Sustained economic growth is the solution to housing stagnation

If you haven’t yet heard the comparison of today’s housing market to depression era housing, the latest Zillow Home Value Index (ZHVI) has fallen 26% since its June 2006 peak. The June 10th ZHVI Report indicated an additional decline of national home values to an average of $177,412. Stan Humphries, Zillow Chief Economist, was keen to point out that the 53 month housing value decline of 26% has officially exceeded the housing value decline of the Great Depression (which is reported to be 25.9% from end-of-year 1928 to end-of-year 1933).

Although the ZHVI indicated that the Washington, DC regional data fared slightly better than the national data, foreclosures may not be a factor. The Zillow Home Value Index indicates that the national home value index declined 5.1% from the previous year, whereas the ZHVI for the Washington DC region declined 4.7%; while the national foreclosure rate for the same time was 0.094% compared to the Washington region’s foreclosure rate of 0.067%.

Zillow’s dramatic news was reported 11 days after the National Association of Realtors® release of the latest Pending Home Sale Index (PHSI) data (Realtor.org). Although the latest PHSI data indicated a 3.5% increase in pending home sales in November 2010 compared to October 2010, the data revealed a decrease in pending home sales compared to November 2009. Because the PHSI is a precursor measure of home sales, it is reasonable to conclude that the number of home sales also decreased from the same time last year.

Although past home value and home sale declines have been attributed to foreclosure and distressed property activity, the recent (albeit brief) decline in foreclosure activity may indicate that other factors are affecting the housing market. Foreclosure activity has recently decreased to resolve issues that arose from legal challenges to alleged lender procedural irregularities.

However, a recent article by Quinn Eddins entitled, “The Problem with Housing” (Mortgage Banking; Dec 2010; 71, 3) alleges that continued sale and value declines are due to excess foreclosure inventory and shadow inventory (homes in foreclosure but not yet foreclosed upon or released for sale). Eddins points out that slight increases in home buyer activity and slight home price increases in early 2010 were mostly due to short term interventions; he states “…The fundamental problem facing housing markets is one of supply. Even if the demand for homes… were to return to peak levels it would take years to absorb the current supply of homes for sale, in foreclosure and in the inventories of financial institutions. The longer it takes to reduce this supply, the longer home prices will languish.”

Eddins solution to the problem is to decrease the number of distressed home owners through equity sharing, which allows a lender to significantly reduce a home owner’s monthly mortgage payment by allowing a third party to invest in the loan in return for sharing in the home’s equity. The idea of equity sharing is not new; it has been incorporated in various home ownership programs and has even been introduced in the last two Congresses as a means to sustain FHA and support home ownership (most recently as H.R.6256: Strengthening FHA Through Shared Equity Homeownership Act of 2010 by Rep. Gary Mill [R-CA]).

Unfortunately, the reality is that regardless of interventions to sustain the housing market, stagnation will continue until there is sustained significant economic growth.

By Dan Krell
Copyright© 2011

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.

What’s making the rounds in housing news

Making news the week of April 19th 2010

What do you mean it’s a seller’s market?!
http://www.realestateeconomywatch.com/2010/04/homebuyer-tax-credit-backfires-on-buyers/
As the deadline for the home buyer tax credit is fast approaching, many home sellers have taken a firm standing on price as well as asking buyers to forgo the usual inspections. Knowing that buyers are rushing to meet the deadline, home sellers have grasped the upper hand- at least for another week.

Signs of life in the jumbo mortgage securitization market
http://www.housingwire.com/2010/04/21/private-label-securitization-market-starts-to-thaw-with-jumbo-prime-rmbs/
Big news in the mortgage backed securities arena with the announcement of a jumbo MBS deal of $222.38 million (each loan averaging a balance of $932,700)…

Washington, DC comes in as #2
http://www.marketwatch.com/story/the-top-10-places-to-relocate-in-2010-2010-04-20
Want to know the best places to relocate? Washington, DC is #2 on the list of the top 10 place to relocate in 2010.

What would the greatest economists say about the financial crisis?
What would Keynes and Hayek say about the current crisis? Take a look at this video of two of the great economists attend a conference on the economic crisis. They decide to go out the night before the conference begins to sing about “why there’s a “boom and bust” cycle in modern economies and good reason to fear it.” This rap called “Fear the Boom and Bust” (a Hayek vs. Keynes Rap Anthem) was created by the collaboration between economist Russ Roberts and director John Papola.

