The Housing Crisis Is Over
By CYRIL MOULLE-BERTEAUX
May 6, 2008; Page A23
The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.
How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won't happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.
Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.
Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what's going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.
The boom made housing unaffordable for many American families, especially first-time home buyers. During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much.
Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the bubble to burst.
Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in.
The next question is: Even if home sales pick up, how can home prices stop falling with so many houses vacant and unsold? The flip but true answer: because they always do.
In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.
The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in "months of supply" terms. That's the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high – but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.
Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually.
Inventories will drop even faster to 400,000 – or seven months of supply – by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won't stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.
Many pundits claim that house prices need to fall another 30% to bring them back in line with where they've been historically. This is usually based on an analysis of house prices adjusted for inflation: Real house prices are 30% above their 40-year, inflation-adjusted average, so they must fall 30%. This simplistic analysis is appealing on the surface, but is flawed for a variety of reasons.
Most importantly, it neglects the fact that a great majority of Americans buy their houses with mortgages. And if one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one's income is required to be able to make the mortgage payments on the house. Today the rate on a 30-year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today's house prices to the 1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading.
This is all good news for the broader economy. The housing bust has been subtracting a full percentage point from GDP for almost two years now, which is very large for a sector that represents less than 5% of economic activity.
When the rate of house-price declines halves, there will be a wholesale shift in markets' perceptions. All of a sudden, the expected value of the collateral (i.e. houses) for much of the lending that went on for the past decade will change. Right now, when valuing the collateral, market participants including banks are extrapolating the current pace of house price declines for another two to three years; this has a significant impact on the amount of delinquencies, foreclosures and credit losses that lenders are expected to face.
More home sales and smaller price declines means fewer homeowners will be underwater on their mortgages. They will thus have less incentive to walk away and opt for foreclosure.
A milder house-price decline scenario could lead to increases in the market value of a lot of the securitized mortgages that have been responsible for $300 billion of write-downs in the past year. Even if write-backs do not occur, stabilizing collateral values will have a huge impact on the markets' perception of risk related to housing, the financial system, and the economy.
We are of course experiencing a serious housing bust, with serious economic consequences that are still unfolding. The odds are that the reverberations will lead to subtrend growth for a couple of years. Nonetheless, housing led us into this credit crisis and this recession. It is likely to lead us out. And that process is underway, right now.
Mr. Moulle-Berteaux is managing partner of Traxis Partners LP, a hedge fund firm based in New York.
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Thursday, May 8, 2008
Monday, April 14, 2008
Buying Vs Renting
Have you ever wondered whether it's better to buy or rent? Well now you can easily discover the answer by using the link I have added from the NY Times. This is an easy to use calculator that will answer your questions. Be sure to play around with it and read the methology to completely understand what you are looking at. Of course this gives the raw facts on the financial aspects of homeownership and doesn't uncover your needs. So please consult a realtor for a full analysis.
Wythe
Wythe
Richmond Makes Forbes "Best for Business" List
Three Virginia cities make nation's 'Best for Business' list
Blacksburg, Charlottesville, and Richmond have made Forbes magazine's annual short list of metro areas that are business-friendly in the U.S.Forbes magazine has for the tenth year in a row ranked the 200 largest metro areas according to their business acumen. Cities topping the list have solid job growth, an educated labor pool and low business costs. The calculation also includes tax, energy and office space costs, and takes into account Economy.com's living cost index.
Six of the 10 top metro areas are in and around state capitals.
Here are the magazine's top choices (in ranking order):
Best Metros
Raleigh, N.C.
Boise, Idaho
Fort Collins, Colo.
Des Moines, Iowa
Lexington, Ky.
Atlanta, Ga.
Richmond, Va.
Olympia, Wash.
Spokane, Wash.
Knoxville, Tenn.
Best Smaller Metros
Sioux Falls, S.D.
Iowa City, Iowa
Bloomington, Ind.
Columbia, Mo.
Bismarck, N.D.
Morgantown, W.Va.
Rapid City, S.D.
Greenville, N.C.
Charlottesville, Va.
Blacksburg, Va.
Source: Forbes, Kurt Badenhausen (03/19/2008)
Blacksburg, Charlottesville, and Richmond have made Forbes magazine's annual short list of metro areas that are business-friendly in the U.S.Forbes magazine has for the tenth year in a row ranked the 200 largest metro areas according to their business acumen. Cities topping the list have solid job growth, an educated labor pool and low business costs. The calculation also includes tax, energy and office space costs, and takes into account Economy.com's living cost index.
Six of the 10 top metro areas are in and around state capitals.
