Loose fiscal policy will boost housing market for 2 years - Inside Tucson Business: News

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Loose fiscal policy will boost housing market for 2 years

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Posted: Friday, January 18, 2013 8:00 am

Mortgage rates that are at “unimaginable, life-time lows” will boost the housing market for two more years before inflation returns. Home prices in the Tucson region could increase by as much as 10 percent on average this year.

In the short term, the Federal Reserve’s “ultra loose” monetary policy, known as Quantitative Easing, will sustain the nation’s slow recovery from the Great Recession. This strategy allows banks to borrow money from the government at virtually zero percent interest.

Looming on the horizon, however, are seriously dark economic clouds in the form of trade and budget deficits.

“Although the fiscal cliff was avoided, it did not solve the budget deficit issue. The deficit is scheduled to go up and up, it is out of control. Put it this way, you have a $1,000 credit card debt and your rich uncle helps by giving you $60. Is that going to help your debt situation? That was the deal that was signed,” said Lawrence Yun, chief economist for the National Association of Realtors.

“There will be a continuing war of nerves in Washington, D.C. The debt ceiling comes up in about two months,” he said. Yun was the keynote speaker at the Jan. 11 Tucson Association of Realtors’ 2013 Real Estate Forecast.

Quantitative Easing is a “non-traditional” fiscal policy that enables the government “to run the economy by printing a lot of money. Inevitably, that means higher inflation by 2015,” Yun explaind.

At that time, he projects inflation will be 4 to 6 percent. For 2012, the rate was about 2 percent. This year he expects inflation will tick up slightly. And although growth in the gross domestic product is essentially zero nationally and net job creation locally “has flat-lined,” the next two years look promising for real estate in the region.

“Inflation and interest rates are related. So even if mortgages go up to 4 percent, it’s nothing to panic about. Tucson is uniquely positioned for housing price increases,” said Yun.

Looking back, 2005 was housing’s bubble year and 2008 the crash. In 2009, housing data had already started to stabilize as measured by unit sales. Prices, however, were still in a free fall as the U.S. dealt with the financial market crisis and 8 million lost jobs.

“From my perspective, the data was stabilizing. Not the market. We still had an economy where 90 percent of the population had jobs. From your perspective, 2009 was awful. And 2010 and 2011 were awful. In 2012, things were breaking out because prices always lag sales,” Yun said. “This momentum will continue into 2013.”

Last year, Phoenix was one of the nation’s hottest price-recovery markets. Investors drove prices up 20 to 25 percent and bought thousands of homes at bargain prices. For investors still wanting distressed real estate, “Phoenix is no longer in play. Many will look to surrounding areas like Las Vegas and Tucson,” said Yun.

Nationally, most housing trends will find and benefit the Tucson market. Job creation, “foot traffic,” new home construction and total sales were higher last year. Distressed “shadow inventory” is falling and listings are trending down.

For five consecutive years, household formation has been suppressed.

“This is highly unusual, rare to have such an extended period. There are many, many people living in crowded spaces,” Yun said. “Young adults moved in with their parents or found that third or fourth extra roommate. In 2012, we saw a bursting out and that increases housing demand.”

Housing is now one of the economy’s strengths, but Yun cautioned the sector still faces uncertainties. Although the economic metrics are positive, the downside concerns are almost all political.

Facets of the housing industry “are seen as potential sources of revenue in Washington. The downside is potential regulation,” Yun said, “including continuing tight underwriting standards.”

Given the nation’s massive budget deficit, the home mortgage deduction will continue to be in play. Other issues include a capital gains and/or sales tax on home transactions, larger down payment minimums and higher loan processing fees.

“Certainly two years from now, mortgage rates will be measurably higher,” Yun said.

Contact reporter Roger Yohem at ryohem@azbiz.com or (520) 295-4254.

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