Housing Crisis

[phil43 0]

Pain Street USA: '08 housing outlook

The forecast is for a longer, deeper home-price slump than previously expected, with double-digit declines in many markets.

By Les Christie, CNNMoney.com staff writer

 

NEW YORK (CNNMoney.com) -- The United States is deep in its worst housing slump since the Great Depression, and according to a new report, it's not going to get better any time soon.

 

In a new survey, Moody's Economy.com says many metro areas will record losses of 20 percent or more during the downturn, with the national median price for single-family homes dropping 13 percent through early 2009. Factoring in discount offers from sellers, the actual price decline would be well over 15 percent.

 

Eighty of the 381 metro areas covered by the report will record double-digit losses, according to the report. Most of the worst-hit markets are in once high-flying areas, such as California and Florida.

 

Home spiff-ups for all seasons

 

 

 

The steep losses were bound to arrive sometime. Throughout the housing slump, which began in the summer of 2006, experts kept expecting prices to tumble, but it wasn't until recently that they dropped substantially, according to Mark Zandi, chief economist for Moody's Economy.com.

 

"There has been a sea change in seller psychology since the subprime shock this summer," he said. "Sellers now realize they have to drop their prices to make a sale and prices are coming down very rapidly in some markets."

 

One such place is Punta Gorda, Fla. In Moody's outlook, prices there will undergo the steepest correction of any U.S. market. From their peak during the first three months of 2006, to their bottom, forecast for the second quarter of 2009, prices will decline 35.3 percent. That's in nominal dollars; adjusted for inflation, the loss will be even greater.

 

Other metro areas expected to go through crushing price drops include: Stockton, Calif., where prices are forecast to drop 31.6 percent, Modesto, Calif. (-31.3 percent), Fort Walton Beach, Fla. (-30.4 percent) and Naples, Fla. (-29.6 percent).

 

The worst hit market outside the Sun Belt is expected to be Ocean City, N.J. where prices will fall 24.9 percent, according to Moody's. Prices in St. George, Utah (-21.8 percent), Grand Junction, Colo. (-18.9 percent) and Atlantic City, N.J. (-18.6 percent) will also suffer. In the Washington, D.C. metro area, Moody's forecasts a decline of 18.4 percent.

 

Home prices are being pulled down by an even more severe decline in home sales, which Moody's expects to bottom out in early 2008, when unit sales will be down more than 40 percent from their peak.

 

Home builders continued to add to inventory even as the slump got well under way, contributing to what is now an 11-month back-log of homes for sale, according to the National Association of Realtors.

 

Many of these homes are sitting completely empty: The Census Bureau reported a total of 2.1 million vacant homes for sale. Vacant homes add pressure on prices because owners of these houses are usually more willing to slash prices to move the properties. They cost out-of-pocket cash each month while providing neither income nor shelter.

 

Even though home construction has now contracted severely - the Census Bureau reported Tuesday that new housing starts were down to an annualized rate of 1.187 million units in November, the lowest in 16 years - it will take time to work through the excess inventory.

 

The housing slump will have a substantial impact on the overall economy, according to Moody's, which says it will depress real gross domestic product by more than a percentage point this year and by 1.5 percentage points in 2008.

 

Speculative investment in the mid-2000s helped fuel the current slump. Zandi pointed out that 16 percent of mortgage originations during 2005 were for non-owner-occupied housing, twice the number of a few years earlier.

 

"And that's a very conservative estimate of investor demand," he said. "Many home buyers lied on their mortgage applications." That's because interest rates are lower for owner/occupied dwellings.

 

Buying for investment was especially prevalent in many resort areas, such as Ocean City, N.J. Many buyers were betting they could hold onto the property for a short time and sell it for a quick profit, a difficult feat to finesse, considering the high transactional costs. Many speculators came late to the party and got caught in the slump. Now their properties are adding to mountainous inventories.

 

Another factor was excessive new home construction, especially in once hot markets. As prices skyrocketed, builders rushed to take advantage of the increases, contributing to the now high inventories.

 

Also adding homes to markets was the increase in foreclosure filings. When lenders take back properties, they put them back on the markets. Foreclosures have just about doubled this year.

 

For the slump to end, much of the excess inventory will have to be worked through. Zandi doesn't envision that happening much before 2010, which he forecasts to be a very modest recovery year with low, single-digit growth.

[Doug Pretorius (ON) 9]

The greatest buying opportunity of your life time is staring you guys in the face, I hope you're enjoying and making the most of it!

[MichaelC 160]

Wow! That is one ugly set of statistics! And very accurate from where I sit here at Ground Zero in south FL.

I suppose the National Association of Realtors will be issuing their rosy rebuttal later on this week?

[Dan (SoCAl) 0]

Wow! That is one ugly set of statistics! And very accurate from where I sit here at Ground Zero in south FL.

I suppose the National Association of Realtors will be issuing their rosy rebuttal later on this week?

