HOUSING: Where will it be in 2012?
Business Week reports that home prices are likely to fall for the next year, then stabilize, with a rebound in 2012 as the overall economy takes off again

By Peter Coy, Mara Der Hovanesian, Christopher Palmeri, Amy S. Choi and Tara Kalwarski, BUSINESS WEEK, 06/29/09, http://www.businessweek.com/magazine/content/09_26/b4137028238311.htm

Highlights and [bracketed comments] added  

Americans have not seen a boring housing market since the last millennium. You know—the average, ordinary kind of market where supply just about matches demand, prices are steady, and real estate ceases to be a topic of daily conversation. Instead, we've had six years of upside craziness followed by three years of downside terror. Now we're in a tug-of-war between those who think we've finally found a bottom and those who are convinced that the overhang of unsold homes is going to push prices considerably lower.  

By 2012 we may finally get back to blissful boredom. With any luck, three years should be long enough for the U.S. economy to recover and for the nation's housing inventory to shrink to more normal levels. At that point, housing will return to its old ways, with prices governed not by national mood swings and global credit crises but by local issues ranging from zoning to immigration to job growth.  

Prices? While they're likely to keep falling a while longer under the weight of foreclosures, the market is definitely closer to the bottom than the top. "We expect prices to drop for another year and then stabilize before starting to rise with incomes," says Standard & Poor's Chief Economist David Wyss. Moody's Economy.com predicts the S&P/Case-Shiller U.S. National Home Price Index, maintained by data specialist Fiserv, will fall about 16% this year before regaining ground. Based on the National Association of Realtors national median home price of $180,000 for the fourth quarter of 2008, that would mean a median of $152,000 at the end of 2009 and then a rebound to $179,000 by the end of 2012.  

ALL REAL ESTATE IS LOCAL 

Of course, the national median price is an artificial construct, since there is no such place as National Median, U.S.A. That's why the following pages provide up-close looks at seven markets: Omaha; Seattle; Saratoga Springs, N.Y.; Salt Lake City; Nashville; Austin, Tex.; and Merced, Calif. Each illustrates a different trend that will have a big impact on sales and prices across the U.S.  

Local job growth is one of the most important factors to study when assessing a market's prospects. Omaha, for example, which has attracted employers such as Yahoo! and Google, missed out on the boom but is likewise dodging the bust. With the city adding jobs, the prospects for home prices look good. Detroit, where home prices fell by a third from 2003 through 2008, is likely to suffer even more in coming years as the auto sector continues to shrink. Demographic change, another trend examined here, is equally influential. For instance, Salt Lake City's youthful population is primed for house buying. While the bust left prices in once-bubbly Western markets such as Phoenix and Vegas lower in 2008 than in 2003, Salt Lake prices rose 51% over that period.  

Other important factors are even more local than those, such as how far a house is from the nearest supermarket. You'll know we're back to an ordinary, boring real estate market when buyers focus less on the intricacies of foreclosures, short sales, and the like and go back to the things that used to matter most: What are the schools like? How quiet is the neighborhood? When am I going to have to replace that roof or cut down that diseased oak?

Sellers Mark and Maura Rampolla, who put their house in Oradell, N.J., on the market early this year, are coping with ultra-local issues such as their house being on a fairly busy road. They're also up against the national housing crisis angst. The Rampollas bought their house for $556,000 in 2004. Now they need to sell it because they're moving to the Los Angeles area to set up a West Coast distribution hub for their coconut-water sports-drink company, Zico. 

They listed the house for $599,000, which would represent a loss after factoring in closing costs and renovations. House hunters didn't even nibble on the property that the Rampollas and their two young daughters have grown to love. In mid-June the couple dropped the price to $559,000. "People say it's a beautiful house, but they're just very nervous right now," says Maura.  

The Rampollas will probably end up being the first owners to lose money on the Oradell home since it was built in 1925—a phenomenon that's happening across the U.S. The classic American foursquare, with four bedrooms and original chestnut molding, was sold by the Bonavita family to the Riccio family for $47,000 in 1972, the first recorded transaction price. The Riccios made out by selling to the DeSouza family for $285,000 in 1997. The DeSouzas sold just seven years later to the Rampollas for $556,000. "We actually bought the house in a day," laughs Maura. "Mark ran through the house in 10 minutes, I kid you not, because he had to get to a meeting in Queens. ... We had nothing to sell, and we just said: 'Great!' "

The good news is that the Rampollas' loss could wind up being some first-time home buyer's gain. From now through 2012, lots of families that couldn't afford to buy when prices went through the roof will be able to get in on the ground floor. Based on today's household incomes and mortgage rates, the National Association of Realtors' Housing Affordability Index is bobbing around the highest level since recordkeeping began in 1970. "To generalize, yeah, it is a good time to buy a house. I don't think there's any urgency because I think it'll still be a great time to buy a house a year from now," says economist Richard DeKaser of Woodley Park Research in Washington.  

Homebuilders are helping by absorbing their share of the pain. In general, the U.S. needs about 1.5 million new homes a year to accommodate the growing population and the demolition of decayed properties. Builders exceeded that rate during the boom, but now they're building fewer than 500,000 homes per year. Their cutback should reduce the glut of homes and bring the market into better balance by 2012, if not sooner.  

