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September 2010 Real Estate Market Commentary
by Peter L. Zachary, MAI, MRICS

On Monday August 23, 2010, the front page of the New York Times had an article entitled "Housing Fades as a Means to Build Wealth, Analysts Say". The article stated:

"Housing will eventually recover from its great swoon. But many real estate experts now believe that home ownership will never again yield reward like those enjoyed in the second half of the 21st Century, when houses not only provided shelter but also a plump nest egg. The wealth generated by housing in those decades, particularly on the coasts, did more than assure the owners a comfortable retirement. It powered the economy, paying for the education of children and grandchildren, keeping the cruise ships and golf courses full and the restaurants humming. More than likely, that era is gone for good."

"There is no iron law that real estate must appreciate," said Stan Humphries, chief economist for the real estate site Zillow.

"All those theories advanced during the boom about why housing is special – that more people are choosing to spend more on housing, that more people are moving to the coasts, that we were running out of usable land – didn't hold up."

Instead Mr. Humphries and other economists say, housing values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment. Dean Baker, co-director of the Center for Economic and Policy Research, estimates that it will take 20 years to recoup the $6 trillion of housing wealth that has been lost since 2005. After adjusting for inflation, values will never catch up. "People shouldn't look at a home as a way to make money because it won't," Mr. Baker said.

If the long term is grim, the short term is grimmer. Housing experts are bracing themselves for Tuesday, when the sales figures for July will be released. The date is expected to show a drop of as much as 20 percent from last year. The supply of homes sitting on the market might rise to as much as 12 months, about twice the level of a healthy market. That would push down prices as all those sellers compete to secure a buyer, adding to a slide that has already chopped off as much as 20 percent in home values. Set against this dismal present and a bleak future, buying a home is a willful act of optimism. In an annual survey conducted by the economists Robert J. Shiller and Karl E. Case, hundred of new owners in four communities near San Francisco, Boston, Orange County south of Los Angeles, and Milwaukee – once again said they believe prices would rice about 10 percent a year for the next decade. With minor swings in sentiment, the latest results reflect what new buyers always seem to feel. At the boom's peak in 2005, they said prices would go up. When the market was sliding in 2008, they still said prices would go up. "People think it's a law of nature," Said Mr. Shiller, who teaches at Yale. For the first half of the 20th century, he said, expectations followed the opposite path. Houses were seen the way cars are now: as a consumer durable that the buyer eventually used up. The notion of housing as an investment first began to blossom after World War II, when the nesting urges of returning soldiers created a construction boom. Demand was stoked as bumper crop children grew up and bought places of their own. The inflation of the 1970's, which increased the value of hard assets, and liberal tax policies both helped and make housing a good bet. So did the long decline in mortgage rates from the early 1980's. Despite all these tailwinds, prices rose modestly for much of the period. Real home prices in increased 1.1 percent a year after inflation, according to Mr. Shiller's research. By the late 1990's, however the rate was 4 percent a year. Happy homeowners were talking about $100 billion a year out of their houses, which paid for a lot of good times.

"The experiences we had from the late 1970's to the late 1990's was an aberration" Said Barry Ritholtz of the equity research firm Fusion IQ. "People shouldn't be holding their breath waiting for it to happen again."

Not everyone views the notion of real appreciation in real estate as a lost cause. Bob Walters, chief economist of the online mortgage firm Quicken, acknowledges that the recent collapse will create a "mind scar" just as the Great Depression did. But he argues that housing remains unique.

"You'll have to live somewhere," He said. "In three or four years, people will resume a normal course, and home values will continue to increase."

All homes are different, and some neighborhoods and regions will rebound more quickly. On the other hand, areas where there was intense overbuilding, like Arizona, will be extremely slow to show any sign of renewal.

"Its entirely likely that markets like Arizona will not recover even in the 15- to 20-year time frame," Said Mr. Humphries of Zillow. "The demand doesn't exist."

Owners in those foreclosure plagued areas considered them selves lucky if they are still solvent. But that does not prevent the occasional regret that a life-changing sum of money was so briefly in their grasp. Robert Austin, a Phoenix lawyer, paid $200,000 for his home in 2000. Five years later, his neighbors listed a similar home for $500,000. Freedom beckoned. "I thought, when my daughter gets out of school, I can sell the house and buy a boat and sail around the world," Said Mr. Austin, 56. His home is now worth about what he paid for it. As for that cruise, "it may be a while," Mr. Austin said. Showing the hopefulness that is apparently innate to homeowner, he added: "but I won't rule it out forever."

