Despite low confidence among consumers and businesses today, U.S. home sales should rise gradually over the next few years as buyers steadily come into the market based on job growth. That was the message of Lawrence Yun, chief economist of the National Association of REALTORS®, at the NAR conference last week in New Orleans.

Over the next year in particular, he said real estate sales will be “choppy” but improving overall and home prices should be about the same next year as they are today.

Nevertheless, he cautioned that interest rates would likely be rising and people who are fussing about home prices may miss out on the cheap financing. He predicts rates will rise to 5 percent in 2011 and to 5.9 percent in 2012. Yun also warned that if the U.S. budget deficit gets out of hand, inflation could rise, which would also push up mortgage interest rates.

Despite the steep decrease in home sales after the expiration of the home buyer tax credit, Yun said buyers are beginning to fill the pipeline and home sales should start to rise on their own power now that the economy is creating jobs and given the favorable affordability conditions.

“The trend overall should be rising home sales activity for the upcoming years just from the fact that we have a pent-up demand in my view,” Yun said. “We have a sizable population growth yet home sales are only matching up with the year 2000 levels.”

The growth in home sales, however, will be closely tied to the rate of job creation. Over the next two years, Yun expects the Gross Domestic Product to grow 2 to 2.5 percent, with the economy adding 1.5 million jobs. This is slower than expected based on history. Normally after a recession, GDP would be around 6 percent; whereas, it’s only 2 percent. The number of new jobs should also be closer to 3 or 4 million based on history rather than the 1 million jobs created since the beginning of the year.

Many businesses are seeing record profits, yet they are hesitant to spend and to hire. If this trend changes and businesses do decide to spend their cash and create jobs sooner, there could be faster improvements and employment levels could be back to normal within two or three years. This would lead to a faster pick-up in home sales.

Although confidence is low, the good news is many of the excesses that created the housing boom and bust have now been removed from the market. For example, there is no bubble in home prices now that housing affordability is greater than historical levels, and subprime loans have virtually disappeared.

Yun’s view on prices is similar to that of other economists. According to Macromarkets, a firm that surveys 100 economists about the home price outlook, the consensus forecast is prices will increase about three-quarters of a percent in 2011 and nearly 2.5 percent in 2012, with greater increases in the following years.

Historically speaking, REALTORS®’ expectations of home values as reflected in the REALTORS® Confidence Index have tended to reflect reality. In other words, when a majority of REALTORS® participating in the survey has expected a drop in prices, they have fallen. When a majority of respondents have said they will rise, they have increased. In the latest month’s data, REALTORS® were split on whether prices would increase or decrease, which, based on history, points to no change in prices over the next year. 

The supply of inventory needs to be around 10 months in order for price stabilization to occur, Yun said. In Utah, the month’s supply of inventory stood at 10.7 months in September. This means Utah is close to having values stabilize statewide, but price drops may continue for a little longer before leveling off. Keep in mind, however, that every housing market is different so inventory conditions will vary based on city and neighborhood.

The information I’ve provided in this article is a gauge for what’s happening on a national level. To learn about the nuances in the area in which you are interested, contact a local REALTOR®.

By Lerron Little, CRS, GRI
Appeared in the Salt Lake Tribune and Deseret News November 13, 2010