Slowdown in appreciation rates will spur home sales

ON THE MOVE: Stan Humphries, chief economist for Zillow Inc., says that increased rent prices are partially a function of an increase in foreclosures. / COURTESY ZILLOW
ON THE MOVE: Stan Humphries, chief economist for Zillow Inc., says that increased rent prices are partially a function of an increase in foreclosures. / COURTESY ZILLOW

Homeowners who can’t help checking their address on Internet property value trackers like Zillow’s “zestimate” likely weren’t happy with Stan Humphries, the real estate website’s chief economist, when house prices were plunging in recent years. An architect of the algorithm behind the “zestimate,” Humphries is probably more popular now that home prices on Zillow are rising again. 2013 was a very strong year for real estate across the country and even in the economically challenged Providence area, where Humphries was in town recently to network with local real estate agents who use or are looking at using Zillow’s data platform.
As the spring homebuying season ramps up, Humphries discusses whether the national and local markets can continue to climb through rising interest rates and low inventory.

PBN: The housing market really took off last year. Can that continue in 2014 or is a slowdown inevitable?
HUMPHRIES: Nationally we are still in the middle of an incredibly robust recovery. We have bounced off the bottom quite strongly. This past year home values across the U.S. rose 5.6 percent, which is quite strong considering the long-term historical average appreciation rate is 3.5 percent. That is to be expected after such a bad recession and moving into the spring season we are in a situation where there are more buyers chasing fewer homes, leading to price spikes. A big reason there are more buyers is we still have incredibly low mortgage rates: 4.2 percent on a 30-year, fixed-rate mortgage is still very low and that has stimulated buyer interest. Buyers are finding fewer sellers and the reason they are finding fewer sellers is real inventory constraints in most markets, especially high amounts of negative equity. … Certainly the pace of foreclosures is dropping, but negative equity is still quite high. Nationally, it is 19.4 percent and in the Providence metro it’s 21.5 percent.

PBN: You mentioned what are still low interest rates. How long is this going to continue?
HUMPHRIES: The beginning of the end of extraordinarily low rates was definitely May of last year when rates went from 3.5 percent to 4.5 percent and then resettled to 4.2 percent. But the inexorable rise of mortgage rates has started. The Fed notched down the taper another $10 billion per month. We believe they will continue that, which will mean the stimulus will be done by October of this year and then we expect rates to modestly increase and believe the Fed will actually increase the federal funds rate in the middle part of next year. So by June of 2015 we believe for the first time since 2008 we’ll have an interest rate change where the rate will actually go up. Basically we think by the middle of next year we could go back above 5 percent on a 30-year fixed mortgage.

PBN: What do you make of the Providence metro market?
HUMPHRIES: Up in the Northeast your strongest appreciation rates are in Boston and New York. Markets in between in Stamford, Providence and Hartford are seeing lower rates of appreciation. I would say they are seeing solid recoveries. In Providence prices are up more than 3 percent, which is solid. Those markets don’t benefit as much as New York or Boston from international buyers. A market like Providence is left to generate its own housing recovery based on its own economy: working down unemployment and getting negative equity down and people buying homes again.

PBN: There is very little new construction in this region, so negative equity going down and people putting their homes on the market seems like the only way inventory could increase. Is that likely to happen? HUMPHRIES: The ways you could see more inventory are, first, new construction, the second is homeowners who have been underwater re-emerging and seeking to sell, and third is if the pace of home-value gains begins to moderate a bit. Generally there is a kind of seller psychology where sellers want to wait for appreciation rates to slow substantially before they sell their house. … Sellers will come into the marketplace once they see appreciation come down, because all of the juice has been squeezed out of this orange. In the Providence metro we are expecting home-value gains of [slightly less than] 1 percent next year. That gives you some sense that the pace of gains is slowing. They rose 3 percent last year and this year it will be about one-third of that pace.

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PBN: Rents stayed steady and even climbed through the downturn. Do you see those rent increases continuing?
HUMPHRIES: More broadly we think there is going to be a lot of pressure on rents across the U.S. because a lot of the household formation that is occurring right now has been among renting households. Looking within Providence, it is more of a mixed bag. You see places like Pawtucket, Coventry and Cumberland, which are lower priced, seeing very robust appreciation. A lot of that could be fueled by decreases in foreclosures, because those areas had a lot of foreclosure activity. In Pawtucket, rents are up 8 percent but home values are still down 41 percent from peak and 41 percent of homeowners are underwater. … That is an indication there is a lot of foreclosure going on and displaced homeowners coming into the rental market can boost rental demand like that.INTERVIEW
Stan Humphries
POSITION: Chief economist for Zillow Inc.
BACKGROUND: Humphries jumped from the staid world of academia to the less-predictable environment of online commerce, using statistical analysis to predict economic events for travel website Expedia. While in Seattle with Expedia, Humphries met the future founders of Zillow, who hired him to help launch their real estate data website.
EDUCATION: Bachelor of arts from Davidson College, 1990; master’s in foreign service from Georgetown University, 1993; Ph.D. in government from University of Virginia, 2000
FIRST JOB: Hardware store associate
RESIDENCE: Seattle
AGE: 46

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