On Wednesday, August 25, 2010, the front page of the New York Times had an article entitled "Housing Market Plunged in July, Fueling Anxiety" It said:

"Americans' long infatuation with owning a home, which even the economic collapse of 2008 could not kill, shuddered and stalled last month. Housing sales in July plunged 25.5 percent below the level of a year ago, the National Association of Realtors said on Tuesday, as buyers lost the spur of government tax credit. The steep descent surprised nearly every analyst and put the volume of singer-family home sales at the lowest level since 1995. Mortgage rates are the lowest in modern memory while afford ability, because of price declines of 30 percent in many areas, is highest in at the least a decade. The government is allowing buyers to put only a token amount down, guarantees lenders against default and regularly issues proclamations that the worst is over. Apparently, all of that is not enough to put a floor under housing. With unemployment steady for month upon month at more than 9 percent, and with millions heavily in debt or simply skittish, many potential buyers are lost to the market. No region was immune in July with sales in the Northeast dropping 30 percent, the Midwest falling by a third, the South down 20 percent and the West off 23 percent. The turmoil in housing, which is likely to lead to further price declines this winter, could send growth in the second half of the year below 12 percent, said Joel L. Naroff, an economist."

"It won't be a double-dip recession but it might feel like it," he said.

Analysts had been expecting a drop in July home sales because the month was the first time in a year that buyers were ineligible for the government housing tax credit. But the consensus expectation was for a decline of about 13 percent. The $8,000 tax credit increased sales and stabilized prices last year, which led congress to expand and extend the incentive through this spring. The cost was about $30 billion. Economists said that just as the credit had artificially buoyed the market, the end of the credit was artificially depressing it. "If you pay them, they will come. But when you stop paying them, they leave in droves," the economist Tom Lawler wrote in an e-mail. His conclusion: "People shouldn't panic." Those on the front lines of real estate describe an unusual stand off between buyers, who can afford to be fickle as rarely before, and sellers, who feel they cannot go lower. For many sellers, agents say, another 5 percent would be taking a loss.

"What few buyers are out there circle a listing like a vulture, waiting form the day of its debut until its left for dead," said Glenn Kelman, chief executive of the online brokerage Redfin. Then, he said, they might make a low-ball bid.

Mr. Kelman said that what made the sales drop "even more breathtaking" was that it was happening in July, which is typically when demand peaks. Sales were down 27.2 percent from the rate in June. Over the last 20 years, sales of existing homes have averaged about 4.9 million a year. The sales volume in July equates to an annual rate of 3.83 million. "Truly gut-wrenching: said Jennifer H. Lee, senior economist for BMO Capital Markets. Mr. Lawler, whose forecast for July was much more accurate than his colleagues' estimates, said housing would truly be healthy only when there was enough employment growth to spur the creation of new households. For instance, adult children who are living at home will have to get places of their own. Few think that will be happening any time soon. In the meantime, there will be too many homes on the market, which tends to push down prices as sellers compete. A normal market has an inventory level of less than six months. While relatively few new sellers put their homes on the market in July, the drop in sales was sufficient to push inventory levels up to 12.5 months. That exceeds any level since records were first collected in 1999. Prices have been stable for much of the last year, a trend largely due to the tax credit. The Realtors' group said Tuesday that the median existing-home price for all housing types was $182,600 in July, up 0.7 percent from a year ago. Most housing experts think prices will fall another 5 to 10 percent this winter. That makes this a miserable time for those who want to sell, not to mention those who do not want to be reminded that the walls sheltering them are worth a tiny bit less each day. But it is quite a hopeful moment for buyers who have waited patiently through the bust and have a bit of nerve.

On Saturday August 28, 2010, The New York Daily News had an article entitled "Federal Reserve has a plan, may buy securities if economy sinks, but sees 2011 gains: Ben Bernanke". The article stated:

"The Economy looks bleak, but don't worry: The Fed has a plan. Federal Reserve boss Ben Bernanke said yesterday the central bank will consider making another large-scale purchase of securities if the slowing economy were to deteriorate. Bernanke acknowledged the recent pace of growth is "less vigorous than we expected." He described the outlook as uncertain and said the economy "remains vulnerable." At the same time, he said growth is likely to pick up next year. He downplayed the odds of another recession; even after a series of dismal reports on housing and manufacturing this week stoked fears that economic scales could tip backwards."

Bernanke stopped short of committing to any specific action, but he raised the prospect of anther fed purchase of government debt or mortgage securities to drive down lending rates and spur consumer spending. Bernanke also indicated the policy makers might cut its key interest rate to zero from 0.25%. "The issue at this state is not whether we have the tools to help support economic activity…. We do" Bernanke said.

