Tuesday, May 25, 2010

Mixed Signal In Residential Real Estate

Homeowners have had little to cheer about for the last 3 years.  For most Americans, the bulk of their net worth, if they have one, is typically the equity of their home.  The financial crisis has pretty much wiped that out.

A solid rise in the value of residential homes is unlikely for the intermediate term.  With joblessness unbearably high and credit nearly impossible to obtain, the pool of new buyers is uncomfortably low.  The overhang of foreclosures and severe delinquencies suggests the prospect of a meaningful recovery can not be immediate.

Recently released data paints a mixed rather than downright pessimistic portrait.  Although economists were expecting a month-over-month increase of 5.5%, the National Association of Realtors (NAR) reported yesterday that sales of previously owned homes rose an unexpected 7.6%.  That continued a year-long rise in housing activity and marked the highest number of sales recorded last November.

U.S. home prices rose 2% in the first quarter from prior-year lows, according to the S&P Case-Shiller broad National Index, the first year-to-year increase in several years.  However, prices were down 3.2% from the end of last year despite ongoing tax incentives, which terminated at the end of April.

Prices in 10 key metropolitan areas were up 3.1% in March from a year earlier, according to S&P Case-Shiller, while the index for 20 major metropolitan areas rose 2.3%.  Compared with February, they fell 0.4% and 0.5%, respectively. 

Optimists are looking to the continuation of low mortgage rates which help spur demand.  But, low rates can only have so much of an effect.  Despite average 30-year rates now below 5%, the Mortgage Bankers Association noted last week that the number of people seeking mortgage purchase applications had dropped more than 27%, reaching a level last seen in May 1997.

Unfortunately, new sellers have been coming out of the woodwork.  NAR reported that the number of previously-owned homes placed on the market has risen quickly to more than 4 million units and that this inventory continues to far outpace the number sold.

Things may get worse.  According to a recent analysis performed by Zillow, U.S. homeowners are so confident in the value of their homes that many of them plan to put up for-sale signs in their front yards. Zillow reported that 7% of homeowners they polled were "very likely" to try to sell their homes in the next 12 months if the housing market seemed to be improving.

If 7% of  homeowners entered the resale market, that would equal about 5.3 million homes, more than the number of existing homes that sold all of last year. 

On the positive side, new home starts, which are a key indicator of where real estate is headed and of builder confidence, increased by 10.2% to hit their highest total since August of 2008.

On a regional basis, starts were even more impressive in some areas.  The Northeast saw a huge jump of 24% for the month.  The Midwestern states were up 17% and the South by 7%.  

So, while the residential market still has some major issues to deal with, it appears to have reached some sort of stabilization in the near term.  However, given the end of the "first-time buyers" tax credit, the residential sector will still be challenged for the forseeable future.

Marko's Take

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  1. Hi Marko

    I like your analysis. If we take inflation into account, the picture will be even more groomy... And if hyperinflation, which is one of your ten predictions of 2010, does come true this year, and gold does climb to 8000 per ounce, maybe we can buy a house for a song (and a fistful of gold metal)...

  2. Ada:

    I believe that home prices have very likely bottomed in rough terms. I think there is a maximum additional 10% downside. In a period of hyper-inflation, real estate ought to, at the very least, hold its value.

    If prices fall much more than that, our economic problems would escalate gravely.

    If a fistful gold buys a house, we are DEEP trouble!


  3. Marko

    For real estate to hold its value, there needs to be some level of balance between demand and supply. I don't know if that will happen during hyperinflation. Anyway, what you said got me thinking. I will be reading Dying of Money over the long weekend!



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