Is recent housing bubble news cause for alarm

by Dan Krell

DanKrell.com
© 2013

real estate bubbleIf I said that we could experience another housing bubble, you might be concerned for my mental health.  But a couple of years ago I wrote about an impending housing shortage, which could spark another bubble similar to what occurred during 2004-2005.  The market-conditions similarities between 2004 and today are foreboding, if not intriguing. (Dan Krell © 2013)

There hasn’t been talk of a housing shortage since 2004; but looking at Montgomery County MD as an example, you might begin to see similarities between the housing bubble of 2005-2006 and today’s real estate market.

Monthly peek single family inventory in Montgomery County did not exceed 2,000 total active units in 2004; while the absorption rate was reported by the Greater Capital Area Association of Realtors® (GCAAR.com) to be about 80% during the winter of 2004.  During the following year, the winter active inventory greatly increased and the absorption rates dropped to about 40%.  The result was a housing market that reached critical mass, and a one year appreciation rate of about 18% for Montgomery County single family homes; which played a key role in the rampant real estate speculation in 2005-2006.

Active housing inventory has been declining since 2010; the greatest decrease occurring during 2012.  According to the monthly home sale statistics posted on the GCAAR website (GCAAR.com), there were 1813 active single family inventory units for sale in Montgomery County during January 2012.  And although active single family units peaked for the year during the spring of 2012, active inventory dwindled to a low of 1198 active units for sale during January 2013 – a year over year decrease of about 40%. Additionally, the absorption rate of listed homes for sale is rapidly approaching 60%

Add the home price facet – on March 5th, CoreLogic (corelogic.com) reported that national home prices increased 9.7% during January 2013, as compared to January 2012.  This was reported to be the greatest year of year home price increase since 2006.

An additional and telling similarity between the pre-bubble years and present is the number of real estate investors jumping in to cash in on distressed properties.  Of course at the height of the real estate bubble of 2004-2006, real estate investing was transformed from the traditional “rehab and flip” to no rehab and flipping properties as quickly as possible.   A great number of homes sold today are to investors, either to rehab or to rent.

In 2004, like today, we were about three years post recession; albeit the recession of 2001 was not as protracted as the “Great Recession.”  At that time, like today, the Federal Reserve funds rate was historically low.

Although an “easy money” monetary policy is another similarity between the periods, a major difference is the availability of mortgage money.  Getting a mortgage is much more difficult today than it was in 2004-2005.  Buying a home without a down payment as well as qualifying for a mortgage without documenting income could have been a factor of the wide spread real estate speculation of 2005-2006.  Today, as a result of the bursting of the 2005-2006 housing bubble, underwriting qualifications are more demanding as are down payment requirements.

The housing bubble phenomenon is not a new or a recent experience; housing bubbles have occurred in the past and most likely will occur in the future.  When they occur, housing bubbles seem to coincide with a recessionary cycle.  And just like recessions, housing bubbles vary in duration and severity.  Sure, another housing bubble may be looming; but the next bubble may be confined to specific regions of the country, and possibly some local neighborhoods.

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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 © 2013 Dan Krell.

Sequestration will affect real estate and housing markets

by Dan Krell
DanKrell.com

Housing and Sequestraion(Dan Krell © 2013) Remember the “Fiscal Cliff?” Well, after a two month hiatus, sequestration concerns are again entering (if not intrusively) the minds of those who may be affected. And, if you remain indifferent on the matter, you might consider the local economic effect from looming government budget cuts that may begin on March 1st.

On February 14th, HUD Secretary Shaun Donovan provided written testimony to the “Hearing before the Senate Committee on Appropriations on The Impacts of Sequestration” (HUD.gov). Secretary Donovan outlined what he described as the “harmful effects of Sequestration” to not only at-risk populations, but families, communities, and the economy at large, as he concluded, “…Sequestration is just such a self-inflicted wound that would have devastating effects on our economy and on people across the nation.”

As a result, HUD counseling would be limited. According to Secretary Donovan, about 75,000 families would not be able to receive the critical counseling services that include pre-purchase counseling, and foreclosure prevention counseling. According to the Secretary: “…This counseling is crucial for middle class and other families who have been harmed by the housing crisis from which we are still recovering, and are trying to prevent foreclosure, refinance their mortgages, avoid housing scams, and find quality, affordable housing. Studies show that housing counseling plays a crucial role in those 3 efforts. Distressed households who receive counseling are more likely to avoid foreclosure, while families who receive counseling before they purchase a home are less likely to become delinquent on their mortgages.”

