Is the Housing Bounce a Stimulus Reaction or Sustainable Growth?

HOT: It's hard to believe the media coverage of real estate and building industries, because sales depends on stimulating buyer confidence. The articles compiled here show different perspectives of the housing market, sobuyers should remain cautious.

Texas laws still favor builders over buyers, even after abolishing the TRCC, but we are working to bring fairness back to Texas homebuying and improve building quality. Because there are still more protections for buying existing homes than new ones, however, first-time buyers should consider applying their federal tax credit toward the purchase of an older home (15 years or so).

See also: Why the Housing Stimulus and FHA, Fannie Mae and Freddie Mac loan guarantees put Taxpayers (and the economy) at Risk.

USA Today: U.S. can no longer afford housing tax breaks 

By Paul Wiseman, USA TODAY, 8/18/2010
http://www.usatoday.com/money/economy/housing/2010-08-18-housing18_ST_N.htm?csp=usat.me

SUMMARY: Federal housing policy offers the wealthiest Americans billions in tax breaks without delivering much bang for the buck in increased homeownership, critics say. The government spent $230 billion last year to promote homeownership through tax breaks and spending programs. The biggest chunk — $80 billion — went toward the mortgage interest deduction.

A study this year by the Tax Policy Center of the Brookings Institution and the Urban Institute noted that the mortgage interest tax deduction, which goes primarily to the wealthiest households, was worth just $91 a year to families earning less than $40,000 — and $5,459 a year to those making more than $250,000.

The U.S. homeownership rate (66.9%) is about the same as Canada's and is lower than Australia, Ireland, Spain and Britain's even though these countries provide far less government support for homeownership.

Supply of Homes Set to Grow

By Robbie Whelan, Wall Street Journal, 7/27/2010
http://online.wsj.com/article/SB10001424052748704700404575391582687553008.html?mod=WSJ_RealEstate_LeftTopNews

SUMMARY: Sales of new homes are near 47-year lows, yet the glutton supply of new and existing homes is expected to grow in the months ahead as construction ramps up, a wave of foreclosed homes hits the market, and sidelined sellers list their properties.

The rise in foreclosures on Fannie and Freddie properties reflects the failure of many troubled borrowers to receive permanent loan modifications plans and find jobs. [The lack of affordable healthcare has also been a problem, and some 60% of foreclosure are caused by accident or serious illness, according to a recent PBS special, Help for the Homeowners?]

Foreclosure could claim more than 1 million homes this year

By Mel Evans, AP Real Estate Writer, USA Today, 7/16/2010
http://www.usatoday.com/money/economy/housing/2010-07-15-foreclosures_N.htm

SUMMARY: The foreclosure rate is now 10 times the historical average of 100,000 per year, and that's flooding the market with low priced homes that will force down prices of neighboring homes and substantially delay any economic recovery. Banks are so far controlling how fast these homes get processed so they can manage the inventory of distressed assets on the market, but they will will eventually clear their books. About 1.7 million homeowners received foreclosure warnings between January and June, which translates to one in 78 U.S. homes. It could take lenders through 2013 to resolve the backlog of distressed properties they have on their books now, assuming the economy doesn't worsen and aggravate the foreclosure crisis. Unemployment and reduced income will continue to drive foreclosures this year. Homeowners with good credit and conventional, fixed-rate loans are the fastest growing group of foreclosures.

[The article fails to mention the growing trend of non-judicial HOA foreclosures in states like Texas.]

Cost of Seizing Fannie and Freddie Surges for Taxpayers

By Binyamin Appelbaum, New York Times, 6/19/2010
http://www.nytimes.com/2010/06/20/business/20foreclose.html

SUMMARY: Fannie Mae and Freddie Mac took over a foreclosed home roughly every 90 seconds during the first three months of the year. They owned 163,828 houses at the end of March, a virtual city with more houses than Seattle. The mortgage finance companies, created by Congress to help Americans buy homes, have become two of the nation’s largest landlords.

