Residential real estate has been a tough investment over the last several years. Many experts think we are at or near the end of the slide. While some metro and state housing markets are still in a slump, others are showing encouraging signs of stabilization. As a general rule, the markets that went into a tailspin first and suffered the worst slide in home prices are showing upswings in sales and prices.
First-time homebuyers who had felt left out of the market until now and aggressive real estate investors are supplying much of the lift. We wouldn’t look for prices to shoot up again anytime soon, since we are still fighting a weak economy with growing unemployment, too many foreclosures and toughened mortgage lending standards. However, most property owners will probably be satisfied with price stability for a while.
We have always liked to remind homeowners that they are real estate investors, too. In most years that has been a distinctly positive side of owning a home. In years like the past couple, though, we might have preferred to ignore that fact. But it’s still true. And over the longer term, it will again be a good thing, difficult as that might be to believe right now. The slow and steady appreciation that built sizeable home equity for our parents and grandparents (and many of us, until recently) will return. When it does, we hope that, as both individuals and a society, we will have learned a few lasting lessons from our late experience with unsustainable house price appreciation and unwise mortgage lending.Residential real estate as an investment has suffered a bashing, but let’s be fair, the stock market has been no picnic over the last few years, either. The S&P 500 index, which was at a 2009 high near 950 in mid-July, had been over 1,100 in 2004 and hit an all-time high of 1,565 in October 2007. So the S&P has fallen more than 13% over 5 years and almost 40% from its highs. Stocks, as an asset class, don’t have much to brag about either. By comparison, over the last five years, the average single family American home’s appreciation was still
in positive figures, at 9.82%, through the first quarter of 2009, according to
the latest available figures from the Federal Housing Finance Agency.
FHFA is the successor to the Office of Federal Housing Enterprise Oversight,
which had been producing these reports since 1991. FHFA tracks the
prices on repeat sales and refinancings of the same single-family properties on which the mortgage is acquired by Fannie Mae or Freddie Mac (so more
expensive homes are not included). As of the first quarter, only seven
states had five-year home price declines: Massachusetts, Ohio,
Minnesota, Michigan, California, Florida and Nevada. In the other 44
(including DC), prices were still higher than in 2004 (see chart on Page 4).
Within the state numbers are signs of stabilization in individual markets that
are being overlooked. FHFA’s data showed that twenty states had price
increases from the last quarter of 2008 to the first quarter of this year. And similar things are happening in selected metro areas.
For instance, in the Northern Virginia suburbs of Washington, DC, homes in the price ranges below $500,000, are seeing short sales, foreclosures and even organic (regular) sale homes getting snapped up. As a result, “days on the market” for homes was declining. Demonstrating how localized markets can be, Washington, DC proper and the close-in Maryland suburbs are not seeing the same bump in sales. Yet. In the San Francisco Bay Area the median sales prices for homes and the number of homes sold both rose in May.
It was the second month in a row that the median increased (largely due to a reinvigorated market for more costly homes), and the ninth time overall that sales went up. Homebuilders, who need to be cautious about assessing the market, inclined more to the optimistic side in July, starting a greater number of new homes and recording the most positive sentiment numbers since September 2008. “Builders are seeing slightly better sales conditions this month as consumers take advantage of the first-time buyer tax credit, low interest rates and attractive home prices,” said the National Association of Home Builders.
Whether the positive news on the stabilization front will continue will depend to a large extent on whether the market stays clear of high levels of foreclosures. That, and the impact of rising unemployment, rather than rising payments on adjustable rate mortgages, are the biggest worries right now. Realtytrac reported that foreclosures in the first half of 2009 were 9 percent higher than in the last half of 2008, but despite that, the market doesn’t seem to be flooded with them. Federal Reserve Chairman Ben Bernanke said he see foreclosures peaking before the end of the year. Some have theorized that banks are sitting on a large number of foreclosed homes that some have called a “shadow” inventory. If they release these in a controlled fashion to lessen their impact, then price stability shouldn’t be compromised. If they spit them out in big numbers all at once, though, that could be trouble.
In general, there are some trends at work that should be positives for real estate investors. First, even with housing affordability flirting with alltime highs, many potential homeowners won’t or can’t own. That means more Americans will be renters. Mortgage programs that seduced marginal buyers into homeownership are largely gone. Even some solid financial citizens are having trouble getting mortgages or raising a sufficient downpayment. Those who have shorter time horizons for staying in a house will (or should) elect to rent, instead. So filling rental properties with qualified occupants should be easier than in recent years. Should be.
Except that apartment vacancies are the highest since 1987. One reason: household formation rates are way down. This is putting pressure on rent prices, as well as contributing to the low rate of home sales. So where are people going? Moving back in with the parents, sharing a home with friends or other relatives. Also, with jobs scarce, immigration has slowed and some immigrant workers have even returned home. Many echo boomers, the children of baby boomers, who are an even bigger age group than their parents, have been putting off going on their own and represent a pent-up source for new households when conditions improve. The slow household formation rate will probably not reverse until employment starts to rise. But when it does, occupancy levels should climb as well and rents will follow. Home sales and prices will also accelerate with rising household formation. In the short run, though, investors should be prepared to have to compete for renters. The group that has been in the best position to take full advantage of the current market conditions and set themselves up for long term home price appreciation are first-time homebuyers.
Without the burden of a home to sell, a patient first-time buyer can seek out a bargain and, with FHA financing, get into a home with a downpayment of a home with 3.5%. And with the first-time homebuyer federal tax credit of $8,000 that buyer no longer has to be paid back (only good for sales closed before November 30), the timing for first-time buyers is perfect. Even those first-time buyers who had been fearful of seizing the opportunity are finally succumbing to the irresistible temptation to join the ranks of homeowners. © 2009, Real Estate Information Services, Capitol Assets, Choice Real Estate, Inc.
