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Real Estate Market Commentary - February 2011
by Peter L. Zachary, MAI, MRICS

The Business Day section of the February 14, 2011 New York Times had an article entitled "Housing Market Looks Sickest in Cities That Once Seemed Immune". I believe this article is so telling of the market, that the following is the entire article that appeared in the New York Times.

"Few believed the housing market here would ever collapse. Now they wonder if it will ever stop slumping. The rolling real estate crash that ravaged Florida and the Southwest is delivering a new wave of distress to communities once thought to be immune – economically diversified cities where the boom was relatively strained.

In the last year, home prices in Seattle had a bigger decline than in Las Vegas. Minneapolis dropped more than Miami, and Atlanta fared worse than Phoenix. The bubble markets, where builders, buyers and banks ran wild, began falling first, economists say, so they are close to the end of the cycle and in some cases on their way back up. Nearly everyone else still has another season of pain.

"When I go out and talk to people around town, they say, 'Wow, I thought we were going to have a 12 percent correction and call it a day'," said Stan Humphries, chief economist for the housing site Zillow, which is based in Seattle. "But this thing just keeps on going."

Seattle is down about 31 percent from its mid-2007 peak and, according to Zillow's calculations, still has as much as 10 percent to fall. Mr. Humphries estimates the rest of the country will drop a further 5 and 7 percent as last year's tax credits for home buyers continue to wear off.

"We went into 2010 feeling gangbusters, thanks to Uncle Sam," Mr. Humphries said. "We ended it feeling penniless, with home values tanking." The fact that even a fairly prosperous area like Seattle was ensnared in the downturn shows just how much of a national phenomenon the crash has been. The slump began when the low-quality loans that drove the latter stage of the boom began to go bad, but the resulting recession greatly enlarged the crisis. Many people could not get a mortgage, and others simply gave up the hunt.

Now, though the overall economy seems to be mending, housing remains stubbornly weak. That presents a vexing problem for the Obama administration, which has introduced several initiatives intended to help homeowners, with mixed success.

CoreLogic, a data firm, said last week that American home prices fell 5.5 percent in 2010, back to the recession low of March 2009. New home sales are scraping along the bottom. Mortgage applications are near a 15-year low, boding ill for the rest of the winter.

It has been a long, painful slide. At the peak, a downturn in real estate in Seattle was nearly unthinkable. In September 2006, after prices started falling in many parts of the country but were still increasing here, The Seattle Times noted that the last time prices in the city dropped on a quarterly basis was during the severe recession of 1982. Two local economists were quoted all but guaranteeing that Seattle was immune "if history is any indication." A risk index from PMI Mortgage Insurance gave the odds of Seattle prices dropping at a negligible 11 percent.

These days, the mood here is chastened when not downright fatalistic. If a recovery depends on a belief in better times, that seems a long way off. Those who must sell close their eyes and hope for the best. Those who hope to buy see lower prices but often have lighter wallets, removing any sense of urgency. Arne Klubberud and Melissa Lee-Klubberud paid $358,000 for a new, 960-square-foot townhouse on trendy Capitol Hill a few weeks after that Seattle Times article was published. Now, with one child and with hopes for more, they need more space. They just put the townhouse on the market for $300,000.

"Obviously, this is not the ideal situation," said Ms. Lee-Klubberud, a 32-year-old lawyer. They are hoping to take advantage of the sour market to buy at a good price, but first, they must sell for an amount that is acceptable. "Everyone has their limits," she said. "We have ours."

On a dark, dank Sunday, a handful of people came to look at the three-level unit. One of them was Katherine Davis, who had just sold her house in the far eastern suburbs. It took 14 months, during which she had to drop the price several times. The equity she had accumulated over the decades disappeared quickly. "At first, I thought it would be nice to come out of this with $200,000, but I adjusted my expectations," Ms. Davis said. She ended up with less than half of that. Her goal is to buy a small place in the city, but not yet. "Selfishly, I'm hoping the market continues to drop," she said.

Increasing numbers of sellers are simply surrendering.

Megan and Ryan Dortch tried to sell their one-bedroom East-lake condo for $325,000 two years ago. They rejected an offer of $295,000 as inadequate. A year later, they relisted it for $289,000, then $279,000, which was less than they paid. Without a sale at that price, they could not afford to buy a place big enough for them and their new baby.

They have given up on real estate. They are renting out their old apartment at a small loss every month, and living in a rented house. "I don't expect the market to get better," said Ms. Dortch, 31, a customer service consultant.

Neither does Gene Burrus, another frustrated seller who became a landlord. "Rent is so cheap it doesn't make sense to buy now," he said. He might reconsider if 10 or 15 percent more comes out of the market.

Redfin, a real estate brokerage firm based in Seattle, says foot traffic began picking up in the last several weeks. Mortgage rates are rising, which could nudge those who need to buy to make a deal now for fear rates will rise even more.

But whenever the market finally does pick up, all those accidental landlords will want to unload, putting another burden on the market. "So many sellers are waiting in the shadows," said Redfin's chief executive, Glenn Kelman. "The inventory is going to expand and expand and expand. I don't see any basis for significant price increases."

