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

On May 31, 2011, the front page of the New York Times had an article, "House Prices Are Set to Hit Another Low - Wary of Weak Market, More Decide to Rent". The article stated:

San Francisco - The desire to own your own home, long a bedrock of the American Dream, is fast becoming a casualty of the worst housing downturn since the Great Depression. Even as the economy began to fitfully recover in the last year, the percentage of homeowners dropped sharply, to 66.4 percent in 2004. The ownership rate is now back to the level of 1998, and some housing experts say it could decline to the level of the 1980s or even earlier.

Disenchantment with real estate is bound to swell further on Tuesday when the most widely watched housing index is all but guaranteed to show that prices of existing homes sank in March below the lows reached two years ago - until now the bottom of the housing crash. In February, the Standard & Poor's/Case-Shiller index of 20 large cities slumped for the seventh month in a row. (It was announced after this article was published that housing prices dropped 4.2% in the first quarter of 2011).

Housing is locked in a downward spiral, industry analysts say, not only because so many people are blocked from the market - being unemployed, in foreclosure or trapped in homes that are worth less than the mortgage - but because even those who are solvent are opting out. "The emotional scars left by the collapse are changing the American psyche," said Pete Flint, chief executive of the housing Web site Trulia. "There was a time when owning a home was a symbol you had made it. Now it's O.K. not to own."

Trulia, a real estate search engine for buyers and renters that is based here, is a hive of renters, including Mr. Flint. "I'm in no rush at all to buy," he said. He expects homeownership to decline further to about 63 percent, a level of the country first achieved in the mid-1960s.

Time Hebb, a Los Angeles systems engineer, expertly called the real estate bubble. He sold his bungalow in August 2006, then leased it back for a year. Since then, the 61-year-old single father has rented a succession of apartments.

"I have flirted with buying again many times over the past few years," said Mr. Hebb. "Let's face it, people are not rational creatures." But he always resists, figuring housing is still overpriced and even when it stops declining it will stumble along the bottom for years and years. He says there is plenty of time to get back in if he should ever want to.

The market signaled further trouble on Friday when the April index of pending deals was released by the National Association of Realtors. Analysts had predicted the index, which anticipates sales that will be completed in the next two months, would be down 1 percent from March. Instead, it plunged 11.6 percent. Many of those in the business of building and selling houses believe the current disaffection with real estate will pass. After every giddy boom comes the hangover, they acknowledge, but that deep-rooted desire for a castle of one's own quickly reasserts itself.

"There's no question that people are reticent to own," said Douglas C. Yearley Jr., chief executive of Toll Brothers, the builder of high-end homes. "They're renting because they're scared." Yet those fears will fade, he predicted.

"Most people still want the big house with the big lot in the desirable school district in the suburbs. No one ever renovated the kitchen or redid a room for the kids in a rental," Mr. Yearley said. "I think - I hope - we'll be O.K."

The market's persistent weakness, however, runs the risk of feeding on itself. Buyers are staying away despite the lowest interest rates and the highest affordability levels in many years, which in turn prompts others to hesitate.

Trulia and another real estate site, RealtyTrac, commissioned Harris Interactive to take a poll last November about when people thought the market would recover. A third of the respondents chose 2014 or later. But in a new poll, released this month, the percentage giving that answer rose to 54 percent.

The sharp decline in prices since 2006 has meant a lost decade for many owners. But what may prove even more discouraging to potential buyers is academic research showing that the financial rewards of ownership were uncertain even before the crash. In a recent paper, a senior economist at the Federal Reserve Bank of Kansas City found that the notion that homeownership builds more wealth than investing was true only about half the time.

"For many households in many years, renting and investing the saved cash flow has built more wealth than homeownership," the economist, Jordan Rappaport, concluded. Economics affects potential owners in other ways. A house is a long-term commitment that many are loath to make it uncertain times like these. "What I'm hearing from people is that they don't want to be tied to a particular geography, which inclines them to renting," said Mr. Flint of Trulia.

San Francisco is one of the country's most expensive cities, so renting has a natural appeal here. But the Associated Estates Realty Corporation, which owns 13,000 apartments in Georgia, Indiana, Michigan and other Midwest and Southeast states, also is seeing more people deciding to rent. "We have more of what we call 'renters by choice' than I've seen in the 40 years I've been in the apartment business," said "Jeffrey I. Friedman, chief executive of Associated Estates.

For decades, the company has asked former tenants why they were moving out. During the housing boom, as many as a quarter of those moving on said they were buying a house. In 2009, the percentage of new owners fell in the first quarter to 13.7 percent, the lowest ever. Last year, as the economy improved, the number rebounded. This year, it fell back again, to 14 percent. Builders clearly believe that the future includes many more renters. So far this year, construction of multi-unit buildings is up 21 percent compared with 2010, while single family-homes are down 22 percent. Sales of new single-family homes are lower than at any time since the data was first kept in 1963.

Susan Lindsey, a San Diego software programmer, was once eagerly waiting for the housing market to crash. She said she would have no guilt about swooping in on some foreclosed owner who had bought a place he could not afford. With prices now down by a third, however, she is content to stay in her $2,500-a-month rented house. She prefers to invest in gold, which she has been buying since 2003.

"I could afford a median-priced house, no problem," said Ms. Lindsey, 48, as she headed off for a holiday weekend in Las Vegas. "But I would be paying more to live in a place I like less."