The Feds strategy carries no guarantees. Short-term interest rates near zero have yet to rejuvenate the economy. The benefits of federal stimulus programs are fading, and Congress has declined to pass any major new economic aid. That is putting immense pressure on Bernanke to provide relief, and he has no easy options for fixing the economy. At such a weak pace, the nation's 9.5% unemployment rate could climb and pass 10% some analysts say. With condition worsening, there's the danger that consumers and business will turn even more cautious in their spending. The Fed is right to hold off, said Brian Bethune, an economist at HIS Global Insight. But if the economy shrinks in the third quarter, the central bank's hand would be forced, he said, adding, "I think they'd have to make a move."

On Sunday August 29, 2010, in The Week In Review section of the New York Times there was an article entitled "Policy Options Dwindle as Economic Fears Grow" This article talked extensively about the economy. It discussed The Three Signs of Trouble are: Inflation Turning to Deflation, Rock Bottom Interest Rates & Ballooning Federal Debt.

The article concluded by stating "Right now, many homeowners owe the bank more than their homes are worth, prompting some to abandon properties, adding inventory to a market choked with vacant addresses. An Obama administration program aimed at slowing foreclosures has prolonged trouble, say some economists, by failings to relive borrowers of unsustainable debt burdens or making transparent the extent of losses yet to be confronted by the financial system. "The big question is, who's going to swallow the losses," says Mr. Stiglitz. "It should be the banks, but they don't want to. We're likely to be in paralysis for years if they prevail." The treasury sits in the middle, concerned by the continued weakness of housing, yet unwilling to pressure banks to write down mortgage balances. Like their Japanese counterparts a decade ago, Treasury officials worry that forcing the banks to take losses could weaken them and risk another crisis. By default, muddling through has emerged as the prescription of the moment. The last sentence of this article accurately describes the state of the economy. We are all just "mudding" through these hard times.

"Jobs are still the number one concern on the minds of Americans and the world. Without jobs, the economy will not recover. Since 2/3 of spending in this country is by consumers, jobs are the most important factor that everyone is watching. If you recall in my September 2007 Commentary I stated the loss of jobs resulting from the loss of jobs in the mortgage industry was my ultimate concern.

On September 4, 2010, the front page of the New York Times had an article entitled "Growth in Jobs Beats Estimates, Easing Concerns" The Article Stated:

"American businesses added more jobs in the last three months than originally estimated, calming fears of a double-dip recession. Yet the pace of growth signaled that the wheels of the economic recovery were still spinning in place. The private sector added 67,000 jobs in August, with some of the strongest gains in heath care, food service and temporary help, according to the Labor Department. That was higher than consensus forecasts, and the government upwardly revised its numbers for June and July, suggesting that job creation was slightly stronger over the summer than originally reported. But the continuing wind-down of the 2010 Census, as well as state and local Government layoffs, led to an overall loss of 54,000 jobs in August. With business adding about half the number of positions needed simply to accommodate the population growth- much less dent the ranks of the jobless – the unemployment rate ticked up to 9.6 percent, from 9.5 percent."

"The overall picture is one where the labor market is still kind of treading water," said Joshua Shapiro, chief United States economist at MFR Inc. "Its better than sinking, but its certainly not surging ahead."

Speaking from the White House Rose Garden on Friday morning, President Obama called the latest jobs report "positive news," but said he would be unveiling "a broader package of ideas next week," to shore up the flagging economy, although he declined to give specifics.

"There's no quick fix for this recession," he said. "The hard truth is that it took years to create our current economic problems, and it will take more time than any of us would like to repair the damage."

"I can say with greater confidence that a relapse into recession now looks even more unlikely," said Bernard Baumohl, chief global economist at the Economic Outlook Group. "And the momentum is gradually building for a stronger fourth quarter and a better 2011."

There is unlikely to be much relief in the coming months. Most economists are forecasting luke-warm growth in the second half of the year. Growth in the second quarter was revised down last week, to 1.6 percent from 2.4 percent. Jan Hatzius, chief United States economist for Goldman Sachs, said he believed the economy would grow at about 1.5 percent in the second half. That is not nearly enough to start bringing down unemployment in a significant way.

"Overall you generally need 3 percent G.D.P growth or more to start making a dent in the unemployment rate on a consistent basis," said Mr. Hatzius, referring to gross domestic product.

He noted that Friday's report might end up being something of a Catch-22 for government action, particularly for the Federal Reserve. Last week, the Fed chairman, Ben S. Bernanke, said the central bank was prepared to act if the economy continued to weaken, but Mr. Hatzius said Friday's labor market numbers might cause the Fed to hold its powder.

"If you had a really bad report, that would spur people into action more," Mr. Hatzius said. "But this is going to reduce the need for immediate action."

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