The Real Estate Market: Don’t Celebrate Housing’s Recent Uptick Yet
by Martin Denholm, Contributing Editor
Monday, August 3, 2009: Issue #1057
Recently, my colleague Marc Lichtenfeld and I took a collective pop at some lazy journalists and other media cheerleaders. Their crime? Whipping the investment community into false optimism through misleading headlines regarding earnings announcements.
They’re at it again.
This time, the flashy headline writers grabbed onto the latest report from the National Association of Realtors, which stated that existing home sales climbed for the third straight month, and at a faster pace than economists expected.
And they were out in force again when the Commerce Department said new U.S. home sales saw an 11% bounce in June. On an annualized basis, that equated to 384,000 homes – 9% higher than estimates.
Collectively, new and existing home sales hit the highest level in eight months in June.
Sweet! Hand me some champagne – let’s celebrate. Or maybe we should hang on a sec… there’s a problem with these headlines. Here’s what you need to know about the real estate market, and what we really should be looking for.
The “Real” Story Behind The Real Estate Sales Numbers
While an 11% rise in new home sales within the real estate market certainly makes for good reading, it doesn’t mean much when it’s not put into perspective.
And the reality is that for a start, year-over-year sales are still down 21%. In addition, while it may well be a good time to grab a bargain, the government wants to hammer the point home by offering puffy incentives and tax credits when buying real estate.
But perhaps the most notable reason for the sales rises is the home defaults…
- Foreclosures hit a record over the first half of 2009, swamping the market with homes and pushing down prices.
- And as the National Association of Realtors notes, the percentage of homes sold as foreclosures totaled 31% in June. Although the rate is declining (down from 50% earlier this year), it’s still a hefty amount.
To understand how real people are being affected by the nascent housing recovery, look no further than the troubles Treasury Secretary Tim Geithner has had in trying to sell his house.
Frustrated at not being able to sell his $1.6 million New York mansion after three-and-a-half months on the market, Geithner has yanked down the “For Sale” sign. And that’s after he and his wife lowered the price to below what they paid for it in 2004. Having taken out a $1.25 million mortgage at the time, they’re now apparently renting the home at a loss.
Doesn’t Tim read the papers?
He didn’t seriously expect to sell Fort Geithner in such a short time in a market like this, did he? It’s tough out there, mate. First, you have to persuade buyers that it’s worth shelling out $1 million-plus for a house.
Then you need to convince them that the plans you have for the recovery will help the U.S. economy. But I digress. Haven’t we just seen some positive data for the real estate market?
Putting Perspective On The Price Figures
Last week also saw the release of the latest S&P/Case-Shiller Home Price Index – a closely watched gauge that monitors home prices in 20 major U.S. metropolitan area housing markets.
- Naturally, many outlets led with the news that the index registered a 0.5% rise in home prices in May, compared with April – its first monthly increase since July 2006.
- In addition, May marked the fourth straight month that the annualized rate of decline has slowed, with 17 of the 20 cities notching improved prices.
Good news, for sure. But let’s put it in context. The market hasn’t magically rebounded with a vengeance. In April, the year-over-year decline was 18.1%. May’s year-over-year figure rolled in with a 17.1% drop.
So while prices did rise month-to-month, the truth is that the real estate market isn’t exactly growing, nor are prices appreciating. It’s just stabilizing and beginning to undo some of the brutal damage from the past few years. Prices are still falling over the longer-term, albeit at a slower pace.
As S&P index chairman David Blitzer says: “On a year-over-year basis, home prices are still down about 17% on average across all metro areas, so we likely do have a way to go before we see sustained home price appreciation.”
And speaking of that, government figures show that the median sale price of a new home in June was $206,200, down 5.8% from May and 12% lower than June 2008.
You might say I sound more bearish than a Rocky Mountain grizzly, but it’s important to inject some perspective into the story, rather than just blindly absorbing the media reports.
What Will It Really Take For The Housing Market To Grow?
As I’ve said before, for the housing market to truly start growing again, it’s going to require a few key things.
- First, we need to see a reduction in the bloated number of available homes on the market. In that respect, it’s good to see the huge foreclosure rate declining, but those homes still need to be sold and prices still need to rise. And when you’re talking about a meaningful upswing, that brings me to another crucial requirement…
- As Tim Geithner just discovered, this is not an easy climate in which to sell a house. Buyers are strapped for cash and able to call more shots in a depressed market. Sellers are frustrated and forced to lower their asking prices to market value (and even that is often hard to gauge with the number of “distressed” sales – i.e. short sales or foreclosures).
Buyers and sellers alike will need to see U.S. job market growth in order to restore some confidence, not to mention wealth. Ironically, the precipitous plunge in the housing market has played a huge part in eroding both.
For example, home prices declines were partially responsible for a $13.9 trillion drop in household net worth during the first quarter, according to the Federal Reserve. And ominously, both the Fed and many economists believe the unemployment rate will top 10% by 2010.
There are other factors, of course. But these are two of the most critical ones that absolutely need to be part of the equation. And while the latest batch of more positive housing data is certainly good news, a real recovery will take time.
