Dr. Alex Villacorta, vice president of research and analytics at Clear Capital, was one of the first to identify the catalytic role small investors played in turning around failing Florida markets in 2011. He tracked the impact investors made in places like Orlando When they entered the market after first-time buyers fled. They created a price floor that restored confidence in the market and encouraged owner-occupants to return and participate as prices appreciated. The “Florida Phenomenon” was a precursor to today’s recovery and Villacorta did the research that helped economists understand the role that investors play.
Today, when someone asks you why we need residential real estate investors, just point them to the Florida Phenomenon and Dr. Villacorta’s research.
Now Dr.Villacorta has a new thesis. In recent market reports, he has been describing the end game of the recovery in terms of a New Normal. I’m aware of several “new normals” that define what real estate markets will be like once the recovery is complete, but his is the newest and it he makes a convincing case for it.
Related: The Elephant in the Real Estate Room
What is the New Normal?
Villacorta’s “New Normal” does not expect home values to return to the price peaks of 2007. It’s widely accepted that the boom in the housing boom was fueled by a system of housing finance that was close to fraudulent. Home prices bore little resemblance to what buyers could actually afford, rather financing created a house of cards that was bound to fall. However, millions of homeowners who bought at the peak and still own their homes silently hope that theirs will be one of the neighborhoods that will be the exception and that they will achieve positive equity in their lifetimes.
Villacorta agrees some will, but many others won’t, at least in their owners’ lifetimes. The recovery will end long before it reaches all.
“While July home prices continue to ramp up throughout the country led by Las Vegas posting more than 30.0 percent yearly growth, let’s not forget a healthy recovery means moderation as the new normal takes hold” said Dr. Villacorta said in his July market report. “Over the last half of 2013, we continue to call for a moderation in home price trends. A rising price floor will dampen some potential homebuyers’ appetites, particularly as recent gains bring many markets back into pre-bubble equilibrium. In other words, homebuyers are starting to adjust to the new normal, where steep discounts from the peak are not as attractive as they once were. Having said that, if housing inventory continues rising, it should help alleviate some of the recent pressure on prices, as well as homebuyer’ confidence in the market’s health overall. After these shifting fundamental drivers shake out, we expect the recovery to continue at a healthier and more sustainable pace. Certainly Las Vegas is the strongest example of a market that is really hot, with yearly growth of 31.2 percent.
“While these gains are a nice pick-up off the price floor, they will not last over the long term. We expect most of the major markets across the country to follow the path of sharp upward corrections in the short term, followed by moderating gains as markets fall back in line with their long run levels. Phoenix, for example, is now seeing quarterly growth that supports a yearly growth rate more in line with 10.0 percent, as opposed to the current yearly gains of 23.3 percent. The exact timing of this moderation will vary market by market. In Detroit, for example, given the current uncertainty in the municipal finances, it will likely be some time before REO saturation subsides to a level more in line with national rates and prices bounce back in a meaningful way. While Detroit has struggled with high levels of distressed activity since the housing market collapse, the recent financial developments for the metro will likely serve as another hurdle. Big picture, though, the housing market overall is in a great position and likely to continue to improve. All the more reason we must continue to observe performance market by market. What holds true for Las Vegas doesn’t hold true for Detroit, let alone San Jose.”
In May, Dr. Villacorta described his New Normal in more detail. “Certainly the expectation for moderation is less flashy than home prices racing their way back to pre-crisis levels. Yet moderation provides a sense of stability that is essential for both consumers and lenders, as it allows for both parties to calibrate to the current housing landscape,” he wrote.
Moderation is the byword in Villacorta’s new normal. It’s been a long time since anyone used the word moderation to describe the real estate economy, and it sounds rather nice.