Real Estate To Come Back Soon?

[RiversideGator]

This article argues that the end of the rout is upon us or very close.  Are things up from here?  Read more here:

Bottom's Up: This Real-Estate Rout May Be Short-Lived

By JONATHAN R. LAING

This real-estate rout has been more painful than prior ones, but it may be shorter-lived. Indeed, there are early signs of recovery.

A FEW YEARS AGO, AN ACQUAINTANCE SENT Wellesley College economist Karl "Chip" Case a T-shirt depicting a cartoon of a smiley-face house surrounded by soap bubbles, called "Mr. Housing Bubble." But it was the words captured in a comic-book cloud on the shirt that gave this otherwise goofy image its bite: "If I pop, you're screwed!"

The dark humor hardly was lost on Case, co-creator along with Yale economist Robert Shiller of the now-canonical S&P/Case-Shiller Home Price Indices. In pairing recent sale prices of U.S. homes with the prices those same homes fetched previously, the index is substantiating what every sentient American knows: The U.S. housing market is in a deep funk, probably the worst in 50 years, according to Harvard's respected Joint Center for Housing Studies.



Home prices are down nearly 18% from the market's peak, according to Case-Shiller, and inventories of unsold homes are at near-record levels. Foreclosures are mushrooming on "subprime" properties, or homes whose purchase was financed with subprime debt. Blowback from the crisis has left mortgage-finance giants Fannie Mae (ticker: FNM) and Freddie Mac (FRE) financially strapped, while many other lenders lack the stomach -- or money -- to offer new mortgages. Noted market experts such as Pimco bond-fund manager Bill Gross and economist Mark Zandi of Moody's Economy.com predict the meltdown in housing will continue for many months, with home prices declining by 10% or more from today's depressed levels.

Yet, such pessimism appears overdone, based on much recent data. Sales of existing homes are showing tentative signs of increasing, while the plunge in prices likely is nearing an end. Total inventories fell in May to 4.49 million existing homes for sale, or a 10.8-month supply at the current sales pace, down from an 11.2-month supply in April, according to the National Association of Realtors, in just one statistic emblematic of the nascent trend.

YES, THE SUPPLY OVERHANG still is humongous, but at least the numbers are moving in the right direction, as even Treasury Secretary Henry Paulson noted last week. Speaking at a Federal Deposit Insurance Corp. conference, Paulson declared that "we are well into the adjustment process." Inventories of new single-family homes are down 21% from a 2006 peak, he observed, while "existing-home sales appear to have flattened over the past several months, indicating that demand may be stabilizing."

Still other numbers suggest prices are close to bottoming. The S&P/Case-Shiller Index for April, released just last month, showed the biggest year-over-year price decline yet, of 15.3%. Buried in the numbers, however, and widely ignored in the media, was the news that home prices actually rose, albeit slightly, between March and April, in eight of the 20 markets covered by the index (Boston, Charlotte, Chicago, Cleveland, Dallas, Denver, Portland, Ore., and Seattle). This was in sharp contrast to the readings for March, which showed prices falling in 18 of the 20 surveyed markets. Also, the pace of monthly price declines is starting to slow in most of the markets with negative readings.

"Other than Larry Kudlow of CNBC, none of the journalists who interviewed me after the latest release seemed at all interested in any of the positive developments," says David Blitzer, chairman of the S&P Index Committee. "They seemed focused on the bad year-over-year number."

In general, transaction-based home-price indexes, including S&P/Case-Shiller, may be painting a bleaker picture of price trends than warranted. That's because subprime housing, though less than 10% of the total U.S. housing stock, accounts for a far larger share of current sales volume, owing to spiraling defaults and distress sales. In the San Francisco area, expensive homes ($721,548 and up) have suffered a peak-to-trough drop in price of only 10.7%, compared with low-priced homes ($473,711 and under), down 40.9%, and mid-range homes, down 28.3%, according to the latest Case-Shiller numbers. The surge in low- and mid-range sales has been sufficient to push average peak-to-trough prices down by 24.6%, despite the index's valuation-weighting.