Here are the magazine's top choices (in ranking order):
Best Metros
Raleigh, N.C.
Boise, Idaho
Fort Collins, Colo.
Des Moines, Iowa
Lexington, Ky.
Atlanta, Ga.
Richmond, Va.
Olympia, Wash.
Spokane, Wash.
Knoxville, Tenn.
Best Smaller Metros
Sioux Falls, S.D.
Iowa City, Iowa
Bloomington, Ind.
Columbia, Mo.
Bismarck, N.D.
Morgantown, W.Va.
Rapid City, S.D.
Greenville, N.C.
Charlottesville, Va.
Blacksburg, Va.
Source: Forbes, Kurt Badenhausen (03/19/2008)
Home Sales Forecast from the NAR
Daily Real Estate News April 8, 2008NAR:
Existing-Home Sales to Level Off
Little change is expected in existing-home sales over the next few months, before improving notably during the second half of the year, according to the latest forecast by the NATIONAL ASSOCIATION OF REALTORS®.Lawrence Yun, NAR chief economist, says the market will come into clearer focus this summer. “Existing home sales could start to show a sustained increase within a few months, unless there are some additional economic problems or excessive inflationary pressure,” he says. “We’re looking for essentially stable sales in the near term, before higher mortgage loan limits translate into more sales in high-cost markets. The wider access to affordable credit should increase sales activity notably this summer as pent-up demand begins to be met.”The Pending Home Sales Index, a forward-looking indicator based on contracts signed in February, slipped 1.9 percent to 84.6, from an upwardly revised reading of 86.2 in January. The index was 21.4 percent lower than the February 2007 index of 107.6. “The slip in pending home sales implies we’re not out of the woods yet, though an era of successive deep sales declines appears to be over,” Yun says.
By the Region
Here’s what the index reveals across the nation with existing-home sales:
Northeast: rose 3.2 percent in February to 71.8 but remains 25.4 percent below a year ago.
Midwest: declined 3.7 percent to 82.7 and is 17.4 percent lower than February 2007.
South: fell 5.5 percent in February to 85 and is 30.3 percent below a year ago.
West: dropped 9.8 percent in February to 84.6 and is 17.1 percent below February 2007.
Home Sales Forecast
Existing-home sales are likely to rise from an annual pace of 4.9 million in the first quarter to 5.9 million in the fourth quarter. With relatively weak activity in the first part of the year, existing-home sales for all of 2008 is forecast at 5.39 million, increasing 6.6 percent to 5.74 million in 2009.
“Exceptionally weak home sales related to jumbo loans problems will depress home prices in the first half of the year, but steady liquidity improvements in the conforming jumbo-loan market will help prices recover in the second half of the year,” Yun says.
The aggregate existing-home price will probably ease by 1.4 percent to a median of $215,800 for all of 2008 before rising 3.7 percent to $223,800 next year.
Yun says that there will continue to be wide variations in regional housing market conditions.
“Some parts of the country that can expect improvement include the Northeastern region and the oil-patch states of Texas, Oklahoma, Louisiana, and Arkansas,” he says. With lower interest rates and flat home prices in many areas, NAR’s housing affordability index is forecast to rise 14 percentage points to 127 in 2008.
New-home sales are projected to fall 25.7 percent to 576,000 in 2008 before rising 4.6 percent to 602,000 next year. Housing starts, including multifamily units, are estimated to drop 26.3 percent to 999,000 this year, and slip another 0.5 percent to 994,000 in 2009. The median new-home price will probably fall 3.6 percent to $238,400 in 2008, and then rise 4 percent next year to $247,800.
Other predictions on factors that can impact the housing market:
Mortgage rates: 30-year fixed-rate mortgages, which has fluctuated recently, should average 5.8 percent in the second and third quarters, but trend up to an average of 6.3 percent in 2009.
Growth in the U.S. gross domestic product: expected to be 1.4 percent in 2008 and 2.4 percent next year.
Unemployment rate: forecast to average 5.4 percent this year and 5.6 percent in 2009.
Inflation: (as measured by the Consumer Price Index) is projected at 3.4 percent in 2008 and 2.2 percent next year. Inflation-adjusted disposable personal income is likely to grow 1.2 percent this year and 3.0 percent in 2009.
“The economy will not grow in first half of the year,” Yun says. “However, the combination of recent fiscal stimulus enactment and the lagged impact of monetary policy will help jump start the economy in the second half.”
