Housing Is On The Upswing
The Good News
The worst of housing times may be slowly working its way into a dim memory as home buyers are returning to the marketplace. The national housing stats are suggesting that the terrible pain of the last six years may, at last, be coming to an end. According to the National Association of Realtors [NAR], national home sales rose 3.4% in April for a total of 4.6 million homes sold and the median home price for the nation rose to $177,400, a full 10% over last year. Of course, the NAR has a vested interest in the health of the housing sector and its stats may be on the rosy side, as many commentators have pointed out. Still, 10% increase in value, even 5%, is terrific news.
For more good news, purchases of new homes rose almost 10% over last year. At the same time the purchase price of these new homes rose almost 5% to a national median of $235,700. Housing starts are up over 50% from their 2009 low. So, it does seem as if there is some ground for optimism. Finally, the combination of incredibly low mortgage rates and low home prices has begun to attract the public, still stunned from the worst economic downturn in decades.
Why Is This Happening?
For the millions still underwater and behind in outrageous payments, even thinking that the housing crisis may be on its way out is a cruel joke. Nevertheless, there are some solid reasons for an eventual and actual end to the housing crisis of the last few years. Our U.S, labor market has been improving over the last two years ever so gradually, diminishing the ranks of the unemployed slightly month by month. Add to that enticing mortgage rates which remain at historic lows and it makes sense that home buyers with the wherewithal would begin to have enough confidence in their future prospects to make that big home purchase.
Rent vs. Buy
Rental rates have been rising throughout the country and renting has many advantages over owning a home. Nevertheless, rental rates are still much higher than the cost of owning a home in great swaths of the country. This is based on purchasing a home with 20% down and owning the same home for at least 5 years Additionally,these stats take into consideration only the purchase price of the home, not the ongoing costs of maintaining it.
Though for the most part in Southern California rental rates are still cheaper than owning a home, the allure of home ownership is still a strong pull both for the younger, first-time buyers as well as older, more experienced ones. The many young people who have returned to live with Mom and Dad or those who have rented with roommates for several years are now yearning to live free–in their own homes.
Is The Crisis Finally Over?
Millions of homes are still underwater. Millions of homeowners are still faced with foreclosure or the prospect of short sale. With that in mind, the housing crisis is certainly not over. Despite the modest recovery in the U.S., now our global trading partners are starting to slow down or even crash themselves, especially the EU and the BRIC countries [Brazil, Russia, India, China], which had been keeping the economic engine stoked. This country is recovering and we may manage to keep up the trend going mainly by satisfying pent-up internal demand, especially in housing.
Should I Buy Or Sell Now?
It seems clear that now and for the rest of this year, it’s a good time to buy a home. Prices are still very low and mortgage rates are very low. Both of these factors are likely to extend through the end of the year and into 2013.
For those thinking of selling, it’s a more mixed picture. For those deeply underwater, home prices are unlikely to spike in the next few years, so better to bite the bullet and sell now. For those who want to move up, this seems to be the ideal time to make the move. And, of course, many have little choice in the matter: whether it’s through marriage, divorce, new babies or new jobs, selling is really the only option.
The horse has already bolted out the barn door, which the mortgage industry is now nailing firmly shut. Due to the banks’ foolhardy loans during the “bubble years”, home prices and loan values are now at an all-time low, but few are able to benefit. The reason? Those who want a home loan today need pristine credit. That means a FICO score of 750 to 775. Since the nation’s median score is 711, that means fully half the population would not qualify for a new home loan even if the 20% down payments were no problem.
Because of the new, much tighter loan qualifying guidelines, the terrific bargains out there will have to remain a tantalizing, but forbidden treat for potential buyers. In the past before the current crisis, a FICO score of 700-725 was considered “solid”, a good risk for the bank. FICO scores range from 300 to 850. Freddie Mac and Fannie Mae, two government agencies, are now covering about 75% of the mortgage market and, according to data just released pursuant to the Dodd-Frank financial-services legislation, have approved borrowers with 750 to 775 for 75% of their mortgages when in 2005 that high a FICO accounted for just 5% of approvals.
Paying close attention to credit reports is now, more than ever, of prime importance for would-be home owners. Having a score below 750 does not make getting a mortgage approval impossible, just more expensive. Besides the 20% down payment required for conventional mortgages, a 730, for instance, would cost an extra .125 percentage points per year. Between 700 to 725, previously an un alloyed approval, the borrower will pay an extra quarter percentage point. Below 680, it gets harder to find an approval and, of course, costs more.
