Realtor Coaching & Training: Phoenix
Home Sales INcrease!
Its been interesting reading all the conflicting reports regarding the economy and the ‘housing recovery’. It seems that the media is now (finally) figuring out what Harris Real Estate University students have known for well over a year..(we are in the eye of the ‘real estate storm’ and its realistic to believe that the real estate markets will get worse…in some cases MUCH worse…. before they get better)
Stocks of homebuilders have had an impressive run recently, thanks to a stream of improving macroeconomic data, including home sales and consumer confidence, climbing an average of 38% since March 9. But will the recovery last? Recent gains in long-dated U.S. Treasury yields augur rising mortgage rates, while the likelihood of increasing foreclosures could further bloat the housing supply in the months ahead.
New sales of single-family homes came in at a seasonally adjusted annual rate of 352,000 in April, down 0.3% from a downward-revised 351,000 in March, but 34% below the April 2008 estimate of 533,000, according to the U.S. Census Bureau and the Housing and Urban Development Dept.. But new home sales are down from 362,000 in February. The median sales price of new houses sold was $209,700, down almost 15% from a year ago.
One reason for the month-to-month improvement in the housing numbers for a couple of months earlier this year was the moratorium placed on foreclosures by many banks from November through February, says Robert Stevenson, an analyst at Fox-Pitt, Kelton Cochran Caronia Waller in New York. But since then, foreclosures have continued to rise, causing home sales to plateau.
Some of the positive data points have proved not to be sustainable, he says. “You haven’t seen as many sales as you would like coming out of the spring homebuying season and the very low mortgage rates and some of the tax stimulus,” he says. Still, homebuilders are feeling more optimistic. The National Association of Home Builders’ housing-market index, which measures both current and future sales conditions, climbed two points, to 16, in May after a five-point increase in April.
The “Better Areas” Are Going to Get Hit
Realtors, there are 2 kinds of agents…those who know how to easily list and sell short sales (and are making a fortune) and those who refuse to learn anything new…struggle to stay afloat…and will probably not be in real estate for much longer. What kind of agent are YOU? Watch the FREE Agent Short Sale Secrets video then download the FREE Agent Short Sale Secrets book. Don’t wait, don’t procrastinate….FINALLY take action and learn how to become one of the agents who is THRIVING in this market.
Economists would like to believe the recent data indicate that the housing market has touched bottom, but prices have further to drop to reach some analysts’ peak-to-trough estimates of 43%. John Burns, a real estate consultant who advises major homebuilders, believes the median home price will fall an additional 5% or 6% and that will be the end of it. “The worst areas have been hit very hard” since that’s where most of the distressed selling has been, he says. “It’s the better areas that are going to get hit over the next 12 months” as foreclosures mount in those areas.
In Phoenix, which has experienced one of the worst drops in home prices from their peak of any U.S. city, sales-office traffic jumped 55% in the three months through the end of April after 11 consecutive quarters of decline, according to Jim Belfiore, president of Belfiore Real Estate Consulting, a market research firm in Phoenix. Traffic is a leading indicator of where home sales are headed, he says.
Builders’ sales in that area have at least tripled in the past 30 days, due to a big drop in prices from January through early March that narrowed the premium over prices of foreclosure properties to just 15% in most local sub-markets, says Belfiore. Meanwhile, the latest S&P/Case-Schiller data show prices of foreclosures on Phoenix’s multiple listing service up an average of $5 per square foot over the past 30 to 40 days, with demand currently outstripping supply.
Phoenix is being looked at as an indicator of what the nationwide housing market could look like 12 to 18 months from now, he says. The land and lots that most of the publicly traded homebuilders own in and around Phoenix comprise a significant portion of their total holdings, he adds.
Bottom-Fishing in Phoenix
Stevenson at Fox-Pitt characterizes most of those buying homes in Phoenix as “bottom-fishers” who are taking advantage of the supply glut that’s pushed prices to bargain levels. Other reasons the market has attracted buyers: Phoenix is likely to produce one of the higher levels of job growth over the next 10 years, and its climate makes it a preferred retirement destination, he says.
