Richmond, Va.
Wednesday, Sept. 17, 2014

Is the housing market rebound here to stay?

An interview with Brent Smith, associate professor of real estate

Thursday, July 25, 2013

Even as the housing market rebounds, many still worry that it's on shaky ground.

Whether the current state of the market has staying power depends on the interdependence of the housing market with employment stability, wage stability and financial liquidity, said Brent Smith, associate professor in the Department of Finance, Insurance and Real Estate of the Virginia Commonwealth University School of Business.

"Although we know the potential buyer cannot enter the market without employment and borrowing power," he said. "Local employment also enhances mobility in the potential seller allowing them to take position in another market with the confidence they will be able to sell their current residence."

The housing market is especially important because it affects other industries such as the financial and manufacturing sectors. Smith explained the housing market's place in the larger economic picture.

What do you think is the most important aspect of the housing recovery?

It depends on what on what perspective you are viewing the market (local, regional, national, population dynamics, economic, etc.). The “recovery” intensity varies greatly and is being stimulated by different factors. Houston, Texas, is experiencing another energy boom along with economic diversification, and their housing market is responding accordingly. In southern Florida, foreign buyers have been swallowing up the excess inventory of low-priced homes with relatively cheap dollars. In some southern California markets it is estimated that one in five homes is owned by investment funds.

Exactly how much of a rebound are we seeing?

I would call it modest on a national level and variable in individual markets. Some of the recovery in prices we are seeing is driven by the sample of sales. In 2010 and 2011, the lion’s share of houses offered for sale was on the low- to moderate-value end of the spectrum. Now more sellers with higher-priced homes are entering/reentering the market, which drives up the average price. Still, shortages in the supply chain for both products and labor indicate builders are attempting to fill a strong demand in many markets.

What factors are contributing to the current state of the housing market? Why now?

I think this has been addressed in question one. There is more liquidity in the market and there appears to be increased confidence in the economy coupled with a slowly improving job market. I would also add the obvious – low interest rates are keeping the cost of ownership down. In many markets the mortgage is cheaper than rent.

Are we looking at rising interest rates? If so, is the market strong enough to withstand them?

Interest rates have been essentially at zero. They are driven by many factors, but one to keep an eye on is the value of the dollar. For roughly 10 years we have seen a dollar that has been relatively depressed when compared to other currencies. Recently, the dollar has shown signs of strengthening.  That drives up demand for dollars, which in turn drives up the cost of dollars (interest rates).

Prices are up the most in Nevada, California and Arizona, respectively. Is there any rhyme or reason to the patterns within individual states? Any particular reason the prices were highest in Nevada and California? The price of living in California is notoriously high – does this come into play at all?

A simple cliché explains this: “The higher you fly the farther you fall.” These markets are notoriously volatile and the downturn sent prices in those markets through the floor.  Think about a less dramatic market such as Omaha, Neb. The foreclosure rate was “minor” when compared to the markets mentioned. Likewise, the current market is not seeing the run up in prices in the same way.

How is the luxury market – homes more than $1 million – faring?

Luxury is relative and as with so much of real estate driven by local factors. High-valued homes are typically purchased by high-wealth households, and, in many instances, through incomes, self-insurance in the form of savings, or transferable skills, they generally fair better in recessions. This last recession is no exception.

Is there anything else that you would like to add?

Keep an eye on two socio-economic factors as time progresses – the boomers and the recent college grads. Where will all the boomers be going and will the urban-centered young adults change their tune and become couples with kids shopping for good schools and continuing the transition out to the burbs? Keep an eye on public sector pension commitments. Local governments in need of cash for unfunded pension accounts will have to turn to the more stable sources of revenue (property taxes). Higher taxes without correspondingly higher service offerings will result in lower values for houses.

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Brent Smith