FHA has been the workhorse to stabilize the housing market as well as providing the means for affordable home purchases. Those directly affected by sequestration would be home buyers and home owners who are applying for FHA mortgages; as well as those seeking assistance through HAMP and HAFA. In written testimony, Secretary Donovan stated that “…furloughs or other personnel actions may well be required to comply with cuts mandated by sequestration.” As a result, “…The public will suffer as the agency is simply less able to provide information and services in a wide range of areas, such as FHA mortgage insurance and sale of FHA-owned properties.”

Another concern is the possibility of a sharp increase in interest rates. Up until now, home buyers (and those refinancing) have had the benefit of historically low mortgage interest rates. Low mortgage interest rates are one of the reasons why home affordability is also at historic levels. A sharp rise in interest rates combined with FHA mortgage delays could shock the housing and real estate market. The result could be housing activity similar to what we experienced immediately after the financial crisis. Granted, the shock would probably not be as prolonged as what occurred in 2008-2009, but nonetheless significant.

In a region that has been relatively unaffected by unemployment and economic issues due to a strong government workforce, sequestration could essentially put a damper on the local housing recovery. Home buyer activity has already been affected, as those who are concerned about sequestration have either put their home purchase plans on hold, or have changed their housing plans altogether. And of course, over time, the changes to consumer behavior would trickle down to various sectors of the economy.

But don’t worry, although sequestration is set to begin March 1st, budget cuts won’t occur all at once. Unless Congress acts on the matter, you might not immediately feel its effects.

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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 © 2012 Dan Krell.

Bold predictions for real estate and housing

by Dan Krell
DanKrell.com
© 2012

fortuneWe survived the “Mayan Apocalypse” of 2012, so what’s in store for the housing market and the real estate industry in 2013?

The “Long Slog:” Although analysts disagree about the date of the housing market bottom, most agree that the national housing market bottomed out sometime time in 2009-2010.  Many looked forward toward 2012 to be a phenomenal year for housing and a return to normalcy.  Certainly 2012 housing figures were better than those of 2011, but in many areas of the country (including locally), the market fell short of outperforming 2010.

Unlike the occasional Pollyanna story about the local housing market, analysts expect “the long slog” or “the long grind” that will take years (emphasis on the plural) to get back to normalcy.  No matter how you articulate it, and barring future economic setbacks, experts describe the climb out from the bottom as a long, slow trudge that will have high and low points along the journey.

Home sale prices: When real estate fell into a seemingly endless downward spiral in 2008, some sectors continued to do well.  Homes priced at and above one million dollars continued to outperform other sectors of the housing market through 2011.  The “upper bracket” sector began to show weaknesses in the early part of 2012; as luxury home sales slowed, mid-range home sales picked up momentum.  However, activity flipped toward the end of 2012; as upper bracket activity increased significantly, while activity in other price sectors decreased.  Until fiscal cliff, debt ceiling, and other government budget debates are resolved; local upper bracket home sales will be inconsistent during 2013.  This market bifurcation can skew local monthly average home sales figures, as well as possibly distorting monthly marketplace snapshots.

Hyper-local real estate: Regional and local variances in home sale prices will require home buyers and sellers to continue to focus on hyper-local data to determine selling prices.  One of the best ways for you to clarify neighborhood sales trends is to consult a local real estate agent for recent neighborhood comparables.

Mortgages & Appraisals:  Getting a mortgage may become be increasing difficult in 2013.  Recent reports of FHA losses and a possible bailout could force new guideline changes to help the venerable mortgage program.  Because of increased foreclosures and delinquencies, there is talk about FHA becoming increasingly credit score reliant, and increasing mortgage insurance premiums for riskier borrowers.

Appraisals will continue to be a lightening rod of criticism and a source frustration.  Since its inception, the Home Valuation Code of Conduct was confusing to everyone, and eventually became a scapegoat for many seemingly inconsistent valuations.  However, a low sales volume due to lack of resale inventory will also create issues with appraisals.

Pent-up demand: No need to worry about interest rates – yet.  Keeping mortgage interest rates low, the Federal Reserve has commented on continued purchases of mortgage backed securities as part of a larger stimulus program.  However, continued low mortgage interest rates may not be the reason for home buyer activity as much as pent up demand.  However, home buyers waiting on the sidelines to purchase a home have been met with low resale inventories during 2012.  For many home owners, the general lack of home equity remains the major reason to not sell a home; and it’s also a reason for low resale inventories to continue through 2013.  Continued low inventory environment will create a competitive environment for home buyers.

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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 © 2013 Dan Krell.