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Home prices rebound more than ownership, economist says

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Home prices nationwide increased about 13 percent last year, but fewer people own homes than before the recession. There’s been a rebound in the stock market, but top line revenues haven’t grown much, according to a California Economic Outlook conference call Wednesday.

Quantitative easing has done a good job bolstering balance sheets, but fails to do a good job bolstering underlying fundamentals, said Mark Vitner, Wells Fargo Securities Senior Economist.

Vitner was joined by economist Michael Wolf on the call.

Quantitative easing has also had distribution effects, especially in California where coastal economies have recovered more than in the interior, Vitner said. The rising stock market has increased household net worth, but gains aren’t evenly distributed. The stock market is higher, but income growth still struggles.

Income growth in California is up 2.8 percent, with a split between the coastal and inland areas — the coast is about 1 percent higher and the inland areas are about 1 percent lower, Vitner said.

California’s GDP growth is expected to be 3.8 percent in 2014 and 4.3 percent in 2015, after growing 3.3 percent in 2013, according to the Wells Fargo Securities forecast presented by Vitner. The unemployment rate is forecast to drop to 7.6 percent in 2014 and 6.7 percent in 2015.

Total housing permits in 2013 was 77,630, which is forecast to increase to 88,000 in 2014 and 100,000 by 2015. Of those, there were 36,265 single family permits in 2013 with a forecast for 40,500 in 2014 and 48,000 in 2015. In 2013 there were 414,000 existing family home sales, which are expected to rise to 424,000 in 2014 and 436,000 in 2015.

Home prices are expected to increase 8.3 percent in 2014 and 4.7 percent in 2015, after rising 20.1 percent in 2013 in California.

The Federal Reserve began tapering “without any great disruption,” Vitner said, adding that the fear of when to taper turned out to be worse than the actual tapering. Vitner said he doesn’t expect interest rates to increase until mid-2015.

In California, home prices were up 19.8 percent in February from February 2013.

“Home prices have rebounded much more than homeownership,” Vitner said.

The rebound in home prices was driven by investor purchases and there hasn’t been much residential development — which Vitner said seems to be changing with some projects moving forward.

“There’s not a whole lot of appetite for residential development, even with home prices coming up,” Vitner said.

California’s home prices were 1.8 times higher than the nation’s at the peak, and now homes are selling at about a 5 percent premium on average, Vitner said. There was a large outmigration when prices were 1.8 times higher than the national average. As home prices have moderated, demographics have improved and the state isn’t seeing as much outmigration, he said.

Investor buying has backed off as home prices have increased, Vitner said. It’s been said that first-time homebuyers were driven out of the market by those investors — which Vitner said is true to some extent — but that age cohort of buyers has also tended to delay marriage more than the generation before it, has come into a weak job market and tends to live in an urban environment where housing is more expensive and they’re more likely to rent – factors that also contribute to less homebuying.

“As investors leave, I don’t know if we’re going to see first-time homebuyers come back to the market in a major way,” Vitner said.

Vitner said he’s concerned about how quickly the influx of investors lifted the price of housing in markets where prices were severely depressed.

“In many ways it was a good thing,” Vitner said, but “on the flipside, prices went up much faster than incomes have.” When investors pull back, there might be an impression that housing is weaker than people thought, Vitner said. And investors have pulled back much faster than traditional buyers have moved back into the market.

The lack of inventory has also caused a “surprising number” of those preapproved for mortgages not to close on a purchase because they couldn’t find a house, Vitner said.

Vitner said he’s fairly optimistic about the U.S. economy, which is still coming out of a deep hole, adding that he thinks 2014, 2015 and 2016 will be the best years of this decade for the economy.

“There’s less policy uncertainty today than we’ve seen for quite some time,” Vitner said. A budget deal was reached earlier this year; continuing resolutions will prevent a government shutdown; and a deal was made on the debt ceiling.

Two areas are booming nationwide — energy and technology, Vitner said.

“Virtually every part of the country with a large tech center is flat-out booming right now,” Vitner said, adding that those areas are doing better than the overall economy — and the same is true for major energy centers.

Some “bubble-like” characteristics are starting to creep into those areas, he said, but if there are problems, they are several years down the road. Some speculative behavior has entered the technology, energy and real estate industries, which tends to happen when interest rates are held down, Vitner said.

Speculative activity includes the prices being paid for some social media companies — where Vitner said he’s starting to see some “cringe-worthy” prices and wonders what the enterprise value is. And he wouldn’t have expected those prices to have been paid if it were a cash transaction, as opposed to stock.

While the potential problems may be well down the road, Vitner said “bubbles don’t pop overnight.” It may be bad news for the people who invested at the top, but not necessarily bad news for the overall economy.

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