...“Our business is the American dream of home ownership,” Fannie Mae declared in its mission statement.

...As it turns out, Fannie and Freddie increasingly were channeling money into loans that borrowers could not afford. As defaults mounted, the companies quickly ran low on money to honor their guarantees. The federal government, fearing that investors would stop providing money for new loans, placed the companies in conservatorship and took a 79.9 percent ownership stake, adding its own guarantee that investors would be repaid.

...Foreclosures punch holes in neighborhoods, so residents, community groups and public officials are eager to see properties reoccupied. But there also is concern that investors are buying many foreclosures as rental properties, making it harder for neighborhoods to recover. Real estate agents tend to favor investors because the sales close surely and quickly and there is the prospect of repeat business. But community advocates say that Fannie and Freddie have an obligation to sell houses to homeowners.

"Fixing Fannie Mae and Freddie Mac will be the biggest bailout in American history," according to this 6/14/10 article from BuisnessWeek (Fannie-Freddie Fix at $160 Billion With $1 Trillion Worst Case).

Long-term effect of recession on housing feared

By By Alan J. Heavens, The Philadelphia Inquirer, in The Seattle Times, 5/28/2010
http://seattletimes.nwsource.com/html/realestate/2011971621_realpinch30.html

SUMMARY: A study for the Mortgage Bankers Association, conducted by Kentucky economics professor Joe Peek, concludes that "the current financial crisis and recession exceeded the devastation created by other post-World War II recessions."

Peek also said, "High unemployment and low house prices are widely projected to remain for an extended period, as well as the rise in problem loans at banks that will restrain their willingness and ability to provide credit."

Two groups most expected to feel the pinch are young first-time buyers and the so-called active-adult purchasers who downsize as their children grow and move out. [See "Should You Buy or Rent? Consider the Hidden costs."]

Is Relief on the Way for Residential Housing?

By Wall Street Cheet Sheet, 4/09/2010
http://seekingalpha.com/article/197872-is-relief-on-the-way-for-residential-housing?source=feed

SUMMARY: With several good charts on unemployment, delinquencies, foreclosures and more, this article published by Merrill Lynch concludes that "We will not get a market capable of sustaining growth until the value of property decreases or income increases to the point where more buyers have more opportunities to purchase. ... A real recovery in housing, if any, may be years away." They looked at a "shadow inventory" of homes that's ready to morph into home foreclosures and predict an "unprecedented wave of mortgage delinquencies and foreclosures" into 2011.

Homeowners Walking Away as new home sales continue to fall

By Chavon Sutton, CNNMoney.com, 03/24/2010
http://rss.cnn.com/~r/rss/money_realestate/~3/j2-EuURZPtg/index.htm&tmusr=69

According to this article, sales of both new and existing homes hit record lows in February as a stubborn job market, continued foreclosures, and a glut of inventory kept pressure on the housing market. Obama tax credits didn't help much and will expire before the peak spring buying season.

"The real story will be if no one knocks at the door for a new-home in an environment of record low mortgage rates, a homebuyer's tax credit and recoverying economy. If they don't, then it's lights out."

New home sales fall to a record low

By Ben Rooney, CNNMoney.com, 02/24/2010, http://www.twit-o-matic.com/icontent/iframe.php?tmurl=http://rss.cnn.com/~r/rss/money_realestate/~3/wuatysMSfJo/index.htm&tmusr=69

This article from CNNMoney.com shows that the weak economy, unemployment and a glut of foreclosed homes continue to weigh on the housing market.

The seasonally adjusted annual rate of new home sales plummeted 11.2% to 309,000 in January, compared with 348,000 in December, a decline of 6.1% from a year ago. Rather than a surge in demand because of the tax credit, the drop surprised many industry analysts who had expected January sales to rise to an annual rate of 354,000.

HOT wonders about the foreclosed homes being held off of the market by banks and how much longer banks they can do this.

