After years of watching the equity in their homes plummet, U.S. homeowners may be a bit skeptical about recent predictions that the housing market is about to turn. But the latest statistics suggest it's true and the Federal Reserve appears determined to give home prices a boost.
The Commerce Department reports sales of new homes decreased slightly from July but the median price of a new home rose to $256,000 -- the highest since March 2007. The day before that report was released the S&P Case-Shiller Indices showed all 20 monitored cities recorded price gains in July.
"We have seen home construction and new home sales soar by twenty percent this year while existing housing demand is up by over seven percent," said economist Joel Naroff, of Naroff Economic Advisers, in Holland, PA. "All this increase in activity is leading a rebound in housing prices."
Rising despite the drag
But unemployment remains stuck over eight percent and mortgage companies, despite record low rates, are making fewer loans because fewer buyers can meet new qualification standards. So why are home prices rising?
Part of it goes back to supply and demand. While demand is less than it once was, it's still there and it's fairly constant month after month. But have you noticed the size of real estate magazines lately? While they were once as thick as a phone book they now are paper-thin.
With a smaller inventory of homes for sale, the consumers who want to buy them have fewer to choose from and less bargaining power. That allows homeowners who want to sell to demand more.
Reasons for falling inventory
Inventory is falling because many homeowners who would like to sell their homes are still under water. They owe more than their homes are worth.
Some homeowners who want to sell eventually are in no hurry, sensing the market is beginning to turn. If they wait to sell, they conclude they'll get more for their homes.
Finally, for whatever reason, fewer foreclosures are coming on the market. Many were held back while major lenders worked out a settlement with the states and the U.S. government. Now that the settlement has been reached, some long-delayed foreclosures are being sold but the number remains subdued in many states.
The Fed's role
The Federal Reserve's latest round of Quantitative Easing (QE) appears aimed, in part, at encouraging these recent trends and boost home values even more. The Fed has committed itself to purchasing massive amounts of mortgage-backed securities for the foreseeable future.
If the Fed is increasing the demand for these securities, it stands to reason that it would be increasingly profitable -- and less risky -- to create more of them. But to create more mortgage-backed securities, banks must first create more mortgages.
To create more mortgages, banks will need to loosen the very tight lending standards they instituted after the housing meltdown. The National Association of Realtors (NAR) has spent the last four years begging the mortgage industry to just use the lending standards that were in place before the housing bubble began to inflate.
If they were to do that, NAR chief economist Lawrence Yun has predicted home sales would surge 15 percent. A pick-up in sales that large would undoubtedly boost home prices even more.
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