Barron's Cover
SATURDAY, SEPTEMBER 8, 2012
Happy at Last
By JONATHAN R. LAING
.
After an ugly six-year decline, home prices are starting to look up. Why the rebound is for real. Plus: What's next for the top 50 U.S. housing markets.
..
Scott Pollack for Barron's
Nothing's wreaked quite the havoc on the U.S. economy, and indeed the national psyche, as the six-year slide in home prices. It wiped out some $7 trillion in household wealth, savaged bank balance sheets, and induced the Great Recession and the tepid recovery.
Yet there are unimpeachable signs that this national nightmare is now over. Home prices are starting to rise, if somewhat haltingly, in most areas of the country. And a number of forecasters predict home-price increases around 10% or so nationally over the next three years, with some metropolitan statistical areas, such as Midland, Texas, and Bismarck, N.D., likely riding the energy-exploration boom to better than 20% jumps in residential-real-estate prices. The turnaround, in fact, appears to be arriving exactly on the schedule that Barron's laid out this year in a March 19 cover story entitled "Ready to Rebound."
Of greatest moment, perhaps, was the release two weeks ago of the S&P/Case Shiller Composite 20-City Index that showed a jump in home prices of 2.3% in June over May. Likewise the Case-Shiller National Index in the second quarter rose 6.9% over the first-quarter level, before any seasonal adjustment. And for the first time since the summer of 2010, the National Index actually nosed ahead of the year-earlier quarter's reading, if only by 1.2%.
"This increase in home prices, unlike the one that occurred in 2009-2010 as a result of the temporary tax credit for first-time home buyers, looks to be for real," says David Blitzer, chairman of the index committee at S&P Dow Jones Indices. "We probably won't see a V-shaped recovery in housing, with prices overall going up 20% in the next year. But this rally has legs, and prices will definitely be higher next year."
The recent strength seems to have continued in July and August, according to home-price indexes compiled by CoreLogic. Like Case-Shiller, the consumer, mortgage and property research firm tabulates prices based on repeat sales of the same properties, but it releases the data more quickly. CoreLogic said last week that, year over year, home prices nationally had jumped 3.8% in July and an even stronger 4.6% in August. The latter number was based on its pending, rather than completed, home-sale price index.
"It has been six years since the housing market last experienced the gains we saw in the July numbers, with indications that the summer will finish up on a strong note," says CoreLogic CEO Anand Nallathambi. "Although we expect some slowing in price gains over the balance of 2012, we are clearly seeing the light at the end of a very long tunnel."
TO BE SURE, any sustained recovery in prices faces some formidable obstacles. The "shadow inventory" of residences that are in some stage of foreclosure or whose owners are at least 90 days delinquent on their mortgages stands at 3.1 million–6% of the 50 million home loans in the U.S. In a normally functioning market, the total of distressed properties would be more like 2%.
Likewise, some 13 million homeowners are under water -- meaning that their mortgages are larger than the value of their houses or condos. Although the vast majority of these people are current on their mortgage payments, many may be tempted to resort to a "strategic default." This is particularly true in the event of a job loss or some other economic vicissitude.
And finally, the collapse in housing prices was so severe -- nationally, residential real estate fell by over one third in value, peak-to-trough -- that it would take at least a 50% jump just to restore prices to the nutty levels they achieved in 2006. Unfortunately, those were the prices at which many homes were purchased. So, for many, hope will be difficult to maintain in the years ahead.
Just look at Phoenix (see table below). Through June, it had enjoyed a 14.4% price recovery, but that rise only reduced the 55.9% decline from its peak to a 49.6% loss. Some areas like the Central Valley of California may take decades to return to the heady levels of peak valuation, when even folks who couldn't walk and chew gum at the same time could get home loans.
Enlarge Image
.
Yet some keen observers of the real-estate market, such as Moody's Analytics' Mark Zandi, are optimistic that home prices will rise as much as 10% from current levels by the end of 2014, once the shadow inventory is worked down over the next year or so. He points to such factors as the continued rise in effective rent rates (the main competition to home ownership), low mortgage rates, steady though slow improvement in job growth and improving availability of bank credit.
"We've clearly reached a key psychological shift in home buyers' psychology, where folks are now starting to worry about missing the boat, rather than fearing whatever house they buy, no matter how attractive the price, can only go down in value," Zandi explains.
