Smart Real Estate News & Commentary by Chris McLaughlin June 6, 2011
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WSJ – why it’s time to buy
Back in June 2006, when the housing market peaked, the prospect of a five-year national housing bust seemed unimaginable to most people. And yet here we are, with the latest Standard & Poor’s Case-Shiller index showing that prices hit new bear-market lows, falling back to 2002 levels nationally and to 1990s levels in some battered regions. Despite all the gloom, however, there are growing indications that it is a good time to buy. Mortgage rates, which fell to 4.55% for the week ending June 2, according to Freddie Mac, are near 50-year lows. Homes have become more affordable than they have been in years: According to Moody’s Analytics, the ratio of home prices to income is now 20.9% lower than the 15-year average through 2010, and 12.5% lower than the 1989-2004 average. A historic glut of homes, meanwhile, has created a buyer’s market: There were about 15 million vacant homes in the U.S. last year, according to John Burns Real Estate Consulting, Inc.—some 3.1 million more than normal.
Such conditions might not last long. Moody’s Analytics predicts that the number of distressed sales will begin to fall in 2013, and that prices will begin to edge upward then. Home building is at a virtual standstill, so the supply overhang isn’t likely to get much worse. Meanwhile, demographic indicators such as “household formation”—the number of new households each year—are on the rise, and promise to take a bite out of the glut in coming years. The upshot: “While we might not see rapid growth in the next couple of years, there are a tremendous number of positive signs that could lead to a rebound,” says Anthony Sanders, a real-estate finance professor at George Mason University. The short-term outlook isn’t encouraging. Job growth remains weak, foreclosure sales are making up more of the market, and economists are predicting that home prices will fall more in the coming months. But the long-term benefits of homeownership remain very much intact. For now, at least, you can deduct the mortgage interest on your taxes—a big perk for people in higher tax brackets. You get to paint your walls any color you wish, without having to clear it with a landlord. And assuming you can buy a home for about the same price as you can rent one, buying will give you the ability one day to live rent-free. Come retirement time, a paid-off mortgage means your monthly expenses are significantly reduced, and you have a chunk of equity to play with.
So what might the next five years look like? Once the foreclosure mess begins to clear up, say housing economists, the traditional drivers of the housing market—demographics, affordability, loan availability, employment and psychology—should take over. Here is a glimmer of what the future may hold: While overall home prices fell by 7.5% in April over the same period a year earlier, according to CoreLogic, a Santa Ana, Calif., provider of real-estate data and analytics, if you exclude distressed sales, prices were off just 0.5%. So if you are in a market that isn’t battered by foreclosures, you may be close to a bottom already.
State and local layoffs hit record levels
According to IHS Global Insight, state and local governments are forecast to shed up to 110,000 jobs in the third quarter, the first time public sector layoffs have risen into the triple digits. State and local government employment has been a drag on the economy all year, averaging a loss of 23,000 jobs a month over the past three months. Meanwhile, the private sector has created an average of 180,000 a month during the same period. In May, public employment shrunk by 29,000 jobs, mostly at the state and local level, while businesses created 83,000 jobs, the Labor Department reported Friday. All told, the sector has lost 510,000 positions since its peak in August 2008. Though tax revenue is starting to rise, states are still wrestling with multi-billion-dollar budget gaps. Federal stimulus funds helped minimize job cuts until now, but that money essentially runs out on June 30. So states are planning to slash funds for education, social services and local governments, as well as downsize their payrolls even more, in the coming fiscal year.
Local governments are in even worse shape. Not only are they losing state aid, but they are finally feeling the fallout from the mortgage meltdown. Property tax assessments, a major funding source for municipalities, have only started to drop. Teachers and school staff will bear the brunt of the layoffs this summer, as hundreds of thousands will likely be laid off around the nation. The national job numbers should reflect the hit in July and September. It’s not uncommon for state and local governments to take longer to emerge from a recession. But usually by then, businesses have ramped up their hiring. This time around, private sector hiring has remained soft, making government cutbacks that much more painful. And it will likely take at least a year before the state and local government job market revives, economists say. Until then, they are waiting to see the extent of the downsizing. “The only question is ‘how much worse?,” said Dean Baker, co-director of the Center for Economic and Policy Research.
