Is the Real Estate Market Turning the Corner?
Friday, August 21, 2009 | Ethan RobertsRating:
Tycoon readers, It's been a while since I've updated you on the conditions in the national real estate market, so I thought we would talk about that today. In fact, starting with this article, the plan is to give you a national update and analysis on the third Friday of each month.
One of the complexities of trying to figure out where the overall market stands is that real estate is not just comprised of a few general markets, like the Dow (INDU), Nasdaq (NASD) and S&P 500 (SPX).
In real estate, there are hundreds of different markets throughout the country. In fact, as we will shortly see, the national real estate statistics are usually broken down into 155 different metro areas.
Therefore, it's almost impossible to equate one area of the country with another one at times.
For example, if you compare the real estate conditions in Davenport, Iowa, to Cape Coral, Fla., it's not like comparing the proverbial apples to oranges -- it's more like a filet mignon steak vs. a McDonald's cheeseburger! More on that in a little while.
Welcome to Davenport, Iowa...
Welcome to Cape Coral, Fla. ...
Welcome to Cape Coral, Fla. ...
The real estate market is definitely a mixed bag right now. Let's begin with the positives first, since there are certainly more positive signs today than there were a few months ago.
Signs of Hope for Housing
The $8,000 homebuyer's tax credit has recently spurred a great deal of interest among both first-time buyers and those who haven't owned a primary residence within the last three years.
However, as it stands now -- unless Congress extends the program -- in order to qualify for the money, there is a contractual deadline of Sept. 30, and the transaction must close by Nov. 30, 2009.
Interest rates, though higher than they were a few months ago, continue to fluctuate between 5.25 and 5.5% for a 30-year loan. The 15-year rates right now are absolutely fantastic. Jumbo rates, which were over 8% near the beginning of 2009, have now come back down to reasonable levels:
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Source: Bankrate.com
Sales of existing homes rose a seasonally adjusted 3.8% in the second quarter of 2009, compared with the first quarter. However, sales volume was still almost 3% lower than the same quarter in 2008. Some improvement is still needed there. Sales were stronger in 18 different states.
What About the Homebuilders?
Toll Brothers (TOL), a high-end homebuilder, reported an increase in signed contracts for the first time in three years. That is probably related to the decrease in the jumbo loan rates.
Median home prices fell a record 15.6% during the period from April 1 to June 30 (second quarter), compared to the same period in 2008. Very few areas were spared. We saw median prices in 129 of the 155 metro areas of the U.S. drop year-over-year.
While that's clearly a negative for those of us who own homes, it's a positive for those who have been shut out of the higher-priced markets for several years and are now ready to buy.
Interestingly, the median home price nationwide rose 4% during Q2, compared to Q1 2009. This is not uncommon, as home prices typically rise during the spring months. But at least it's a sign of normalcy, and not a continuation of the declines from previous quarters.
Even the stock market has been turning positive on the housing market in recent months. The Philadelphia Housing Index (HGX), which crashed from $260 to $54 between early 2007 and March 2009, has had a slow, steady climb since then. As of today, the HGX is trading around $100.
Where are Prices Rising and Falling the Most?
The aforementioned Davenport, Iowa, had the largest median price gain year-over-year. Davenport was up 30.6% to $113,200! Other strong areas of the country include Beaumont, Texas; Cumberland, Md.; Jackson, Miss.; and Elmira and Buffalo, N.Y.
Most of those were in double figures.
On the other hand, Cape Coral, Fla., had the largest decline -- an annual drop of 52.8%, to only $84,000! Cape Coral, previously a hot spot for real estate sales, has now completely gone the other way.
I'm not sure what's stimulating the sales in Davenport (most likely jobs), but if I had to choose between those two towns, I think I'm heading south!
Cape Coral, Fla.: Incredible bargain or trouble in paradise?
Want a really good deal on a house? Saginaw, Mich., has now become the lowest-priced housing market in the United States. The median-priced home sold for only $55,700 during Q2, a drop of over 30% from last year.
Other inexpensive areas (Tycoon readers looking for inexpensive housing: take note) include Youngstown, Ohio; western Pennsylvania; Lansing, Mich.; Cape Coral and Fort Myers, Fla.; and Elmira, N.Y.
Honolulu, Hawaii, continues to be the most-expensive area, with a median price of $569,500. But even that is a 10% drop from a year ago. Other expensive areas include San Jose, San Francisco and Anaheim, Calif.; and Bridgeport-Stamford-Norwalk, Conn.
Housing Market Horrors
U.S. home foreclosures set another record in July. Foreclosures were up 7% from June, and were 32% higher than a year ago!