Help for the housing market also may be on the way in the form of proposed congressional legislation that would allow the recasting of some $300 billion in troubled subprime mortgages through the Federal Housing Administration. The bill, which some have derided as a bailout, would demand sacrifices by both lenders and borrowers, and could help to ease conditions in the subprime market.

Of greater importance, a government takeover of loss-ridden Fannie and Freddie -- the subject of widespread speculation late last week -- would ease concerns about the continued availability of credit in the housing market. Fannie and Freddie, which buy mortgages from banks and repackage them into mortgage-backed securities, are the biggest source of financing for the U.S. mortgage market.

SURPRISINGLY, CHIP CASE, whose knowledge of the housing market goes back decades and is based on the voluminous collection of data, is among those who think home prices may be nearing a bottom. Case notes, among other things, that new housing starts fell to 975,000 in April from a peak rate of 2.27 million in January 2006, and that three declines of similar magnitude -- from more than two million to less than one million -- have occurred in the past 35 years. "Every time this has happened before, housing-market activity has rebounded within a quarter and caught experts by surprise," he says. "In many areas, particularly outside the overbuilt markets of Arizona, Florida and Nevada and the huge bubble market of California, home prices may well stabilize" and begin to recover before the end of this year.

Case acknowledges history might not repeat, as the U.S. could be on the cusp of a painful recession. Unlike the three prior dips of a million-plus starts -- in the first quarter of 1975, the second quarter of 1982 and first quarter of 1991 -- the latest slide was triggered by insensate speculation and suicidal lending practices rather than the traditional factors of rising unemployment and interest rates and slowing economic growth. Thus, he says, a protracted dip in the economy would temper his optimism, though the official measures of economic growth don't indicate a recession yet.

Jim Paulsen, chief investment strategist of Wells Fargo's primary investment unit, expects home prices to steady by year end, with the pace of foreclosures slackening shortly. Most of the subprime debt at the center of the current crisis already has been written down by financial institutions, he notes, while many subprime borrowers who lost their homes are returning to rental units. "Folks who compare this home-price cycle to the one that occurred in the early '80s obviously have short memories," Paulsen says. "In the 1980s the economy was in a deep recession, mortgage rates were at 17% or more, and unemployment [was] hitting a post-Great Depression high of nearly 12%."

THE STEEP DECLINE IN HOME prices -- Case prefers to study the ratio of sale prices to per-capita income in various locales -- already has improved affordability. The change in such ratios varies by market, with Florida, Arizona and Nevada typically tracing short boom-and-bust cycles because any surge in speculative demand quickly is followed by overbuilding, due in part to the abundance of cheap land. The ratio in Phoenix, for example, has been reverting to a more typical six times home prices to income, after soaring to nine times in 2005 and '06.

Most volatile are popular metro areas, such as Los Angeles and Boston, where housing demand is high, along with restrictions on development. Los Angeles' affordability ratio doubled from 2001 to 16 times at the height of the housing boom, before dropping back to around 11. The Boston market never grew so frenzied, perhaps because it was far from the center of the subprime-lending business in Southern California, where an array of bad business practices flourished. Boston's housing-affordability ratio peaked at 12, and since has returned to a more normal nine times prices to income.



Building a New Foundation: The U.S. housing market typically begins to improve after housing starts have fallen by a million units or more, says economist Karl "Chip" Case, co-creator of the S&P/Case-Shiller Home Price Indices. Case measures the affordability of homes in various markets via the ratio of home prices to per-capita income. Such ratios rose to excessive heights in recent years in many metro markets, but lately have reverted to more normal levels in cities like Boston and Phoenix.

For much of the country, particularly in the industrial Midwest, affordability never became a problem. In Detroit, for instance, a race to the bottom between home prices and per capita income left the ratio at under four times. Chicago's ratio likewise has been well-behaved, bobbing between five to seven times.

