One of the nation’s leading economists not only says the housing slump is over, but is also predicting a multiyear recovery.
Speaking Tuesday at the Chattanoogan during the annual economic update luncheon for local Realtors and builders, Dr. Lawrence Yun, chief economist and senior vice president of research at the National Association of Realtors (NAR), said several economic indicators are pointing to a prolonged bump in the housing market.
“There was concern earlier this year when things were slow, but housing is one of the most cyclical industries in the country, and when it goes up, it generally tends to be a multiyear phenomenon,” Dr. Yun said.
The recovery began in 2012, Dr. Yun said, as buyers started to enter the market again after the extended slump. Then, in the beginning of 2014, sales slowed nationally. A significant jump in June over sales in 2013 provided an early sign that the recovery which began two years earlier will continue.
While Dr. Yun stopped short of predicting how long the recovery would last, he did display a chart showing past recoveries that lasted several years each. “If we have only a two-year recovery, it would be highly unusual,” he said.
Dr. Yun attributed the pause in the recovery in early 2014 to rising prices and a decline in inventory, neither of which were a factor in Chattanooga, he said. Rather, he said a harsh winter and rising interest rates were responsible for the dip locally.
“The entire South had a bad winter, and when the weather is cold, people don’t want to go outside,” Dr. Yun said. “But those were just delayed transactions. People who wanted to buy a house in February still wanted to buy one in May.”
Dr. Yun also said tighter underwriting standards as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act, which went into effect earlier this year, were a factor in the slowdown: “The law now says if a lender makes a loan, and the consumer defaults, the government can sue the lender. So even though recent consumers have been paying their mortgage on time, lenders have become more conservative.”
A bigger factor in the slowdown earlier this year were rising interest rates, Dr. Yun said. Interest rates for most of 2013 averaged 3.8, but late last year, rates climbed to 4.8. Although this is still an excellent rate, the increase put off consumers, he said. “Anyone who’s been in the real estate industry for the last decade knows 4.8 is a great rate. However, this is not how your clients see it,” he said. “Your clients have short term memory, and they remember how their friends, colleagues, and family members have rates locked in at 3.8 percent. So they wonder, ‘Can it come back down?’”
Rates have lowered slightly to 4.1 percent, leading to the bump in sales in June, but they won’t be there for long, said Dr. Yun. Rather, all indicators point to “the feds” raising interest rates sooner rather than later, he said. Therefore, Realtors should encourage their clients to make decisions based on future rates, not past rates.
“Explain to your clients that the rate today is still a bargain,” he said. “One year from today, it will be higher, two years from now, even higher, and three years from now, even higher because we are in a rising interest rate environment.”
Dr. Yun said inflation as high as 3.5 percent will trigger the increase in interest rates. He expects inflation to hit soon after the federal government stops printing money to stimulate the economy, which he says will likely happen in October of this year.
Although buying now would save homebuyers money in the long run, Dr. Yun discouraged using this information to pressure clients to make a purchase. “Buying a home is a major expenditure for most families, so you never want to rush them,” he said. “You want to make the homebuyer comfortable in their decision. But one of the factors they must take into consideration is that interest rates will be higher later.”
In spite of rising interest rates, Dr. Yun is standing firm in his prediction of a multiyear housing recovery. He said he’s basing his predication largely on the healthier economy, in which companies are once again making money and creating jobs, both of which have increased consumer confidence. However, Dr. Yun does not expect the current housing recovery to be as strong as past recoveries due to people who purchased a home at an interest rate of 3.8 percent not wanting to buy again at a higher rate.
Dr. Yun oversees a wide range of research at the NAR, including the organization’s existing home sales statistics, affordability index, and homebuyers and sellers profiles. He also participates in numerous economic forecasting panels, including the Harvard University Industrial Economist Council. In addition, Dr. Yun appears regularly on financial news outlets and is a frequent speaker at real estate conferences and functions. He’s also testified before Congress. In 2008, USA Today listed Dr. Yun as one of the top ten economic forecasters in the country.
Born in South Korea, Dr. Yun moved to the U.S. at a young age. He received his undergraduate degree from Purdue University and his doctorate from the University of Maryland at College Park. He currently resides in Washington, D.C.
Dr. Yun’s visit to Chattanooga was his first. He said he was pleased to be here. “This morning, I took a stroll to the waterfront. I was surprised to see a bike share program. That means you are looking to the future in terms of bringing millennials closer to downtown and making it a livelier place.”
About 150 practitioners from related industries, including homebuilders, Realtors, and persons from affiliated businesses, attended the luncheon. Present were leaders from both hosting organizations, including the Greater Chattanooga Association of Realtors and the Home Builders Association of Greater Chattanooga. Representing the former were Travis Close, president-elect; Byron Kelly, president of the Chattanooga MLS; Robert Fisher, secretary-treasurer; and Carol Seal, CEO and executive vice president. Representing the latter were Ethan Collier, president; Win Pratt, vice-president; Mike Croxall, secretary; Chris Mabee, treasurer; and Teresa Groves, executive director.