Conflicting Market Forecasts

Austin home sales up 5%, prices up 6% -- This report is from the Austin Board of Realtors, a group who'd mission it is to promote home sales. They said, "We saw dramatic increases in sales volume in October and November 2009, which wee presumably related to the original deadline for the first-time home buyer tax credit." They also said, "While some demand was driven by the tax credit deadline, a sustainable recovery is also underway in the real estate market." They did admit, however, that "home sales were still down 6 percent from 2008."

Austin home prices still falling -- This report is from First American CoreLogic, an independent market research firm that saw "prices sliding 1.17 percent in November 2009 compared with the same month the previous year." They said Austin fared better than most cities where prices dropped 5.7% and also said, "The report forecasts continued price depreciation with an expected recovery in the spring."

One way that market analysts can show growth and present rosy forecasts is to compare a relatively good month with a horrible one, rather than examining market conditions over a longer time period, but that's deceptive. HOT's perspective and distrust of many market research reports comes from our staff's extensive past experience both as a consumer/buyer of such consulting services and market research and a producer of it.

Homebuilder group's index dips again despite tax credit

http://www.statesman.com/business/bernanke-seeks-u-s-probe-of-fed-s-186487.html

WASHINGTON - The National Association of Home Builders said its housing market index fell this month to the lowest level since last summer, reflecting fears that demand for new homes will be weak despite the extension of a federal tax credit for buyers.
[HOT: Again, one report says housing is recovering, and another says it’s not. It’s hard to believe any of them.]

The reading of 15 is the second monthly decline in a row and the lowest since June. It shows that builders are grim about their prospects even though Congress extended the deadline for a tax credit of up to $8,000 for first-time homebuyers and expanded it to include $6,500 for existing homeowners who move.

The index reflects a survey of 504 residential developers nationwide. Index readings below 50 indicate negative sentiment about the market. 

Don't bank on your home as an ATM

The coming decades won't repeat the dramatic rise in real estate values that previous generations experienced, economists say. It may be time to return to viewing the home simply as a place to live.

By Peter Y. Hong, Los Angeles Times, 09/27/2009, http://www.latimes.com/business/la-fi-cover-housing27-2009sep27,0,2185799.story

For generations of Americans, a home was seen not simply as a dwelling, but as an engine of personal wealth. That view was promoted by the home-building and real estate sales industries as well as the U.S. government, which subsidized home loans and provided tax deductions for mortgage interest.

There have been booms and busts along the way, but from the second half of the last century through the start of this one, nothing derailed the real estate locomotive on its uphill climb. The train stalled here and there and rolled back now and then, but each time it roared back up and got homeowners to the mountaintop.

Now, however, the worst housing crash since the Great Depression may mean that a home purchase ought to be considered with the same warning issued to investors in securities: Past performance is not indicative of future results.

The economic fundamentals that drove home values up in the 20th century -- sustained growth in incomes, population and household wealth -- have been sputtering for decades. Though the future isn't necessarily bleak, economists say there's no reason Americans should continue to see a home purchase as a path to wealth.

"We can no longer assume that housing will be as good an investment for the future as it has been," said Robert Reich, public policy professor at UC Berkeley and U.S. Labor secretary in the Clinton administration. "We can expect a gradual rise [in home values], but not the bonanza we've become accustomed to between the end of World War II and 2006, and especially the last 20 years."

Millions of homeowners have been rewarded handsomely as house values climbed steadily for decades after World War II. Houses in Valencia, for instance, sold for $22,000 to $33,000 in 1967 when that suburb was brand-new. Many of those homes sold in the mid-$500,000 range during the housing bubble and are now hovering in the high $300,000 range, property records show.

If you paid $33,000 for a house in 1967 and sold it in 2006 for $550,000, the annual return would be about 7.5%. If you missed the peak and sold this year for $375,000, you'd still have about a 6% annual return. Adjusting for inflation, $33,000 in 1967 would be equivalent to about $213,000 today.

