My thinking is that we have completed the extremes of the cycle. From the silliness of 2006 to the 50% (average) drop in 2010 the process of re-pricing may be completed. We shall see if this lasts. Some reasons why it might be happening and a few that make me wonder if it will continue.
-MERS problems have shut down the pipeline of distressed homes. There was, and continues to be cash buyers of stuff being sold by the financial players (REO). In South Florida hundreds of apartments have been bought (paid with cash) and taken off the market. There is still a lot of junk, but the supply of nicer properties has gotten smaller.
-In NYC the market is good. Apartments are selling faster and at higher prices. The City has always been the driver of RE in the burbs. With prices over 1,000 a foot in town the ‘country’ looks better at under 500.
-There are cash buyers. Some of this is overseas money. To some extent the 100% rise in equities has to be the source of the money. I can imagine the conversations that took place two years ago:
“Honey, we got hammered in the stock market. If we ever get back to “X” we are going to sell half and buy the house we always wanted.”
The Russell 5000 is up $7 trillion in two years. Some of those X’s are being reached.
-A common theme that I’m hearing is “What's the new construction cost for this property?” The answer to this is that costs have been rising very fast of late. According to Reed Construction Data materials cost rose in the three months ending in January rose at an annualized rate of 5.6%. Some of the contributors: Concrete +10.9%, metal joists 5.5%, tile +6.5%, site preparation +8.5%, fire protection, plumbing and HVAC +19% (copper).
These are January numbers. There will be a big jump again in February/March. Everything is energy driven in construction. Want a new roof? Get it fast. Asphalt shingles are a “buy”.
Net-net there is a “cost pull” that is influencing pricing of older homes. This is exactly what Bernanke has been trying to engineer.
-I don’t know if prices are “cheap” today or not. I know they are a lot lower. Where I live we are back to 2003 levels.
-Brokers have a great selling line to prospective buyers today. “Mortgage rates will be rising, the availability of mortgages will be curtailed in future years due to the wind down of the GSEs. Better to move now.” This is just brokers pushing buyers. An old game. But in this case there is truth to it. The days of the mortgage with a “4” handle are gone. I doubt we’ll see that again in a very long time. The question today is, “Are they going above 6?”
Don’t read this to be some bull case for RE or the great comeback in the US economy. It's just an observation of where I think we are in the spring of 11'. I think residential RE is a lousy investment. Ownership cost is twice rental. You need 5% annual appreciation just to break even. That’s not going to happen.
Property taxes are going up all over. The cost of maintenance is way up. Interest rates have just started to rise. In a few years they will be much higher than today. Then there is that wild card of energy. The last place you want to be is in a big home and $200 crude.
If I’m right about this you will see it in the foreclosure stats. The bottom rung always has to get a lift first. Outside of the MERS issue the Chairman of the Federal Reserve is bringing this to you. He is responsible for almost all of the factors I mention. But in about six months he is going to be forced to take away the punchbowl.
Punchbowl Falls
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It's just an illusion.
ReplyDeleteThe federal government is running a huge deficit. State and local governments are doing pretty much the same. You have to be an idiot to believe this money will ever be paid back while America maintains its current living standard. So the Fed is creating a lot of money to provide the dollars to pay for all that. Cutting spending or increasing taxes to achieve more balance in all that will show the US does not produce enough wealth to justify its current living standard.
And at this point these problems are more structural than anything else.
Like I said: It's an illusion.
You should qualify the statement: apartment buildings are probably selling more since rental rates are unfortunately increasing. But residential RE is crashing due in direct or greater proportion the rise in rents. Many houses for sale, few for rent. The ones for sale are going for lower and lower prices. Financing is not available so youre correct about cash. But residential stuff takes a year to sell and in my area(Raleigh), down at least 10-15%. Rents have increase 25% in the last 15 mo.
ReplyDeleteNorthern Calif SF area is close to double dip and in many area's already. Napa for instance a nice neighborhood was 400K 18 months ago now around 325K on zillow has two REO's going for 265K which kills the comps. I live in Sonoma and its a mixed bag with prices back to 2002-3 levels and going lower with lots of short sales. One area that is very slow is our high end 55+ developments, with many forsale, few buyers so the boomer move into higher priced retirement living seems on hold. Many stranded flippers those that buy at auction and remodel quickly within 90 days. Overall its a market full of short sales with many deals ending quickly due to higher credit standards. Prices will be back to mid 90's in a couple years!
ReplyDeleteI see double-dipping and the number of short sales is still high in my area. Lots of places for rent in an area that doesn't see much rental turnover. Much of real estate is local though, so don't generalize.
ReplyDeleteWhen interest rates go up, the price of most real estate goes down out here in normals-ville. Look out below!
CoreLogic ... January Home Price Index (HPI) which shows that home prices in the U.S. declined for the sixth month in a row. According to the CoreLogic HPI, national home prices, including distressed sales, declined by 5.7 percent in January 2011 compared to January 2010 after declining by 4.7 percent in December 2010 compared to December 2009. Excluding distressed sales, year-over-year prices declined by 1.6 percent in January 2011 compared to January 2010 and by 3.2 percent in December 2010 compared to December 2009. Distressed sales include short sales and real estate owned (REO) transactions.
ReplyDeleteThe January data shows home prices continuing to slide. Mark Fleming, chief economist with CoreLogic, said, “A number of factors continue to dampen any recovery in the housing market. Negative equity, which limits the mobility of homeowners, weak demand and the overhang of shadow inventory all continue to exert downward pressure on housing prices. We are looking out for renewed demand in the coming months as the spring buying season gets underway to hopefully reduce the downward pressure.”
Do you spend time in S. Fla?
ReplyDeleteWhere is the capitulation? In a correction of this size you will get every element of the Kübler-Ross cycle as society renormalizes. Your seeing the bargaining part of the cycle after the anger where the gov and home owners try to make sense of "waiting out the storm" or negotiate with their banks etc.. Give them another year or two of bleeding out and we will get to full on depression. These cycles take more time than anyone would think. Going up the price move was fast but going down you have to wait for everyone to throw in the towel. Just look at the narrative to see where most of society is in the cycle.
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