Belfiore concedes that a large percentage of the recent sales has been by investors rather than people planning to move in immediately, and most are resales of foreclosure properties. The majority of new-home sales have been by first-time home buyers, motivated by the federal tax credit of up to $8,000, which is set to expire in November.
The expected increase in foreclosures over the next few months will force homebuilders to lower prices on new homes to be able to compete. Builders who own the land end up building a house and selling it at a price that results in a negative margin just to get the money out of the land, says Stevenson. Normally, however, rather than build at a negative margin, companies will take an impairment charge, marking down the value of the land to where they can afford to sell the houses for less without killing their margins.
Generally, the bigger homebuilders are still reporting impairment charges between $100 million and $400 million per quarter this year, including the cost of walking away from options on land they don’t own and goodwill remaining from past acquisitions, he says.
more foreclosures than new homesMetrostudy, a national housing market research firm in Houston, is still projecting 490,000 U.S. housing starts for 2009, below the 520,000 to 550,000 forecast by many general economists. Brad Hunter, chief economist and national director of consulting at Metrostudy, recently cited three reasons for the low level of starts: the inventory overhang builders are trying to work off, denial of credit by some builders’ banks even if they’re current on their loans, and the depressed price levels that make it hard for some builders to sell homes profitably.
Housing inventory fell to 10.1 months of supply from 10.7 in March and was well below the peak 13 months of supply, After a couple of strong months, there was a lull in purchases of homes priced between $150,000 and $200,000, which had had the strongest growth, Goldman Sachs said in a May 28 research note. The key to further paring excessive housing supply is a slowdown in foreclosure filings, which Goldman doesn’t see as likely. In March, foreclosure filings were 15% higher than the total inventory of new homes for sale, Goldman said, citing RealtyTrac data.
Realtors, there are 2 kinds of agents…those who know how to easily list and sell short sales (and are making a fortune) and those who refuse to learn anything new…struggle to stay afloat…and will probably not be in real estate for much longer. What kind of agent are YOU? Watch the FREE Agent Short Sale Secrets video then download the FREE Agent Short Sale Secrets book. Don’t wait, don’t procrastinate….FINALLY take action and learn how to become one of the agents who is THRIVING in this market.
Do stock-market pros like any names in the battered industry? D.R. Horton (DHI) is one of the stocks favored by James Wilson, an analyst at JMP Securities in San Francisco, who rates it as outperform. He said he expects the company to be among the first to return to profitability starting in fiscal year 2010. “Over 50% of its customers are first-time home buyers, who will be the first, in our view, to enter the market as prices begin the bottoming process and sales start to pick up in certain markets,” he wrote in a May 6 research note.
D.R. Horton had $1.5 billion in cash at the beginning of May and said it was terminating a $275 million revolving credit line due to lack of anticipated need, and as a result saving $3 million in annual non-use fees. The company generated $161 million in operating cash flow in the second fiscal quarter and $978.6 million for the first six months of fiscal 2009. “This puts Horton in a very favorable position to capitalize on attractive land deals as banks and private builders begin to unload assets on the cheap,” Wilson said in his note.
While the company said it’s trying to work down current inventory and is not considering any joint-venture deals, at some point land will become too cheap to ignore, Wilson said. After two straight quarters of impairments below $60 million, the company is nearing the end of its impairments, he said. He expects an additional $65 million in impairments for the current fiscal year, which should bring Horton’s assets close to being in-line with current market values. However Credit Suisse analyst Daniel Oppenheim is less optimistic about the stock, which he rates as underperform, citing risk from mounting foreclosures.
Wilson reaffirmed his outperform rating on MDC Holdings (MDC) on May 11, citing the company’s strong balance sheet and much lower-than-expected impairments in the first quarter. With MDC perhaps $30 million away from the end of its impairments, he lowered his net loss forecast for fiscal 2009 to $2.25 from $2.75 a share, but reduced his estimate for fiscal 2010 from breakeven to a loss of 50¢ a share based on lower revenue from a lower-than-expected backlog plus higher corporate overhead costs.
