Headlines – Week of October 9, 2011

October 21, 2011

U.S. Housing Trends

Information firm CoreLogic recently predicted that consumer spending would remain slow because housing price trends had a stronger negative wealth effect impact on consumer spending than the positive wealth effect impact of stock prices. Since then, equity values have dropped over 10 percent and home prices have been flat. They concluded that unless there is a sustained increase in home or equity prices over the next couple of years, the primary driver of changes in spending will be household income.

The following is their summary from the October U.S. Housing and Mortgage Trends report:

  • Median income fell by 2.3 percent from 2009 to 2010, and real median income has declined more than 7 percent since its peak in 1999.
  • Real median income for prime home buying age cohorts in 2010 was at the same level as in the late 1970s.
  • Homeownership rates for prime home-buying age cohorts are down almost 10 percent in 2010 relative to 1980.
  • Consumers continue to allocate a higher share of household expenditures to housing, which means they have less money left to spend on non-housing consumption.
  • Of the foreclosure properties that were auctioned in 2006, 66 percent became REO properties. Once in REO, 85 percent have only sold once and have not gone back into REO.
  • The REO recidivism rate within five years of the initial REO sale is only 2 percent.
  • Investors have shifted from buying properties at foreclosure auction to buying properties at the REO sale, increasing the burden of losses on the banks holding REO properties.

Full Report

Is it Time to Buy?

A recent article in the Wall Street Journal reported that U.S. house prices have plunged by nearly a third since 2006, and homeownership rates are falling at the fastest pace since the Great Depression.

With that bad news comes the fact that two key measures now suggest it’s an excellent time to buy a house, either to live in for the long term or for investment income.

The article focuses on two measurements.  First, the nation’s ratio of house prices to yearly rents is nearly restored to its prebubble average and second, when mortgage rates are taken into consideration, houses are the most affordable they have been in decades.

The article strongly points to a home’s “price/rent ratio” as a stock analyst would evaluate a stock’s price/earnings ratio, which compares the cost of an asset with the money the asset is capable of generating.

click to enlarge

For investors looking to buy real estate, a lower ratio suggests more income for the price and for prospective homeowners, a lower ratio makes owning more attractive than renting … all else equal.

According to the analysis provided in the article, the math is turning in a buyers’ favor.

Nationwide, the ratio of home prices to yearly rents is 11.3, down from 18.5 at the peak of the bubble, according to Moody’s Analytics. The average from 1989 to 2003 was about 10, so although valuations aren’t quite back to normal, their close.

And for many home buyers, mortgage rates are a key determinant of their total costs and rates are the lowest in many years.

The National Association of Realtors Housing Affordability Index hit 183.7 in August, near its record high in data going back to 1970. The index’s historic average is roughly 120.

But not all housing markets are bargains. Home and real estate marketplace Zillow has developed a new price/rent ratio that uses estimates for each individual property rather than city medians, to better reflect the choices facing typical buyers. Their analysis shows that Detroit and Miami are the cheapest for buyers, with price/rent ratios of 5.6 and 7.7, respectively. New York and San Francisco are more expensive, with ratios of 17.6 and 17.2, respectively. The median ratio for 169 markets is 10.7.

Although housing is not the magic bullet it was during the bubble, the article believes that when prices are low, loans are cheap and other investment yields are scarce, buyers should jump in.

Full Article

What’s Lurking in the Shadows?

A recent report by the National Association of Realtors (NAR) reported an 8.5-month inventory level, close to the six-month level that historically signals a balanced market, even though there’s a general feeling of uneasiness about the market.

The anxiety, they point out, is likely due to “shadow inventory” which homes placed in foreclosure or owned by lenders, and loans overdue by at least one payment.

And no one knows the true extent of the shadow inventory since the amount depends on its definition such as how delinquent must a property be to include it in shadow inventory … 1 day, 90 days?

Estimates of shadow inventory in March 2010 ranged from 1.7 million to 7 million, according to NAR. While the number of homes in shadow inventory is important, just as critical s the timing of their exact release to the market.

If banks slowly release shadow inventory to the market, the market could stabilize as the supply of homes would be restricted.

But if banks dumped all of the homes they own on the market all at once, the increase of supply would cause a decline in price and since demand could not respond quickly, the price drop would have a tremendous impact on the market.

However, as the article points out, homeowners also control the number of homes in shadow inventory. A homeowner in trouble can decide whether to pay the mortgage, seek mitigation or walk away.

Banks, homeowners and the government can modify their actions to speed up or slow down the amount of inventory added to the current supply. With each player making different moves, the moral of the story is that the timing and number of distressed properties in the market can’t be predicted. We do know it will affect your business, so monitor your local market closely. Communicate with lenders so you know the business decisions they are making, and work with distressed homeowners to help mitigate their debt burdens.

Posted by Scott R. Lodde

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