Real Estate Outlook: Recession is Over

Now it's official. The chairman of the Federal Reserve Board himself has said it publicly that it looks like the recession is over.
By: Kenneth R. Harney: RealtyTimes.com
Here comes the recovery.

But there was a big footnote in Bernanke's speech on the economy last week in Washington: Don't look for a dramatic recovery.

It'll be more like a slow moving, plodding sort of improvement where the economy inches toward expansion. But there'll be no sudden, splashy return to economic boomtime anytime soon.

Bernanke's point about the end of the recession was underscored by a 2.7 percent jump in retail sales for the month of August, according to the Commerce Department.

That's an important indicator because the key to pumping up the economy again is to get consumers spending, and that appears to be happening. Not just for auto sales, which got a big boost in August from the government's "cash for clunkers" program, but also for other key categories, like food and clothing purchases, department store retail, entertainment and restaurant spending, sporting goods.

They were all up for the month, after having been mainly down for well over a year.

One reason for the pick-up in consumer spending: People feel more confident about the direction of the economy in the months ahead. They see the stock market up, so their retirement funds and 401 K plans are bouncing back.

They see home values stabilizing or growing in most areas, so their equity is beginning to increase again.

The one big negative - and it's definitely a drag for housing - is the unemployment rate, which Mr. Bernanke said won't be coming down fast, even with the end of the recession.

Nonetheless, the vast majority of Americans who do have jobs have seen their real wages rise this year, up five percent. That's the largest annual gain in fifty years.

All of this is feeding into the housing sector in key markets, such as southern California, where August sales were up 11 percent compared with the year before, according to MDA DataQuick. Even prices are rising slightly.

In the combined markets of Los Angeles, San Diego, Orange County, San Bernadino-Riverside and Ventura, the median price of homes sold gained 2.6 percent in August, which is very encouraging for one of the hardest-hit boom-to-bust areas of the country.

Meanwhile, the mortgage market continues to be exceptionally positive for housing sales and values: 30 year fixed rates averaged just above 5 percent last week, according to the Mortgage Bankers Association, and 15 year loans averaged 4.4 percent.
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Housing Seems Set to Aid Economy a Bit

After facilitating the economy's downfall, the housing sector will soon start helping its recovery, though probably not by much.
By: MARK GONGLOFF: WSJ.com
Census Bureau data on August housing starts are due Thursday morning. Economists think starts rose 3.3% from June to an annualized rate of 600,000 units, the fastest pace since November 2008.

A tentative recovery in home construction might be enough to boost annualized gross-domestic-product growth by as much as 0.5 percentage point, according to some estimates, perhaps as soon as this quarter.

That would be an impressive turn of events. Collapsing residential construction slashed nearly one percentage point, on average, from GDP growth for the past 3½ years in a row.

That starts are gaining ground might seem quizzical, as there is still an oversupply of housing on the market, including a large "shadow" inventory of homes that will eventually enter foreclosure or that are being held off the market while their owners wait for prices to recover.

But many unsold homes might be too large for the first-time buyers that have boosted the market in recent months, spurred by government tax credits, suggests Ian Shepherdson, chief U.S. economist at High Frequency Economics. Home builders can make smaller houses to meet that demand.

Still, there are limits to how much activity is likely to be seen. Builders remain cautious. Though their sentiment has improved, it is still near record lows, according to the latest survey by the National Association of Home Builders.

August's expected gain would still leave starts down 29% from a year ago and down 74% from the 2.27 million-unit record pace set in January 2006, at the height of the bubble.

Goldman Sachs economists, weighing population growth, inventory and still-high home-vacancy rates, estimate there might be just 850,000 housing starts in 2010 - roughly the pace before the Lehman Brothers collapse a year ago.

That suggests there mightn't be much more juice in home-builder stocks. The Dow Jones U.S. Home Construction Total Stock Market Index has more than doubled from its November bottom and is near pre-Lehman levels.

It also suggests housing's contribution to GDP will be minimal.

Still, it's a start.
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Housing Starts in U.S. Climb to Nine-Month High

Builders in the U.S. broke ground in August on the most houses in nine months, led by a jump in multifamily dwellings that overshadowed a decrease in construction of single-family homes.
By: Bob Willis: Bloomberg.com
Housing starts rose 1.5 percent to an annual rate of 598,000, as anticipated, figures from the Commerce Department showed today in Washington.
Single-family projects dropped 3 percent, the first decrease since January, while work began on 25 percent more multifamily units, such as apartments.

Builders may be pulling back as the expiration of the government’s tax credit for first-time buyers nears. The incentive, plus foreclosure-driven declines in prices, helped boost sales in recent months, and companies may not want to be caught with excess supply should the program fail to be extended.

“These tax incentives often borrow from future sales and the pickup does not last,” Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ Ltd. in New York, said before the report. “This does not throw the recovery idea into a tailspin, but the housing normalization will come at a slow, measured pace.”