But a broader look at home prices over time in Southern California shows that price appreciation usually has been more gradual than magical.

If you bought a home in 1988in Southern California for the median price of $133,500 (according to MDA DataQuick) and sold it in August for the median price of $275,000, that would represent about a 3.5% annual return. If you had sold the same home at the peak price of $505,000 in 2007, it would have yielded about a 7.25% annual return.

The same home purchased in 1988 and sold 10 years later, in January 1998, at the median price of $159,000 would have returned about 1.8% a year. Those more modest returns were quickly forgotten during the bubble years, when, for instance, the median Southern California home price shot up from $265,000 in July 2002 to $505,000 in July 2007 -- an annual return of 13.8%.

The housing market may be hitting its bottom, as median prices lately have held steady or declined only modestly in many regions. But Reich and other economists say there are many fundamental reasons the coming decades won't repeat the kind of dramatic rise in real estate values that previous generations experienced.

For one thing, many of the baby boomers who fueled the demand for homes in the 20th century are now retired or retiring, and as they move out of their homes, there are fewer younger people to purchase the houses. The years after World War II were exceptional, says Thomas Lawler, an influential housing consultant and a former Fannie Mae official.

"You talk about pent-up demand; you had all these people coming out of the Great Depression and others coming back from World War II at the same time, then that was followed by the baby boom" -- a convergence of events we won't see again, Lawler said. "There were all kinds of demographic conditions conducive to more positive increases in real home prices. Those fundamental things started to shift a while ago."

Despite rancorous debates over immigration, the influx of new residents isn't enough to slow the aging of the population. In fact, the Census Bureau estimates that California's working-age immigrant population grew an average of only 2% a year in this decade through 2007, down from 4.4% in the 1990s and 9.5% in the '80s.

Those who are 55 and older are now 25% of the population, and the Census Bureau projects that the 55-and-older group will climb to 31% of Americans in 2040. That's up from 21% in 1980.

The median age in the U.S. has climbed to 36 today from 30 in 1980, and the Census Bureau projects that it will level off at 38 in 2030.

Not only is the population aging, but also the workers who are replacing today's retirees are by some measures earning and saving less than their parents and predecessors -- which could mean they have less to spend on a home purchase.

Average weekly earnings, adjusted for inflation, peaked in 1972 and today they are lingering at roughly 1980 levels, according to the Bureau of Labor Statistics.

Household debt stands at 124% of income, according to the Federal Reserve, because people are earning less or spending more, or both. That's nearly four times the 36% level of 1952 and close to double the 69% level of 1985.

Housing market improves
Economists say strong June sales may mean worst is over

By Alan Zibel and Alex Veiga, Associated Press real estate writers, 7/28.2009
Source: http://www.statesman.com/search/content/shared-gen/ap/Finance_General/US_New_Home_Sales.html

WASHINGTON - New home sales rose last month at the fastest clip in more than eight years as buyers eagerly took advantage of bargain prices - a clear sign, economists said, that the real estate market may finally be bouncing back.

Historically low interest rates and a federal tax credit for first-time homeowners also helped push home sales to their highest level since November, the Commerce Department reported Monday.

While home prices are still falling around the country, sales have now risen for three months in a row. Construction of new homes is at the busiest level since last fall. And home resales rose in June for the third straight month.

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

Put in perspective, the improvement in sales is modest. The pace of sales for new homes in June was still 72 percent below the peak of four summers ago, and there is still an enormous inventory of homes lingering on the market.

"There's been signs of improvement, but we're a long ways off from being back to a normal market," said Corey Barton, president of CBH Homes in Meridian, Idaho. Sales were up there in June, but Barton stressed: "It wasn't our biggest jump in eight years."

But there were clear signs the housing market is showing more than life than it has at any point since the recession began. Keystone Custom Homes of Lancaster, Pa., which was founded in 1992, had its best June ever. July is looking good, and president Larry Wisdom expects an even stronger August.