Olick – corporate housing
Earlier this week I did a piece on television about how many job seekers are frozen in place because they can’t sell their homes to relocate for a new job. More than a quarter of U.S. borrowers owe more on their mortgages than their homes are currently worth. We call that in a “negative equity position” or “underwater.” “I had an example last week of someone who was on the East Coast and there was an opportunity on the West Coast. Great paying job, and the family just could not afford to take a $250,000 loss on their house. That employee, prospective employee, had to forgo that opportunity,” recalled Gary Burnison, CEO of Korn Ferry International, an executive recruiting firm.
I decided to dig a little deeper into this phenomenon and found another fascinating story: Temporary corporate housing is seeing a boom, and it’s not just in big rental apartment buildings. Job seekers are actually renting out their own homes as corporate housing, so they can take a job somewhere else and not have to sell at a loss. “I probably get a call on an hourly basis with people who have a new job, have new job opportunities, know that there are job opportunities in another area, but have this home, which is a burden around their neck that they don’t know what to do with,” said Kimberly Smith, president of the Corporate Housing Providers Association (CHPA). Smith is also the founder of Corporatehousingbyowner.com, a site that helps homeowners find corporate renters. “If you find that right person at the right time, the ability to rent your home fully furnished is a huge emerging real estate trend that is hot.” Sixty percent of the properties listed on Smith’s site were rented as a result of the owner’s relocation needs. And demand is booming, especially as corporate apartment rents climb due to strong demand. “Just this morning, I got a call from an individual in a random town in Minnesota. They had listed their property for rent two days ago, and now have their property rented for six months,” said Smith, but she added there is something else far more troubling pushing the corporate rental demand:
“I was having lunch with an executive head hunter the other day, and they were stating that corporations are picking their second or third choice for job applicants because they don’t want to be stuck with someone who might be underwater with their home. Corporations can discriminate against you based on your financial status, and being in a home that’s underwater is a perfectly good reason for an employer not to hire you.”
Corporate renting is one alternative. It may seem strange, swapping your house for someone else who has been dislocated from their home, but these are strange times. The upside is that instead of moving your family into some sterile corporate apartment box, you can move them into a real home that might remind them of better times.
Consumer confidence down
The Consumer Confidence Index — a report compiled by the Conference Board — fell to its lowest level since October, showing consumers are more apprehensive about the job market, their income and inflation. “Right now, we’re in a tough patch for the consumer,” Bostjancic said. “We’re not yet near a double dip, but we’re in a frustratingly slow recovery.” Perhaps it’s not that surprising then that May’s job growth was weak, adding 54,000 jobs — a measly number when you compare it to job gains that averaged above 200,000 in the prior three months. When consumers aren’t feeling confident about the economy, they’re likely to reduce spending. Businesses begin to anticipate lower demand for their products, and become reluctant to hire — or worse — cut jobs. In May this appeared to be true with a variety of consumer industries. Retail, for example, cut 8,500 jobs after adding a whopping 64,000 in April.
The leisure and hospitality industry — which depends almost entirely on discretionary consumer spending — cut 6,000 jobs, after averaging gains of 44,000 each of the prior three months. Even the subcategory of food service — which was expected to benefit from a recent McDonalds’ hiring spree – showed significantly slower job growth. The economy added 13,600 food service jobs in May, after averaging growth of nearly 32,000 each of the prior three months. “After two years of an economic recovery, businesses are starting to figure out, there’s very little room for top-line revenue,” said John Silvia, chief economist for Wells Fargo. “Consumer spending has been subpar this economic recovery,” he added.
WSJ – five factors governing housing markets
1 Demographics
Household formation fell during the economic downturn as a weak economy led some people to stay in school, double up with roommates or move in with family members. According to Moody’s Analytics, the number of new households renting or owning a home dropped to 578,000 in 2008 from nearly 2 million in 2005, just before the peak of the housing boom. But household formation increased to nearly 950,000 last year, says Moody’s, and should average 1.2 million over the next decade. That, combined with increased obsolescence and higher demand for second homes, should begin sopping up excess inventory in much of the country over the next two years, Moody’s says.
