Cart (0)
business newsHousing Market Years From the Bottom
Looking to invest today? Some areas, including coastal California, are perfect for buying foreclosed homes.
PRINT
The Case-Shiller report yesterday wasn’t news because we all know that housing prices are continuing to decline on a national basis. But, it reinforces what we are seeing.
Home prices fell to new lows in 11 cities in December, the latest sign that the weak housing sector remains a soft spot in the US economy.
Across 20 major metropolitan areas, home prices fell 1% in December from November [and 4.1% year-over-year for the fourth quarter], according to the S&P/Case-Shiller home-price index released Tuesday. The index has declined for five consecutive months, all but erasing the gains in home prices since the recession ended in June 2009. … Robert Shiller, the Yale University economist who co-founded the index that bears his name, said Tuesday that there remains a “substantial risk” of another 15% or 20% decline in home prices.
Their December 2010 data show this:
Unlike previous reports, not any of their 20 metropolitan areas had price increases:
To live up to my “truth in forecasting” goal, I have consistently overestimated the housing “recovery.” I have not been forecasting a recovery as much as a bottoming of the market. My prior views that the housing market has been finding a bottom were clearly wrong.
Why was I wrong? I underestimated the volume of housing that would come onto the market as a result of declining prices. I also think I underestimated the carryover effect of some of the government’s (futile) efforts to stabilize the market. While it was pretty obvious that the first-time buyer credit was limited and borrowed from future sales, HARP, HAMP, and other programs also forestalled some of the declines. I believe now that consumers are seeing the inefficacy of those efforts and, with rising mortgage rates, they are more cautious about the market. Many are finding their tax credit already eaten away by price decreases.
What is my current, chastised view? I’ll go along with Professor Shiller, at least on a national basis, that we are a couple years from bottom, much less recovery. On a national basis, S&P estimates that it will take 49 months to clear out the foreclosure market. I would say that lull in foreclosures is over.
Would I be buying foreclosed homes for investment today? This is a market decision. Coastal California? Yes. From my own experience and anecdotal evidence, I believe the California coast is still firming up. This trend is limited to the coastal cities of California. There is a lot of money chasing foreclosures, which has prevented a free fall as in Las Vegas and South Florida. Coastal areas are notoriously difficult to build out and overproduction was limited. But as shown on the second chart, prices nationally are at first-quarter 2003 levels.
Las Vegas? No. South Florida? Maybe with retiring baby boomers plus foreign money seeking cheap deals in the Sunbelt. Location is everything as they say. If the supply was more than 12 months, I would be cautious. In really overbuilt areas I would make sure I was buying the best property location and amenities on that market. Cheap is sometimes just, well, cheap. Be concerned about property tax increases as states look for sources of revenue. As you know, there is no substitute for good due diligence and market research.
The test for investors is: does it pencil out? That is, with a 20% down payment, a fixed interest rate 30-year PITI loan, and reasonable HOA fees with a reserve for increases, do the rents yield a 10% return? If not, skip it unless you have deep pockets. It’s never a simple game and there are a lot of economic factors that could make your renters go away. On the other hand, if you know what you are doing in your area, there are opportunities.
Follow the markets all day every day with a FREE 14 day trial to Buzz & Banter. Over 30 professional traders share their ideas in real-time. Learn more.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