"We doubled our sales in May, and then in June it took off," he said.

New home sales for June clocked in at a seasonally adjusted annual rate of 384,000, blowing past the expectations of economists surveyed by Thomson Reuters, who were looking for 360,000.

The figure is up 11 percent from May, and May's number of 346,000 was higher than previously thought. The [percentage] increase is the largest since December 2000, when investors scarred by the tech-stock bubble were looking for more stable places to put their money. [But 346,000 is still less than 1/3 of monthly totals in 2005.]

Sales were strongest in the Midwest, where they jumped 43 percent from May's total. Sales climbed 29 percent in the Northeast and 23 percent in the West. They declined slightly in the South.

The median sales price was $206,200, down from $234,300 a year [ago] and $219,000 from May. Economists expect home prices to continue falling until the competition from low-priced foreclosures ebbs sometime next year.

To drum up sales, CBH Homes has had to slash prices by up to 10 percent from last year's levels. The new homes CBH builds have to compete with the glut of foreclosures, which are drawing many first-time homebuyers. [HOT: Texas has had less of a foreclosure problem than some states, so home prices haven't been hurt as badly. See related article below.]

In addition to lower prices, buyers are rushing to take advantage of a federal tax credit that covers 10 percent of the home price or up to $8,000 for first-time buyers. Home sales must be completed by the end of November for buyers to take advantage.

"There's definitely more first-time homebuyers in the market than what we've seen in the last several years," Barton said.

Fallout from the housing crisis played a central role in the U.S. recession, now the longest since World War II. Mortgages went bad, homebuilders pulled back and fired thousands of workers, foreclosures spiked and lenders were shuttered by the dozen.

Although the real estate market appears to be starting a recovery, that doesn't mean it will instantly become a powerful economic engine. Construction is weak because builders still have too many unsold homes sitting vacant.

At the current sales pace, there are enough new homes for sale to last nearly nine months. That's slightly less time than in May but still much longer than the six-month mark that indicates a balanced market.

Falling prices mean homebuilding companies won't be making much money anytime soon, but their stocks soared nonetheless on the impressive June sales. Beazer Homes USA gained 13 percent, and shares of Centex and Hovnanian Enterprises rose 9 percent.

Texas leads the nation in homebuilding

By STEVE BROWN (stevebrown@dallasnews.com), The Dallas Morning News, 7/28/2009

Texas cities continue to lead the nation in homebuilding, even in the face of huge construction cutbacks. Houston and Dallas-Fort Worth are the top markets in the country for building permits for single-family homes, based on numbers for the 12-month period ending in May. And Texas had more homebuilding permits than California and Florida combined, according to data provided by California-based John Burns Real Estate Consulting. Austin and San Antonio also rank among the country's 10 busiest homebuilding markets.

"Texas didn't see the downturn in the housing market the other states did," said Lesley Deutch, a vice president at John Burns.

"Florida and California have really pulled off their permit totals, but Texas is still high up there."

During the 12 months ending in May, almost 64,000 single-family homebuilding permits were recorded in Texas. Houston had almost 22,000 permits, and more than 15,000 were recorded in the Dallas-Fort Worth area.

"It's not surprising that we lead the country - both because every place is really hurting and we've held up relatively well," said Dr. James Gaines, an economist with the Real Estate Center at Texas A&M University. "We do have to be careful that we don't build just for the heck of it. Most of the builders I've talked to say they are doing mostly contract work with just a few speculative homes here and there and only by those with capital resources to be able to finance it."

Gaines is forecasting a 25 percent drop in homebuilding permits in Texas this year, "the lowest level we've had since 1992."

"Builders have to build somewhere, and Texas is about the only game in the country," he said. "We still have a growing population - although not as much - and our home prices and markets have held up pretty well."

At midyear, home starts in the Dallas-Fort Worth area were down about 70 percent from mid-2006 levels.