Futures on the Standard & Poor’s 500 Stock Index were down 0.1 percent to 1,062.60 at 8:39 a.m. in New York after rising as much as 0.6 percent.

Jobless Claims

A separate report today from the Labor Department showed that the number of Americans filing first-time claims for jobless benefits fell unexpectedly last week, a sign the labor market is deteriorating at a slower pace as the economy pulls out of the recession.

Applications dropped by 12,000 to 545,000 in the week ended Sept. 12, from a revised 557,000 the week before. The total number of people collecting unemployment insurance rose the prior week.

Starts were projected to rise to a 598,000 annual pace from a 581,000 rate initially reported for July, according to the median forecast of 74 economists surveyed by Bloomberg News. Estimates ranged from 570,000 to 640,000.

Permits, a sign of future construction, climbed 2.7 percent to a 579,000 annual rate in August, also led by an increase in multifamily. They were projected to rise to 583,000, economists forecast.

Construction of single-family houses, which account for about 85 percent of the industry, fell 3 percent to a 479,000 rate, the first decline since January. Work on multi-family units, which make up the rest of the market and is often volatile, jumped 25 percent to a 119,000 rate.

Gains in Northeast

The increase in starts was led by a 24 percent increase in the Northeast. They rose 0.9 percent in the Midwest, and fell 2.4 percent in the South. The West was little changed.

Volatility in multifamily projects has obscured the underlying improvement in residential building. Construction of apartments and condominiums surged 56 percent in May only to slump by 21 percent and 15 percent the next two months.

Americans are taking advantage of the Obama administration’s $8,000 tax credits for first-time buyers that expires at the end of November. Those with jobs, cash to make down payments and good credit scores are picking up bargains as record foreclosures have driven down home prices by about 32 percent from their peaks in mid-2006, according to the S&P/Case- Shiller index.

Combined sales of new and existing homes rose in the four months though July.

A report yesterday showed gains in sales and buyer traffic pushed builder confidence this month to its highest level since May 2008.

Toll Brothers

Luxury builder Toll Brothers Inc. is among companies that see demand improving, even as losses mount.

“In the last six months, we see a pretty significant change in some markets,” Chief Executive Officer Robert Toll said in an interview Aug. 27 with Bloomberg Television. “People are now concerned with missing the market.”
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L.A. Buyers Flock to Low-End and Luxury Homes

L.A. homebuyers went to extremes in August, boosting sales in the high- and low-price ranges.
HOUSING: August sales up 45 percent year to year and 5 percent from July.
By: HOWARD FINE: Los Angeles Business Journal.com
People are buying homes again in L.A. County, and not just cheap foreclosed properties: They’re buying at the upper end, too.

Convinced that prices are near the bottom, and drawn by low interest rates and impending deadlines for federal and state tax credits, first-time homebuyers and bargain hunters continued their return to the market, often getting into bidding wars over foreclosed and bargain-rate properties, especially condominiums.

Meanwhile, banks have finally eased the reins a bit for jumbo loans, allowing buyers to step in at the upper end, boosting sales in luxury areas like Calabasas, Manhattan Beach and Palos Verdes Estates.

These trends are evident in the August new and existing residential sales data for Los Angeles County from HomeData Corp. of Hicksville, N.Y. Home sales jumped 45 percent from August 2008 and August 2009, and were even up 5 percent from July levels.

Meanwhile, the median home price held steady at $330,000 between July and August. Also noteworthy: The rate of year-over-year decline is slowing: Between August 2008 and August 2009, the price dropped 18 percent, compared with a 30 percent drop between August 2007 and August 2008.

“We’re either at or near the bottom,” said economist Chris Thornberg, a principal with Beacon Economics in West Los Angeles and a close observer of L.A.’s real estate markets.

The biggest beneficiary has been the condo market, where sales surged 55 percent between August 2008 and August 2009.

What’s more, condo prices posted a 7 percent gain between July and August, hitting $320,000, the highest level since November. The August numbers show a 16 percent decline in year-over-year condo prices.

A federal tax credit of up to $8,000 for first-time homebuyers runs through November, while a state tax credit of up to $10,000 just expired this past week for purchases of new homes and condominiums. These credits – combined with mortgage interest rates in the 4 percent to 5 percent range for 30-year fixed-rate loans less than $417,000 – have spurred many buyers who had been sitting on the sidelines during the housing market meltdown.

This has boosted sales in the county’s urban core, with communities such as El Sereno and Exposition Park recording year-over-year sales jumps of 200 percent or more. Many of the county’s suburban markets, including Mission Hills, Pomona and West Covina, saw sales volumes double between August 2008 and August 2009.

Yet sales are also hopping in many areas at the opposite end of the price spectrum. Several ZIP codes with median home prices exceeding $1 million saw their sales volumes increase by more than 100 percent over the past year, including areas of Calabasas, the Hollywood Hills, Manhattan Beach and Palos Verdes Estates.

“The prices have finally dropped enough to where buyers are stepping in and the banks are doing better at making loans,” said Syd Leibovitch, owner of Rodeo Realty in Beverly Hills.