Now sales activity seems to be picking up. According to the latest report from the National Association of Realtors, sales of single-family homes, condominiums, town houses and co-ops edged up 2% in May from April's levels. That might not sound like much of a jump, but May marks only the second month in the past 10 to have seen an increase.

Much of the gain came from markets such as Sacramento, Las Vegas and California's San Fernando Valley and Monterey County, all regions where lenders were unloading large numbers of foreclosed properties. In Detroit, too, sales are soaring, albeit at median prices of under $30,000.

Cape Coral, Fla., a Gulf Coast city of some 170,000, has been depicted in the New York Times and Good Morning America as Foreclosure Central. Yet, in the past two months year-over-year sales have jumped more than 40% as a result of avid bargain-hunting. So-called 3-2-2-1s (three bedrooms, two baths, two-car garages and one swimming pool) that sold for more than $300,000 at the height of the boom now are being snatched up in bulk by investors for as much as 60% less, says local Realtor Tommy Lee. "I'm telling people to come on down and take a look, but only if you have pre-approved credit, because with gas prices where they are, I don't want to be running a taxi service," he says.

NAR economist Lawrence Yun is optimistic home prices will stabilize in the next five months and begin to recover next year, despite today's gloom and overly stringent lending standards. NAR officials typically are cheerleaders, but Yun advances some reasonable arguments to buttress his view. Home sales, he notes, currently are running at a pace of about five million a year, around the same level as a decade ago. Yet, the population has grown by 25 million in the past 10 years, and the U.S. has created 10 million new jobs. Though the rate of new-household formation requires the net addition of 1.6 million housing units a year, housing starts likely will remain below one million into next year, creating pent-up demand in the years ahead.

TODAY'S HOUSING BUST IS unique in U.S. economic history. It began in good, not bad, economic times, and has proven to be national rather than regional in scale, with markets around the country detonating like Chinese firecrackers between early 2006 and mid-2007.

With the benefit of hindsight, one can discern a concatenation of developments that made the latest cycle almost inevitable. In the aftermath of the 2000 stock-market bust and the 2001 terrorist attacks, and amid heightened fears of deflation, the Federal Reserve drove short-term interest rates to near-historic lows and flooded the nation's financial system with money. Cheap funding spurred a surge in home-buying, and drove the home-ownership rate to a peak of 69% of all U.S. households by 2004, up from 64% a decade earlier.

Prices in many areas began to go parabolic in '04, at the time the Fed began to raise rates. Affordability became a problem in some markets, and cash-out refinancings began to slow. On Wall Street, however, where the securitization of mortgages had become a huge profit center, the demand for new mortgage product was unrelenting. Mortgage brokers and other loan originators were also getting rich off the business, and thus were eager to oblige. By 2005 the mortgage industry had began churning out new "affordability" products that featured low "teaser" rates in the early years of a mortgage to keep monthly payments low. Long-sacrosanct down-payment and family debt-to-income requirements were jettisoned. Other products enabled borrowers to repay interest only in the early years of a loan, while so-called option ARMs added the unpaid portion of monthly interest to the principal balance.

Come 2006, many lenders were scraping the bottom of the barrel to find new borrowers, some of whom, by fibbing about their annual income and net worth, often with the connivance of mortgage brokers, secured "liar loans." As greed gave way to fraud, both borrowers and lenders came to believe that ever-rising home prices would cure any defects in the underwriting process.

All this helps explain the seemingly aberrant behavior of many homeowners once prices started down in 2006. Borrowers with 100% loan-to-value mortgages, particularly after including first and second mortgages and home-equity lines of credit, began defaulting, sometimes mailing their keys, or "jingle mail," to their loan servicers. Why keep paying, after all, once the value of a property has slumped below that of the debt against it? Better to live rent-free until the foreclosure notice arrives. Such behavior also was rampant in Texas in the mid-1980s, when the oil boom went bust.