Will there be changes to Regulation C?
http://www.federalreserve.gov/newsevents/press/bcreg/20100423a.htm
The Federal Reserve Board announced on Friday (4/23) that it will look into revising the Home Mortgage Disclosure Act. “The act requires mortgage lenders to provide detailed annual reports of their mortgage lending activity to regulators and the public. Consumers, community and consumer organizations, mortgage lenders, and other interested parties will be invited to participate in the hearings.”

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.

Copyright © 2010 Dan Krell

Check your ego and get out of your way

by Dan Krell © 2010

If you’re going to sell your home this spring, “check your ego.” Having a high self esteem is a good thing; however, having an over-inflated worth of your home can cost you money and aggravation.

Listing your home at a realistic price can decrease the home’s “days on market,” and reduce the probability that you would have to significantly lower the list price down the road. Last year, many home owners who were unwavering in their belief that there home was worth more than what the market would bear found that selling their homes took longer and ultimately accepted a price much less than they had hoped. Other home owners who were determined to sell at the higher price eventually exasperatedly withdrew the listing.

Last week’s release of the Standard and Poor’s/ Case-Shiller Home Price Index for January 2010 (standardandpoors.com) revealed that home prices continue to fall; although the silver lining is that the rate of price depreciation is not as steep as it was a year ago. The composite index of 20 metro areas is down 0.4% from December 2009 to January 2010 and down 0.7% from a year ago; nationwide average home prices are at 2003 levels. The Washington DC metro area fared much better than other metro areas; Washington metro area home prices only fell 0.2% from December 2009 to January 2010, however home prices increased 3.5% from the same time last year!

Statistics reported by the Greater Capital Association of Realtors (GCAAR.com) support the findings of the S&P/ Case-Shiller Home Price Index. Average home prices for single family homes in Montgomery County fell between December 2009 ($480,931) and January 2010 ($451,255). Data compiled and reported by the Metropolitan Regional Information Systems, Inc. (MRIS.com) also substantiate these data, such that the median area home prices decreased comparing data from January 2009 to January 2010. However, home prices slightly increased in February 2010.

Many home owners remain confused about the unstable real estate market due to ambivalence caused by the reality of a downward market conflicted with their own value assessment of their home. Needless to say, home owners may find it more difficult to come to terms with the reality that today’s depreciated home prices have fallen to 2003/2004 levels (as indicated by S&P/Case-Shiller Home Price Index), especially if they attempted to sell their home last year. Additionally, home owners are disserved by over-aggressive real estate agents who will say anything to get the listing; including telling the home owner that the home can sell at a much higher price, when the comps clearly suggest otherwise.

Obviously, selling your home is ultimately your decision. Since the decision to sell may hinge on many factors including the sale price, consulting with several different Realtors about neighborhood comparables can give you a good command over the neighborhood data as well as a realistic range of sale prices. If another factor of your sale is the purchase of another home, remember that real estate is relative such that the home you may purchase may be just as good of a buy as your home will be to another home buyer.

Clearly you should not sell your home if you are content living there. But if you are in the position to sell your home and want a successful sale- get out of your way.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of April 5, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell

Bubble market or solid economic fundamentals: Lessons we can learn from the Canadians

by Dan Krell © 2010

Bubble housing markets occur when real estate markets, either local or regional, are overvalued. The cause of bubble markets is often debated, as has been hotly argued in recent times, to be the cause of speculation and/or credit policies.

There are several real estate markets that have rebounded much faster than most such that they are in danger of becoming bubble markets. Some economists rank the real estate markets in China, Australia, and Canada as having the highest risk of becoming the next busted bubble market. Because of Canada’s close proximity and similar real estate market, we’re compelled to take a closer look.

Canada’s equivalent to the Federal Reserve Bank is called the Bank of Canada (www.bank-banque-canada.ca) and much like the Fed, the Bank of Canada is a central bank that offers advice on monetary policy. The Deputy Director of the Bank of Canada, Timothy Lane, PhD, offered his analysis on the current situation that is occurring in Canada’s real estate market in a speech given on his behalf on January 11th, 2010.

Although Dr. Lane’s speech was delivered by an advisor, in what may seem like a déjà-vu to Americans, there was somewhat of a denial of a bubble market. The Deputy Director maintained that fundamentals of the Canadian market are intact, such that recent increases in home prices are not unusual for supply and demand economics. As Canadian housing starts are below the target to meet population growth requirements, the Deputy Director made clear that inventories were diminishing as well.