Pressure on MarginsEven though MDC slashed it speculative sales by 173 units from the fourth quarter of 2008 to the first quarter of this year, its remaining 648 spec sales are too high compared with backlog of just 629 units, which will put pressure on margins, according to Credit Suisse (CS). In a May 8 note, Oppenheim rated MDC as underperform, saying that with sales, general, and administrative expenses at 29.3% of revenue, the builder needs significant further cuts or higher sales volumes to become profitable again.
Although he sees MDC as one of the best-managed home builders, Oppenheim said he expected weaker sales and lower prices due to greater competition from foreclosures in the short term to put pressure on the stock and also pointed to the risk associated with its premium valuation to its peers.
Oppenheim downgraded KB Home (KBH) to underperform from neutral in April, citing “risks from weak demand, falling home prices, and increased competition from other builders at the low end of the market where KB Home competes with its new lower-priced ‘Open Series’ product.” His $10 target price is based on a 10% premium to his adjusted book value estimate.
While a lot of the data suggest the housing market is close to bottoming out in some ways, there’s really no recovery on the horizon, says Burns. That’s because mortgage rates are being held artificially low for now and are going to trend up in the months ahead, which will prevent a strong recovery. Meanwhile, any pent-up demand from renters who want to become owners will be overwhelmed by the rising number of foreclosures. “It’s going to take a couple years to work our way through this [inventory],” he says.
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Luxury, Highend Foreclosures
We have been warning all of you that the no price segment or region of the country would go unaffected by this housing correction/ recession/ depression….whatever you want to call it. Now, the high end homes are experiencing the harsh realities of this market….
With the U.S. economy and financial markets showing signs of life, optimistic analysts are looking for a recovery in the all-important housing sector. They got some ammunition on June 2 from the National Association of Realtors, which said that its Pending Home Sales Index jumped in April by the most in more than seven years.
But housing can’t revive as long as the market is being flooded with homes that are falling into foreclosure. And far from going away, the problem is broadening. It’s not just about subprime anymore. Now, people with excellent credit who never dreamed of getting in financial trouble are being dragged down by a dangerous cycle of rising unemployment and falling home prices. That is going to prolong the foreclosure crisis and, inevitably, inhibit the recovery of the rest of the economy.
Any illusion that prime loans would emerge unscathed was shattered by a May 28 report from the Mortgage Bankers Assn. “For the first time since the rapid growth of subprime lending, prime fixed-rate loans now represent the largest share of new foreclosures,” the bankers said. The grime in prime was responsible for the worst performance on record for the U.S. mortgage sector in the first quarter: Nearly 13% of loans were delinquent or in foreclosure, the most since the bankers started keeping tabs in 1972. The problems were worst in the bubble states of California, Florida, Arizona, and Nevada.
The biggest factor in this second wave of foreclosures is the inability of distressed homeowners to sell in order to pay off their debts. Prices in bubble cities such as Los Angeles, Phoenix, and Miami are down less at the high end of the market than at the bottom, according to data from Standard & Poor’s/Case-Shiller home price indexes. But that’s cold comfort to people who haven’t managed to sell at all. According to research by the National Association of Realtors, there are enough $750,000-plus homes on the market to cover more than 40 months’ worth of demand at the current rate of sales. That’s four times the rate of oversupply in the housing market as a whole.
Realtors, learn how to become a REO Listing Agent. BE the agent with all the buyer baited REO Listings. Watch the FREE Agent REO Secrets video and download the FREE Agent REO Secrets book now!
Unemployment is exacerbating the problems at the top of the market. The jobless rate for adults with a bachelor’s degree or more may not sound too high at 4.4% in April given the overall April jobless rate of 8.9%. But it’s more than double the rate of 2% a year earlier. And many families in that segment of the population built their finances on the assumption of continuous full employment, so they can’t cover the mortgage when even one spouse is out of work.