—REALTOR® magazine online
Copyright THE NATIONAL ASSOCIATION OF REALTORS® Headquarters: 430 N. Michigan Ave., Chicago, IL 60611 DC Office: 500 New Jersey Ave. NW, Washington, DC 20001 1 800 874 6500
Existing-Home Sales to Level Off
Little change is expected in existing-home sales over the next few months, before improving notably during the second half of the year, according to the latest forecast by the NATIONAL ASSOCIATION OF REALTORS®.Lawrence Yun, NAR chief economist, says the market will come into clearer focus this summer. “Existing home sales could start to show a sustained increase within a few months, unless there are some additional economic problems or excessive inflationary pressure,” he says. “We’re looking for essentially stable sales in the near term, before higher mortgage loan limits translate into more sales in high-cost markets. The wider access to affordable credit should increase sales activity notably this summer as pent-up demand begins to be met.”The Pending Home Sales Index, a forward-looking indicator based on contracts signed in February, slipped 1.9 percent to 84.6, from an upwardly revised reading of 86.2 in January. The index was 21.4 percent lower than the February 2007 index of 107.6. “The slip in pending home sales implies we’re not out of the woods yet, though an era of successive deep sales declines appears to be over,” Yun says.
By the Region
Here’s what the index reveals across the nation with existing-home sales:
Northeast: rose 3.2 percent in February to 71.8 but remains 25.4 percent below a year ago.
Midwest: declined 3.7 percent to 82.7 and is 17.4 percent lower than February 2007.
South: fell 5.5 percent in February to 85 and is 30.3 percent below a year ago.
West: dropped 9.8 percent in February to 84.6 and is 17.1 percent below February 2007.
Home Sales Forecast
Existing-home sales are likely to rise from an annual pace of 4.9 million in the first quarter to 5.9 million in the fourth quarter. With relatively weak activity in the first part of the year, existing-home sales for all of 2008 is forecast at 5.39 million, increasing 6.6 percent to 5.74 million in 2009.
“Exceptionally weak home sales related to jumbo loans problems will depress home prices in the first half of the year, but steady liquidity improvements in the conforming jumbo-loan market will help prices recover in the second half of the year,” Yun says.
The aggregate existing-home price will probably ease by 1.4 percent to a median of $215,800 for all of 2008 before rising 3.7 percent to $223,800 next year.
Yun says that there will continue to be wide variations in regional housing market conditions.
“Some parts of the country that can expect improvement include the Northeastern region and the oil-patch states of Texas, Oklahoma, Louisiana, and Arkansas,” he says. With lower interest rates and flat home prices in many areas, NAR’s housing affordability index is forecast to rise 14 percentage points to 127 in 2008.
New-home sales are projected to fall 25.7 percent to 576,000 in 2008 before rising 4.6 percent to 602,000 next year. Housing starts, including multifamily units, are estimated to drop 26.3 percent to 999,000 this year, and slip another 0.5 percent to 994,000 in 2009. The median new-home price will probably fall 3.6 percent to $238,400 in 2008, and then rise 4 percent next year to $247,800.
Other predictions on factors that can impact the housing market:
Mortgage rates: 30-year fixed-rate mortgages, which has fluctuated recently, should average 5.8 percent in the second and third quarters, but trend up to an average of 6.3 percent in 2009.
Growth in the U.S. gross domestic product: expected to be 1.4 percent in 2008 and 2.4 percent next year.
Unemployment rate: forecast to average 5.4 percent this year and 5.6 percent in 2009.
Inflation: (as measured by the Consumer Price Index) is projected at 3.4 percent in 2008 and 2.2 percent next year. Inflation-adjusted disposable personal income is likely to grow 1.2 percent this year and 3.0 percent in 2009.
“The economy will not grow in first half of the year,” Yun says. “However, the combination of recent fiscal stimulus enactment and the lagged impact of monetary policy will help jump start the economy in the second half.”
—REALTOR® magazine online
Copyright THE NATIONAL ASSOCIATION OF REALTORS® Headquarters: 430 N. Michigan Ave., Chicago, IL 60611 DC Office: 500 New Jersey Ave. NW, Washington, DC 20001 1 800 874 6500
Tuesday, March 25, 2008
Long and Foster Site now has Foreclosures
The Long and Foster website now gives you the opportunity to view foreclosures that are listed in the Richmond MLS. The site is www.longandfoster.com. When buying foreclosure property it's best to have a realtor and real estate attorney to help you through the process. You will need to inspect the property, insure there are no existing liens, check comparable properties to prepare your offer, arrange for financing and follow up on any inconsistencies or decrepancies that you encounter. Buying forclosed property can be rewarding, but proceed with caution. If I can be of any assistance please do not hesitate to call.
Wythe
Wythe
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