While headlines continue to portray a housing market with rising prices and tight inventory, the Census Bureau released its Housing Vacancies and Homeownership report last week. Government data reveal a dark cloud looming behind the bright headlines. Vacancies remain high, and according to Trulia, more than three-fourths of the nation's largest markets are dealing with bigger shares of vacant homes than they saw prior to the latest housing bubble. With inventory levels retracting even further - falling 3.3 percent year-over-year in the third quarter, according to Realtor.com - it may seem counterintuitive that vacancies would be high. However, according to the Census Bureau, about 53.5 percent of vacant homes are currently being held off the market. The vacancy rate today is 10.2 percent, according to Census data, down from a peak of 11 percent in 2010 but stubbornly higher than the pre-bubble 8.8 percent. Furthermore, the high vacancy rate is widespread. Trulia pointed out in a blog post Wednesday that vacancies exceed pre-bubble levels in 86 of the largest 100 metros in the country. Some homes are being held off the market temporarily for repairs before being listed for sale or rent. However, Trulia warns that when these homes hit the market, demand may not rise to match the new inventory. "Household formation was alarmingly slow," said Trulia's chief economist, Jed Kolko in a statement Tuesday responding to the newly released Census data. Household formation totaled about 380,000 year-to-date in the third quarter, notably lower than the historical annual norm of about 1.1 million. "The underlying survey data showed a slight year-over-year increase in the share of millennials (age 18-34) living with their parents," Kolko said in the blog post Wednesday. "Without more new households, vacant homes will fill up slowly." Vacancies also directly impact new construction, according to Kolko. "The local vacancy rate matters for construction-builders are hesitant to build new homes where there are many vacant homes," Kolko wrote in his Wednesday blog post. In the 10 metros with the highest vacancy rates, new construction is about 48 percent of its historical levels, Trulia reports. On the other hand, where vacancy rates are lowest, construction has returned to historical norms. Detroit, which recently topped two lists of recovering housing markets, outranked all other metros in terms of vacancies with a 19 percent vacancy rate, according to the Census Bureau's Q3 data. Trulia points out that Detroit's vacancy rate far surpasses the next-highest vacancy rate-12.4 percent in Palm Bay-Melbourne-Titusville, Florida. Detroit's low inventory and rising prices reported by Realtor.com and Clear Capital sit atop a shaky foundation of hidden vacancies. The lowest vacancy rate, according to Trulia, was recorded in San Jose, California, where just 3 percent of homes sit empty. Not surprisingly, vacancies are lowest in areas that suffered the least from the housing crisis.

Analysts Say Government Should Continue 'Significant' Role in Housing

Ideally, the government should back up to 35 percent of all new mortgages, according to the median response given in a recent Zillow survey which polled 108 economists, real estate experts, and investment and market strategists. Among those surveyed were analysts and authorities from such institutions as Barclays Capital, Equifax, the International Monetary Fund, Auction.com, Wharton-University of Pennsylvania, Local Market Monitor, and the Urban Land Institute. The government currently backs about 90 percent of all new mortgages, and according to Zillow the last time the government held a 35 percent share of new originations was in 2006 "at the height of the housing bubble." Despite a widespread opinion that the government's current majority share should be scaled back, about 58.4 percent of the experts and analysts surveyed say the government should continue to play a "somewhat significant," "significant," or "very significant" role in the housing market. Just 8 percent say the government should exit the housing market completely. "Policy discussions centered on reforming the nation's housing finance system have only just begun, and it will be very interesting to see what comes out of these debates and how much the market will react to new proposals," said Stan Humphries, chief economist at Zillow. Zillow polled sentiment surrounding government participation in the housing market as part of its quarterly Zillow Home Price Expectation Survey. Zillow found market analysts generally expect price growth to dwindle but not stagnate over the next few years. Those surveyed anticipate price growth will reach between 5.6 percent and 8.3 percent for 2013. Next year, they anticipate a 4.3 percent rise in prices, and by 2018, they expect prices to increase just 3.4 percent annually. "The housing market has seen a period of unsustainable breakneck appreciation, and some cooling off is both welcome and expected," Humphries said. Based on analysts' forecasts, prices should exceed their May 2007 peak by 2018. By the end of 2018, the national median home price could exceed $200,000.

Report: Housing Bubble Fears May Not Be Unfounded

Fitch Ratings last Wednesday stated unabashedly a fear that has been whispered across the industry for the past several months-a looming bubble in some markets. National home prices are 17 percent overvalued, and current levels of price appreciation in some areas of the country are unsustainable, according to Fitch. "Fitch identifies a bubble risk in continuing price rises and sees several factors which could halt or even reverse recent gains in the market," Fitch stated in its quarterly U.S. RMBS Sustainable Home Price and Economic Risk Factor Report released Wednesday. Rising prices and interest rates threaten affordability, and investors may be creating an illusion of demand that does not exist. "Having avoided the worst of the downturn, but participating fully in the drastic growth of the past year, much of coastal California is now approaching the peaks of home prices seen during the expansionary bubble of the early 2000s," Fitch said. Fitch identified the San Francisco Bay Area as experiencing "the largest unchecked growth" in the nation. If prices continue their current rate of appreciation, they will "eclipse 2006 levels within six months," Fitch stated. Prices are already 30 percent overvalued in the region, according to Fitch. Furthermore, Fitch points out investors have contributed considerably to recent buying activity. In fact, cash purchases-often an indicator of investor activity-is almost 50 percent in the Bay Area. "The concern is that housing prices are being driven up more through speculative buying than from an increasing base demand," Fitch said. On the other hand, Fitch did reveal some good news in its report, including "signs of a strengthening economic recovery" and "momentum continued to trend in a positive direction" across the nation. Also, while coastal California markets may be approaching a bubble, other markets are showing sustainable price growth. "Amongst the 10 cities that saw the largest declines from the 200s peak to their post-crash values, home price growth over the past year has averaged nearly 20 percent, twice the national average, with nearly all of this growth seen as sustainable," Fitch said.