A STILL-MURKY PICTURE 

Most important, the economy should be growing briskly again by 2012, according to Moody's Economy.com. In May the firm predicted gross domestic product would shrink 3% this year before growing 1.4% in 2010, 4.7% in 2011, and a robust 5.8% in 2012. It's also looking for home buying and building to return to their pre-bubble paces—no higher and no lower—by 2012.  

Even if the economy performs as projected, there's still plenty that could go wrong in the housing market. Because conditions have been so unusual, "it's very hard for the model to extrapolate, based on past experiences, what's going to happen this time," says Moody's Economy.com Senior Economist Celia Chen. In a study of global real estate markets, economists Kenneth Rogoff of Harvard University and Carmen Reinhart of the University of Maryland found that home prices fall for an average of six years after a major financial crisis. That would put the U.S. bottom in 2012, or later.  

Another risk is that potential buyers will stay out of the housing market, no longer trusting in home appreciation to do their saving for them.

[HOT: Trust is the key word. Consumers have lost trust in government and the regulatory oversight of both the financial system and the homebuilding industry. This is especially true in Texas, where laws enacted over 20 years have freed builders from accountability and encouraged their bad behavior. The related article below cites Texas as having fewer housing problems than other states. However, it fails to tell of the many good people who left our great state because of serious construction defects in their home and their frustration in dealing with a legal system that protects builders more than consumers.]

Writes David Rosenberg, the former Merrill Lynch economist who is now chief economist at Toronto-based asset management firm Gluskin Sheff & Associates: "Baby boomers are still in the discovery process on oversized real estate being more of a ball and chain than a viable retirement investment asset." Rosenberg also is concerned that an aging population won't need the kind of big houses erected during the boom. "The high end of the market will be in a bear phase," Rosenberg says in an interview.  

So much has gone wrong with housing lately that it's easy to imagine worst-case scenarios. But in the more likely case, the market will fall some more, bounce off its lows, then gradually start growing. By 2012, families like the Rampollas may even get a warm, fuzzy feeling about homeownership again.  

Texas 

Metro Area: Houston-Sugar Land-Baytown
What a Home Will Be Worth in 2012: $160,471
Q4 2008 price: $160,000
Projected price change by MSA: 0.3%
Projected price change by state: -0.1%

Texas in general and Houston in particular have been spared the worst of the downturn, thanks in large part to the energy industry. The sixth-largest metropolitan area in the country will hold steady over the next four years. Prices are expected to dip a bit in 2009 and 2010, but regain ground by 2012. 

Affordable Austin 

Inexpensive real estate, a lively college-town aura, and rising employment are luring transplants from both coasts  

http://www.businessweek.com/magazine/content/09_26/b4137037262191.htm  

Adelle Brewer, 43, and her husband, Daniel, decided they needed to leave Portland, Ore., last year. After their home insulation business faltered, the couple started researching less expensive cities in the Carolinas and Texas. In December they plunked down $149,000 in cash for a four-bedroom ranch house in an Austin suburb. "If this house were in Portland, it would be $400,000," says Adelle.  

Although prices have dropped nationwide, affordability remains a key factor in the housing market. Transplants seeking a low cost of living and cultural amenities likely will gravitate to cities such as Austin, Minneapolis, and Ann Arbor. In the Texas state capital, the median home price of $191,000 is just under three times the median family income of roughly $69,100—a ratio that's in line with Ann Arbor and Minneapolis and below the national average. Ironically, the influx of new arrivals seeking cheaper housing will only drive up prices in those areas. Price increases, though, should be modest compared with the rest of the country since prices in those areas never saw the same lows. For example, Austin rose 4.4% in 2008 and is expected to fall off only modestly this year.  

By Texas standards, Austin may seem pricey. But it's a bargain compared with cities such as San Francisco, New York, and Los Angeles. In Los Angeles, home prices are six times greater than the area's median income; they're seven times as much in New York and San Francisco. While the major urban areas on both coasts likely will remain expensive by comparison, the high-priced housing could keep a lid on values. In New York, the market isn't expected to turn around until 2012.  

Why does Austin look so affordable? The city's economy lagged the U.S. for much of the boom as one big driver, the tech industry, struggled. First, the dot-com bubble imploded in 2000; Intel's chip design center stood half-built as a painful reminder of the tech bust until it was demolished in 2007. Then big local companies such as Dell and Freescale Semiconductor ran into trouble.  

But Austin is on the upswing, with major employers, including the state government and health-care sectors, hiring. Job seekers are moving there in droves. Last year some 25,000 people relocated to Austin while cities such as Los Angeles and Chicago saw an exodus. Austin economist Angelos Angelou predicts that 38,000 more people will arrive over the next two years: "Even during a recession, people move to Austin."  

The decision to relocate to Austin was an easy one for Kevin Hopke, 36, a technical writer for Sun Microsystems in Los Angeles. His boss gave him the option to move to Austin or Silicon Valley. After he found condos running at around $500,000 in Northern California, Hopke opted for Texas. In January, Hopke and his wife, Carmelita, 36, paid $176,000 for a 2,300-square-foot home in the suburb Round Rock. Now the Hopkes devote just 25% of their income to housing costs, vs. the 50% they would have paid in California.  

Austin, Texas: Tempting real estate, plus a lively cultural scene, is a draw for people from both coasts  

Population: 1,513,565  

2007 Median Home Price: $182,898  

2008 Median Home Price : $191,000 (Numbers reflect metropolitan area; Data: Fiserv)