Even more upbeat is Lawrence Yun, chief economist at the National Association of Realtors, who, unlike some of his predecessors, is more a sober analyst than a cheerleader for the real-estate brokerage industry. Yun is heartened by several factors that have been showing up in NAR monthly sales figures and median home-price trends.
For one thing, existing home sales in July ran at an annual pace of 4.47 million, up 10.4% from the 4.05 million pace in July 2011. Median sales prices, too, have been ticking up for five straight months. They hit $187,300 in July, 9.4% above the year-earlier level. Part of that rise reflects a changing mix of sales, with higher-priced homes accounting for a bigger share of volume. But, Yun points out, this factor alone should help boost overall economic growth.
.
AS A CONSEQUENCE, he thinks that home prices could rise as much as 5% in both 2012 and next year. One reason is that the inventory of unsold dwellings has remained surprisingly tight with just 2.4 million, or 6.4 months' worth of inventory, on the market in July, based on the current sales pace. Back in the darkest days of the home-price collapse in late 2008 and early 2009, inventories regularly clocked in at around a 10-month supply and even briefly surged to more than 12 months in the summer of 2010.
This current market tightness has confounded many residential real-estate bears in light of the fact that so many American homes remain in the foreclosure pipeline and so many homeowners are under water on their mortgages.
Even so, Yun expects the supply tightness to linger for some time to come. Many of the troubled properties in places like Phoenix and Miami are being absorbed by local investors attracted by the bargains available and the ability to earn a handsome yield on the properties by renting them out. Many of these opportunistic buyers are putting up all cash.
As a result, the shadow inventory has been dropping precipitously, declining from more than 4.5 million homes at the peak of the bust to just over 3 million homes currently.
Two years ago, distressed sales accounted for about a third of all sales of previously occupied homes. This year, the figure will be 25% and next year just 15%, predicts the economist.
.
This is important because foreclosure and "short" sales (sales by homeowners with the approval of lenders at less than the amount of the mortgage debt) are typically done at significant discounts to the price of comparable properties, destroying neighborhood home values in the process. But now, Yun notes, not only are distressed sales declining as a percentage of total existing-home sales, but so are the price discounts at which they occur.
Also potentially bolstering existing housing prices has been the precipitous drop in new-home construction, Yun contends. Given population growth and new household formations, the U.S. is producing only about half the 1.2 million new dwellings needed each year. In fact, he fears that a housing shortage could even develop.
.
FEW OBSERVERS HAVE FOLLOWED home-price trends with the assiduity of Ingo Winzer, president of Local Market Monitor. He started tracking them two decades ago, when he worked in the finance department of a now-defunct mortgage insurer.
But he does more than merely pontificate on market behavior. Indeed, he has the audacity to make three-year price forecasts for all 317 U.S. metropolitan statistical areas, from the populous New York area (11.7 million residents) to tiny Cheyenne, Wyo. (population 88,852). His clientele consists of local and regional banks, mortgage companies, home builders, and private real-state investors all over the country.
Winzer readily concedes that his is a somewhat inexact science, but he claims to be able to get most trends right. "Home prices tend to move in distinct long-term waves, particularly in major metro markets," he says. And, he maintains, the magnitude of the price moves is generally within the range of his three-year forecasts, even if each yearly prediction doesn't precisely come to pass.
His methodology involves establishing an equilibrium home price for each market, or a price for housing that each metro area's per-capita income comfortably can support. Other factors entering into his calculations include unemployment rates, job growth, and single- and multi-family building-permit activity. He also takes into account the past relationship in each area between income and home prices. Homes in desirable areas like San Francisco, for example, historically trade at prices above those that per capita income levels would dictate in most other parts of the country.
Winzer admits that forecasting prices these days is tougher because there is less history to use to judge price behavior in the current market. Nonetheless, he sees prices nationally rising a cumulative 7% over the next three years (beginning July 1, 2012).
He expects some of the biggest jumps in oil-and-gas boom towns like Midland, Texas, where he sees prices jumping 49%; Houston, 26%; and Bismarck, N.D., 20%. At the same time, he expects prices in overbuilt Florida climes that rely on the second-home market to continue suffering, with Port St. Lucie falling 14%, Panama City dropping 7%, and Pensacola sliding 6%.
.
.
What's next for your home? The table above shows Winzer's forecasts for the top 50 U.S. markets.
0 comments:
Publicar un comentario