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May 12, 2011July 26, 2019

Can timing the real estate market help you get a better deal?

If you’re trying to time the market before buying or selling your home, you may decide to wait a little longer after hearing the recent housing data; however, you could also change your mind when you consider some recent research.

First, a recent housing report released May 8th by Zillow.com indicates further erosion of home values. According to Zillow.com’s chief economist Stan Humphries, home values continue to slide nationwide – except for the metro areas of Honolulu, HI (there was a slight increase in home values in March 2011 compared to the same time last year) and Pittsburgh, PA (where home values have been determined to be flat for the time period) (Zillow.com).

Even the Washington, DC metropolitan appears to have taken a hit. According to Zillow.com, area home values declined 0.5% in March 2011 compared to February 2011; and declined 7% in March 2011 compared to March 2010.

Humphries further stated that housing demand continues to be “fundamentally weak;” while housing supply is and will continue to be affected by distressed properties due to higher than normal delinquency rates (which are expected to continue into the near future).

Given the less than rosy picture of the housing market, those doubting the long term value of home ownership may continue to wait out the market. But a recent research article by Anderson & Harris (2010. Timing the market: You don’t have to be perfect. Real Estate Issues 35, (3) (10): 42-42-50) may indicate that you don’t have to be perfect when timing your purchase and sale of your home.

Anderson & Harris studied various strategies of purchasing and selling commercial real estate to determine if there is a significant difference in return. Their strategy simulation provided these results: the typical “buy and hold strategy” over a thirty year period results in an annualized return of 8.18%; however, buying when a recession has ended with a predetermined sale period yields a wide range of return that ranged from 13.38% to 1.42% annualized total return. Alternatively, timing your purchase and sale with the overall peaks and valleys of the market could be more effective than trying to be exact; although they concede that peaks and valleys are realized in hindsight.

Although their data analyzed commercial real estate investor behavior, the results may have implications for the housing market. As the data suggests, attempting to exactly time your purchase and sale can yield a wide range of unpredictable results; while a long term strategy appears to be more stable. Additionally, they caution that market timing can also be affected by macroeconomic factors as well as your personal financial picture; which can reverse positive returns, even if your timing was perfect.

Anderson & Harris’ data may indicate that attempting to time your purchase may not yield the results you might expect; long term home ownership can be as good, if not better, than speculating on the exact bottom or top of the housing market. Likewise, home sellers waiting for the housing market to rebound before making a move may be missing an opportunity as well.

Obviously, you should consult financial professionals before making any financial decision; as well as consulting a Realtor® to assist you in analyzing local and neighborhood sale data. However, if you’re trying to time the housing market, consider a long term approach before making your decision.

by Dan Krell
© 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.

April 20, 2011July 25, 2019

Has the market hit bottom yet?

I have to admit that after offering definitively optimistic analyses about the housing market after the meltdown, I now answer housing market questions tentatively. The tentative answer is not for a lack of optimism (the local market has shown strength in the last year where other regions continue to languish at best); however current analyses are tentative because rather than making a decision to buy or sell a home strictly on the strength of the market, consumers also need to be aware of personal goals and preferences.

Sure, if you look at some of the housing market indicators, such as the S&P/Case Shiller Home Price Index and the National Association of Realtors® (NAR) existing home sale report, national data are conflicting and may not yet indicate a solid recovery (although the Washington, D.C. regional data has shown strength).

The last S&P/Case-Shiller Home Price Index (standardandpoors.com) data that was released March 29th indicated that national home prices have not fared well for January 2011. However, it must be pointed out that as home prices slid across most of the country, the Washington, D.C. region’s home prices revealed an annual increase of 3.6%.

The NAR’s February existing home sale report released March 21st indicated a further decline for the number of homes that sold compared to the same time the previous year. However, the Washington, D.C. region was reported to have increased in home sales but decreased in home prices compared to the same time the previous year. We are anxiously waiting for this month’s report, which is scheduled to be released this week (realtor.org).

Additionally, the April NAHB/Wells Fargo Home Market Index (HMI) fell to 16; as reported in the April 18th press release by the National Association of Home Builders (nahb.org). The HMI is a scale from 0 to 100 that rates builder sentiment across the country (the lowest index reported was 9 in 2009; the highest index was 77 reported in the late 1990’s). NAHB Chairman Bob Nielsen was reported as saying in the press release, “While builders in some areas are starting to see a pickup in traffic of prospective home buyers, many consumers remain skittish about the health of the housing market and overall economy, particularly in view of recent legislative and regulatory proposals that could make it much harder to get a mortgage…”

Economists and other housing experts remain conflicted about sources for the continued issues facing the national housing market. Some point to continued problems with distressed home sales, which include foreclosures and short sales; while others continue to point to unemployment. The reality is that these economic factors are just a part of a larger puzzle. Other economic forces that can affect consumer sentiment and the housing market can range from mortgage regulation (as recognized by Bob Neilson of the NAHB) all the way to energy shocks and policy (one of Shell’s energy scenarios named “Scramble” predicts major global economic difficulties as early as 2020 unless serious energy policies are undertaken).

