September 10, 2009

The Wall Street Journal carried an article today about a further real estate decline predicted by Meredith Whitney. Much of her analysis is based on the larger American cities hit hardest by the mortgage melt down, which of course led to the foreclosures that brought real estate prices to their knees.

Despite her dire predictions, many analysts feel there is a marginal recovery in the market now and if as she suggests unemployment climbs, the drop will be significantly less than her 25% prediction.

Meredith Whitney a well known banking analyst feels the real estate market is in for another major shock, part of a cycle of tumbling home prices and escalating unemployment which she says could plummet another 25%.

Since here in Montana and other cities in the United States the real estate market is showing some signs of stabilizing, that is a pretty depressing prediction. Sales while slow have been gaining steady growth over the summer but dropping prices in other states will have its impact nationally and that would mean that mortgages can be higher than a home is worth in today’s market. This is untenable especially with declining employment statistics and someone in the household loses their job.

The cycle continues with those unemployed being unable to make payments losing their home to foreclosure, putting more distressed homes in the market, which in turn drives prices down even more. The only bright side is that these lower prices are bringing buyers out looking and finding bargains.

 “I think there is no doubt that home prices will go down dramatically from here, it’s just a question of when,” Ms. Whitney, known for accurately predicting troubles for Citigroup Inc., told CNBC Thursday. “…If you look at the drivers for unemployment, I don’t see that reversing very soon.” (More on Ms. Whitney.)

Housing bubbles grew in Las Vegas, Los Angeles and many other American cities – unchecked for several years and now those cities have experienced a severe down market bringing prices down by as much as 50 per cent according to the S&P/Case-Shiller index. New construction – unrestrained in the boom years has left neighborhoods desolate and abandoned.

Slight improvements are showing up in the statistics in that prices fell less in the second quarter than in the first by 4.2%. This is the first positive comparison in three years. Some cities like Denver Colorado and Dallas Texas have consistent positive comparisons for the past 12 months.

 “Moody’s expects a drop of about 10% from current levels, and the declines will continue late into next year, says analyst Joseph Snider.”

Many analysts feel Meredith Whitney’s doom and gloom forecast is not reasonable given the positive comparisons this quarter.

While S&P/Case-Shiller shies away from predictions, David Blitzer, chairman of the index committee, thinks Ms. Whitney’s is estimate is too negative. While prices may fall further, “a 25% decline from here sounds very steep, he said. “To say that we’re only half way through this sounds pessimistic.”

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A Real Estate Market Comeback? Maybe.

Signs are sprouting  in unusual places that perhaps the real estate market is finally on the rebound.  Are there enough details and statistics to back this up? Or is this just more rhetoric hoping to boost confidence in the housing sector? 

Washington this week said that home sales rose last month as buyers took advantage of the depressed market.  Economists were quick to say this is a clear sign the market may finally be bouncing back.  Buyers have been taking advantage of the bargain basement sales with home prices being forced down by the huge foreclosure market.  And first time buyers are jumping on the band wagon to take advantage of the federal tax credit.

From the undersecretary of Commerce "The U.S. Bureau of the Census released new residential sales for June 2009. Sales of new one-family houses rose 11.0 percent in June, well above the rise of 2.3 percent expected by private-sector analysts."

“The evidence is clear that home buyers are taking advantage of Recovery Act tax incentives, declines in home prices and relatively low mortgage rates,” U.S. Under Secretary for Economic Affairs Rebecca Blank said. “Both new and existing homes have become more affordable. While the economic environment remains difficult, as more Recovery Act dollars hit the streets, we anticipate that it will further bolster the economy in the coming months.”

The stats say these purchases have pushed the home sales to a high not seen since last November. Then go on to say that home prices are still falling around the country.  What gives? Another article pipes up to say sales have risen for three months in a row, and new construction is moving ahead into their busiest season since last fall.

"The worst of the housing recession,"said David Resler, chief economist at Nomra Securities, "is now behind us." "But the recovery in the overall economy, is likely to be slow and arduous" he said.

"There’s definitely more first-time homebuyers in the market than what we’ve seen in the last several years." says Corey Barton, president CBH Homes in Meridian, Idaho

How can all of these conflicting comments make sense?  In a jumbled way they do.  The real estate market as we all know has been hit tremendously hard by the foreclosures.  This has driven the average price for a home down.  Unfortunately, those who must sell their homes are forced to sell at these rock bottom prices established by the foreclosures.  These factors then creates an environment where home buyers are motivated to buy. So the cycle continues with more sales that are driving the prices down, certainly not contributing to any increase in value for home owners.

Locally, last week in the newspaper, it was noted that developers for the first time this year are starting to pour concrete for new housing. This is a good sign that they have some confidence in the market recovering.  But even though the real estate market appears to be starting a recovery, it does not mean it is going to turn around and become a powerful economic engine anytime soon.

Sherry Fields