For more than two years, news stories have regularly heralded the arrival of the housing recovery. A small change in a few key markets, or a blip in a national index makes for hopeful news that the ruins of the 2008 debacle will be cleared from the site for good. The entire market of 70 million homes and 3033 counties is treated as an organic whole moving in lock step onward and upward.
Then, the next month arrives and some indicator or eminent economist inconveniently throws cold water on the whole recovery idea. In fact, real estate home values have a long way to go, and the healing process will be uneven – some areas will do relatively well, some will lag. It’s just not sensible to make general statements about a continental nation of 70 million single family homes. Didn’t we all learn about location, location, location?!
So, a few facts from recent reports may be in order, however sobering. Foreclosures create an overhang that affects home values. And, there are 5.6 million properties that are past due or in foreclosure. That’s a lot, but probably not enough to push values down in general.
A look at real estate across the nation
Places like Phoenix and Las Vegas have experienced healthy increases of late, but most sales are to investors of bank-owned homes. And since housing values there dropped 45% from the peak, those who stayed are likely underwater. Same with Florida, and other pockets where values soared, then burst at the end of 2008. Now is the time to buy a condo in Florida – just make sure you aren’t a lonely owner in a building of empty, dusty units leftover from the great developer skedaddle.
We ought to be heeding the advice of those who got it right, who warned that the bubble was likely to burst and that we were headed for trouble. Robert Shiller of Yale hoisted warning flags years before the 2008 bust. Now, he believes that it will take at least ten years to get back to the peak, if we ever actually get there. Let’s ignore the irrational exuberants of the past and heed those with wiser heads.
Interest rates, borrowing and the real estate market
Our public servants are doing their level best to help by keeping rates low to allow best opportunities to borrow for a purchase. The historically low rates on 30 and 15 year fixed rate loans will continue as the Fed and other agencies maintain a favorable credit environment. Other factors may put some drag on borrowing, including tight credit standards and appraisal value challenges.
At some point, rates will have to climb if only to respond to all those on fixed incomes and retired boomers whose earnings on CDs are so pitifully low. (Get Your 1.3% CD Here! Banks should save their ad dollars…) And even doubling today’s 30 year, 3.5% mortgage rate would place it below the average of the past generation.
It’s a buyer’s real estate market
So now is a fine time to purchase residential real estate. Rates will remain low at least through 2013 and perhaps longer. The next foreclosure wave, though smaller than 2009/10 will press banks to dump REOs (bank-owned homes) onto the market. New home building is up a bit but still 50% or more below typical. The FHFA REO to Rental program now in pilot could potentially convert a quarter million bank-owned homes to rentals, reducing the downward pressure on home values. And the vast majority of markets are rising even if only slightly.
Investors in real estate will benefit from the high demand for single-family rentals and increasing rents overall. Occupancy of rental properties is at 95% or higher even in older industrial cities like Cleveland. Online rental listing services report that the proportion of single family homes as rentals has nearly tripled since 2010. And the Gen Y and Millennial generations prefer renting to purchasing (good for rental rates, bad for first-time homebuyer sales) and will eventually want to move out of their parents’ homes and take that college diploma with them.
For those who wish to upgrade, there are many, many terrific values for home purchase. Contrary to past experience, bank-owned homes are just as likely to be in suburbs as inner cities. The extensive use of property management companies maintains the homes reasonably well. So it’s a good time to find a new home for a healthy discount and probably in good condition. But beware the long sale process.
A neighbor purchased a larger home for a 30% discount off 2008 value and was very pleased with himself. Nice home, nice property. But his former home has now been on the market nearly a year, pinching his finances. At least he was not underwater on his home so he won’t have to go the short sale route. Short sales still require months to process, as banks struggle to handle the volume.
Home loans, government bail outs and market recovery
Underwater loans and the issue of principal reductions have plagued especially Fannie Mae and Freddie Mac. There is a great deal of pressure to reduce principal balances to match the new lower home values. And the incidence of so-called strategic defaults worries many. Whatever happened to the principle of fulfilling your obligations? People should treat their homes has homes, not investments. They shouldn’t just walk away from a bargain (a contract) because the value dropped.
A principal reduction program on the scale that many propose would result in further bank and Freddie/Fannie losses in the $100s of billions. That could require another taxpayer bailout, for which there is zero political appetite. (In an election year, no less!) It is not only the underwater first mortgages; think of all the home equity loans tacked on to the home that are effectively unsecured. But there are other options on the table for our dilemma.
So the market recovery will be uneven, favoring some areas over others, but it is clearly underway. Smart investors can find good homes and take advantage of the strong rental market. Rates will stay low, and that’s good news for those with good credit. If we do make it back to peak home value levels, it’s going to take time, and an overall rising economic tide.
Written By: Patrick Moore