According to RealtyTrac, over 360,000 households -- or one in every 355 households -- with a mortgage loan received a foreclosure filing in July. This was the third time in the last five months that a new record was set for foreclosure activity.
That's just dismal.
The states that are suffering the most continue to be those where the sales and prices appreciated the most during the 2002-'07 period. These include California, Florida, Arizona and Nevada, which totaled some 57% of all foreclosure activity in July.
In Nevada, an astounding 1 of every 56 properties received a filing! Other states hit hard in July were Illinois, Texas, Georgia, Ohio and New Jersey.
A new state law in Nevada requires lenders to offer mediation to homeowners who are facing foreclosures. But, as recent history points out, offering mediation and actually getting a loan modification done are dichotomous entities. Only a small percentage of homeowners have been able to modify their loans thus far.
Furthermore, the recent moratorium on foreclosures did NOTHING to cure the default problem. All it did was delay the inevitable (more foreclosures hitting the market) for a few months.
Housing Market Bottom ... or Crash Landing?
It seems as if the government is trying, in its usual short-sighted way, to steer the real estate market in for a nice soft landing.
Your nice 'soft landing,' government-style...
It's important to understand that what is fueling the foreclosures is no longer the subprime loans. Foreclosure activity now is predominantly due to the rise in unemployment within the last six months. The slight decrease nationwide from 9.5 to 9.4% this month was a slight positive (if it continues to decrease), but it didn't do much to stem the tide of foreclosures.
Until we see a marked improvement in the national employment picture, we will continue to see a steady wave of foreclosures hitting the markets.
Foreclosures and short sales continue to account for some 36% of all transactions each month. Lenders who were sitting on huge quantities of foreclosures during the moratorium, are now beginning to release them onto the market.
The typical foreclosure or short sale will sell for 15% or more below traditional re-sales. Therefore, the foreclosures that have sold, continue to drag down equity values on traditional sales.
Last week, Deutsche Bank analyst Karen Weaver predicted that, by next year, nearly HALF of American homeowners with mortgages will be underwater.
There's something 'fishy' about this home...
Because so many recent sales were either foreclosures or short sales, that means that there are no "step up" sales to second homes right now. Basically, despite the recent decline in interest rates, the jumbo loan market (above $417,000) remains in a coma.
Value Might Only be in the Eye of the Mortgage Holder
One of the more interesting developments this week was the report from Zillow.com that only 60% of homeowners believe their homes lost value in the last 12 months when, in fact, some 83% of all homes lost value.
Many home sellers are having to cut their original list prices once, and sometimes twice, before potential buyers begin to show up at their door.
As Diana Olick of CNBC.com pointed out, we should not delude ourselves into thinking that increased sales numbers will mean a total recovery and a return to instant appreciation. The bottom for housing may be a very bumpy ride for quite a while, as we work our way through foreclosures that seem to have no end in sight.
A (First-Time) Buyer's Market?
For new buyers, this period of time will be an incredible opportunity for them to own a home without having to stretch to make the payments. The combination of low interest rates, first-time homebuyer tax credit and lower prices (even more so if buying a foreclosure), make the next few years an incredible time to buy a home, even if prices don't recover for awhile.
Everyone keeps waiting for "the bottom" to come. But, just like with stocks, even if you don't catch "the bottom" (and you probably won't), you can still come away with a heck of a deal!
Value Might Only be in the Eye of the Mortgage Holder
One of the more interesting developments this week was the report from Zillow.com that only 60% of homeowners believe their homes lost value in the last 12 months when, in fact, some 83% of all homes lost value.
Many home sellers are having to cut their original list prices once, and sometimes twice, before potential buyers begin to show up at their door.
As Diana Olick of CNBC.com pointed out, we should not delude ourselves into thinking that increased sales numbers will mean a total recovery and a return to instant appreciation. The bottom for housing may be a very bumpy ride for quite a while, as we work our way through foreclosures that seem to have no end in sight.
A (First-Time) Buyer's Market?
For new buyers, this period of time will be an incredible opportunity for them to own a home without having to stretch to make the payments. The combination of low interest rates, first-time homebuyer tax credit and lower prices (even more so if buying a foreclosure), make the next few years an incredible time to buy a home, even if prices don't recover for awhile.
Everyone keeps waiting for "the bottom" to come. But, just like with stocks, even if you don't catch "the bottom" (and you probably won't), you can still come away with a heck of a deal!
foreclosures are finding plenty of bargain-hunters...
This week I would like to hear from any Tycoon readers who have purchased a home this year and gotten a terrific bargain. Let me know how you did!
See you next week!
(Please let us know what you think about Ethan Roberts's article.)
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Ethan Roberts
Contributing Editor
The Tycoon Report