2 Affordability
Rising home prices made renting cheaper than buying in many parts of the country. But that dynamic has begun to change: Housing affordability, as measured by the ratio of median home prices to median household incomes, has fallen below pre-housing bubble levels in just over two-thirds of the country, according to an analysis of more than 380 metro areas by Moody’s Analytics. Renting is still cheaper than buying in most markets, but rising rents and falling house prices mean that, in some areas, this won’t be the case for long. Buying a home is already cheaper than renting in Chicago, Cleveland, Detroit and Orlando, Fla., according to Moody’s Analytics. In other markets, including Dallas, Las Vegas and Sacramento, Cailf., the equation is likely to soon turn in favor of homeownership if current trends persist, the firm says. In Ann Arbor, Mich., where home prices fell 11.2% between 2007 and 2010, according to Fiserv Case-Shiller, housing affordability has risen well above historical levels, according to Moody’s Analytics.
3 Employment
The strength of the housing market depends largely on the economy. Rising incomes and increased employment tend to give more would-be buyers confidence and buying power. For now, job growth remains sluggish: On Friday the Labor Department reported that just 54,000 jobs were created in May, far below expectations. But signs of how a stronger job market could fuel housing demand are evident in the Dallas metro area, which added 83,100 new jobs in the 12 months ending in April—the largest gain in the nation, according to the Bureau of Labor Statistics. Dallas never had a big housing boom or bust and has benefited from trade with Mexico, a strong telecommunications sector and a central location.
4 Credit
Mortgage financing remains plentiful for borrowers with good credit scores and solid employment histories. But for borrowers who don’t fit traditional lending standards, getting a loan can still be nearly impossible. In the first quarter, about 10% of banks tightened standards for nontraditional loans, according to the Federal Reserve. Meanwhile, higher down-payment standards are locking some would-be buyers out of the market. Just 35% of renters have the minimum 3.5% down payment needed for an FHA loan on the median-priced home in their market, according to a recent survey by Zelman Associates. Credit is likely to remain tight for at least the next six months, says Clifford Rossi, a former Citigroup Inc. consumer-lending executive who teaches at the University of Maryland. But conditions should improve over time, he says: “There’s no question that it will gradually get easier.”
5 Psychology
The long-term case for buying over renting remains in force. Yet nowadays, “People are simply scared,” says Aaron Galvin, chief executive of Luxury Living Chicago, which finds rental apartments for wealthy clients. Mr. Galvin says he has seen a 30% increase in business in the last year, driven by would-be home buyers who can afford to purchase a property but are choosing not to do so. The portion of Americans who believe homeownership is a safe investment dropped to 66% in the first quarter from 83% in 2006, according to Fannie Mae, the government-controlled mortgage company. But it isn’t clear whether the fear will result in a prolonged change in attitudes, as during the Great Depression, or have little long-term impact, as was the case for the housing bust that shook California and the Northeast in the late 1980s and early 1990s. Eighty-seven percent of people surveyed by Fannie Mae said they preferred owning to renting, though access to schools, control over one’s environment and other quality-of-life issues now are seen as the key benefits of homeownership, with building wealth and other financial factors viewed as less important. In addition, 67% of renters surveyed by Zelman Associates said they planned to buy a home in the next five years.
See you at the top!
Chris McLaughlin
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About the author:
Chris McLaughlin is widely known as America’s top
Real Estate Attorney and Investment Consultant.
* As the top Florida foreclosure and pre-
foreclosure expert, he oversees more than
100 short sale & REO closings each month
* Long-time authority on real estate investing
and rapid reselling of distressed homes. Owns
portfolio of nearly 150 high-value, high-profit
properties
* Owner of one of Florida’s largest Real Estate firms,
running 4 different offices, supporting over
420 agents, uniquely positioning him to help
thousands of investors make money in the
biggest market opportunity ever!
* In 2010, Chris’ 4 Central Florida real estate offices
closed 2,786 sides for a closed sales volume of
$392,912,927!
* Highly sought-after speaker, consultant, and
seminar leader for current trends and hot topics
in Real Estate Investing, Entrepreneurship, and
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