Analysts Say Double-Digit Appreciation Will Come to an End by 2014

National home prices were up 10.1 percent year-over-year in the second quarter, but price appreciation is expected to fall out of the double-digits, reaching 5.4 percent by the beginning of next year, according to the CoreLogic Case-Shiller Home Price Indexes. Home price appreciation will continue to occur but will drop off even further moving forward, CoreLogic says. The company’s national index predicts prices will rise 3.4 percent over the next five years. “Combined with increased housing construction, expected increases in existing inventories should restrain price appreciation even if demand remains strong,” said David Stiff, principal economist for CoreLogic Case-Shiller. Currently, prices are rising in almost 90 percent of the nation’s metro areas, according to Stiff. He also points out that prices are rising in all of the nation’s metros where population is more than 1 million. “The strongest growth continues to be recorded in cities that were at the center of the housing bubble, but investor demand in those markets appears to be waning, meaning rapid rates of price appreciation are likely unsustainable,” Stiff said. When observing metros with populations exceeding 950,000, CoreLogic Case-Shiller found four of the five metros with the greatest annual price appreciation in the second quarter were in California. Sacramento, California, experienced the greatest price growth—25.9 percent. Las Vegas took the No. 2 spot with prices rising 24.7 percent over the year in the second quarter. The three California markets to fill out the top five list were Oakland (23.7 percent), San Jose (21.9 percent), and Los Angeles (20.3 percent). At the other end of the spectrum, four of the five metros with the smallest price appreciation are located in the Northeast. Honolulu, Hawaii, and Edison, New Jersey, posted the smallest annual price gains in the second quarter—both at 1.1 percent. They were followed by Hartford, Connecticut (1.3 percent); Long Island (1.9 percent); and Newark, New Jersey (2 percent). Looking forward, CoreLogic Case-Shiller analysts expect a shift in the lineup over the next year. Only two markets are expected to post double-digit gains—Oakland, California (11.1 percent), and Baltimore (10.8 percent). Other markets with price gains anticipated in the top five through the second quarter of 2014 include Tuscon, Arizona (9.5 percent); Hartford, Connecticut (9.1 percent); and Santa Ana, California (8.8 percent). Metros expected to post the smallest price gains over the next year are Miami (1.5 percent); Warren, Michigan (1.9 percent); Nashville (2 percent); Fort Lauderdale, Florida (2.2 percent); and Houston (2.7 percent). CoreLogic notes first-time and trade-up buyers are starting to increase their roles in the market, albeit slowly, while investor demand is waning as fewer distressed homes are listed for sale.

Report: New Wave of Delinquencies from ARM Resets Unlikely

Concerns of a new wave of problem loans caused by unsustainable rate resets on adjustable-rate mortgages (ARMs) are largely unfounded, according to Lender Processing Services (LPS). LPS conducted an in-depth analysis of the outstanding hybrid ARM population and found that the majority—63 percent—have already reset from their initial rates. Of the remaining 37 percent that have yet to reset, three-fourths were originated in post-crisis years when lending criteria was tighter and most new loans went to borrowers with credit scores of 760 or above—an attribute that LPS says suggests they are less likely to default in any type of scenario. And even among those ARM loans with looming rate resets that originated during the bubble years—when underwriting criteria weren’t nearly as strict—interest rates would need to rise a full 3 percent, or 300 basis points, for hybrid rates to increase, according to LPS. In fact, the company reveals in its latest Mortgage Monitor report that most of these borrowers will likely see their rates and their monthly mortgage payments decrease, not increase, when their loans reset. LPS’ Mortgage Monitor also looked at residential real estate transactions through August. Home prices were up 9 percent year-over-year, by LPS’ assessment. However, at just 0.4 percent month-over-month growth, home price appreciation is beginning to show signs of seasonal slowing, the company says. Still, the pace of home price appreciation in 2013 is greater than it was in 2012. LPS reports year-to-date through August, home sales remain at their highest levels since 2007. Distressed sales—including REO and short sales—continue to make up a smaller percentage of overall transactions. Annually through August, distressed sales comprise 19 percent of total home sales. That’s down from 20 percent for all of 2012 and 33 percent in 2011. Among distressed sales, short-sale volumes accounted for 46 percent of distressed transactions in August—a declining share, but still historically high, LPS says. Short sales as a percentage of distressed sales hit a high point of about 58 percent in late 2012, according to LPS’ report. New problem loans—those that were seriously delinquent as of September but current just six months prior—are close to pre-crisis levels at 0.85 percent, LPS says. New problem loan rates remain higher in judicial states (1.0 percent) than in non-judicial states (0.8 percent). At the same time, first-time foreclosure starts are at their lowest level in at least five and a half years. LPS’ data show the nation’s total foreclosure inventory stood at 2.63 percent as of September, or 1,327,608 loans.