Evidence That US Housing Has Hit A Price Floor

Don Miller
Money Morning

The U.S. housing market has been the epicenter of the global financial crisis. And many analysts believe that by watching it, investors will be able to better predict an economic recovery.

Unfortunately, because housing market data is an amalgam of a wide range of local markets, it is notoriously difficult to follow.

“It’s like a weatherman who combines conditions in Nome, Alaska and Clearwater, Florida and issues an “average” national forecast of 45 degrees,” says Andrew Waite, a former institutional investor who is now the publisher of a magazine focusing on real estate investing. Real estate markets are by their very nature ‘hyper-local.’ Averages simply don’t apply.

Waite is the publisher of the Personal Real Estate Investor, a magazine for investors who buy houses or condos to manage for income or to fix up and sell for a profit.

The housing market is too fractionalized to put a finger on an “average” price, Waite says. Real estate is segmented by individual neighborhoods, and is further subdivided by price points and such price-influencing factors as condition, cash flows – and even cap rates on rental properties.

To combat this problem Waite compiles and verifies data directly from records kept by local Multiple Listing Services. Using those sales records, Waite determines the supply inventory of major markets, giving him the hyper-local data that reveals a more complete picture of individual markets.

And according to Waite’s analysis’ the real estate rebound is already underway.

“The formula’s pretty simple,” he says. “As housing inventories shrink in real estate markets around the country, demand and prices go up.”

After examining the statistics for March, Waite sees a clear bottoming pattern, at least in some markets. If he’s right, the Western United States is already making a comeback and the ripples of resurgence will soon make their way to the Midwest and then to the East Coast.

What’s more, the improvement from year to year indicates the bottoming sequence will soon have prices on the rise.

Housing Markets in Western U.S. Have Already Bottomed

Remarkably, Waite’s research reveals the downtrodden Las Vegas housing market has already bottomed and is currently “balanced” between buyers and sellers. Housing markets in Seattle, Los Angeles, Phoenix and Denver are on the move too:

  • Phoenix’s MLS housing inventory is 7.33 months, down from 19.1 months last year.
  • Denver’s current inventory is 5.59 months, down 35% from a year ago.
  • San Diego’s inventory stands at a paltry 4.19 months, down 58% from a year ago.
  • And Las Vegas’ inventory stands at just 6.25 months, down a whopping 64% from an inventory of 17.5 months in 2008.

Waite sees the trend on the West Coast as a leading indicator that the worst is behind us.

In short, if you’re in one of those depressed markets where prices are still dropping, relief may well be on the way.

Here’s the “market-bottoming” sequence as Waite sees it:

The chart depicts the market for houses in the western United States. It follows the natural sequence of a housing market recovery through its progressive phases: As the supply of homes drops, demand picks up. And as that demand picks up, prices first stabilize and then begin to rise.

Based on this research the housing cycle on the West Coast has already bottomed and prices will start to swing upward in the fall. Eventually the trend will move from West to East and prices will move up broadly.

But the recovery will be painfully slow getting to certain markets where cities are still being hit with swelling inventories, which is likely to continue to put downward pressure on prices.

Housing supplies in Baltimore, for example, have increased 11% from March 2008, to 15.9 months this year. Similarly, listings grew from eight months to about 9.5 months in Houston, and from 8.5 months to 10 months in Charlotte.

But some of the hardest hit markets are clearly on the upswing. Miami has slashed inventories from a staggering 52 months to 31 months, a decrease of 40%. Rochester, New York and Boston have each dropped housing supplies by about 13% in the last 12 months.

Some realtors in Boston are even reporting that sellers are receiving multiple competing offers to buy homes for more than their asking price and buyers are entering counteroffers.

Fewer New Homes Stoke Demand

And it’s not just pre-existing home sales driving a rebound in the sector. In October 2007, new home permit applications stood at roughly 800,000 nationwide. A year later, in October of 2008, that number had dropped to about 480,000.

Since it takes about 12 months for buildout to progress from permit to finish and with many builders halting construction altogether Waite estimates only about 450,000 of those permits will actually translate into new homes that will hit the market in 2009. And with as new home inventories dry up, demand will start climbing.

In fact, declining new home inventories are already beginning to stabilize prices in hard-hit Southern California, an area where prices were hammered by a wave of foreclosures.”

