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The Housing Crisis is Over

Tue, 06 May 2008 10:07 GMT

Is it time to start house hunting? Cyril Moulle-Bertaux opined that April 2008 marked the bottom of the U.S. housing market. I totally agree with him that the Florida housing market is bottoming right now.

How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won't happen for another 7-10 years. It just means that the trend is no longer getting worse, which is the critical factor.

Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.

Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what's going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.

Mr. Moulle-Bertaux wrote in The Wall Street Journal that the boom made housing unaffordable for many American families, especially first-time home buyers. During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much.

Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the real estate market to weaken.

Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in.

The next question is: Even if home sales pick up, how can home prices stop falling with so many houses vacant and unsold? The flip but true answer: because they always do.

In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.

The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in "months of supply" terms. That's the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high – but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.

Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually.

Inventories will drop even faster to 400,000 – or seven months of supply – by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won't stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.

Many pundits claim that house prices need to fall another 30% to bring them back in line with where they've been historically. This is usually based on an analysis of house prices adjusted for inflation: Real house prices are 30% above their 40-year, inflation-adjusted average, so they must fall 30%. This simplistic analysis is appealing on the surface, but is flawed for a variety of reasons.

Most importantly, it neglects the fact that a great majority of Americans buy their houses with mortgages. And if one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one's income is required to be able to make the mortgage payments on the house. Today the rate on a 30-year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today's house prices to the 1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading.

This is all good news for the broader economy. The housing bust has been subtracting a full percentage point from GDP for almost two years now, which is very large for a sector that represents less than 5% of economic activity.

When the rate of house-price declines halves, there will be a wholesale shift in markets' perceptions. All of a sudden, the expected value of the collateral (i.e. houses) for much of the lending that went on for the past decade will change. Right now, when valuing the collateral, market participants including banks are extrapolating the current pace of house price declines for another two to three years; this has a significant impact on the amount of delinquencies, foreclosures and credit losses that lenders are expected to face.

More home sales and smaller price declines means fewer homeowners will be underwater on their mortgages. They will thus have less incentive to walk away and opt for foreclosure.

A milder house-price decline scenario could lead to increases in the market value of a lot of the securitized mortgages that have been responsible for $300 billion of write-downs in the past year. Even if write-backs do not occur, stabilizing collateral values will have a huge impact on the markets' perception of risk related to housing, the financial system, and the economy.

Brett Arends from WSJ also makes a similar argument. He looks at the data on housing starts since 1972, which shows that new housing starts slumped below the one million mark in March. Every time that has happened in the last 50 years, Mr. Arends writes, it proved to be the bottom of a recession.

“It’s bottom-fishing time, I think,” says Wellesley College Prof. Karl E. Case in the column. Mr. Arends says that he is one of the leading experts on the housing market in the country. “There’s got to be bargains in Florida, Arizona and Nevada.”

In the Journal editorial, Mr. Moulle-Bertaux suggests that the housing market will revive, as more first-time buyers are lured in by falling prices and lower mortgage rates. “Homes on average are back to being as affordable as during the best of times in the 1990s,” he writes. “Numerous households that had been priced out of the market can now afford to get in.”

To be sure, as Mr. Arends points out, there is no guarantee that this downturn will follow the patterns of the past. And he notes that prices in many areas are far from a historic bargain. And where there is a glut, prices — obviously — are likely to stay lower for longer. But in many areas, prices are low and buyers may be tempted.

Are you tempted?

Great Time to Buy Real Estate in Florida

Thu, 24 Apr 2008 21:46 GMT

I read an article in USA Today that points out more foreign buyers vie for U.S. real estate. As the falling dollar makes the U.S. second-home market more attractive to international buyers, we see more and more foreign buyers express their interests in investing in Florida's real estate market. Fifteen percent of all Florida home sales now involve foreign buyers. Now is the best time to buy real estate in Florida.

More than 100,000 homes are sold to foreigners annually in the international second-home market, particularly to buyers from Europe, North and South America, Africa and the Middle East. Current valuations of the U.S. dollar against foreign currencies have made U.S. property one of the world’s great bargains, and the prestige of owning U.S. property remains high.

Real estate agents are increasingly courting foreigners to buy homes in the USA – hiring agents fluent in other languages, marketing to foreign buyers and in some cases, offering to pay the airfare and hotel bills of foreign shoppers who buy a home.

The agents are eager to win the business of foreign investors who are swooping in to buy property in the USA as home prices plummet and the dollar’s weak value produces eye-popping deals for international buyers.

Because of the sinking value of the U.S. dollar relative to other currencies, a home bought by a foreigner comes with a discount averaging 30 percent, the National Association of Realtors estimates. Between April 2006 and April 2007, about 30 percent of foreign buyers came from Europe, according to an NAR survey.

