By JONATHAN R. LAING
After an ugly six-year decline, home prices are starting to look up. Why the rebound is for real. Plus: What's next for the top 50 U.S. housing markets.
Nothing's
wreaked quite the havoc on the U.S.
economy, and indeed the national psyche, as the six-year slide in home prices.
It wiped out some $7 trillion in household wealth, savaged bank balance sheets,
and induced the Great Recession and the tepid recovery.
Yet
there are unimpeachable signs that this national nightmare is now over. Home
prices are starting to rise, if somewhat haltingly, in most areas of the
country. And a number of forecasters predict home-price increases around 10% or
so nationally over the next three years, with some metropolitan statistical
areas, such as Midland, Texas,
and Bismarck, N.D., likely riding the energy-exploration
boom to better than 20% jumps in residential-real-estate prices. The
turnaround, in fact, appears to be arriving exactly on the schedule that Barron's laid out this year in a March 19 cover
story entitled "Ready to Rebound."
Of
greatest moment, perhaps, was the release two weeks ago of the S&P/Case
Shiller Composite 20-City Index that showed a jump in home prices of 2.3% in
June over May. Likewise the Case-Shiller National Index in the second quarter
rose 6.9% over the first-quarter level, before any seasonal adjustment. And for
the first time since the summer of 2010, the National Index actually nosed
ahead of the year-earlier quarter's reading, if only by 1.2%.
"This
increase in home prices, unlike the one that occurred in 2009-2010 as a result
of the temporary tax credit for first-time home buyers, looks to be for
real," says David Blitzer, chairman of the index committee at S&P Dow
Jones Indices. "We probably won't see a V-shaped recovery in housing, with
prices overall going up 20% in the next year. But this rally has legs, and
prices will definitely be higher next year."
The recent strength seems to have continued in July and
August, according to home-price indexes compiled by CoreLogic. Like
Case-Shiller, the consumer, mortgage and property research firm tabulates
prices based on repeat sales of the same properties, but it releases the data
more quickly. CoreLogic said last week that, year over year, home prices
nationally had jumped 3.8% in July and an even stronger 4.6% in August. The
latter number was based on its pending, rather than completed, home-sale price
index.
"It has been six years since the housing market last
experienced the gains we saw in the July numbers, with indications that the
summer will finish up on a strong note," says CoreLogic CEO Anand
Nallathambi. "Although we expect some slowing in price gains over the
balance of 2012, we are clearly seeing the light at the end of a very long
tunnel."
TO
BE SURE, any sustained recovery in
prices faces some formidable obstacles. The "shadow inventory" of
residences that are in some stage of foreclosure or whose owners are at least
90 days delinquent on their mortgages stands at 3.1 million–6% of the 50
million home loans in the U.S.
In a normally functioning market, the total of distressed properties would be
more like 2%.
Likewise, some 13 million homeowners are under water --
meaning that their mortgages are larger than the value of their houses or
condos. Although the vast majority of these people are current on their
mortgage payments, many may be tempted to resort to a "strategic
default." This is particularly true in the event of a job loss or some
other economic vicissitude.
And
finally, the collapse in housing prices was so severe -- nationally,
residential real estate fell by over one third in value, peak-to-trough -- that
it would take at least a 50% jump just to restore prices to the nutty levels
they achieved in 2006. Unfortunately, those were the prices at which many homes
were purchased. So, for many, hope will be difficult to maintain in the years
ahead.
Just
look at Phoenix
(see table below). Through June, it had enjoyed a 14.4% price recovery, but
that rise only reduced the 55.9% decline from its peak to a 49.6% loss. Some
areas like the Central Valley of California may take decades to return to the
heady levels of peak valuation, when even folks who couldn't walk and chew gum
at the same time could get home loans.
Yet some
keen observers of the real-estate market, such as Moody's Analytics' Mark
Zandi, are optimistic that home prices will rise as much as 10% from current
levels by the end of 2014, once the shadow inventory is worked down over the
next year or so. He points to such factors as the continued rise in effective
rent rates (the main competition to home ownership), low mortgage rates, steady
though slow improvement in job growth and improving availability of bank
credit.
"We've
clearly reached a key psychological shift in home buyers' psychology, where
folks are now starting to worry about missing the boat, rather than fearing
whatever house they buy, no matter how attractive the price, can only go down
in value," Zandi explains.
Even
more upbeat is Lawrence Yun, chief economist at the National Association of
Realtors, who, unlike some of his predecessors, is more a sober analyst than a
cheerleader for the real-estate brokerage industry. Yun is heartened by several
factors that have been showing up in NAR monthly sales figures and median
home-price trends.
For one thing, existing home sales
in July ran at an annual pace of 4.47 million, up 10.4% from the 4.05 million
pace in July 2011. Median sales prices, too, have been ticking up for five
straight months. They hit $187,300 in July, 9.4% above the year-earlier level.
Part of that rise reflects a changing mix of sales, with higher-priced homes
accounting for a bigger share of volume. But, Yun points out, this factor alone
should help boost overall economic growth.
AS A CONSEQUENCE,
he thinks that home prices could rise as much as 5% in both 2012 and next year.
One reason is that the inventory of unsold dwellings has remained surprisingly
tight with just 2.4 million, or 6.4 months' worth of inventory, on the market in
July, based on the current sales pace. Back in the darkest days of the
home-price collapse in late 2008 and early 2009, inventories regularly clocked
in at around a 10-month supply and even briefly surged to more than 12 months
in the summer of 2010.
This
current market tightness has confounded many residential real-estate bears in
light of the fact that so many American homes remain in the foreclosure
pipeline and so many homeowners are under water on their mortgages.
Even so, Yun expects the supply tightness to lingerfor
some time to come. Many of the troubled properties in places like Phoenix and Miami
are being absorbed by local investors attracted by the bargains available and
the ability to earn a handsome yield on the properties by renting them out. Many
of these opportunistic buyers are putting up all cash.
As a
result, the shadow inventory has been dropping precipitously, declining from
more than 4.5 million homes at the peak of the bust to just over 3 million
homes currently.
Two
years ago, distressed sales accounted for about a third of all sales of
previously occupied homes. This year, the figure will be 25% and next year just
15%, predicts the economist.
This
is important because foreclosure and "short" sales (sales by
homeowners with the approval of lenders at less than the amount of the mortgage
debt) are typically done at significant discounts to the price of comparable
properties, destroying neighborhood home values in the process. But now, Yun
notes, not only are distressed sales declining as a percentage of total
existing-home sales, but so are the price discounts at which they occur.
Also
potentially bolstering existing housing prices has been the precipitous drop in
new-home construction, Yun contends. Given population growth and new household
formations, the U.S.
is producing only about half the 1.2 million new dwellings needed each year. In
fact, he fears that a housing shortage could even develop. (For a look at what
this means for home builders, see feature "A Window on Home Builders." )
FEW OBSERVERS HAVE
FOLLOWED home-price
trends with the assiduity of Ingo Winzer, president of Local Market Monitor. He
started tracking them two decades ago, when he worked in the finance department
of a now-defunct mortgage insurer.
But he does more than merely
pontificate on market behavior. Indeed, he has the audacity to make three-year
price forecasts for all 317 U.S.
metropolitan statistical areas, from the populous New York
area (11.7 million residents) to tiny Cheyenne,
Wyo. (population 88,852). His
clientele consists of local and regional banks, mortgage companies, home
builders, and private real-state investors all over the country.
Winzer
readily concedes that his is a somewhat inexact science, but he claims to be
able to get most trends right. "Home prices tend to move in distinct
long-term waves, particularly in major metro markets," he says. And, he
maintains, the magnitude of the price moves is generally within the range of
his three-year forecasts, even if each yearly prediction doesn't precisely come
to pass.
His methodology involves
establishing an equilibrium home price for each market, or a price for housing
that each metro area's per-capita income comfortably can support. Other factors
entering into his calculations include unemployment rates, job growth, and
single- and multi-family building-permit activity. He also takes into account
the past relationship in each area between income and home prices. Homes in
desirable areas like San Francisco,
for example, historically trade at prices above those that per capita income
levels would dictate in most other parts of the country.
Winzer admits that
forecasting prices these days is tougher because there is less history to use
to judge price behavior in the current market. Nonetheless, he sees prices
nationally rising a cumulative 7% over the next three years (beginning July 1,
2012).
He expects some of the
biggest jumps in oil-and-gas boom towns like Midland,
Texas, where he sees prices jumping 49%;
Houston, 26%; and Bismarck,
N.D., 20%. At the same time, he
expects prices in overbuilt Florida climes
that rely on the second-home market to continue suffering, with Port St. Lucie
falling 14%, Panama City dropping 7%, and Pensacola sliding 6%.
What's
next for your home? The table above shows Winzer's forecasts for the top 50 U.S. markets.
Read the original article here.
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The Landis Co., Realtors has a bunch of weekend rentals for September and October. These are the best months to enjoy Sea Isle City's beaches and restaurants. the weather is still great so come on down.