Although Dr. Lane’s opinion is that housing bubbles are fueled by credit expansion, and that recent growth in the Canadian housing market is due to low interest rates and pent up demand. Mr. Lane pointed out that the Canadian housing market was not as turbulent as the market in the United States because Canadian home price appreciation was not as steep. The resulting turbulence manifested in sharp declines in American housing, while Canadian housing fared much better.

Similarities between the current Canadian housing market and the U.S. market prior to the global recession includes: historically low mortgage interest rates, reduced inventory, and increased real estate speculation. The role of increased real estate speculation is of interest because it is not only the domestic investors fueling the Canadian market, but foreign investor looking for large gains.

However, fundamental differences also exist between the markets. Dr. Lane pointed out that the Canadian mortgage system is inherently different than its counterpart in the U.S. Canadian mortgage guidelines are written primarily by mortgage insurers because mortgage insurance is compulsory for mortgages with less than a 20% down payment. Additionally, about 70% of Canadian mortgages are held by the lending institution (rather than becoming securitized) forcing the lender to make more responsible lending decisions.

Deputy Director Lane’s summation was that the Canadian housing market requires “vigilance, but not alarm.” However, they may not have much choice but to ride out market disturbances because any intervention may stall the recovering Canadian economy in a global recessionary environment.

Time will tell whether the Canadian real estate market is a bubble waiting to burst, or just a manifestation of solid economic principles. Either way, we will learn whether prudent mortgage policies can play a part in mitigating future real estate bubbles here in the U.S.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of March 8, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell

Will an expected housing shortage cause another bubble market?

by Dan Krell © 2010

housing shortageLast week’s statements by Brian Wesbury may have startled the real estate industry. The chief economist for First Trust Advisers stated in an interview with Steve Forbes that the United States is headed for a housing shortage in 2011 (“Housing Shortage Coming In 2011” by Alexandra Zendrian, Forbes.com; 2/15/2010).

Mr. Wesbury’s dire prediction is predicated on housing statistics that indicate that the United States needs to add an annual average of 1.5 million homes to stay on par with population growth. The fact that housing starts and completions in the last two years have only been a fraction of the 1.5 million home target may be an indicator of a housing shortage. Even though the foreclosure crisis has added many homes to the market, the number of homes being built is significantly deficient in maintaining a reasonable pace with the population growth, according to Wesbury.

The last time people spoke of a housing shortage was in 2004, when monthly peek single family inventory for Montgomery County never exceeded 2,000 units and absorption rates of single family homes approached 80% during winter months (as reported in the 2005 Year in Review by the Greater Capital Association of Realtors). The following year, winter inventory soared and housing absorption rates did not exceed 40%. The result was a bubbling real estate market that exhibited an appreciation of 18% of single family home prices in Montgomery County from November 2004 to November 2005, even though inventory increased from 1,692 to 3,100 units for the same time period.

Cole Kendall, of Understanding Markets LLC (understandingthemarket.com), explains that the annual addition of 1.5 million homes is a benchmark that is widely used by economists to predict housing trends. The benchmark is based on a decade of demographic and economic data.

The problem is that since 2008, the Country’s economy and demography may have changed significantly, such that predictions based on historical data may be flawed. In fact, in 2008 Mr. Kendall was emphatic that over building occurred during the housing bubble. He stated that housing starts must remain low just to catch up with diminished demand, “It is impossible to know how many houses there should be in the U.S. at any time, but we can say that the gap between demographic demand and the supply of homes has been getting smaller.”

The national and local economy is vastly different today than it was earlier this dhousing shortageecade; so even if the demand for housing once again equaled the levels that existed in 2004, any resulting market gains may be expressed differently. Currently, unemployment and stricter lending policies are only a couple of changed factors that have significantly impacted the housing market in recent years. Compared to a time when many home buyers did not even need to prove they had a job (much less an income) to qualify for a mortgage, today’s lending environment is such that a home buyer not only needs to provide evidence of employment and income, they need a higher down payment as well as evidence of financial reserves to make their case for a mortgage.

There is no doubt that the housing supply is being reduced because of decreased demand. The result may not be a housing shortage, but more likely it is the manifestation of economic forces seeking equilibrium.

This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of February 22, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell