Is the Housing Market Headed Toward Another Crash?

by on April 12, 2013Madhusmita Bora

For-Sale Signs Up

There’s a shortage of inventory in the market. And that’s driving up price tags for homebuyers.

New research shows that number of homes listed for sale in March rose by 2.4 percent when compared to February, but that’s still down 15 percent from 2012.

Real estate news - Hank Paulson thinks the housing market could be headed for another crash“The newest data shows that the outlook is optimistic for the overall real estate recovery,” Steve Berkowitz, CEO of Move, which operates, told USA Today. “Things are slowly picking up steam.”

That’s good news given that we are just embarking on the spring buying season. The National Association of Realtors® said that in February it saw only 4.7 months worth of inventory. That means all the homes listed in the month would sell off in that time period. That’s not ideal in a balanced market, which usually has a six-month supply. Perhaps the shortage was responsible for the 10.2 percent price hike in that month, compared to a year-ago period. And if inventory levels don’t increase, prices are expected to keep climbing.

Usually, spring ushers in a busy homebuying season. But inventory levels could play spoilsport this year. With less options in the market, buyers could get discouraged and hold off on buying.

Paulson Warns of Another Crash

Here’s a bit of scary news. Hank Paulson, former U.S. Treasury Secretary, told Bloomberg TV this week that the housing market is headed toward yet another crash unless officials reform mortgage giants Freddie Mac and Fannie Mae.

“Today, the government is guaranteeing 90 percent of the mortgages. If the government keeps doing this, and markets aren’t allowed to work, we’ll be right back where we were in 2007 and 2008,” he said.

It’s clear that Paulson isn’t a big fan of the government-backed mortgage companies. He isn’t too convinced by Freddie Mac’s and Fannie Mae’s recent performances either. Fannie Mae reported a $7.6 billion quarterly profit, while Freddie Mac reported 2012 net income of $11 billion. The previous year the company had reported a loss of $5.3 billion.

“I could hardly believe what I was reading,” he said. “When housing recovers, of course they’re going to make more money, and that’s a good thing now, because the government losses will end being – or the taxpayer losses will be less than projected.”

Paulson may think there’s another crash in the horizon, but homebuilders clearly think otherwise.

With prices trending upward and inventories shrinking, private homebuilders have embarked on taking their companies public. Taylor Morrison Home Corp. and TRI Pointe Homes LLC have already made their initial offering while William Lyon Homes and UCP LLC have announced plans to go public.

The trend is a sign that the worse may truly be over for the industry. The housing industry is pn a strong recovery mode with prices up, foreclosures down and inventory on the downside. Strong job numbers, record low mortgage rates and rising rents have all helped drive buyers into the market. There now seems to be a good amount of investor interest in real estate stocks, according to Reuters.

Land Prices Rise

The renewed interest in the housing market has resulted in a big bump in prices for land.

Land investors are laughing their way to the banks, but builders are being pressured into passing the increase on to buyers of new homes.

On average, land values in the U.S. spiked 13 percent last year, according to the Wall Street Journal. That’s the first yearly gain since 2005. Builders are driving up the demand as they are hunting for finished lots and sites with infrastructure, such as road and sewage lines already set.

Higher land prices mean higher home prices for consumers. When land prices go up, builders pass on 100 percent of any hike to the consumers.

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