Has Housing Turned the Corner?

Much has been made of the recent upturn in housing data. All three of the major housing indicators actually rose in June; housing starts were up 3.6%, existing-home sales also up 3.6%, and new-home sales blew the doors off expectations with an 11% rise. Yesterday's Case-Shiller index rose 0.5% for the three month period ended in May, although the seasonally adjusted May number was actually down. However, even Mr. Shiller who had predicted more declines in home prices was surprised at the positive results.

I am including the charts from the WSJ that show housing starts (see end of post), existing-home sales, and new-home sales data going all the way back to 2000 for some historical perspective. What is initially most shocking about the charts is just how far we've fallen and how puny the recent rebounds appear in the context of the past nine years. In particular, new homes, even with the strong rebound in June, are only selling at a very depressed 384,000 annual unit pace. This compares to a pre-bubble rate of roughly 800,000 units in the early 2000's. Existing home-sales have declined much less than new home sales, due to the fact that foreclosures have traded briskly throughout the housing crisis. One positive note is that the number of foreclosure sales as a percentage of existing-home sales in the March-through-May period fell to 33% from 50% earlier in the year. Are we really running out of foreclosed properties? Possibly, but some analysts attribute the decline to foreclosure moratoriums enacted late last year, most of which have recently expired. Foreclosure sales should pick up the pace again later in the year.

One sign that I view as legitimately positive is all of the anecdotal evidence I read about average folks buying their first homes in places where prices have dropped significantly to levels where it makes financial sense to purchase a home versus renting. This is happening in certain parts of the country such as Southern California, but it has yet to happen in certain high priced areas, such as NYC or higher priced parts of the Bay Area. Certainly the ridiculous amount of overbuilding in Las Vegas (where yet another casino, Station, bit the dust and filed for bankruptcy today) are still screwed. According to the WSJ, banks took title to 13,200 properties in June, which is more than the total number of homes listed for sale in Las Vegas that month. Las Vegas has a major inventory problem that won't be resolved for years.

The recent positive housing news is a sign of some stabilization, but not an indication of a return to business as usual. Unemployment induced defaults are bound to continue rising as the unemployment rate hits double digits. Loan modifications have notoriously high re-default rates, and we shall see more foreclosures later in the year as the recent spate of modifications fail to work for a large number of borrowers. Furthermore, the new reality of financing for jumbo mortgages, which requires down-payments of 20-30%, is not going to change anytime soon. Providing cheap financing for buyers of high-priced properties in high-priced areas is not a political priority for this administration. The FHA or Fannie Mae isn't going to start offering 3.5% down loans for those in the market for a $1 million house. Consequently, the pool of potential buyers for higher priced properties has shrunk significantly. While this doesn't affect much of middle America, it is a major issue for places like New York, San Francisco, and their higher priced suburbs. Exotic financing was the norm for several years which helped push prices to unsustainable levels and allowed everyone to trade up. You can't trade up if you don't have equity, and if you've been living the high life and not squirreling away your cash, you can't cough up the 20% required down-payment for a jumbo mortgage.

Believe it or not, K10 is house hunting. Not because I believe the "bottom is in," but because the family is expanding and it is the right time personally. I live in the Bay Area and have been observing the local markets here like a hawk for over a year, with multiple spreadsheets that compare price-per-square-foot, inventory levels, and other relevant statistics in several neighborhoods in order to find the best deals. I can say with a reasonable amount of certainty that the high-end (i.e. jumbo mortgage land) is due for more of a correction than what we have seen so far. Inventory levels are high, and properties are sitting on the market for very long periods of time. Prices get slashed with still no takers. I am constantly amazed at how many of the homes I look at have been purchased within the past couple of years, and I wonder why they want to sell so soon. There is always a "good" story, but I suspect that in many cases it is simply the fact that the seller is overextended. More on my search later. For now, here is the WSJ chart I mentioned above.