Consider the plight of Stephanie and Bob Walker, who bought a $799,000, three-bedroom home in Los Angeles with a view of the Hollywood sign in 2006 but are losing it because last year Bob stopped getting computer consulting work that used to pull in about $240,000 a year. Bob eventually landed a job paying $60,000, and Stephanie found work as a $13-an-hour temp, but it wasn’t enough to cover their mortgage and credit-card debt, which was swelled by about $130,000 worth of home renovations. They listed the house last year for an “optimistic” $875,000 but didn’t get any takers. After months of price cuts and threats of foreclosure from the bank, they’re days from closing on a sale at $700,000 that will assuage their primary mortgage lender—but leave them under pressure from other creditors. “We had no expectation things would come crashing down as fast as they did,” says Stephanie. “We had no one to blame but ourselves. We didn’t have a backup plan if he lost his job.”
The economics at the top of the market aren’t as advantageous as they are at the bottom, where first-time home buyers are flocking to lower-priced homes, spurred by low interest rates, temporary tax credits, and a drop in prices that has made owning cheaper than renting in many cities. At the high end, homes are too expensive for most first-time buyers, and move-up buyers can’t purchase a home without selling property they already own. What’s more, financing is far costlier, if it’s available at all, because private investors have lost their appetite for big mortgages. Rates on “jumbo” loans—that is, those too big to be purchased by Fannie Mae (FNM) or Freddie Mac (FRE)—are roughly a percentage point higher than those for loans that conform to Fannie and Freddie’s purchase limits. (Those limits range from $417,000 to $730,000, depending on local housing costs.)
An inflation panic in the fixed-income market is the latest blow to homeowners who are trying to sell to avoid foreclosure, because it’s pushing up mortgage rates and pushing potential buyers out of the market. Rates on 30-year fixed, conforming mortgage loans jumped nearly half a percentage point, to 5.25%, in the week ended May 29 from a week earlier, according to the Mortgage Bankers Assn. Meanwhile, the market is unlikely to get much help from the Obama Administration’s foreclosure-prevention program. Although it’s somewhat more ambitious than the Bush Administration’s program, it is voluntary for lenders and is off to a slow start since its March inception.
Why are some agents struggling in this market while others are making a fortune? 2 words: Short Sales. Learn NOW how to easily list and sell short sales. Watch the FREE Agent Short Sale Secrets video and download the FREE Agent Short Sale Secrets book.
When will this second wave of foreclosures crest? David Crowe, chief economist of the National Association of Home Builders, doesn’t see the peak coming until 2011, later than most other experts predict. Foreclosures typically top out after unemployment does, and Crowe doesn’t expect that to occur until late this year. After that, Crowe says, more people will lose their homes because of upward resets on adjustable-rate mortgages. Credit Suisse says mid-2010 is the peak for scheduled resets, and resets will stay high well into 2012. While most of the subprime loans issued during the boom years have been washed out by now, there are still about half a trillion dollars’ worth of option ARMs, which allow borrowers to add unpaid interest to the principal they owe. There’s an even more alarming $2.5 trillion in “alt-A” loans, which are between prime and subprime and include a big chunk of the mortgages that required little or no proof of income or assets. Most of these loans were issued to people with relatively good credit who were buying more expensive homes.
A key unknown is how many middle- and upper-income homeowners will simply walk away from homes that are worth less than the mortgages on them. So far few have. Whitney R. Tilson, managing partner of New York investment firm T2 Partners and co-author of the book More Mortgage Meltdown, expects the ranks of walk-aways to increase, exacerbating foreclosures. But Rick Sharga, senior vice-president of RealtyTrac, a foreclosure data specialist, disagrees. “To sign a contract for a house and then walk away from it runs counter to everything we were taught,” says Sharga, who predicts foreclosures will dip slightly in 2010.