The May 31, 2011 issue of Real Estate Weekly, the trade magazine of New York real estate industry had an article entitled "Double Dip" declared as U.S. Housing Prices Tumble: The numbers are bleak. U.S. home prices fell 4.2% in the first quarter of 2011, according to data from Standard & Poor's Case-Shiller house index, released on Tuesday. With the latest decline, prices have hit a new post-recession low, and are now comparable to mid-2002 prices. The trend has been described as a "double dip," defined by prices dropping below the previous post-recession low in 2009.

"The numbers are horrifying. But it's focused damage," said David Blitzer, managing director of Standard & Poor's and index committee chair of S&P Indices, referring specifically to foreclosures. He noted that certain areas of the country have borne the brunt of foreclosures, rather than uniform distribution. However, the overall result is a drag on home prices. Nineteen of the 20 major metropolitan areas covered by Case-Shiller were down in prices, with only Washington D.C. seeing gains in prices compared to the previous year and quarter. New York saw a 3.4% decrease in prices compared to the first quarter of 2010, and a 0.9% decrease compared to February 2011.

One reason cited for the decline was a federal tax credit for first time home buyers, which led to a surge in activity during the early months of 2010, and likely an uptick in prices that resulted from increased competition. But after it expired last year, activity has dropped. "Last year the First Time Home Buyer Tax Credit pulled a significant number of sales forward and, to an extent, artificially supported prices. So, absent the tax credit, it is understandable that we see prices continue to decline when compared with last year," said Mark Fleming, chief economist with CoreLogic, a research firm, in a statement. "As we move further away from that support, we will see a leveling of prices and eventually organic improvements in the market."

CoreLogic's most recent Home Price Index indicated that prices have declined for eight straight months and were down 7.5% in March 2011, including distressed sales, compared to the previous year. Even without distressed sales, prices were down 0.96%, compared to the previous March. The hardest hit states in the CoreLogic report included Idaho, Arizona, Michigan, Florida and Illinois, which all saw double digit drops in home values, including distressed sales. New York State performed above the national average, seeing a 1% gain in single family home prices, including distressed properties.

However, S&P's Blitzer, downplayed the overall impact of the tax credit, citing issues such as financing and employment as factors.

"What I think the tax credit did was just change the time pattern of sales, rather than actually creating sales. These kinds of programs tend to take from the future," he said. "I don't think it created too many new buyers. think it accelerated buyers."

Case-Shiller and the "double dip" theory has its critics. Jonathan Miller, president and CEO of appraisal firm of Miller Samuel, said that the federal tax credit simply delayed the inevitable, and the long-term slide in housing prices has been one big dip, so to speak, with the tax credit offering only temporary relief.

He also noted that Case Shiller takes closings data from approximately three months before the report, meaning that the numbers lag compared to current conditions. Nonetheless, Miller predicts further declines, followed by flat prices.

Other reports are also grim. According to the Federal Housing Finance Agency (FHFA), U.S. home prices were down 2.5% in the first quarter of 2011, compared to the previous quarter, the largest drop since the fourth quarter of 2008. The study uses data from the purchase prices of Fannie Mae and Freddie Mac mortgages. Prices are down 5.5% compared to the first quarter of 2010.

FHFA's monthly index reports that prices are down 0.3% for the month of March, a slower rate of decline, but still 19.8% below the peak of April 2007.

"House prices in the first quarter declined in most parts of the country," said Edward DeMarco, FHFA acting director, in a statement. "In many local real estate markets, particularly those hit hard by this cycle, foreclosures and other distressed properties are still a key factor in recorded and anticipated future sales and may be delaying price stability or recovery. Fortunately, a serious delinquency rates also are declining." Regional factors have been crucial in shaping the recovery - and lack thereof - of particular areas. The partial collapse of the automobile industry, for example, led to countless layoffs, and Detroit has seen housing prices fall 30% from 2000 values, according to Case-Shiller data. It managed to avoid a new low with a 1% gain in home prices in February, but it is far from a recovery.

The situation in the southwest, particularly Phoenix and Las Vegas, has more to do with geography. An overabundance of cheap land and rampant speculation has led to acres of unbuilt or unsold homes, which remain frozen in the wake of the recession. Decreases in tourism have also hit the area, along with the likes of Florida, leading to more layoffs and, subsequently, less capital to invest.

In contrast to the struggles of much of the country, a lack of supply and constrained land leads to the skyscraper-high prices of Manhattan, while a surging financial sector fills homes on the strength of rising compensation. In Washington, D.C., perhaps the country's strongest housing market, a federal government backbone employs a vast workforce, and the residential market has remained steady.

But the long unwinding of foreclosures - delayed because of scandals involving "robosigning" and other discrepancies - is expected to remain a drag on the entire housing market.

"We continue to have the overhang of foreclosures," said Robert O'Brien, vice chairman and head of Deloitte's U.S. real estate practice. "That also creates a lot of uncertainty."

He said that some studies predict that current foreclosures will not be resolved until late 2013.

The global economy has an indirect effect on the domestic housing market, and recent events have not helped. Fears of European defaults, natural and nuclear disasters in Japan and turmoil in the Middle East have hurt worldwide trade and economic stability.

But experts say the most crucial factors for long-term recovery are a recovery in the job market, more accessible financing, and the unwinding of foreclosures. For now, such progress remains elusive.

What did I say in a prior commentary about a bird who landed on my shoulder and said, "Things could be worse"? And sure enough, things got worse.

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