Nearly one-third of Realtors reported in that survey that they had done business with foreign buyers. Activity is especially busy in affluent cities such as New York and in warm-weather vacation destinations such as Miami and San Diego. Many of these investors, Realtors say, are buying homes as vacation retreats.

Florida Existing Home Sales Improve in March Compared to February 2008

Tue, 22 Apr 2008 21:56 GMT

Florida Realtors® statewide reported slight gains in existing home and condominium sales from February to March 2008, according to the latest housing statistics released by the Florida Association of Realtors® (FAR). A total of 9,330 existing single-family homes changed hands in March, a 12.3 percent increase over the previous month when 8,310 homes sold. Existing condo sales statewide rose almost 16 percent, with 3,207 units sold in March compared with 2,765 condos in February.

The median price for both housing types increased slightly as well during the one-month period. The median price of an existing single-family home reached $205,100 in March, compared with $198,900 the previous month. The median price of an existing condo rose to $176,300 in March from $175,600 in February.

In the latest National Association of Realtors® (NAR) housing outlook, Chief Economist Lawrence Yun says, “Existing home sales could start to show a sustained increase within a few months, unless there are some additional economic problems or excessive inflationary pressure. We’re looking for essentially stable sales in the near term, before higher mortgage loan limits translate into more sales in high-cost markets.

In the year-to-year comparison, a total of 9,330 existing homes sold statewide last month while 12,356 homes sold in March 2007 for a decrease of 24 percent, according to FAR. Florida’s median sales price for existing homes last month was $205,100; a year ago, it was $242,800 for a 16 percent decrease. But, looking back to March 2003, the statewide median sales price for single-family homes has increased about 35.2 percent, according to FAR records – at that time, the statewide existing-home median price was $151,700. The median is the midpoint; half the homes sold for more, half for less.

In a year-to-year comparison for condos, 3,207 units sold statewide compared to 4,163 in March 2007 for a 23 percent decline. The statewide existing-condo median sales price last month was $176,300; in March 2007 it was $220,700 for a 20 percent decrease. NAR reported the national median existing condo price was $211,700 in February 2008.

The national median sales price for existing single-family homes in February 2008 was $193,900, down 8.7 percent from a year earlier, according to NAR. In California, the statewide median resales price was $409,240 in February; in Massachusetts, it was $310,000; in Maryland, it was $284,822; and in New York, it was $230,000.

Last month, interest rates for a 30-year fixed-rate mortgage averaged 5.97 percent, down from the average rate of 6.16 percent in March 2007, according to Freddie Mac. FAR’s sales figures reflect closings, which typically occur 30 to 90 days after sales contracts are written.

Several of Florida’s smaller metropolitan statistical areas (MSAs) showed slight gains in existing home sales for the month. Realtors around the state reported more buyer interest as demonstrated by increased phone calls, showings and other positive movement in their local housing markets.

Among the state’s smaller markets, the Fort Pierce-Port St. Lucie MSA reported a total of 387 homes sold in March compared to 338 homes a year ago for a 14 percent increase. The existing home median sales price was $169,700; a year ago, it was $239,700 for a 29 percent decrease. A total of 69 existing condos sold in the MSA last month compared to 87 condos the previous March for a 21 percent decrease. The market’s existing condo median price was $182,500; a year ago, it was $202,300 for a decrease of 10 percent.

Dave Derrenbacker, president of the Realtor Association of Martin County and a broker with Water Pointe Realty Group, agrees that buyers are recognizing the long-term value of homeownership. “There are some encouraging signs,” he says. “It looks like home prices are starting to stabilize and buyer activity is picking up. In many cases, Realtors are able to show that homes in our area are back to a valuation of pre-real estate boom figures. I tell people, ‘If you missed your chance the first time around, then now is a great time to buy.’”

Source: FLORIDA ASSOCIATION OF REALTORS

NAR: Existing-Home Sales Slip in March

Tue, 22 Apr 2008 07:30 GMT

Existing-home sales edged down in March, remaining within a narrow range of sales activity that has persisted since last September, according to the National Association of Realtors® (NAR). Existing-home sales – including single-family, townhomes, condominiums and co-ops – were down 2.0 percent to a seasonally adjusted annual rate of 4.93 million units in March from a level of 5.03 million in February, and remain 19.3 percent below the 6.11 million-unit pace in March 2007. A rise in condo sales in March offset a drop in single-family sales. Regionally, sales rose in the Northeast and West but fell in the Midwest and South.

Lawrence Yun, NAR chief economist, says the market is performing unevenly. “Though mortgage rates are at historically low levels, some borrowers are facing restrictive lending practices in declining markets,” he says. “At the same time, many buyers continue to bide their time with a large number of homes to choose from, while other potential buyers remain on the sidelines.”

The national median existing-home price for all housing types was $200,700 in March, down 7.7 percent from a year ago when the median was $217,400. Because the slowdown in sales from a year ago is greater in high-cost areas, there is a downward pull to the national median with relatively higher sales activity in low-cost markets.