Even if foreclosures don’t rise, the rate is already so high that it will put considerable pressure on the national housing market for at least two more years, says Mark Hanson, managing director of Field Check Group, a Menlo Park (Calif.) research firm.
While forecasts differ in detail, the clear message is that foreclosure is going upscale. And that means the housing bust won’t end anytime soon.
Source: BusinessWeek.
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Harris Real Estate University students (and future students) here are the latest Case-Shiller home price indices. 
The March report(.pdf) for the S&P Case-Shiller Home Price
Indexes shows a record decline of 19.1 percent in the quarterly National Home Price Index and a slightly less severe rate of decline for the 10-city and 20-city indexes. Price indexes for all 20 cities are shown below.
The top to bottom position on the right (corresponding to the order of the legend in the upper left to aid in viewing the data) saw a few changes last month, San Francisco, Las Vegas, Minneapolis, and Phoenix continuing to move down.
The index for Detroit now stands at 71.67, well off the bottom of the chart.
As shown below, Phoenix maintained its leadership role in year-over-year price declines with an astonishing 36.0 percent plunge. Las Vegas and San Francisco are not far behind with declines of more than 30 percent, all underlined in red.
Home prices in Minneapolis continue to tumble at an astonishing rate, down more than 6 percent in March with a year-over-year drop of 23.3 percent, sixth worst of the 20 cities.
David M. Blitzer, Chairman of the Index Committee at Standard & Poor’s
Declines in residential real estate continued at a steady pace into March. All 20 metro areas are still showing negative annual rates of change in average home prices with nine of the metro areas having record annual declines. Seventeen metro areas recorded a monthly decline in March, with Minneapolis, Detroit and New York posting record monthly declines.
On a positive note, nine of MSAs are reporting a relative improvement in year-over-year returns and nine of the 20 metro areas saw an improvement in their monthly returns compared to February. Furthermore, this is the second month since October 2007 where the 10- and 20-City Composites did not post a record annual decline. Based on the March data, however, we see no evidence that that a recovery in home prices has begun.Realtors, the CEO and Founder of RE/MAX said that every agent must be doing short sales! What are YOU waiting for? Watch the FREE Agent Short Sale Secrets video now and then download the FREE Agent Short Sale Secrets video. Learn NOW how to easily list and sell short sales.
There’s your “green shoot” for the day – March was the second month in the last six where neither index showed a record annual decline in home prices.
Source: TheMessThatGreenspanMade.com
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The HREU featured real estate blog of the week is The Phoenix Real Estate Guy. The blog is owned by Jay and Francy Thompson. We asked Jay’s OK to repost this and he graciously agreed. Read this article and let us know what you think….
The recent “Blogstorm O’ Controversy” surrounding the complaint filed by an Indianapolis real estate broker to MIBOR (Metropolitan Indianapolis Board of Realtors), and the subsequent “clarification” by the NAR (National Association of Realtors) that an agent can not post IDX/MLS listings that can be indexed by search engines has unleashed a flurry of reactions across the blogiverse, in the hallways at the NAR Midyear Conference, and beyond.
I won’t rehash the debate. It’s the reason I was invited to Washington D.C. to address the MLS Committee. You can read the initial post and its 372 comments on Agent Genius if you want all the gory details.
What amazes me the most about this mess are the things I keep hearing from (some) real estate brokers and others “in the business”:
“If I acquire the listing it should be my decision where, when and how it is displayed, and keep some details accessible only through me.”
“If it goes on Google, I want it to be under my company’s name and not that of my competitor.”
“Why should some techy agent outrank me in Google and get my leads from my listing?”
“We’ve let too much information get into consumers hands. We should be the keepers of listing information.”
“My listing shows up with their name on it, and leads I would otherwise be able to get are directed to my competitors site.”
“It’s my listing, everything should point back to my site”.
I could go on and on. To be blunt, talk like this sickens me.
Here’s what I just can’t wrap my mind around.
When I take a listing, the goal is unified and simple – sell the home. Isn’t… that… the… point???