Delinquencies, defaults and foreclosures hit the housing market with a rapidity and virulence unmatched in previous cycles, pushing total loans past-due and foreclosure rates to unprecedented highs. As a consequence, the current residential real-estate cycle has been front-end-loaded relative to past bear markets, which suggests the pain, though excruciating for many, may be shorter-lived than in the past. Early mortgage defaults have blunted the negative impact of subprime-mortgage-rate resets, which peaked in the spring, and are likely to curb the effect of interest-rate resets on option ARMs and other affordability products, expected to peak between 2009 and 2011. Many of these mortgages already are in the foreclosure pipeline, which will lessen the overhang of foreclosed properties in the future.

THERE ARE SIGNS THAT THE PRESSURE on home prices from foreclosures may wane in the months ahead, says Tom Brown of Bankstocks.com, who studied the performance of the dozens of subprime-mortgage securities that make up the ABX indexes. Precipitous declines in these now-infamous indexes, which track the value of the underlying securities, forced financial institutions around the globe to mark their own subprime assets to market, forcing many to write down billions of dollars, and seek new capital.

The performance of the ABX indexes covering the four crummiest subprime vintages -- those securitized from the second half of 2005 to the first half of 2007 -- shows that the rate of early-stage, or 31- to 60-day, delinquencies has been falling for the past six to eight months, says Brown, depending on the newness of the vintage. This is key, he adds, as today's early delinquencies are the raw material for tomorrow's foreclosures. Fewer delinquencies will eventually mean less of an inventory overhang in the housing market.

Likewise, Brown notes a decline in the percentage of early delinquencies that advance to later states. Both developments tell him the cumulative-loss assumptions on these mortgages made by both the credit-rating agencies and Wall Street could prove far too pessimistic.

One can draw a similar conclusion from the delinquency-inflow trends of other types of mortgages, be they loans backed by home-equity lines of credit or second-lien mortgages from the bubble years. Many have performed horribly, but the rate of inflow of new delinquencies suddenly has dropped in recent months.

An ebbing tide of new delinquencies strongly hints that the worst may soon be over for the housing market, at least in terms of burdensome supply. The pig, in other words, is well along the python's alimentary canal.

In hindsight, the housing bust hasn't been nearly as calamitous as depicted in the media, or as Wall Street's woes might suggest. Yes, people have lost their homes, but more than a few were mendacious mortgage applicants and mere speculators, who eagerly sought out 100% margin loans, only to fold just as quickly when prices turned against them.

It is important to remember, as well, that even after a steep drop in the S&P/Case-Shiller Indices, long-term buyers in the top 20 U.S. metro markets have seen their properties appreciate by 70% since 2000. Home prices often take five to 10 years to recover fully from severe declines such as this. But at least the available data suggest the scary dive in home prices soon will be over.

http://online.barrons.com/article/SB121581623724947273.html?mod=ba_mp_view&page=sp

[Jason]

I really hope those predictions are right.

[Driven1]

some commercial RE funds are positive for the year (after being 20% losers last year).  still think we have at least another 6 months of pain in the residential RE market.

[Johnny]

Warren Buffet's comments on the bust last year... "when people get scared I get greedy, when people get greedy, I get scared."

People are scared right now, prices are down. If you can, buy it up. It's just like stocks, don't quit investing, right now everything is just on sale.

[Ocklawaha]

Some have poo pooed the idea of rail transit in Jacksonville, but oddly the 10 cities with the lowest % change in values are all rail transit cities.

Las Vegas - Bus + BRT + short monorail
Phoenix - Bus
San Diego - Corridor Rail + Streetcar + Bus + New Commuter Rail
Miami - HEAVY RAIL (short) + limited Commuter Rail + BRT + Bus + DPM
Detroit - Bus + Corridor Rail + DPM
Los Angeles - Corridor Rail + Light Rail + BRT + Bus + Commuter Rail + HEAVY RAIL (limited)
Tampa - Bus + Streetcar (very short)
San Francisco -  Streetcar + HEAVY RAIL + Commuter Rail + BRT + Bus + Cable Car + Boats
Washington - JEAVY RAIL + BRT + Bus
Minneapolis - BRT + New Light Rail + New Commuter Rail + bus