Those who already own their homes and are looking to tap into today’s great loan rates will face similar obstacles. The banks will look for the higher credit scores, adequate income and what is now increasingly difficult to come by–at least 20% equity in the property. The rules for refi really are little different from those for first-time buyers. Cash-out refis also are subject to stringent approval guidelines as home values are still dropping or wildly gyrating in many areas. And, unlike the past, no one seems to have much faith in the future any more.
The bomb has already exploded and suburbia has been left childless. Suddenly, it’s not just rural areas and the Rust Belt that’s losing population. Even, Beaver Cleaver’s neighborhood has no kids. That’s what’s contained in the 2010 Census. Very few of the 3143 American counties report any growth in population and many [58.6%] report steep declines. Children used to make up 25.7% of the population, even a scant 10 years ago. Now, children are 24% and still declining. In only 49 counties did the kid population increase, most in suburbs around mid-sized cities like Charlotte, NC.
Los Angeles County, as reported in the L.A. Times, is losing children at a rapid rate due to the high cost of housing and the high unemployment rate. Too, hard times have led many new immigrants, many illegal, to return to their home countries, rather than tough it out here. That group had among the highest birthrates.
Time was when new schools were popping up all the time to accommodate the burgeoning baby boom. Now, even the youngest boomers are into advanced middle age. And, they have not produced children like their parents. As a result, the archetypal American neighborhood, Suburbia, USA, is increasingly childless. This fact is having massive impact in those communities. As in L.A. Unified, schools are closing, pools and recreation areas are shutting down. All the activities we associate with child-rearing are diminishing or eliminated altogether–youth sports, music and dance classes, martial arts, swimming, skiing, birthday parties.
With the vanishing children goes the need for the 3-bedroom, 2-bath home with yard. Perhaps, too, the whole concept of suburbia is fading as newer communities insist on walkability, proximity to shops and public transportation.
Who Will Be Future Home Buyers?
During the real estate boom, as home values moved inexorably upward, buyers spread out to purchase a second or even third home. Will this trend accelerate? It’s possible, yet, given the moribund state of housing right now, it doesn’t seem too likely. What does seem likely is that the buyers will increasingly be singles, childless couples, older singles and couples.
Where will they want to live? That, too, is not really known as yet. Many young singles spend their twenties in urban areas like San Francisco and Manhattan or Brooklyn, Boston or Miami. They are marrying later and putting off child-rearing to their thirties. Many of these want to stay in the urban core. With only one or, possibly, two children, that’s what they are doing. The childless couples are doing the same thing. They like the amenities so close by–public transportation, great shopping, wonderful restaurants. Why move?
The Baby Boomers, many of whom were themselves raised in Suburbia, also raised their own children there. But, the kids are long gone for the oldest boomers and going for the younger ones as now even they are in advanced middle age. No longer tied to school districts or commutes, many of the still-huge boomer generation are likely to leave the suburbs where they brought up their children in search of new horizons.
Effect On Today’s Housing Market
None of this is terrifically good news for today’s market of foreclosures, short sales and underwater property. If the kids are grown, why would a couple hang on to the four bedroom home on which they owe twice as much as it’s worth? They would be better off short selling the house and finding something smaller. On the other hand, if they were counting on sellling the home to move to a cheaper, slower-paced area, that option is closing fast as well. Not only has their equity dropped like a stone, but who is going to buy that big house? Who’s going to be rushing to the suburbs to buy anything?
We’ve been expecting it for a year and hoping we were wrong, but the double dip is here as home prices are plunging again. It seems that last year’s uptick was a result of the Congressional tax credits for home buyers. That pumped some life into the otherwise moribund housing sector, but the air all leaked out this year.
How bad is it? Nationwide, home prices are down 5.1% from last year to levels not seen since 2002. Home prices have now lost an average of 32.7% since the highs reached in 2006. Almost 30% of homes with a mortgage are now underwater and many of the rest are hanging on by their fingernails. Here’s a graph from CNN Money that shows the decline from 2006, the uptick last year and the plunge again this year.
It’s starting to look like Niagara Falls, and it appears poised to get worse. What is actually causing this depressing negativity in real estate? Why can’t the nation and our Golden State seem to pick ourselves up and start all over again?