KB Home (NYSE: KBH) Chief Executive Officer Jeffrey Mezger said on May 4 that home prices in Southern California have begun to stabilize, making his company’s new houses competitive with existing homes, including foreclosures.

“If you go to Southern Cal, as an example, we’re seeing a floor on pricing,” Mezger said in a conference call with analysts organized by J.P. Morgan Securities Inc. “We don’t see prices going down right now, which is a good thing, because then you can set a baseline.”

In March, Los Angeles-based KB Home, reported a narrower first-quarter loss as orders increased for the first time in three years.
And there are other positive signals.

  • The median price paid for a home in six Southern California counties was $250,000 in March, the same amount as in January and February, according to San Diego-based research company MDA DataQuick.
  • The National Association of Realtors says a total of 3.7 million homes were listed for sale nationwide at the end of March, down 10% from a year earlier.
  • The supply of homes for sale in 29 major metropolitan areas at the end of April was down 3.6% from a month earlier, according to figures compiled by ZipRealty Inc., a real-estate brokerage firm based in Emeryville, Calif.

That last figure defies normal trends listings typically increase in April as for-sale signs bloom heralding the spring home-shopping season. Since 1982, the average increase in April from the prior month has been 4.8%, according to Zelman & Associates, a research firm.

Tom Lawler, a housing economist based in Leesburg, Va., says the decline in listings “suggests that the bottom in home prices is much closer than many pundits believe.

Still Looming: Foreclosures, Credit Crisis, And Unemployment

However, Lawler also says the future remains uncertain because no one really knows how many homes in the foreclosure process will eventually land on the open market. Estimates are that some of the nation’s largest banks currently are listing only about 60% of foreclosed homes.

Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) are the biggest owners of foreclosed homes, but they have only about 35% to 50% of those homes listed for sale at any given time, according to industry estimates.

And some foreclosed homes aren’t listed because they’re on the rental market, are undergoing repairs, or are subject to legal action or other delays.

Barclays Capital PLC (NYSE: BCS) estimates that banks and investors owned 765,500 foreclosed homes as of April 1, up from 629,100 a year earlier. Barclays forecasts that this inventory will peak at around 1.3 million homes in mid- to-late-2010, The Wall Street Journal reported.

The credit markets pose another obstacle to recovery.

There’s no doubt that banks have made it more difficult to borrow money. And mortgages are far more expensive than they appear, especially for people borrowing large amounts or trying to refinance.

As previously reported in Money Morning, buyers can only get those rock bottom 4.75% interest rates if they put 20% down, borrow $417,000 or less, and boast a high credit score (730 to 750).

And the days of “stated income” loans where you don’t have to document your earnings, and option adjustable-rate mortgages, where you could choose to pay less than the interest due, are long gone.

But while that’s true, it’s also true that mortgage lending is still one of the banks’ most important sources of revenue.

“Tight lending standards and the credit lockup is absolutely the limiting factor on how soon prices will recover nationwide,” Waite says. “But eventually, banks will loosen their purse strings if for no other reason than it’s their most efficient way to earn profits.”

But the cold reality is that skyrocketing unemployment remains a major threat to the recovery of the U.S. housing market. The unemployment rate soared to 8.9% in April, leaving more than 5 million workers without jobs. Economists predict the national jobless rate will probably hit 10% by year-end even if an economic recovery kicks off before then.

Consumers who are unemployed typically cannot afford to buy homes. Most can barely afford to pay for the homes they’re already living in. And even consumers who are afraid that they might be joining the jobless ranks are loath to take on the added risk – making them unlikely candidates to buy a new home either.

Bottom Line: Prices Don’t Matter if You’re Not Selling

While the news may be full of talking heads espousing the latest “average” numbers about the downward spiral in home prices, the basic truth is the vast majority of homeowners won’t be selling this year or next.

The typical house is owned for five to seven years, and only about 5% of U.S. housing stock turns over in a single year, meaning only 1 in 20 homeowners plan to sell this year.

And, as Waite points out, houses aren’t a tradeable commodity so there’s no reason why you should consider marking your home “to market” as the Wall Street bankers are being forced to do with the derivatives they’ve been trying to dump.

In fact, if you’re not in a hurry to sell, there’s a good chance that your home will recover much of its pricing power over the next few years.

“Unless you have to sell now, you’re pretty much insulated. If you sell in five years, chances are what’s happening now won’t have any effect on your selling price at all,” Waite said.

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