Cleveland  - HEAVY RAIL + Light Rail + streetcar + BRT + bus
Boston - Commuter Rail + SUBWAY + Light Rail + streetcar + BRT + bus
Chicago  - COMMUTER RAIL + HEAVY RAIL (EL) + Corridor Rail + AMTRAK (massive hub) + INTERURBAN + bus
Denver - LIGHT RAIL + BRT + bus
New York -  HEAVY RAIL  (EL+SUBWAY) + Commuter rail + High Speed Rail + Boats + Bus + Light Rail (metro) + Skycable
Atlanta  - HEAVY RAIL + bus
Seattle  - Commuter Rail + Corridor rail + Light Rail + streetcar + BRT + Bus + Boats
Portland  -  Extensive LIGHT RAIL + Streetcar + bus
Dallas -  Extensive LIGHT RAIL + Subway (limited) + Commuter Rail + Streetcar + BRT + bus
Charlotte  - new LIGHT RAIL + Corridor Rail  + Streetcar + Bus

JACKSONVILLE - Bus - Skyway (very short) + boats

While Los Angeles and San Francisco seem to be misplaced, keep in mind the California market has been far above normal housing prices for 50 years. Other then these two, there seems a DIRECT connection between modes + transit + system size + system age = % change in housing value.

OCKLAWAHA

[tufsu1]

so...what's your explanantion for the huge decrease in values in Miami?

[RiversideGator]

Mass Panic!  The sky is falling!  Florida will soon be submerged!!   

[Downtown Dweller]

Hmmm... I wonder why the last three houses I put an offer on were sold for OVER the asking price, and this after being up for sale less than 24hrs! Stephen can you talk to some of these buyers who are offering more than the asking price and let them know the market is in a free fall?

[Driven1]

well - and i have a closing on July 28th...sold FSBO 5 days after I put the sign up.  we shall see.  looks like its gonna close.  signing a listing agreement tomorrow for another one in the 32246 zip code.  we'll see how that one goes too.

[samiam]

This was in Forbies magazine 14 July 2008

 

Houston, we don't have a housing problem.

The city's $152,500 median home sale price is up 6.6% from 2005. It boasts a low vacancy rate and an oil-rich economy. Throw in a bubbling entrepreneurial tech scene, and you've got four factors that put Houston on the top of our list of best places to buy a home.

San Francisco, Charlotte, N.C., Jacksonville, Fla., and St. Louis, Mo., are other areas buyers can feel safe investing in.

In Depth: Ten Best Cities To Buy A Home
We examined the country's 40 largest metropolitan areas and looked at cities where home prices have appreciated over the last two years. We also measured tightening vacancy rates. These metrics indicate places where buyers are investing in homes in order to live, not just make a quick buck, and where the housing market is relatively solid. We culled our vacancy and home price information from the U.S. Census Bureau and the National Association of Realtors.

The average vacancy rate across the major metro areas was 2.88%, and the average percent appreciation was just .07% over the last two years.



With lending tight, we also factored in the spread between a monthly rent check and a mortgage payment at the median level (assuming that the down payment was 10% and the fixed interest rate is 6.25%). Encino, Calif.-based real estate brokerage firm Marcus & Millichap provided stats on median monthly rents.
Cities where a mortgage payment was close to, or less than, the average rent were given a higher score. For instance, in Cleveland the average rent is $702, and the average mortgage is $565.78. With a lower monthly payment, tax incentives and the opportunity to build equity, it makes sense to buy here.

In stark contrast, San Jose, Calif., has an average monthly mortgage payment of $4,322.33, versus an average rent of $1,612.

Lots To Like In The Lone-Star State
Texas dominated our lineup of mortgage-worthy areas. Thanks to a business-friendly tax environment, many large corporations call the Lone Star State home, which creates jobs and tax revenue.
The University of Texas campus provides young blood and research-related jobs to No. 2 city Austin. This state capitol is a hip area on the rise. The vacancy rate has fallen by 37.5% in the last 24 months to just 1.5%, despite a lot of building in recent years. And buying isn't much more expensive than renting. An average mortgage payment is $1,022.40, and average rent hits $767.