Causes of the Continuing Decline In Housing
Many factors are contributing to this stubborn stalemate–high unemployment, lack of consumer confidence and spending, outsourcing of jobs–but the major reason is the same as at the beginning of the recession–the big banks.
Most of us now understand that the push for deregulation of the banking industry which culminated in the lifting of the 1930s-era Glass-Steigal Act functioned like a giant gold rush for the so-called financial services industry or, better yet, a red flag to a bull. The Wall St boys almost literally went crazy dreaming up creative ways to make money [for themselves] without much consideration for the consequences.
In those heady days, intoxicated with the freedom from almost all regulation, the banks shoveled out loans. Almost anyone could get a loan. Bad credit scores, no down payment, low or no income–none of it mattered. The bankers had a loan for everyone and raked in the money doing refi after refi as everyone cashed out their new-found equity as the housing bubble grew.
When it burst, the first to explode were the sub-prime loans. That was back in 2007 and 2008. Those were the really terrible loans with horrendous interest rates given to completely unqualified buyers. That was the first wave of foreclosures and short sales.
Since then we have been dealing with the ARM loans, the adjustable rate loans that so many qualified buyers anxious to get into the hot housing market were advised by their lenders to undertake “to get into the property.” At the time lenders pitched these as “starter loans” because down the road, when they adjusted, buyers were told, with the rise in equity, you could easily refi when the rates went up.
Now we know better of course. Those ARM loans, so lucrative for lenders five years ago, are now time bombs exploding all over the place. Here’s another graph showing how all these 3- and 5-year ARMs are now adjusting. Owners can’t refi now due to plunging real estate values. On the other hand, they can’t pay $1500 more a month either. Naturally, the banks aren’t budging–no help for you, partner.
Thanks to Sean Chapman for the graph.
This year, as we can plainly see from the graph, we can expect a huge number of resets for these adjustable mortgages. Since the properties are usually now either underwater or nearly underwater, even those who could pay will quickly determine that it is not in their financial interest to do so. The result will be an even deeper crisis for the housing market as home values plummet ever downwards.
Just when we think it’s getting better, the news comes out that we are in for a double-dip in housing prices. Last year in 2010 things were starting to look up in many municipalities as sales were brisk and housing prices were even starting to inch up again. This year, though, the situation has turned from hopeful to grim. Now it appears that the price increases of last year were mainly due to the home buyers’ housing credit extended by the U.S. Congress to buoy the market. Buoy it they did, but now we’re in for a let-down. In September of 2010 as the last of the home buyer credit buyers closed on their properties, housing started to slide. Of course, it’s natural for sales of homes to slide after Halloween and throughout the winter, especially in cold-weather states, but this year’s slide began earlier and lasted longer.
Compounding the problem was the “robo-signing” scandal which halted foreclosures for several months last fall. Regular sales and short sales continued to pile up as inventory on a stagnant market, then the banks resumed their foreclosures. Foreclosures hit at perhaps a more rapid rate as banks rushed to close out their books at the end of the year. Now, at the end of February, here in Southern California we have not only a huge inventory, but I would even characterize it as a glut of properties clogging up the market.
Another issue adding to the misery is the difficulty borrowers are having obtaining financing. After the bailout, as we all know, banks, instead of spreading the wealth around as was intended, instead simply stopped lending. Belatedly realizing their folly during the bubble years, banks, always ponderously slow and bureaucratic, finally reacted–by clamping down on lending! Too late, banks. It has been estimated that half the population now has bad credit due to the recession in one form another, either a short sale, foreclosure, bankruptcy, late payments on credit cards or, at a minimum, too much debt. Lenders now will not lend to these people
For an analysis of what the near future holds for lending, check out my Pasadena Short Sale Blog. Hint: it’s another downer.
All of these factors have played a part in the current housing glut and consequent stasis. The inevitable result will be–yet lower prices as banks, short sellers and those who must sell for one reason or another, all compete with one another for the few buyers out there. Already this year, analysts have indicated that the scant 2.25% gain in L.A. housing last year has been wiped out. Some experts are predicting that we are in for another dip of approximately 15%. I am not in the prognostication business, but I can say that it’s not looking good.