I don’t take a listing to generate leads. I don’t take a listing in the hope that I will “double side” the transaction (a practice known as dual agency – where the agent represents both the buyer and seller in the same transaction). In fact, I abhor dual agency. And I don’t see anything wrong with providing information.
So why, WHY would any real estate broker have a problem with their listing being splayed all across the Internet, and beyond? (assuming of course, all other rules and regulations with regard to advertising are followed. You Arizona types should pay particular attention to Commissioner’s Rules A.A.C. R4-28-502 ).
Well, the only thing that makes sense is some brokers DO want to generate leads from a listing and/or they DO want to double-side the transaction. Or perhaps they want to keep information out of the consumers hands so they can “add value” via data access.
Not this broker. I want to sell my listings. Period.
Standard of Practice 12-4 in the Realtors Code of Ethics states:
Realtors® shall not offer for sale/lease or advertise property without authority.
In other words, no broker can advertise a Thompson’s Realty listing without the authorization of the designated broker (that would be me).
If you’re reading this, consider yourself duly authorized.
You want to put one of our listings on your web site? Run an ad in the Sunday paper? Place a 2 page fully color glossy ad in Homes & Land Magazine? You want to hike up Camelback and sing the praises of our listings from the top of the mountain?
Knock yourself out.
Please advertise our listings. Send out mailings, buy ads, build websites – doesn’t bother me one iota.
And what if your web page / blog post / single property web site outranks me in Google? Will I go crying to my local board that it’s not fair?
Hell no. In fact, if you want help advertising one of my listings on the internet, call me.
I want the listing sold. Period. If you want to advertise that listing and help it get sold, more power to you. And if you get a “lead” from advertising a Thompson’s Realty listing, I hope it’s the strongest lead you ever get that leads to the biggest commission check of your lifetime.
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HREU Students here is the promised city-by-city break down of the Case-Shiller home-price index.
The S&P/Case-Shiller home-price index, a closely watched gauge of U.S. home prices, continued to post declines in February but the pace stopped setting records after 16 consecutive months.
Click the image for an interactive map of home-price declines.In the 20-city index, no area experienced year-over-year price gains, the eleventh straight month that has happened. Further, none of the cities managed to avoid month-to-month declines for the fifth month in a row.
Phoenix, Las Vegas and San Francisco continued to lead year-over-year decliners, with drops over 30%. Cleveland posted a large month-to-month drop, as the rate of decline accelerated there. The rates of decline also accelerated in Charlotte, New York and Washington.
Realtors, clearly more sellers who will need the services of an agent who knows (really knows) how to list and sell short sales. Watch the Free Agent Short Sale Secrets video now…then download the FREE Agent Short Sale Secrets book.
Dallas, Denver, Cleveland, Boston and Charlotte managed to avoid double-digit year-over-year declines, while New York moved posted a year-to-year drop over 10% for the first time. Measuring from each market’s peak, Dallas has suffered the least, down 11.1% from its peak in June 2007; while Phoenix is down 50.8% from its peak in June of 2006. All of the 20 metro areas are in double digit declines from their peaks, with seven — Detroit, Las Vegas, Los Angeles, Miami, Phoenix, San Francisco and San Diego — in excess of 40%.
“We continue to believe that it is unlikely that we are anywhere near a bottom in nationwide home prices,” said economist Joshua Shapiro of MFR Inc. “After all, in the seven years leading up to the peak in July 2006, the national 20 city home price index jumped by 155% (126 index points). So far, this index has dropped by 31% (63 index points) in the 30 months since the peak. By our estimation, the composite 20 city index is perhaps two-thirds of the way through its ultimate total decline in this cycle.”