San Antonio, No. 5, and Dallas, No. 6, made the list thanks to affordable housing, which continues to appreciate. In both cities, the median home price hovers around $150,000, and a monthly mortgage payment of around $800 is pretty close to what one pays in rent. If you can pony up the down payment, these are great areas to live.

Coast-to-Coast Sweet Spots
Philadelphia landed at No. 4, with homes appreciating by 9.1% in the last two years and vacancy rates staying low at 1.9%. This university town, which plays host to the University of Pennsylvania, certainly has its charm. A city on the rise with a tempting cost of living, Philly is a great place to buy a new home.
What's housing like in your area? Weigh in. Post your thoughts in the Reader Comment section below.

The South made a nice showing with Charlotte, N.C., Jacksonville, Flo., and Atlanta, Ga., making our list. Charlotte and Jacksonville have surged in price by 12.9% and 8%, respectively. Atlanta has seen huge amounts of growth and remains reasonable with a median home price of $172,000.

San Francisco, this year's best city for young professionals, came in at a respectable No. 8. While housing certainly isn't cheap in the City by the Bay, it is definitely in demand and continues to appreciate. For a buyer, San Francisco offers a culturally rich and beautiful city that is chock full of opportunity.

In Depth: Ten Best Cities To Buy A Home

[Jason]

The South made a nice showing with Charlotte, N.C., Jacksonville, Flo., and Atlanta, Ga., making our list. Charlotte and Jacksonville have surged in price by 12.9% and 8%, respectively. Atlanta has seen huge amounts of growth and remains reasonable with a median home price of $172,000.

I wonder how much truth this holds?

[RiversideGator]

Can you provide a link to this, samiam?

[Jason]

Here you go:

http://www.forbes.com/realestate/2008/07/14/housing-buyers-list-forbeslife-cx_md_0714bestbuy.html

[RiversideGator]

Thanks Jason.  It is good press for J-ville.  I dont think the 8% increase was achieved in the last year though.  That must have been the 2006-2007 gains minus the 2007-2008 losses.  Still, 8% return in 2 years on a leveraged bet is a fine return. 

The smart money is getting back into real estate with all the great deals out there.  The trick is getting financing as the banks today are extremely conservative about real estate loans for obvious reasons.

[RiversideGator]

Although this may be an isolated event, housing starts have begun to rebound.  If sustained, this would signal a housing revival:

U.S. Housing Starts Spurred by New York Code Change (Update2)

By Timothy R. Homan

July 17 (Bloomberg) -- U.S. housing starts unexpectedly surged the most in more than two years in June because of a change in New York City's building code that overshadowed a slide in single-family home construction.

Housing starts rose 9.1 percent to a 1.066 million pace from a revised 977,000 rate in May, the Commerce Department said today in Washington. Excluding a jump in construction of multifamily units in the Northeast, starts would have dropped 4 percent. Work began on single-family homes at the slowest pace in 17 years.

Rising foreclosures, higher mortgage rates and declining property values threaten to keep home sales depressed in coming months, discouraging builders from starting new projects during the worst housing slump in 25 years. Spending on residential projects may continue to be a drag on growth the rest of this year as builders try to work off excess inventories.

``It's still a very, very weak housing market around the country,'' said Stuart Hoffman, chief economist at PNC Financial Services Group Inc. in Pittsburgh. ``Builders are coping with sharp oversupply, a big overhang of single-family homes that for the most part are still falling in prices.''

A separate government report showed initial claims for unemployment benefits rose less than forecast last week. Claims increased to 366,000 from 348,000 the prior week, the Labor Department said.

Economists' Forecasts

Economists forecast the pace of starts would decline to 960,000, from a previously reported 975,000 for May, according to the median on 76 projections in a Bloomberg News survey. Estimates ranged from 925,000 to 1.03 million.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aboQs91gAR8A&refer=home