Already from 2006-2008 many cities in five states, California, Nevada, Arizona and Florida and Michigan, according to Federal Housing Finance Agency data, have lost significant value in housing. Starting with Stockton, which lost 75% of its housing value in those two years, the dreadful list continues with Modesto at negative 73%, Vallejo negative 64%, Salinas at negative 60%. These are horrible numbers. Imagine losing 75% of the value of your home in just two years through no fault of your own!
The roll of California cities continues with Riverside-San Berdo-Ontario tied with Bakersfield at negative 47%, Fresno at negative 45%, Sacramento area at 44%, Oxnard-Thousand Oaks at 41%, Santa-Barbara-Santa Maria-Goleta tied with Santa Rosa at negative 40%. The l ist goes on-Oakland area -38%, Santa Ana-Anaheim-Irvine -36%,LA-Long Beach-Glendale -32, San Luis Obispo-Paso Robles -29% and even Santa Cruz-Watsonville lost 29% in two years.
That just us. Of course, Vegas lost 54% of its value in those years and is still hemorrhaging. Reno-Sparks lost 41%; Phoenix-Mesa-Glendale was down 31% and is still falling. Then, like California only worse because it has a less diversified economy, is Florida which was and still is a disaster zone. Cape Coral-Fort Myers lost 60% of its value, followed by Naples-Marco Island at 54% negative, Ft. Lauderdale -45%, West Palm Beach-Boca Raton down 45% and on and on.
That was the story three years ago. Much as we would like to say it’s getting better, really, it’s not over yet.
Louis XIV of France, styled the Sun King, famously opined, “Apres moi, le deluge.” After me, the flood. He was right, of course, for his excesses so infuriated the people that his successor was guillotined and his monarchy overthrown in the French Revolution.
SoCal Plunge In Foreclosure Filings
Something similar seems to be brewing in Southern California and maybe even nationwide as lenders ratchet up their foreclosure filings after the “robo-signing” lull. Though foreclosures dropped dramatically in SoCal this fall, so, too, did all home sales. The reasons seem to be many: the end of the home buyer tax credit, stubbornly high unemployment and the generally still-moribund economy. In fact, sales are down a full 16% from November of 2009. This at the same time foreclosure filings fell 14% from the previous November after a 22% decline in October for a two-month total 36% decline. Nationwide, the filings fell 21%.
December is traditionally a slow month in real estate as consumers focus on retail buying, parties and holiday travel plans. Typically, though, also in December smart investors are out there snapping up last-minute bargains of the now-extremely motivated sellers still on the market. Competition is almost always much less, to put it mildly, and sellers are determined to close out their books for year’s end. This year seems to be different as even investors are holding back.
That may be because the huge drop in foreclosure filings this fall has ominous repercussions for home prices in the new year. With the foreclosure freeze over, informed observers now expect to see the banks ratchet up their foreclosures with a vengeance, restarting filings begun in October and November and barreling ahead with new ones in January. Executives from RealtyTrac, a real estate data collection firm, speculate that the housing recovery could be set back three months, if not more, as the foreclosures pile up. In fact, we can expect ” an avalanche” of foreclosures shortly.
SoCal Home Prices
The most immediate effect of an avalanche of foreclosed properties on the market will be to further depress prices in Southern California which had started a slight upward movement. Los Angeles County home prices had dropped 1.2% over November 2009 to a median of $325,000. Riverside and San Bernardino Counties, the hardest hit by the bursting of the real estate bubble, lost 2.5% and 5.0% respectively to medians of $195,000 and $152,000. But, that is a huge improvement over the 30% and 40% drops of previous years. Other SoCal counties actually gained in value. Orange County eked out a .6% improvement for a $435,000 median home price. San Diego topped the charts with a 3.1% improvement over last year to a median of $335,000 with Ventura County just behind at 2.7% uptick to a median of $375,000.
Future: More Underwater Homes
These hard-earned gains will soon be lost as the promised avalanche of foreclosures hits the market. Perhaps sales will pick up as buyers and investors are lured back into the game. But, bargain-hunting fun aside, another price drop for already distressed homeowners will plunge yet more homeowners underwater. That, in turn, spirals down into more foreclosures and more equity loss in future.
Like Louis XIV, banks see this as well as anyone, yet still refuse to modify loans in any serious way. Like Louis, they see, but, obviously, don’t give a damn as long as they get their bonuses. Short-term is the only term.