This is a particularly important time of the year. Not because we’re in between the pandemonium of the June recall elections and the tumult of the November general elections, but because we’re in the selling season of a recovering real estate market — and things are looking good.

A detailed review of that market was the subject of a superb conference at the UW-Madison in early June, co-sponsored by the WRA. The occasion was the annual Wisconsin real estate and economic outlook conference organized by the James A. Graaskamp Center for Real Estate at the UW-Madison School of Business. This year’s conference was titled “Building a Housing Policy that Works” — which is a particularly timely topic. With major federal budget battles on the horizon and a bruising presidential campaign that’s well underway, attempting to advance bipartisan solutions to fix the nation’s ongoing housing challenges will be difficult at best. The conference was thus designed to consider questions like what current policies are working and which ones aren’t? How can we best address large inventories of vacant, foreclosed properties? What reforms are likely for the GSEs (Government Sponsored Enterprises like Fannie and Freddie) and what role should lenders, capital markets, regulators, insurers, servicers, government entities and consumers play?

Presenters at the conference included NAR’s Chief Economist Lawrence Yun; Karl “Chip” Case, co-founder of the Case-Shiller home price indices; Matthew Feldman of the Federal Home Loan Bank of Chicago; and Curt Culver of MGIC, to name a few. One of the more provocative presentations came from Graaskamp Center Academic Director Professor Morris Davis who used the Great Depression to forecast the recovery from the Great Recession — which turned out to be surprisingly upbeat! 

I found some familiar themes in the presentations of these renowned economic thinkers and housing market makers, including:

Good news:

• Demand for housing is on the rise due to historically high affordability, historically low interest rates, ongoing job creation, solid stock market recovery, rising rents, increasing pools of qualified renters and pent-up demand due to several years of low household formations — or as Dr. Yun of NAR puts it, “more young people now leaving their parents’ basements.”
• Investors are increasingly choosing real estate, due to low prices and rising rents.
• Increasing consumer confidence and the returning perception that real estate is an appreciating asset.
• Decline in housing inventories, both listed properties and seriously delinquent mortgages, known as shadow inventory.
• Inflation is under control, at least for now, predicted at 2.4 percent in 2012 and 2.8 percent in 2013.
• Housing starts, while below long-term average of 1.5 million, are expected to rise to 770,000 in 2012, up from 610,000 in 2011, and expected to grow to 970,000 in 2013. In fact, Dr. Yun speculated that with a growing population, we could see a housing shortage in 2014-2015 if builders don’t increase production now.

Issues of concern:

• A semi-dysfunctional mortgage market, with tight credit holding back a stronger recovery. Some speculated that housing sales would be 15 to 20 percent higher right now if only Fannie, Freddie and FHA used “normal” credit scores to approve loans rather than the higher scores they’re currently using.
• Mortgage rates are expected to rise gradually to an average of 4.9 percent in 2013, which is still historically favorable. The pressure of rising rents and an increase in consumer inflation could force the Federal Reserve to raise interest rates in 2014, which isn’t all bad since that could shift refinancing loans to new purchase loans.
• There could be significant economic fallout if no new federal budget compromises come out of Washington by the end of the year, causing automatic deep cuts to military and domestic spending as well as automatic tax increases. Moreover, other federal policy uncertainties loom over the real estate market, including:
  • GSE reforms that could fundamentally change secondary mortgage markets.
  • The risk of eliminating or seriously restricting the mortgage interest tax deduction.
  • Potential for requiring large down payments of possibly 20 percent for all mortgages.
  • Discussions regarding a capital gains tax on home sales.

The months of April through August typically account for 51.5 percent of annual housing sales volume in Wisconsin. With Wisconsin home sales up for ten straight months and prices once again on the rise, albeit slightly, we seem poised for a strong market in these summer months. As our world-class presenters noted at the UW housing conference, the market fundamentals are good. Now we must ensure that government policies, both at the federal and state level, don’t mess it up.

Mike