Has the housing market bottomed out? Macro-economic factors may indicate that housing could continue to manifest symptoms of a labile global economy; while micro-economic factors might indicate a completely different picture. For someone contemplating buying or selling a home, the answer is probably more of a personal reflection combined with local and hyper-local housing data.

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.

February 16, 2011July 21, 2019

What’s Next for Housing Finance Market Reform

No one said change is easy, however it’s necessary. That thought is reflected in the Treasury Department’s (Treasury.gov) white paper entitled, “Reforming America’s Housing Finance Market.” The white paper, released last Friday, is an assessment of the housing market and offers proposals for reforming the mortgage markets. Being the most significant reform of the housing finance markets in 80 years, the main points for this reform are to create a robust mortgage market by “winding down Fannie Mae and Freddie Mac” and “increase the role of private capital.”

Although it was admitted that housing finance reform “will make credit less easily available than before the crisis,” experts agree that reform is necessary. However, that’s where the consensus ends; for you see, there is disagreement about what kind of reforms are to be realized. Industry groups such as the National Association of Realtors® (Realtor.org) and the Mortgage Bankers Association (mortgagebankers.org) hail mortgage market reform, but offer slightly different solutions.

Two extreme positions of reform are complete privatization and nationalization; the white paper contrasts each with the notion that actual reform would be somewhere between the two. A complete privatization of the mortgage market would limit access to financing as well as increasing financing costs; while a nationalization of the mortgage market would increase taxpayer risk and market distortion.

As possible solutions, the white paper weighs several proposals against four criteria: access to mortgage credit; incentive to invest in the housing sector; taxpayer protection; and economic stability. The best path is described as a “balance of [these] priorities.”

The options discussed are several versions of option 1, which is: “privatizing housing finance but with government insurance limited to FHA, USDA and Department of Veterans’ Affairs for a narrowly targeted group of borrowers.” The stated benefits of this option include minimizing market distortions and limiting “moral hazards” within the lending industry. Although this option would reduce risk in private markets, there is concern that it may cause capital to retreat from housing into other economic sectors (which could have an undesirable effect on home prices). Additional concerns include increased mortgage costs, restricted access to the 30-year pre-payable mortgage, and the inability for the government to quickly respond to a credit crisis.

Option 2 is the same as option 1, but with a guarantee mechanism that would engage in a crisis. This would address the inability of a swift government intervention in option one; however there is a risk of increased moral hazard.

The 3rd and final option proposed in the white paper is same as option 1, but with catastrophic reinsurance behind significant private capital. (Reinsurance is the purchase and re-issue of mortgage insurance from mortgage insurance companies, which transfers the risk of the loans). This option has the government role as reinsuring mortgage securities, which is thought to reduce financing costs by increasing the flow of capital to mortgage markets. Although the Stated benefits of this option include affordable 30-year pre-payable mortgages for the average home buyer, as well as allowing small lenders to participate in the mortgage market; there are some concerns, which include the possibility of creating another housing bubble by artificially inflating housing prices due to the increased investment flowing into the housing sector.

Although it’s inevitable, there is no clear path to housing finance market reform; which means that the road ahead may be bumpy.

By Dan Krell.
Copyright © 2011

Comments are welcome. 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.

December 16, 2010July 8, 2019

Optimistic about housing in 2011

Would you have ever imagined that home prices could depreciate one third since the market peak? 33.5% is the overall decrease of the Standard and Poor’s/Case-Shiller Home Price Index 10 city composite from June/July 2006 through April 2009. If the index is expanded to the 20 city composite the decrease is only 32.6%; the peak to date decrease (through September 2010) is just under 29% (standardandpoors.com).

Although the latest index indicates another decrease in home prices, the Washington, DC metropolitan area was one of two metro areas that had a slight increase (the other metro area was Las Vegas, NV). DC metro area home prices increased 0.3% in the third quarter of 2010, preceded by a 0.2% increase during the second quarter.

Similarly, the Federal Housing Finance Agency’s seasonally adjusted House Price Index (HPI) also indicated an overall drop in home prices (a 3.2% decrease from Q3 2009 to Q3 2010). However, Washington, DC is one of ten cities that experienced price increases over the past four quarters (FHFA.gov).

If you haven’t yet become indifferent, some industry experts are expressing optimism for 2011 – for a change of pace.

Fannie Mae Vice President and Chief Economist, Doug Duncan, expressed cautioned optimism in Fannie Mae’s November Economic Outlook podcast (fanniemae.com). Dr. Duncan expects slight improvements in home sales and other economic factors in 2011. These slight improvements, along with expected low mortgage rates through 2011 will assist a slight recovery.