Home Prices, by Metro Area
Metro Area February 2009 Change from January Year-over-year change Atlanta 106.65 -2.50% -15.30% Boston 148.77 -1.30% -7.20% Charlotte 118.94 -1.60% -9.40% Chicago 126.3 -3.40% -17.60% Cleveland 97.76 -5.00% -8.50% Dallas 112.39 -0.30% -4.50% Denver 120.22 -1.70% -5.70% Detroit 74.6 -3.80% -23.60% Las Vegas 121.06 -3.60% -31.70% Los Angeles 163.16 -2.00% -24.10% Miami 154.28 -3.00% -29.50% Minneapolis 116.39 -3.10% -20.30% New York 178.16 -1.60% -10.20% Phoenix 111.89 -4.50% -35.20% Portland 150.88 -1.90% -14.40% San Diego 146.82 -1.00% -22.90% San Francisco 120.39 -3.30% -31.00% Seattle 152.12 -1.50% -15.40% Tampa 145.25 -2.70% -23.00% Washington 168.02 -2.30% -19.20%
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S&P Case Shiller Home Price Index
Harris Real Estate University students (and future students) here is the most recent Case-Shiller Home Price index information.
Read this and then share your comments with us…Do you think housing has reached bottom? (If not, when will it?)
After deteriorating relentlessly for nearly three years, the much-watched S&P/Case-Shiller Index showed a brief glimmer that plummeting home prices are at least slowing their fall.
Prices are still plunging: Home prices in 20 major cities across the country have fallen 18.6% between February of this year and last, according to the index released Tuesday. That painful drop, however, is an improvement from January, when prices fell an unprecedented 19%.
“This is the first month since October 2007 where the 10- and 20-city composites did not post a record annual decline,” says David Blitzer, the Chairman of the Index Committee at Standard & Poor’s, in a statement with the release. “We will certainly need a few more months of data before we can determine if home prices are finally turning around,” he cautioned.
Realtors, learn now how to become a REO listing agent. Watch the FREE Agent REO Secrets video now…then, download the FREE Agent REO Secrets book. Become a REO Listing Agent NOW!
The Case-Shiller Index paints a particularly brutal portrait of the housing bubble in American cities. All 20 cities in the index have seen home prices decline by more than 10% since their bubbles burst. In Phoenix, a market particularly flooded with foreclosures, home prices have fallen 51% since June 2006.
Six other American cities have seen declines of more than 40% since their peaks: Detroit, Las Vegas, Los Angeles, Miami, San Francisco and San Diego.
Home prices are still falling in every city tracked by the index. But in 16 of the index’s 20 cities, home prices are no longer falling as quickly. Historical data from the Case-Shiller Index show home prices beginning to charge up a mountain in the mid ’90s; by 2004, home prices were posting record improvements, with the 10-city index showing annual price increases of 20%.
Then, in 2004, the size of the increase began to slow (in mathematical terms, the second derivative became negative). By 2006, prices were falling, and by 2007, the fall accelerated to the highest rates the 20-year-old index had ever recorded.
It is at least a glimmer of good news for the battered housing market, even if it does not mean price recovery has begun. The plummeting housing market is a key barrier to economic recovery.
Falling home prices have decimated consumer confidence. Economist Robert Shiller of Yale University, one of the designers of the Case-Shiller Index, told Forbes earlier this month that, despite tentative evidence that confidence is stabilizing, “I do think it is too soon to draw any conclusions that confidence has bottomed out, especially since home price indices have been continuing to fall, and if this continues it will continue to damage balance sheets.” Not knowing when home prices would stop falling has hindered banks in pricing mortgage-related assets.
The housing report is also good news for the “stress tests” the Federal Reserve is administering to the country’s 19 biggest banks to determine how well they can weather a deep recession. The tests evaluated whether or not the banks could survive a 22% annual decrease in home prices.
Many economists feared this assumption was not pessimistic enough–that banks could survive the stress test, but still perish when the economy proved even worse. Today’s index provided a glimmer of hope that the economy could at least outperform the adverse stress test.
Source: Forbes.com
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Home Value Losses Increasing
Interesting Analysis of Case-Shiller Home Price Index Data
(This post is from The Affordable Mortgage. Read it and share your comments)
An analysis of the publicly available data which constitutes the S&P/Case-Shiller Home Price Index produces some interesting conclusions.