"The industry understands that Texas has performed much better than the rest of the country throughout the downturn," said Ted Wilson, a housing analyst with Dallas-based Residential Strategies Inc. "But to say that there hasn't been pain here is a misstatement. Yes, the market has been better here, but you aren't going to find many builders crowing about local market demand."

TOP HOMEBUILDING MARKETS:

Based on single-family home building permits for the 12 months ending in May:  

1.   Houston                                        21,921

2.   Dallas-Fort Worth                        15,115

3.   Phoenix                                            9,293

4.   Washington, D.C.                              7,498

5.   Atlanta                                             7,100

6.   Austin                                            6,411

7.   San Antonio                                  5,271

8.   Riverside-San Bernardino, Calif.        4,888

9.   Charlotte, N.C.                                 4,810

10. Raleigh-Cary, N.C.                            4,678

TOP STATES:  

Texas                                                  63,993

California                                              25,766

Florida                                                  24,027

North Carolina                                       20,292

Georgia                                                13,573

SOURCE: John Burns Real Estate Consulting

READER COMMENTS: (representative sampling)

AnythingMoreImportant:

A leader in Shoddy construction... Nothing to be proud of... We have enough homes... Stop the building...

russ72:

Do these Texas homes come with wheels?

Truckster:

The last thing we need around here are more new houses.

Whoisthatmaskedman:

People build homes; builders build houses for these people to build homes.

cmra325:

Texas also leads the nation is dishonest builders and developers. Let’s take Huffines Communities for example. They sell 20+ lots to builders that have not been properly surveyed or prepared. The houses then begin to fall into the void HUFFINES left below them and HUFFINES refuses to do anything about the problem. Now our neighborhood has 25+ houses with destroyed foundations. Lucky for those with DR Horton homes they are being taken care of by their builder but those with Vision Homes are getting ignored even though the problem was created by shoddy development work by Huffines. I would recommend that nobody do biz with Huffines, including their car dealerships. If they are dishonest in one way, they are probably dishonest in every way.

TexasBuckeye:

Builders will keep building as long as the lenders keep using inflated appraisals to get enough money for all to make some money. Since sale prices are not fully disclosed in this state, appraisals on proposed construction have a very high rate of fraud in them. The builder's lender (often owned by the builder) selects the appraiser because the HVCC (appraiser independence to reduce fraud) rules do not apply until the house is sold. So if a builder gets an inflated appraisal to start the project, they rarely lose money even if the house does not sell because of tax breaks. Texas builders can also bankrupt each LLC they use for each development they are working to avoid paying sub-contractors. This is a game in which the builders in Texas have an unfair advantage.

Ionian:

Builders build because that's what they do and they will continue to build until they go bankrupt.

During the last Depression, some American farmers did something very similar. The only way these farmers could make money was to plant crops - it was the only thing they knew. But times got tough and grain prices plummeted as vast numbers of farmers continued to work their land more and more in an effort to produce enough to pay the bills.

They abused the land so mightily that eventually the topsoil began to blow away in blinding dust storms all across America and eventually, into the sea. By some accounts, 10,000 years worth of topsoil was lost in large portions of the mid-west in the era we now call the "Dust Bowl" and countless farmers ended up losing their money, their lands, and their homes as they failed to adapt to their changing times.

These developers and builders are following a pattern similar to those depression era farmers. They leverage themselves as much as possible and hope that the great housing bubble of the last 30 years will soon return. They hope that the return to sensible lending standards is an aberration rather than the new norm.

Instead of adapting to the new reality, they fight the last war, hoping the bubble economy returns.

So they build - more and more. Speculators begin to nibble too, memories of the good old house-flipping days of a few years ago fresh in their minds.

Knife-catchers and bag-holders all.

Right now, I believe there is approximately 1 home for every 2.5 persons living in the United States of America. Still, the builders will build at an increasing rate and the speculators will speculate as their bank allows and they will continue doing what they do until, like the Dust Bowl farmers who failed to adapt and realize their peril, they are all dead broke.