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Ask the Economist: Recovering Home Prices Can Drive Inventory and Sales Increases

Peter Muoio

Peter Muoio

Peter Muoio is an EVP at Auction.com, where he is Chief Economist and head of Auction.com research. In this position, Peter heads all commercial and residential research and analytics for Auction.com and is Senior Principal of Maximus Advisors, its third-party research provider. Dr. Muoio has nearly 30 years of experience in real estate research, specializing in tailored real estate research for specific transactions, underwritings, portfolios and strategies, as well as a steady stream of research on the macro and regional economies, capital markets, and their impact on the full spectrum of real estate segments. DS News recently spoke with Dr. Muoio on housing recovery, the investment market, and Q2 GDP growth.

Where do you see the housing market right now in terms of recovery, and what more, if anything needs to be done to have a complete recovery?

In terms of where we stand, there's actually two ways to look at it. If you look at it from the perspective of home prices, we're pretty much fully recovered. Home prices are approaching their pre-bust peaks, and that's looking at it across the various gauges of home prices.

If you look at it from the perspective of sales, it's not a complete recovery and not moving into expansion yet, but that's probably because we're not likely to revisit the kind of sales pace that we saw in the peak parts of the housing boom. Maybe we're halfway back from the perspective of sales, but if you think back to prices being richer, that actually, oddly enough, can help sales because what it's likely to do is bring more supply into the market, then people see that the prices are higher and they start listing their homes, and the inventory of homes increases. It becomes a more virtuous circle of more inventory, more choice, people buying, and it goes on from there.

If you look at where we are in the recovery from the pace, I think we have shifted into a more fundamentally solid pace of recovery from what we've seen up until this year. What our Nowcast suggests is that the strong pace of sales that we saw in June and in the months prior to that has continued into July. We do another report on pricing activity, and that, too, is also suggestive of a firming market.

You might ask, "How do we get it to move on from here?" I think that's a key question. The key issue is, we're now seeing consistently good job gains, and I think that's the first, second, and third most important element in the picture. Consumers are more confident, people's wealth situation has improved, and clearly, they're also enjoying a benefit from low oil. Outside of the oil-producing areas, in the rest of the country, people are saving money every day, every week, as they fill up their cars and heat their homes, and that's helping the household budget.

The investment market overall is not near as robust as it was five years ago at the foreclosure peak, but it is still strong in some areas of the country. Where do you see the future of the investment market?

It's a harder market for investors than it was, because prices have come back. The "easy pickings," where you could get homes very cheap and you could hit your return parameters relatively easier, are not there. We've been seeing a lower percentage of all-cash sales, which I think is probably the best indicator of investment activity. Both the investor purchase percentages and the all-cash sales percentages are shrinking because there's less and less opportunity either for people who are in there to flip or people who are in there to buy and hold and rent. But the going-in price for the buy-to-rent scenario makes it a harder economics than it was previously. I think in a way we're reverting back to a more normalized historical market where owner-occupiers are the major drivers rather than investors who were the drivers in the early stages of the recovery.

To what do you attribute the Q2 GDP growth after such a slow first quarter? Was it strictly seasonal, or are their other factors involved?

I think there are a few factors, but I think you're on to something. There is a growing body of evidence from the Bureau of Economic Analysis that the numbers may be skewed, and that's why we've been seeing these super weak first quarters over the last few years. It's partially a mirage of seasonal adjustments, so there is something to the theory that "The first quarter is the first quarter and has its issues."

There were three things we were looking at with the first quarter weakness this time around. All along we were saying that these negative factors were dissipating. The three things are:

  • First, we had yet another brutal winter in many parts of the country, which slowed economic activity;
  • Second, we had a bunch of labor disagreements at a bunch of the West Coast ports that really slowed the flow of cargo during the first quarter. That problem was solved in March, so it was really a first quarter event. As we got into the second quarter, a lot of the goods that got held up started to flow through the ports. If you look at the components of the GDP numbers in the advance report for Q2, trade was actually a strong positive. I think part of that was a bounceback from a weird first quarter because of the ports situation.
  • The third factor is something I think a lot of people are not paying enough attention to. It gets back to the energy story. The way we've been parsing the energy story is that the initial impact of low oil on the economy is negative, because the oil companies cut back their investment, they cut back their drilling, they cut back their exploration, and they start laying off people. As you know, it's not just people directly working for oil companies, but it's accounting firms, law firms, and all the kinds of business and other kinds of services that an energy company will use. You get that negative impact right away, and I think the first quarter weakness partially reflected that. As we look at the low oil story, our view is that over time, you take the hit on the negative, but you get the positive multiple effect I referred to before of people having more money in their pockets because they're saving a lot of money every time they fill up their cars with gasoline. That starts making its way back into the economy and generating increased economic activity.

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.

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