Introduction
During the mid-1990s the Government proactively pursued the goal of increased homeownership for the poor, the credit-challenged, minorities and inner-cities.
Many tools were employed but the primary incremental policies used to achieve this goal were:
- Revisions to the Community Reinvestment Act which directed lenders to make loans to people who could not otherwise qualify for them based on merit
- The reallocation of Fannie Mae’s/Freddie Mac’s expenditures towards subprime loans which constituted a large and recurring supply of capital to fund subprime loans and a huge potential profit opportunity for the fee-based mortgage industry
- Pressure brought to bear on lenders by the GSEs to meet subprime lending goals
- Regulatory influence over the lending industry
Increased access to credit with generous terms caused demand for houses to expand, transaction volumes to rise and inventories of for-sale properties to tighten. As a result, home prices began to rise nationally at an unsustainable pace in 1997.
Framework for Analyzing Case-Shiller Data
Since home prices began to decouple from the fundamentals of value in 1997 it makes sense to analyze current home values relative to the sustainable levels which existed before the Housing Bubble distortion. Analyzing what these values would be today adjusted for inflation provides an interesting perspective on where home prices should be and potentially allows us to project where they are heading.
Realtors, clearly to survive…and thrive in this market you must know how to easily list and sell short sales. Watch the FREE Agent Short Sale Secrets video now.
Housing prices are expected to generally track inflation because it is logical that they should do so (as the cost of inputs including materials, labor and land rise with inflation and excess price appreciation will lead profit-seeking builders to increase supply) and because several hundred years of housing price data clearly establishes this trend.
Analyzing the Data
Looking at the Case-Shiller figures since January 1997 proves interesting.
While the 10 City Price Index has fallen 30.2% from its peak value in June 2006, the index needs to fall an additional 34.4% from current values to reach inflation equilibrium with January 1997.
Eight of the 19 markets analyzed need to fall by in excess of 25% to reach inflation-adjusted, pre-bubble valuations and 10 markets need to decline by more than 20%.
The most overvalued markets continue to be New York and Los Angeles which need to fall an additional 41% from current levels.
Some may draw comfort from the observation that many markets analyzed are approaching inflation-adjusted equilibrium, but this perspective may prove to be optimistic. Most of the factors which determine market prices are far less favorable today than they were in 1997. The supply of houses is excessive, inventories are higher, credit is tighter, expectations for current/future price performance is negative, subprime loans no longer exist, and the primary mechanism which propelled prices to unsustainable heights (affordable mortgages) are no longer available.
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Potentially of even greater concern though are those markets which are not currently overvalued relative to 1997.
Detroit and Cleveland are actually trading in real terms at less than prices twelve years ago. These cities have been impacted by rust-belt and auto industry issues and are unique cases. But they may provide insight into what happens to housing prices in economic downturns. Slumping economic activity and high unemployment have depressed housing values. But which one of the remaining 17 markets analyzed isn’t experiencing an economic slowdown and rising unemployment?
Even more shocking are the markets of Las Vegas and Phoenix. Each has effectively reached equilibrium but both are experiencing rapid price declines which are accelerating. In fact these two were the worst performing markets year-over-year for January with Phoenix down 35.0% and Las Vegas down 32.5%. It seems likely that both markets will trade at substantial discounts to real 1997 prices in the near future. This is amazing as each was a recent boom town, in states with growing populations and without the macro-economic challenges of Ohio and Michigan.
This should scare anyone who hopes that price declines will cease once we return to pre-bubble prices. It appears that the fundamentals which influence value, not the protestations of Washington DC, determine asset prices.
Based on my understanding of the primary causes of the Housing Bubble, my expectations for the Affordable Mortgage Depression and my interpretation of the Case-Shiller data, I expect every market analyzed to see home price index values fall below inflation-adjusted, January 1997 levels.
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