Economy: Home Sweet Home

Once a mainstay of Georgia’s economy, the real estate market has struggled since 2007. Now, as foreclosures decrease and sales prices increase, there is considerable optimism throughout the industry.

In most areas of the state, home prices began to rise in the second quarter of 2012, and that upturn will be sustained through 2015, albeit more slowly, as prices reach levels high enough to prompt more homeowners to put their homes on the market.

There is considerable pent-up demand to sell, but many properties are not being listed because prices remain well below the level at which many homeowners’ are willing or able to sell their homes. As of late 2014, Georgia’s existing home prices were still 7 percent below their pre-recession levels, and that’s without inflation. Still, expect existing single-family home prices to rise by 6 percent in 2015.

Of course, many homeowners who would like to sell and have significant equity in their homes recognize that they may not qualify for a new mortgage under today’s more strict lending guidelines, and they will stay put.

In Georgia, the peak-to-trough drop in existing home prices was 28 percent, compared to 21 percent for the U.S. as a whole. Georgia’s home prices peaked in the second quarter of 2007 and bottomed in the first quarter of 2012.

Home price appreciation will continue as job growth increases, mortgage defaults abate, credit is more widely available and appraised values more accurately reflect market values. One concern, however, is that an unusually large percentage of recent home sales in the Atlanta market were cash sales, suggesting that investors are playing an outsized role in the recovery of Atlanta’s housing market.

As home prices and interest rates rise, sales to investors will moderate. The shrinking number of short sales and other distressed sales will also shrink sales to investors. Investors’ interest in the Atlanta market is a positive factor, but sustaining the recovery will require trade-up buyers and first-time homebuyers to become more active.

The S&P/Case-Shiller Home Price Index, the leading measure for residential real estate prices, shows that home prices in the Atlanta Metropolitan Statistical Area for all market segments – low-,  middle- and high-tier homes – rose by about the same percent during the boom, but performance varied significantly during the bust and recovery.

During the bust, low-tier home prices performed the worst, with peak to trough price de-clines of 64 percent compared to 43 percent for middle-tier homes and 29 percent for upper-tier homes. The tiered indices for all three market segments stabilized nearly simultaneously in the first half of 2012. During the recovery phase of the cycle, lower priced homes have appreciated the fastest but remain furthest from full price recovery. At the end of 2014, the home price index for low-tier homes was 23 percent below its peak value, compared to 15 percent for middle-tier and 8 percent for upper-tier homes.

An important difference between Georgia’s housing recession and the recessions that played out in many other states is that Georgia had a huge supply bubble, but there were no investor-driven home price bubbles to burst. Households buying homes for use as their primary residences were setting house prices rather than investors, speculators or people buying second homes.

Georgia’s large homebuilding industry, a seemingly inexhaustible supply of land suitable for new residential development, plus relatively few restrictions imposed by local governments on new home construction provide additional reasons why home prices never really got too far out of line with household income levels or replacement costs. That’s fairly amazing given the fast-paced population growth that Georgia enjoyed during the bubble-prone years.

A major factor driving down home prices was the elevated number of foreclosures and short sales. Home prices declined the most in the outlying suburbs – places characterized by a lot of developing neighborhoods and long commutes – and in urban neighborhoods where foreclosure was ubiquitous. Initially, many foreclosures were due to lax lending standards or innovative mortgage products, but over time a rising proportion were the result of job losses or other forms of economic stress.

As the economy continues to improve, you can bet that the real estate market will grow across the state. That’s good news for home buyers – and sellers.