You crack me up, Michael

 

I couldn't wait for their rosy rebuttal and sneaked over to check their website. I'm pretty sure I wasn't seen. Here's the rotating flash subhead on their front page: "The housing market may be stabilizing in the wake of mortgage disruptions."

 

What a relief, huh?

 

Dan

Freedom Creek LLC

[MichaelC 160]

Hehe. Seems I underestimated my buds over at NAR. They didn't wait a week. This was released today: Stable Existing-Home Sales Expected in Early 2008, then Gradual Rise

 

WASHINGTON, January 08, 2008 - Over the next few months, existing-home sales are expected to hold fairly steady as indicated by pending sales activity, then rise later in the year and continue to improve in 2009, according to the latest forecast by the National Association of Realtors®.

 

Lawrence Yun, NAR chief economist, said there is a pull and tug exerting itself on the market. “On the one hand, we have a pent-up demand from the four million jobs added to our economy over the past two years of sales decline,” he said. “On the other, consumers continue to wait for additional signs of market stabilization. There are more people with financial capacity now than in 2005, but many are trying to market-time their purchase. As a result, the exact timing and the strength of a home sales recovery is a bit uncertain. A meaningful recovery in existing-home sales could occur as early as this spring, or it may be further delayed toward late 2008.”

 

The Pending Home Sales Index,* a forward-looking indicator based on contracts signed in November, fell 2.6 percent to a reading of 87.6 from a strong upward revision of 89.9 in October, but remains above the August and September readings and indicates a broad stabilization. The index was 19.2 percent below the November 2006 level of 108.4. “Although there could be some minor slippage in the first quarter, existing-home sales should hold in a narrow range before trending up,” Yun said.

 

The PHSI in the South rose 2.3 percent in November to 100.7 but is 19.8 percent below a year ago. In the West, the index slipped 2.1 percent to 86.6 but is 18.5 percent lower than November 2006. The index in the Midwest fell 4.1 percent in November to 82.1 and is 18.6 percent below a year ago. In the Northeast, the index dropped 13.0 percent in November to 70.1 from a spike in October, and is 19.1 percent below November 2006.

 

Existing-home sales for 2007 will probably total 5.66 million, the fifth highest on record, then edge up to 5.70 million this year and 5.91 million in 2009, compared with 6.48 million in 2006. Existing-home prices for 2007 are likely to be down 1.9 percent to a median of $217,600, hold even this year and then rise 3.1 percent in 2009 to $224,400.

 

“Rising home prices in the affordable midsection of the country are likely to offset declines in some of the previously hot markets,” Yun said.

 

There are wide variations in housing market conditions around the country, with nearly two-thirds of the metropolitan areas showing price gains. Healthy increases in metro prices are occurring in places such as Pittsburgh; Beaumont-Port Arthur, Texas; San Jose, Calif.; and Bismarck, N.D.

 

“Our consumer survey shows buyers today are in it for the long-haul, planning to stay in their home for a median of 10 years. This is a wise approach to housing because the data shows the longer you own, the better your investment,” Yun said.

 

New-home sales are projected at 773,000 for 2007, and declining to 669,000 this year before rising to 730,000 in 2009, but well below the 1.05 million 2006. With an appropriate slowdown in production, housing starts, including multifamily units, are forecast at 1.36 million for 2007 and 1.09 million this year before edging up to 1.10 million in 2009; starts totaled 1.80 million in 2006. The median new-home price should drop 2.1 percent to $241,400 for 2007, and then rise 0.4 percent to $242,200 this year and gain another 5.9 percent in 2009.

 

“Some policy changes, such as raising the loan limit on conventional mortgages, would provide a significant boost to home sales, increase liquidity, strengthen home prices and lessen foreclosures, but it is unclear as to if and when the measure will be implemented,” Yun said. NAR strongly supports raising the Government-Sponsored Enterprise loan limit to at least $625,000 from the current $417,000 so that more consumers will have access to lower interest rates on safe conforming mortgages. “NAR estimates that raising the GSE loan limit will result in interest rates savings for an additional 330,000 homeowners,” he said.

 

NAR also encourages the Fed to make a single lump-sum cut in the Fed funds rate to 3.5 percent at the January Federal Open Market Committee meeting, rather than a series of modest cuts throughout the year. “Consumers are also looking to market-time interest rates, and the expectations of further rate cuts are pushing some home buyers to delay. Monetary policy will be much more effective with a one-time large cut, rather than a series of small cuts,” Yun added.

 

The 30-year fixed-rate mortgage is expected to rise slowly to the 6.3 percent range by the end of this year, but an additional cut in the Fed funds rate would lower short-term interest rates.

 

Growth in the U.S. gross domestic product (GDP) is seen at 2.1 percent in 2007, below the 2.9 percent growth rate in 2006; GDP growth will probably be 2.0 percent this year.