Freddie Mac Chief Economist Frank Nothaft shared some optimism in his December 6th commentary in the Freddie Mac’s “Executive Perspectives Blog, Insights on Housing Finance” (freddiemac.com). Dr. Nothaft expects that foreclosure inventories will continue to affect local markets and home prices. However, home affordability (which is at the lowest point in years) combined with low mortgage rates should give the housing market a boost in the second half of the year.

The National Association of Realtor’s Chief Economist, Lawrence Yun, expects that the biggest push for the housing market will be through the extension of the Bush tax cuts. In a November 16th NAR press release, Dr. Yun explains that the recovery of the housing market depends on jobs. He expects about 1.5 million jobs to be created if the Bush tax cuts are extended for those earning up to $250,000, and an additional 400,000 jobs to be created “if the Bush tax cuts are extended for everyone” (Realtor.org).

Of course, many factors can influence our presently impressionable economy. For example, recent Congressional testimony by two Governors of the Federal Reserve Board (Elizabeth Duke on November 18th and Daniel Tarullo on December 1st) discussed the impact of foreclosures going into 2011 (federalreserve.gov). Governor Tarullo concluded his testimony to the Committee on Banking, Housing, and Urban Affairs by stating, “…I regret to say that the hangover from the housing bubble of this past decade is still very much with us…”

The bottom line is that although most expect foreclosure inventories to continue to drag home prices, there is optimism – for the second half of 2011. As job numbers begin to improve, employment will be the big news. A slightly better employment picture combined with low mortgage interest rates and the most affordable housing market in decades will provide the spark that the housing market and economy have been seeking for over two years.

By Dan Krell
Copyright © 2010

Comments are welcome. 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.

November 10, 2010October 5, 2019

The next real estate boom is already here

by Dan Krell © 2010

A couple of years ago, I wrote an article about a future real estate boom that would occur as suburbanites would seek out urban homes. As I discussed in my May 2008 article, peak gasoline costs and increased traffic compelled many to seek housing closer to their employment; as well as being close to metro and mass transit. A recent Brooking Institution report appears to agree with my premise, and expands on the idea of urbanite living with a focus on sustainable and walkable neighborhoods.

The November 2010 article titled “The Next Real Estate Boom” (Leinberger & Doherty; The Brookings Institution) discusses how baby boomers and their children have been increasingly seeking out housing that is close in vicinity to commercial spaces, mass transit, and easily traversable by foot (walkable). The article discusses how the development of high density neighborhoods will once again spur on real estate growth, and ultimately forge a new economy in the United States.

Although, Leinberger & Doherty proclaim that the great recession was the climax for the change from suburban to urban lifestyles; the trend has been increasing for the last two decades, but actually had roots much earlier with planned communities such as Columbia and Greenbelt (MD). And although his first planned walkable community of Cross Keys (in Baltimore) came to fruition in the 1960’s, there is no mention of James Rouse in the Leinberger & Doherty report. It must also be pointed out that recent planned local communities such as King Farm and the Kentlands were built in the spirit of walkable and sustainable communities.

The trend, as Leinberger & Doherty discuss, is toward shifting from sprawl to revitalization. However, urban renewal has gone through many cycles and forms of re-development in many cities; from the revitalization of New York City in the 1950’s, by Robert Moses who seemed to transform the city single handedly, to the revitalization of Baltimore’s Inner Harbor in the 1970’s;

Notably, the May 20th signing of the Sustainable Communities Tax Credit by Governor O’Malley highlights the focus on revitalization. The tax credit expands the current tax incentive beyond historic properties so development is encouraged to renew and revitalize existing local communities.

A prime example of what Leinberger & Doherty describe is the redevelopment of the North Bethesda corridor along Rockville Pike (MD 355). The White Flint Partnership has been advocating and promoting the revitalization of this community to become one of Montgomery County’s newest walkable and sustainable neighborhoods. The project is transforming the area into high density living with adjacent commercial development that is described by the developers as sustainable, accessible, safe, connected, and containing an abundance of green spaces.

Additionally, market demands have and will transform existing neighborhoods to become the walkable and sustainable communities that are becoming vogue. And it may be that suburban renewal will become the trend in the near future, as isolated sprawling communities will eventually transform into smaller versions of Leinberger & Doherty’s vision.

Maybe the point is not to transform all communities into the high density, walkable communities that exist in mid-town Manhattan, but aim higher in community planning. Their description of a high density urban utopia appears healthy for residents, due to increased physical activity (i.e., walking); and healthy for the environment, due to green and sustainable buildings as well as reducing car emissions.

Comments are welcome. 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 November 8, 2010. Using this article without permission is a violation of copyright laws. Copyright © 2010 Dan Krell.