While almost every economist is expecting another round of price declines for the next few months, many see a leveling off in the second half of the year. Fiserv, the company that produces the monthly Case-Shiller Home Price Indexes, analyzed prices in 375 communities. About three-quarters of them will be stable by December, Fiserv calculates.

"We're at a period near the bottom but with more volatility than we normally see at this point," said David Stiff, Firserv's chief economist. "This sort of double dip is unprecedented for housing."

Maybe that is why belief in a bottom is as elusive now as fears of a top were in 2006.

"We would love to have a house," said Dan Cunningham, a 41-year-old renter. "I have more than enough for a down payment. I'm preapproved for a loan. But I have to have confidence it's not going to lose another 20 percent." He plans to wait until he sees prices rising before making any offers."

The Business Day section of the February 16, 2011 New York Times had an article entitled "New York Courts Vow Legal Aid In Housing". The article stated:

"New York court officials outlined procedures Tuesday aimed at assuring that all homeowners are facing foreclosure were represented by a lawyer, a shift that could give tens of thousands of families a better chance at saving their homes."

Criminal defendants are guaranteed a lawyer, but New York will be the first state to try to extend that pledge to foreclosures, which are civil matters. There are about 80,000 active foreclosure cases in New York courts. In more than half of them, only the banks have lawyers.

"It's such an uneven playing field," said the state's chief judge, Jonathan Lippman. "Banks wind up with the property and the homeowner winds up over the cliff, on the street. It doesn't serve anyone's interest, including the banks."

A lawyer for every defendant will also serve the courts' interests, the judge said by making proceedings more efficient.

Under the procedures, which will be put in place in Queens and Orange Counties in the next few weeks and across the state by the end of the year, any homeowner in foreclosure who does not have a lawyer will be supplied one by legal aid groups or other pro bono groups.

Legal aid groups are expected to have foreclosure offices in the courts to handle the influx.

After revelations last fall that several major banks had used improper methods to seed foreclosures, the courts are increasingly becoming a central battleground for people seeking to modify their loan and salvage their house. Simply responding to a foreclosure notice in court, homeowners have learned, can sharply delay the proceedings.

That is a change from when the foreclosure crisis began. A few years ago, most foreclosed owners in New York and everywhere else did not show up at court proceedings and simply abandoned their homes. It was a "paper process," the New York courts system concluded in a recent report, with lenders inevitably the winners. New York now mandates settlement meetings overseen by a judge an attended by the lender, a sort of court inside the court. Homeowners are participating in large numbers but most of those without lawyers have little idea how to defend themselves. The cases are also overwhelming the courts. In several counties, half of the civil cases in higher courts are foreclosures.

Legal aid groups will find the task of representing all foreclosures defendants easier if the State Legislature agrees to Judge Lippman's request for a $100 million increase in legal services programs spread over the next four years. Current financing for legal services in New York is about $200 million a year drawn from a variety of public and private sources.

New York, which is one of the 23 states where foreclosures must be overseen by a judge, has been more aggressive than most in trying to reshape the flood of housing cases. Lawyers pursuing foreclosure in New York are personally liable for the accuracy of the documents they represent. It is a requirement that some lawyer find onerous, but has been credited with significantly slowing the pace of foreclosures in the state.

Legal aid organizations in the 23 states, which include Illinois, Florida and New Jersey, say that they do not have enough money or lawyers to help everyone who needs assistance. New Mexico and Connecticut have started classes to help train people to represent themselves. Legal aid groups in other starts are forced to choose among families, helping some but not others.

New York's action "will shift the debate," said Donald Saunders, director of the civil division of the National Legal Aid and Defender Association. "Everything Judge Lippman is saying will be looked at closely elsewhere."

Mr. Saunders added, however, that fiscal realities could trump other considerations.

Nationwide, 2.2 million households are in foreclosure, with another 2.1 million at least 90 days past due, according to LPS Applied Analytics. After the banks' revelations about their procedures, the average number of days delinquent for a foreclosed property rose to 507 days in December, its first time above 500.

In New York, the two initial counties will serve as a model for the statewide program. Legal Services of the Hudson Valley will work with the court in Orange County to provide representation, while the Legal Aid Society, which assists people in New York City, will supply lawyers in Queens, a foreclosure hotbed.

According to court data, foreclosed filings in Queens have increased 217 percent, to 5,839 cases from 2005 to 2009. "There's a huge demand," said Steven Banks, the society's attorney in chief. While there are no specific statistics for foreclosure, he said that in general the group has been able to fulfill only one out of nine requests for help.

How will it then handle so many more foreclosures?

"Redeploying resources," Mr. Banks said. It should help that the lawyers will "take more of an early intervention in the case rather than at the 11th hour when the sheriff is on the way." He added.

Judge Lippman, who announced the new initiative in his annual State of the Judiciary address in Albany, said he hoped that the lawyers would reach out to defendants even before they appeared in court.

Citing the 1963 ruling by the Supreme Court that state courts are required by the Constitution to provide counsel in criminal cases to defendants who cannot afford their own, Judge Lippman said this was the right moment to extend that provision.

"Today it is an equally obvious truth that people in civil cases dealing with the necessities of life can't get a fair day in court without a lawyer," he said.

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