 

After averaging 4.6 percent for both 2006 and 2007, the unemployment rate is estimated to rise to 5.3 percent in the second half of 2008. Inflation, as measured by the Consumer Price Index, is projected at 2.9 percent for 2007 and 3.1 percent this year; it was 3.2 percent in 2006. Inflation-adjusted disposable personal income is forecast to grow 3.1 percent for 2007, the same as in 2006, and then grow 1.6 percent this year.

 

The National Association of Realtors®, “The Voice for Real Estate,” is America’s largest trade association, representing more than 1.3 million members involved in all aspects of the residential and commercial real estate industries.

 

# # #

 

*The Pending Home Sales Index is a leading indicator for the housing sector, based on pending sales of existing homes. A sale is listed as pending when the contract has been signed but the transaction has not closed, though the sale usually is finalized within one or two months of signing.

 

The index is based on a large national sample, typically representing about 20 percent of transactions for existing-home sales. In developing the model for the index, it was demonstrated that the level of monthly sales-contract activity from 2001 through 2004 parallels the level of closed existing-home sales in the following two months. There is a closer relationship between annual index changes (from the same month a year earlier) and year-ago changes in sales performance than with month-to-month comparisons.

 

An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined as well as the first of five consecutive record years for existing-home sales.

 

Existing-home sales for December will be released January 24; the next Forecast / Pending Home Sales Index will be released February 7.

[jimculler 0]

Chase just announced that they will not be doing stated income mortgages AT ALL.

 

If other lenders were to follow suit, its going to be even worse than these people predict. Hopefully that will not happen, and the pool of buyers will not continue to dissipate.

 

The adjustments to subprime were necessary, because we dont want them foreclosing all over the place constantly messing up our ccomparable sales. So many people should have never qualified in the first place.

 

But Stated Income is the way of the self employed individual! If all lenders were to follow suit with Chase, then these individuals will be forced to get creative if they want to own anything; or become an employee somewhere for a couple of years. <-- yeah right.

[Doug Pretorius (ON) 9]

I was just talking to a mortgage broker the other day and he said that the same no-doc loans that helped prop up the bubble in the states, are now available in Canada. No credit, no down payment, no proof of income? NO PROBLEM!

 

Idiots.

[MichaelC 160]

For instant approval, just wear one of these when applying for your mortgage. . .

 

[-Tony- 0]

The greatest buying opportunity of your life time is staring you guys in the face, I hope you're enjoying and making the most of it!

 

I don't get it.....and I'm no dummy I spent 3 years in the 12th grade. But everyone is saying this...and I DON'T GET IT (opps accidentally hit the caps lock but it works well). You can get houses 25-35% off but all the prices are "coming down" (we here in SE VA we still saw 7% from 3rd to 3rd just a little longer on the market) and what if they fall below your 25-35%. Unless you wait until the end of the downward cycle, 3-4 yrs, then get a 25% discount???

 

I really want to get some rental that will cash flow but I am hesitant with the uncertainties of the market. I know I will have to buy out of state to do this and plan on using CA's to augment closing cost and $ down.

 

Tony

[MichaelC 160]

Tony, if you're investing with a buy and hold strategy, you needn't be concerned with the short term direction of the market. History tells us that ultimately real estate will be worth more in, say, six years than it is today. If you have tenants covering your payments, you reap the benefits of appreciation over the long term. Of course, if your area doesn't offer cash flow possibilities, then you need to look west, young man. Get off the east coast and out of the major meto areas and you'll find deals.

[-Tony- 0]

I thought it would be easier to rent in a metro area! I guess you would also pay the price. I lost a web site that actually broke down by state where best appreciation, cashflow, and blah blah blah. Believe it or not I think they said Montana had the best cf.

[Doug Pretorius (ON) 9]

Like MC said if you buy for the long-term then current market conditions mean nothing so long as you can get some cash flow going in.

 

But the reason to buy now (and for the next few years) is because everyone wants to sell. This is the only time in the market cycle when you can get huge discounts on nice properties (the rest of the time you have to take junkers to get big cash discounts).

 

If you wait until the market starts to turn back around it will already be too late because by then you will be competing with everybody else who was waiting for signs of a recovery. In my second year I bought in a market that everyone was running away from, sellers couldn't give their houses away fast enough or cheap enough, the papers were flooded with ads BEGGING for buyers, virtually all of the realtors were out of business except for the old multi-generational family-run offices. I was buying houses for 50 cents on the dollar without even trying. Now those houses have all doubled and tripled in price, that was only 6 years ago, but nobody saw it then. As far as they were concerned the market was going straight down the toilet and never coming back.

 

Buying on the way down is not so bad as long as you're buying for the 5-10 year timeframe with solid cash flow in the meantime. Sure you could make a bit more if you buy right at the bottom, but if you try to time the market just right you will almost always be late.

[-Tony- 0]

I don't look at it as a discount, I see the glass half empty I see it as a correction. So your really buying at market value.

[Doug Pretorius (ON) 9]

Thanks for that little ray of sunshine, Tony