the recovery in home prices. They include historic lows in mortgage rates that have buoyed nondistressed home prices, changes to shift-in-mix away from distressed towards non-distressed transactions, steady declines in shadow inventories, the rise of short sales in distressed home disposition, and the rise of cash sales. Based on the cumulative impact of these factors, we are now convinced that a sustained recovery in US home prices is underway, encompassing both distressed and non-distressed housing.”

Demand and supply trend for the market points out three remarkable boosters for the recent housing market rally: increases in cash sales, short sales and non-distressed sales. All three serve to raise the value of aggregate housing assets on the market.

“The pick-up in nondistressed transactions that we alluded to earlier has resulted in the shift-in-mix of monthly transactions away from distressed properties in favor of non-distressed home sales, which has served to amplify aggregate housing price”

“To put it more generally, short sales allow shadow inventory to be cleared in a manner that supports neighborhood preservation by preventing properties from falling into disrepair through non-occupancy, abuse and abandonment… the pick-up in the proportion of short sales is relatively recent.”

“Around 50% of distressed sales today are cash. The pick-up in cash sales has also been a byproduct of increased investor interest at Foreclosure auctions and in REO inventories, to cater to the buy-to-rent investors, among others. Even with non-distressed sales, a notable proportion of cash sales has emerged. In aggregate, the proportion of cash sales is now around 35%, up from about 20% during the housing boom.”

In terms of tight mortgage credit accessibility, regulatory authority is likely to ease strict conditions imposed upon borrowers, in the near future.

“Recent policy pronouncements such as the FHFA’s announced Reps and Warranties relief, while not game-changers in the near term, are a step in the right direction. We also expect that the ultimate resolution of thorny regulatory issues stemming from Dodd-Frank – QM, QRM, risk retention rules – may be more favorable for mortgage credit than the draft rules have implied.”

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