A mix of market conditions continues around the country, but areas showing healthy price gains include Des Moines, Iowa; Austin, Texas; and Durham, N.C.

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage rose to 5.97 percent in March from 5.92 percent in February; the rate was 6.16 percent in March 2007.

“It appears there is some over-reaction on the part of some lenders now in requiring higher downpayment percentages than may be necessary,” says NAR President Richard F. Gaylord. “On the other hand, buyers in many parts of the country are able to take advantage of more lenient policies for FHA loans. However, because lenders don’t have enough underwriting experience with FHA loans in high-cost areas, there are localized bottlenecks in loan processing. Consumers should consult with a Realtor in their area to learn about the kind of financing that may be available to meet their needs.”

Yun offered a caution: “With elevated inflation, the Federal Reserve should be extra careful about further rate cuts. Mortgage interest rates, which do not move directly with Fed funds rates, may rise measurably and hurt the housing recovery if inflation gets out of hand. Monetary stimulus is plentiful – what is needed more at this point is a home buyer tax credit to get buyers off the sidelines and prevent the market from overshooting on the downside.”

Total housing inventory rose 1.0 percent at the end of March to 4.06 million existing homes available for sale, which represents a 9.9-month supply at the current sales pace, up from a 9.6-month supply in February.

Single-family home sales fell 2.7 percent to a seasonally adjusted annual rate of 4.35 million in March from 4.47 million in February, and are 18.4 percent below the 5.33 million-unit pace in March 2007. The median existing single-family home price was $198,200 in March, down 8.3 percent from a year ago.

Existing condominium and co-op sales rose 3.6 percent to a seasonally adjusted annual rate of 580,000 units in March from 560,000 in February, but are 25.5 percent below the 779,000-unit level a year ago. The median existing condo price was $219,400 in March, which is 2.8 percent lower than March 2007.

Regionally, existing-home sales in the Northeast rose 2.2 percent to an annual pace of 910,000 in March, but are 18.8 percent below March 2007. The median price in the Northeast was $284,300, up 4.6 percent from a year ago.

Existing-home sales in the West rose 2.2 percent in March to a level of 940,000 but are 22.3 percent below a year ago. The median price in the West was $285,100, which is 14.7 percent lower than March 2007.

In the South, existing-home sales fell 3.5 percent to an annual rate of 1.92 million in March and are 20.0 percent below March 2007. The median price in the South was $167,200, down 7.1 percent from a year ago.

Existing-home sales in the Midwest dropped 6.5 percent to an annual rate of 1.16 million in March, and are 15.9 percent below a year ago. The median price in the Midwest was $152,600, down 5.3 percent from March 2007.

Source: FLORIDA ASSOCIATION OF REALTORS

St. Johns is One of 10 Most Endangered Rivers

Thu, 17 Apr 2008 21:37 GMT

The St. Johns River has been named one of the 10 most endangered rivers in the country by a nonprofit group dedicated to waterway conservation.

The river landed on the Washington D.C.-based American Rivers' list because of plans to allow the removal of up to 262 million gallons of water per day to quench Central Florida's growing thirst.

Opponents of the St. Johns River Water Management District's plan say the withdrawal will harm the river's plant and wildlife. The district counters that early research indicates no such effect, but that it will make a final decision on allowing "significant withdrawals" when a two-year environmental impact study is complete.

"No matter what the problem is, stealing is never an acceptable solution," Rebecca Wodder, American Rivers president, said in a news release. "Yet, instead of embracing water smart solutions like conservation and efficiency, Florida lawmakers seem set on sanctioning this river robbery."

The American Rivers' reasoning for the St. Johns making the list was a two-page advocacy paper with no scientific basis, said Alfred Canepa, the water management district's assistant director of resource management. The proposed withdrawals would account for less than 1 percent of the river's flow.

"The withdrawal from the St. Johns River is not the biggest danger," Canepa said. "The biggest dangers are wastewater discharges and stormwater runoff that add pollutants and nutrient loads to the river."

The American Rivers report will help keep the St. Johns Riverkeepers' fight in the forefront and stir agitation among people who don't completely understand the issues.

The issue isn't just an environmental one but also an economic one, said Riverkeeper Neil Armingeon. He warned that millions of dollars in commercial fishing and recreational activities will be lost if the withdrawals are allowed.

"In a state with theme parks, cruise ships, and any number of other tourism-based ventures, it's simply mind boggling that decision makers are telling those who enjoy the St. Johns to take their money elsewhere," he said in a news release.

Duval County and Northeast Florida are improving conservation by increasing reclaimed water usage and will improve the quality of stormwater by making drainage improvements, which are funded through the new stormwater fee, said Mayor John Peyton in a news release.

Source: Jacksonville Business Journal