What Will Your Home Be Worth in 2017?
Friday, July 3, 2009 | Ethan Roberts
In the real estate news this week, the pace of the monthly price decline in homes "moderated," according to the just-released Standard & Poor's/Case-Shiller home price idexes. Following a steep 2.2% decline in March, the April price decline was only 0.6%.
Woo hoo! That's like saying after you get punched in the head for the 12th-consecutive time, it doesn't hurt as much as the first 11!
Average Joe homeowner takes a "moderated" blow to his equity...
Overall, among the index of 20 metropolitan areas, the average home was worth approximately 18% less than one year ago. However, 13 of the 20 metro areas showed improvement in the annual returns from April, versus the annual returns seen in March.
The best-performing areas this past year were Denver, Dallas and Boston, while the worst-performing areas were Phoenix, Las Vegas and San Francisco. Nationwide, however, home values are now back to levels last seen in 2002-'03.
When Will Prices Stop Dropping?
In my opinion, there is one factor that could help to support prices at the current level. Most people move every five to seven years on average. This means that a large percentage of people who currently own their home, have only lived in it since 2002 or later.
When prices fall to 2002 levels, there will be very few people left who have any equity in their homes. If homeowners owe more on their mortgages than they can net (after closing costs, commissions, repairs, etc.) from the sale of their homes, then they can't afford to sell. Very few sellers are willing or able to bring a check to the closing.
So, unable to sell their homes, they remove them from the marketplace, and this tends to shrink the inventory levels. We are already witnessing that in my area of Florida. Inventory levels in the local Multiple Listing Service have diminished from 14,000 two years ago, to about 12,000 this month.
While that number is still very high (when compared to the number of sales closed), at least the number is declining. About 8% of the total inventory of homes is selling each month, up from the lows of 4% in the autumn of 2008.
On the other hand, there are several forces at work that, if unchecked, could continue to reduce home values -- even as inventory levels are in decline.
How Low Can Home Prices Go?
The first factor is if unemployment levels continue to rise, like we saw yesterday with the unemployment number ticking up to 9.5%. Plain and simple: You can't buy a home if you have no job, or little to no income coming in.
Even Countrywide wouldn't give this guy a loan...
Second, lending standards continue to be ridiculous, as lenders have gone from one extreme in 2005 where everyone could get a loan, to making it as onerous as possible to get a loan in 2009.
Jumbo loans are still very difficult to obtain, and this keeps people from being able to move up in housing, or for people in the more-expensive areas of the country to secure a loan.
Third, rising interest rates aren't helping, either. The 30-year interest rate, which had been below 5% a few months ago, took a journey above 6% two weeks ago, and is currently around 5.5%. Rising interest rates completely offset the lower monthly payments from falling prices.
Principal and interest on a $180,000 loan at 5%, are only $966.28 per month. But if the rate rises to 6%, the payment climbs to $1,079.19 per month.
So, if someone only qualified for a payment of $970 per month, at 6% they could only afford a $162,000 loan. If the rates rise to 7%, they can only afford a loan of $146,000.
Then there are the new appraisal standards. Thanks to Uncle Sam, and the Home Valuation Code of Conduct (HVCC), it is becoming increasingly difficult to get fair appraisal values on pending sales.
The appraisers are not always familiar with the areas they are assessing, and as I noted in a recent Tycoon Report article, they are using foreclosures in very poor condition as comparatives with seller-owned homes that are in pristine condition.
This is killing potential home sales everywhere.
Of course, homeowners and appraisers are never going to agree on what is "fair value" for their home, but the disparity is becoming more and more dichotomous each week.
How the typical homeowner views his own home...
How the HVCC appraiser sees that same home...
And now for the final bit of good news. The "Cap and Trade" proposal currently being debated in Congress has among its rules a requirement that a federal inspection for energy efficiency must be conducted on any home before it is sold.
This means that homeowners who are already close to zero equity at closing, would possibly be forced to spends thousands of dollars on upgrading the energy efficiency of their homes before being allowed to sell them.
Holy Cow, the Gloom and Doom Just Keeps on Coming!
Deutsche Bank analyst Richard Parkus was quoted in Forbes magazine this week, saying that the residential real estate market won't see a turnaround in values until 2012, and won't return to their 2007 peaks until at least 2017.
According to Parkus, the reason it will take so long is because it will take another three years for the unemployment numbers to drop. If that's true, then we are in for a long economic nightmare.
I have been saying for several years that it was the real estate market that was propping up the American economy for the first six or seven years of this decade. What other industry has provided as many jobs to the American economy?
The government allowed tens of thousands of customer service jobs to go overseas. Then they sat idly by while all the manufacturing jobs left for the Far East. Look what has happened to deplete our nation of medium- and small-sized farms!
So when the real estate market collapsed on the weight of its own hot air in 2007, a steady stream of jobs began to evaporate. Homebuilding slowdowns led to the loss of thousands of jobs for roofers, carpenters, painters, tile setters, plumbers, electricians, landscapers, etc. Site agents were let go. A reduction in sales led to smaller incomes for self-employed home inspectors, appraisers, realtors, loan officers, surveyors, title company personnel, etc.
Eventually, the job losses led to decreases in business for the companies that are related to the real estate market. Companies like Home Depot, Lowe's, Linens-N-Things, Pier One, etc. began to feel the pinch, saw their stocks drop, and began laying off employees.
The domino effect continued, as all of those people cut back on their dinners out, the daycare hours, the vacations, and the routine visits to the dentist. To save a few bucks, they did without the monthly haircut, or even tried cutting it themselves at home. Soon, every business in town was either shutting down or just barely scraping by.
'Mom, I know it's a recession, but please don't cut my hair again!'
Is There an 'Echo' of Hope for New Homebuyers to Emerge?
A massive number of people in the Baby Boomer generation (1948-'64) is now nearing retirement age. Many have planned on selling their expensive homes, and moving to less-costly areas of the country. States like Florida, Nevada and Arizona, hurt by a decline in tax revenues from paltry real estate sales and dropping home values, should be the beneficiaries of a mass migration of retirees.
The "Echo Boomers," aka the children of the Baby Boomers (born between 1981 and 2000), are now entering their late 20s and early 30s, and will soon be buying their first homes. There are higher numbers of "echos" than their Baby Boomer parents, and this will bring fresh buyers into the real estate market.
'Echo Boomers,' the next wave of homebuyers...
The National Association of Realtors is also predicting that first-generation immigrants will make up a large segment of new buyers in the next wave.
So, What Will Your Home be Worth in 2017?
Probably more than it is right now. Remember that, on a LONG-TERM historical average, real estate typically increases 4% to 5% per year. We had several years of far-above-average gains, then a total collapse of all those gains within a few years. It is highly probable that, within the next few years, markets will stabilize and be flat for two to three years, to be followed by a normal 4% to 5% appreciation per year thereafter.
Of course, this prediction is predicated upon Uncle Sam getting out of the appraisal business and keeping a lid on spending to keep interest rates down.
But will that happen? Stay tuned.
Tycoon readers, let's conduct an unofficial poll. Do you think your home will be worth more, less or the same in 2017 as it is currently worth? Let me hear from you!
See you next week!
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Ethan Roberts
Chief Investment Officer
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