As has been broadly reported, the S&P/Case-Shiller U.S. national home price index rose nearly 3% in the second quarter compared with the first three months of this year. In the Washington region, prices of previously owned single-family homes rose 2.85% in June over the previous month, the second gain in a row after a 1.3% increase in May.
I wrote previously that we’re still facing further unemployment and foreclosure activity, as well as the end of the first-time buyer tax credit; all of these factors have the potential to take away the gains we are seeing. Specifically to the tax credit issue, Dean Baker, the co-director of the Center for Economic and Policy Research, stated in the LA Times that the tax credit “probably pulled a lot of purchases forward that might not have happened until 2010 or 2011, and that demand’s not going to be there.”
We’ll need to wait until after the tax credit program expires before we can really get a sense of how prices will trend in the “normal state.”
Bloomberg reported this morning that July sales of existing homes exceeded the forecast to reach the highest level it has been in almost two years.
The Bloomberg News survey of 64 economists had a July median forecast of a 5 million annual rate. The actual sales in July, according to the National Association of Realtors, exceeded this forecast with a 5.24 million annual rate.
Of course, the number of transactions tends to increase as prices fall: the median price of existing homes fell 15%, from $210,100 in July 2008 to $178,400 in July 2009. There is no new concrete evidence of price stabilization, as the supply of previously-owned unsold homes, measured in months, remained unchanged from June at 9.4 months. To this point, I wrote in previous posts about the possible existence of “shadow inventory,” homes whose owners are waiting for signs of economic improvement before putting on the market, which would continue to keep inventory high (and prices depressed).
Other factors to keep in mind: the elevated level of foreclosure activity will likely persist for some time, which will continue to depress prices. In addition, the $8000 first-time homebuyer federal tax credit will not be available for transactions occurring after December 1; first-time homebuyers accounted for 30% of July sales, so the end of the program could also have a negative impact on home sale activity.
Some good news today, but I’m taking it with a grain of salt, given these other long-term factors.
Amidst the signs being cited as proof of a recovering economy, other data still shows a rough road ahead. Yesterday, CalculatedRisk highlighted two such reports from Deutsche Bank (reported by Bloomberg) and the Wall Street Journal. The Bloomberg report indicates that:
The percentage of properties “underwater” is forecast to rise to 48 percent, or 25 million homes, as property prices drop through the first quarter of 2011, according to [Deutsche Bank] analysts Karen Weaver and Ying Shen.
According to Bloomberg, Deutsche Bank also believes that a large segment of the newly underwater homeowners will be prime borrowers (conforming and jumbo), not subprime or option ARM borrowers as has been the general case thus far.
WSJ reports an increase in the number of homeowners upside-down on their mortgages:
Some 24% of owner-occupied homes had mortgage debt that exceeded the values of those homes at the end of June, according to data from Equifax and Moody’s Economy.com. That number rises to 32% when looking at the share of homeowners with mortgages that don’t have equity left in their homes.
Overall, 16 million homeowners are “upside-down” on their mortgages, up from 10 million, or 15% of owner-occupied homes, one year ago.
Rough times ahead for a lot of homeowners, despite any improvement in the economy.
My apologies for a long hiatus from blogging. I needed to check out from the online social media world for a little while to handle an intense spike of new client activity in the physical world. I was also out since Saturday on vacation. But I’m back!
While I was out, The Daily Show had this hilarious take (embedded below) on Treasury Secretary Timothy Geithner’s problems selling his own home as proof that Secretary Geithner’s was unqualified for the job — hope you enjoy!
I hope everybody had a wonderful weekend! On Saturday, the Washington Post had this article with a compelling lead-in:
At what point does the real estate industry’s penchant for boosterism — and the sunny outlook that comes naturally to any good salesman — get in the way of buyers and sellers looking for guidance they can trust?
I will make this one comment: regardless if abuse is prevalent or not, it cannot be disputed that there is an unavoidable conflict of interest here — a direct result of the traditional commission fee model. When your adviser is compensated based on whether or not you take a certain course of action, there is a conflict. I discussed this in my very first post titled “The Problem with Real Estate Commissions”.
The SmithAdams approach avoids this conflict of interest. To that point, we will shortly be enabling you to self-subscribe to detailed market updates for your zip code or area. Click the thumbnail to the right to see a sample report (PDF format) for condos in select Arlington zip codes. If you don’t want to wait until the self-subscribe function is set up, just let me know (1) what area you are interested in and (2) condo/townhouse or single-family home, and I’ll email it to you.
Speaking of Arlington, if you somehow still haven’t seen the Arlington rap on Youtube, here it is:
Paul Krugman’s NYT column yesterday discusses how, for the past decade, we have been living under the illusion that this was a period of great wealth creation. Unfortunately for us,
Last week the Federal Reserve released the results of the latest Survey of Consumer Finances, a triennial report on the assets and liabilities of American households. The bottom line is that there has been basically no wealth creation at all since the turn of the millennium: the net worth of the average American household, adjusted for inflation, is lower now than it was in 2001.
At this point, I think that illusion is fairly well shattered. Much of the growth in our economy was fueled by consumption enabled by personal leverage on real estate assets. Now that the run-up on asset values is gone, that leverage-based consumption is impossible — and our economy must contract. Further, much of that debt (secured by assets with newly-lowered values) is still there, an albatross for many consumers for some time to come.
To continue moving through the vicious cycle: the perception of our wealth drives our consumption, as well as the valuations of assets such as real estate property. As I argued in a previous post, we will need to see this perception fundamentally turn around before we see a general all-around growth in real estate prices. I think there is a long road ahead of us before we see this happen.
With all the ground shifting so rapidly in the real estate industry and the American economy, I was reminded of a video that was originally conceived as a PowerPoint presentation for a 150-person staff meeting at a Colorado high school in 2006 (see the Shift Happens wiki for the presentation’s history, source material, and various versions). It went viral and has been seen by at least five million viewers. Updated in 2007, the version embedded above is just as revealing now as when I first saw it. For instance — WAIT! There is more to read… read on »
I have been getting a lot of questions about the housing market, specifically regarding my thoughts on where home prices are going and whether this is a good time to sell or buy.
Before proceeding, and without singling out any one person or entity, let me offer this suggestion: use a healthy dose of skepticism when considering the advice/judgments/forecasts from “experts” who have a business/financial stake in how you act upon their predictions. The economic lessons of late (failing banks, irresponsible lending practices, corrupt investment funds, biased and inaccurate ratings by ratings agencies, and others) should give us pause. WAIT! There is more to read… read on »
