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EconomicsReal estate 2010: We’re not in Kansas anymore
With recent changes in the real estate market, you too may be feeling a bit like Dorothy and Toto in the Land of Oz. So, just for fun I’ve put together a list of just how much the landscape has changed in the last few years. Follow the yellow brick road.
You know you are in a different time and place when:
1. House prices are lower this year than last year and last year’s prices were lower than the previous year’s prices.
2. There’s a continuing danger that the equity in many homeowners’ properties is at risk, especially the down payment for recent purchasers. In today’s real estate market, down payments evaporate if prices fall.
3. Despite recoveries over the past seven months in terms of prices, sales and reduced numbers of foreclosures, markets are still weak. The Wall Street Journal reported that new home sales dropped another 11 percent in January 2010 (after a December 2009 decline of 7.6 percent) to a seasonally adjusted rate of 309,000. This is the lowest level of new home sales since record-keeping began in 1963!
4. Interest rates are at historic lows yet consumers are not buying most things, including houses.
5. Tax shelter is increasingly being viewed as a bad thing in the housing market (since it results in higher asking prices today). Brokers may promote it as an advantage to homeownership but buyers, especially first-time buyers, would rather not have to pay the premium built into the settlement price.
6. Sub-prime loans, Alt-A mortgages and Option ARMs were heralded as favorable innovations by industry and consumers alike; soon afterward, they became dreadful memories.
7. Defaults and foreclosures have become everyday terms around America’s water coolers. Once a fraction of one percent, now these are everyday problems.
8. It’s good news when the number of borrowers in arrears increases but at a decreasing rate.
9. Mortgage modifications currently total over 116,000 but four million borrowers seek help.
10. The federal government has announced a new program to bail out borrowers in states with large price declines and high rates of unemployment — but even before it’s implemented, government officials are lowering expectations. As important as $1.5 billion will be to those five states (California, Arizona, Nevada, Florida, and Michigan), it’s not going to solve what is a catastrophically large problem.
11. “Strategic defaults” are beginning to be questioned as immoral financial decisions.
12. Even the market for jumbo loans is very tight. A recent report indicated that a borrower with $8 million in assets could not refinance his home mortgage.
13. “More affordable” is about the best thing you can say about the current housing market.
14. Rents are falling and are expected to continue to decline.
15. In terms of legal issues, the authority of eminent domain is a significant government threat rather than the major constitutional protection of private property in the U.S.
16. Commercial real estate defaults are likely to be the next shoe to drop. One report indicates as much as $1.4 trillion in commercial mortgages will require refinancing over the next four years. Expect $200-$300 billion of defaults threatening as many as 3,000 banks.
17. While the housing market is on a “path to recovery,” no one believes there will be significant appreciation, revived sales activities or shortages of inventories for a very long time.
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Austin Jaffe, Ph.D. is PAR's Consulting Economist from the Smeal College of Business at Penn State University. |
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Mr. Cunningham,
I am a bit confused about your note, although I certainly appreciate your interest.
One reading of your comment is that you appear to claim that observations about the national real estate market are not very useful because you work in a local market. I believe the idea is that there is benefit to reviewing and applying the national studies to local environments with the recognition that the fixity of location in real estate markets requires a different specific analysis of each locale. However, for some questions, the correlation between national and local results is very high. Perhaps this is true, especially once lags are taken into account, for most questions in real estate. Sometimes national phenomena do not apply locally; there can be no doubt that this is also sometimes correct.
On another level, the reason why we have more studies, observations, findings, reports, etc. of the mythical “national market” is because there is a large audience interested in the findings so as to justify the costs of doing the analysis. Stated differently, it is too expensive to do an extensive analysis say, for Benton, PA. Careful studies require many things and players in local markets would benefit from extensive local studies but they are often just too expensive. Thus, local, quality research is often not available. The reality is that economic analysis is costly to complete and so we observe more nationally than regionally, more regionally than locally, and more locally than property-by-property.
I agree that it would be nice to know many more things about local markets. My comments about constitute an explanation as to why we do not have the information you seek.
AJJ
Jim,
Thanks for your note. You probably learned more in Econ 101 than I did!
The determination of rents is complicated by numerous factors. Rental space is a substitute for homeownership so when potential homeowners are hesitant, demand for rental space could increase. However, in the current case, it is more likely that increases in supply with foreclosures, a reduced number of transactions so more houses are on the rental market, uncertainty about taking a long position in the housing market, etc., all move in the opoosite direction. It is impossible to predict whether a price such as rent would increase or decrease when there are both supply and demand forces at work. In this case, it seems reasonable to expect rents to fall with the large increases in supply of housing and the slowdown of real estate markets. In addition, there is evidence in some markets of rents falling. This type of reasoning above is why I suggested rents are headed downward. AJJ
To print the article, there should be a link above the comments. The print version of this article is located at: http://www.parjustlisted.com/archives/3491/print/
Hi! The information was very helpful at my recent listing appointment.
I enjoy hearing from Dr. Jaffe at the PAR meetings. He is usually right on; however, sometimes we don’t line the forecasts.
Ist there way to print just the article information like RIS with a print link only for the information we would like to capture.
Harry@HarryMcCarty.com
Believe it or not, I’m in our business since 1948 and still at it. I believe you are pretty much correct in stating the facts. Although we filled our pockets with commissions during this last cycle it really was LaLa land because our government several years ago told the banks to lend money to people who could’nt afford it and so legal, intellectual scams such as ARM’s, hedge funds, derivatives, swaps and mortgage backed securities came into play all of which resulted into todays problems which are very very real. Simply put, we were overpriced, ovespent and over financed. However, people still have to eat, sleep and play so stick it out it will get better.
Mr. Jaffe I understand you are only stating fact but don’t you agree that these stats are national rather then local. Can you give us some fact that reflect areas in PA since this is where we apply our profession. I for one find it more useful to know fact and figures about my market area, so that I may compare to national stats. Would you not agree that stats on Philadelphia,PA are not as important to buyers in Benton,PA
Good article, although certainly not very cheerful. I am curious about your Item #14 – Rents are falling.
With many current owners losing their homes, or walking away from them, shouldn’t the increased supply of “those looking for a place to live”, i.e., renters, keep the demand, and therefore the price, of rent high?
Maybe I should have paid more attention in my Econ 101 class at PSU – don’t worry, Dr. Jaffe, if YOU had been the Professor, I would have stayed wide awake and taken better notes, but I was there as a student before you started. (And those sorts of lines of praise and admiration, a/k/a “blarney” didn’t work for me back in 1973, either!)
Connie, I believe there is humor throughout this piece. The Wizard of Oz motif is an attempt to indicate that the current market is unreal. More importantly, I tried to report “facts” rather than opinions in each of the observations. Many are reported from other legitimate sources. There are no forecasts here … Sorry if you did not like this piece. Austin
Didn’t your mother ever tell you, “If you can’t say something nice, don’t say anything at all”.
We, who are still in the trenches, face these realities every day. It would have been much better to put a little humor with it.
And, it’s for these very reasons that today’s real estate professional has to constantly and consistently educate themselves to stay on top of their game. We have a duty to our clients to educate them so they can make informed decisions.