Meantime, if you’re looking for a bargain in the New York area, give Tim Geithner a call.
Good investing,
Martin Denholm
Related Investment U Articles:
- The Real Estate Market: Another Rough Year Looming
- Residential Real Estate: How Strategic Defaults Will Torpedo Your Home Value
- A Three-Step Plan to a Real Estate Recovery
- Do You Have the Courage to Buy This Market? You Should…
- A Lost Decade in the Housing Market
12 Responses to “The Real Estate Market: Don’t Celebrate Housing’s Recent Uptick Yet”
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Just sold a building lot on July 31, 2009, and we cannot close for thirty days because the title company is so swamped with new buyers buying homes that need to close. This is in the Northeast Ohio market. Contrary to your position.
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“Ces’t magnifique!”
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Dear Martin,
Good for you! Of all the so called statistics, housing is the bottom of the barrel in terms of reliability. I have followed the housing debacle closely for years, and predicted the present mess several years in advance of the collapse. It is past time some basic honesty show up in this critical economic segment, because until that happens not much else is going to happen with out sick economy.
Dan Gayman
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I agree. Some states, like Ohio, Michigan, Indiana and Kansas have seen tremendous declines in value. Investors from California have purchased homes in those states for $0.10-$0.30 on the dollar! No wonder they have sales.
Try doing business on the west coast. Unless the property is a short sale or REO, there is no real estate business. I know-I am a 22-year veteran real estate broker. We are slowly getting there. The decline is not over!
I also agree with your take on the job market. Unless people get back to work, there will be no real recovery!
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Mr. Denholm’s view of the housing market hits several notes of interest. In fact, several tiers of the market have notably deficient inventory after the recent spate of REO’s and short sales have been bought up and comparably bargain prices. One aspect of the uncertainty in the market he did not see, however, is the worrisome fact that lenders still have significant numbers of distressed mortgages on their books that have not been sent into foreclosure due to the Fed’s pressure (through FHLMC/FNMA) not to release them. When those loans are foreclosed on and they become REO’s, the lenders will have to unload them into the market, swamping the market again and driving down prices. This will effectively terrorize the market, yet again!
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I would say you are telling a lot more of the truth than the so called “official position.” I would equate the Oxford position on housing not too much differently than the official report on national unemployment. Govt. position is approx. 10% while most informed people know it is much closer to probably 15%. In addition, many professional people may have gotten another job,
but not in their field or diminished remuneration. Amen
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A very perceptive article and I agree with the observations in Leon Danforth’s remarks. We are experiencing a similar suggested recovery, or decrease in attrition, in house prices here in the UK, with commentators choosing to ignore the widespread incidence of mortgages technically in default and the pressure brought to bear on lenders by the Government not to initiate recovery proceedings. In the UK, one cannot simply deposit the keys to the house with the lender and walk away – you could be pursued through the courts. In any case, is it necessarily “a good thing” if house prices begin to rise? In so far as it saves currently over-committed people, yes. But prices are surely just adjusting to the norm of affordability, which was lost in a flood of easy and cheap – not to mention inappropriate, in too many cases – credit.
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Thank you Martin, It is nice to hear “The REst of the Story” I thoroughly enjoyed your article.
Thank you
Oxford Subscriber
Veronica Gray
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It appears that many of the foreclosed properties in southern California are not listed on the MLS. It seems that prices are being driven upwards by inventory being held back and off the market. We are seeing multiple offers driving the prices up by as much as 10% plus while many homes sit vacant with no sign in the front yard indicating the property is for sale. All of this is going on while new homes are being built in the same area just north of Temecula. This area grew rapidly from 2001 to 2005. Our last howm went from 100K in 1998 to 350K in 2004.
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another factor …..50% of sales are by investors which means many of those homes will be back on the market soon…they sure are not all going to be rentals especially if values do not come back up….and for values coming back up soon…not sure they will happen unless we go back to lier loans…or income goes up the the lier loan amounts which I doubt either of these will happen in the next several yrs.
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Good article! A helpful tool for anyone in the process of buying a house is a mortgage rate calculator. This can be found here, http://www.cb-hb.com/mortCalc/calc.html and be added to any site. I hope this is a helpful tool for people!
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Tim seems to be doing his usual job of missing the point. Maybe if he takes the time to visit Chica again, they can point out to him again what’s happening with OUR national real estate market & the great derivitives undergirding all the prime realestate we thought we owned going up in price to the moon etc.? Tim, if you go to China, please don’t forget to ask them if they could also bail out your little piece of the real estate pie and, if that doesn’t work, maybe Dr. Obama/Cousin Bernanke will give you a bailout handout to sustain you, until your home reappreciates itself beyound the price you originally paid, if you upkeep it and keep it painted etc.? Just don’t let anyone else in on any of your dealings. No major national bailouts; just a little Timmy bailout can change your story here. Maybe Cousin Ben can inflate the price of your home back up against this major trend? He’ll perhaps try anything once, in order to try and help his major friends won’t he?
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