All Signs Point to a Positive Q2 for Real Estate

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Despite apprehension around the sustainability of the housing recovery, all signs point towards a strong second quarter for the property sector. Considering that the housing rebound began to effectively gain traction during the latter half of 2012, it’s great to see that the first two quarters in 2013 are mimicking the trend. Much of the momentum in the housing market was catalyzed by a self-reinforcing combination of climbing home values and escalating purchase rates. With the much-dreaded shadow inventory finally drying up, one of the primary suppressants to value growth disappeared and a wave of buyers finally emerged from the woodwork.

As noted in a recent report from The Washington Post, the combination of rising home prices and dwindling foreclosure rates has maintained through March. The rampant amount of foreclosures that occurred following the housing crash were only a small side effect of the nationwide epidemic of toxic equity and underwater mortgages, but the fact that they continue to decline even up until the opening of Q2 show that smooth sailing for the housing sector wasn’t just a flash in the pan. As the Post report notes, the nationwide foreclosure rate measured from all mortgage-bound homes dipped to 2.8% at the close of March, the lowest overall monthly rate since the housing sector began to show recovery signs last October.

So What’s the Takeaway?

Beyond the dwindling mortgage rates, home values had rise a full 9.3% year-over-year as of this February, the most pronounced annual climb in prices since 2006. Beyond the rise in values, an associated Washington Post story takes into account that buyer demand has grown to a comparatively ravenous volume. The only caveat, it seems, is apprehension that there might not be adequate market-ready property, which is a near inverse to the quandary the housing sector faced in the midst of 2011. Private homeowners still seem comparatively hesitant to sell, as property demand is outpacing interest in unloading property on the open market. As a fortunate side effect, this resulted in a tremendous quarter for both major homebuilders as well as loan management entities.

Potential Downsides

As a consequence of unleashed demand and constricted inventory, housing prices could rise to the point where it discourages potential homeowners from entering the market. Many of the nation’s possible buyers fall under the umbrella of 20 and young 30-somethings, a group that is generally hungry to become first-time owners but also lack a comparative level of equity and personal income. In a worst-case scenario formulation, home values could rise to the point where property becomes a lucrative tradable property for fund management and investing entities, but organic homebuyer interest dries up due to an unfriendly level of price elevation. This could, ultimately, yield a market circumstance not unlike that which preceded the bubble wherein the property sector becomes a volatile investor’s playground but more abstract to the circumstances of everyday homebuyers.

Granted, much of this is doomsaying, and despite the predictable apprehension around possible housing trends, we’re likely to see a fourth consecutive positive quarter for the housing market. Considering the economic landscape, homebuilders will likely see exceptional earnings, and nationwide property values will escalate as well. The major long-term concern is whether or not conditions emerge that foster a sustained recovery.

Photo: stevecadman

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.