Leibovitch said few banks were making jumbo loans of more than $730,000 earlier this year, and the few that were required down payments of 50 percent or more and were charging interest rates of 8 percent or 9 percent.

“Now, with the price coming down and the interest rates more like 5.5 percent, a home that was on the market for $3 million six months ago is now being sold for, say, $2.2 million,” he said.

Tightening supply

In Manhattan Beach, tightening supply is also an issue. Six months ago, there were seven months’ worth of unsold homes on the market. Today, that figure has been cut in half, said Steve Goddard, broker-manager for ReMax Marquee Partners in Manhattan Beach and president-elect of the California Association of Realtors.

In Long Beach, the supply of residential units is so tight that one brokerage house has started sending out mailers to see if residents would be willing to sell their homes.

“We’re actually doing mailings into certain areas of Long Beach inquiring if anyone is looking to sell,” said Phil Jones, managing partner of the Coldwell Banker Coastal Alliance, which has three offices in Long Beach. “This has been very surprising; a few months ago, we would never have dreamed of this situation.”

Yet despite all these encouraging signs, few are willing to say the local housing market is in recovery mode.

“The real estate market is now bouncing along the bottom,” Goddard said.

Looming over everything is the huge number of foreclosures, both current and expected. As has been the case for the past year, many of the bargain properties now on the market are foreclosures.

But nearly everyone expects thousands of new foreclosures to be dumped into the L.A. market in coming months now that a federal moratorium on foreclosures has been lifted.

“This halting, temporary recovery we’re seeing right now could be cut short by future foreclosures coming onto the market,” said Joe Breckner, sales associate with Coldwell Banker of Studio City.

Also in question is the impact that the expiration of the federal tax credit for first-time homebuyers in November will have on the market.

“It’s like the Cash for Clunkers program,” said Stephen Cauley, director of research at the Ziman Center for Real Estate at UCLA. “It was very good while it lasted, but what it ended up doing was stealing sales from the future.”
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Yes, the Housing Market Has Rarely Looked Better

Passing through the Fort Myers, Fla., airport a few weeks ago, I noticed people eagerly signing up for a free bus tour of foreclosed real estate—with all properties offering water views.
By: JAMES B. STEWART: WSJ.com
During the ride to my hotel, the young driver volunteered that he had just bought his first house, paying $65,000 for a foreclosed property in nearby Cape Coral that last sold for over $250,000. He said he had never expected to be able to buy anything on a driver's salary, let alone something that nice.

Last week, Standard & Poor's reported that its S&P/Case-Shiller U.S. National Home Price index of real-estate values increased this past quarter over the first quarter of 2009, the first quarter-on-quarter increase in three years. Its index of 20 major cities also rose for the three months ended June 30 over the three months ended May 31, with only hard-hit Detroit and Las Vegas experiencing declines. The week before that, the National Association of Realtors reported that sales volume of existing homes was up 7.2% in July from June.

In short, the data suggest that real-estate prices hit a bottom some time during the second quarter, and have now begun to rise. There's no way to be certain that this marks the end of the long, painful correction that followed the real-estate bubble, but clearly prices are no longer in free-fall. That means if you've been sitting on the fence, it's time to act.

Ordinarily I'd never try to time the real-estate market, but I can understand why buyers have been cautious. Few want to buy in down markets, just as stock buyers avoid bear markets. And for most people, of course, buying a house is a much bigger decision than buying a stock. But with real-estate prices nationally now down about 30% from their 2006 peak and showing signs of turning up, the prices aren't likely to go much lower. Every real-estate market is local, and so there may be a few exceptions. Overall, though, I can't imagine a better time to buy than now.

In addition to bargain prices, buyers also should find plenty of homes to choose from. The inventory of unsold homes was 4.09 million units in July, up 7.3% from June, according to the National Association of Realtors. And mortgage rates this week were at a two-month low of close to 5%, according to Zillow. Even the stricter appraisal process is working to the advantage of buyers. Appraisals are coming in far lower than most sellers have been expecting, forcing them to face the new reality of sharply lower prices. And with stricter standards, lenders aren't going to let buyers borrow more than they can afford, which protects buyers and helps to keep prices down.

Unless you're really prepared to accept the demands (and headaches) of being a landlord, I don't recommend direct ownership of real estate as an investment. The days of buyers lining up to flip Miami Beach and Las Vegas condos are mercifully gone.

There are much easier ways to make money in real estate, such as real-estate investment trusts or buying shares in home builders and other housing-related businesses (such as Home Depot). Historically, the mean rate of return on real estate has been around 3%, according to research from Yale economist Robert Shiller, who co-developed the Case-Shiller index. Shares in REITs and other stocks have often done much better.

But there's a good reason homeownership has been such a central part of the American dream. It delivers security, pride of ownership, a sense of community and decent investment returns as a bonus. I felt glad for my driver in Florida. He represents the other side of the foreclosure crisis. For every hardship story, and no doubt there are many, others are realizing their dreams of home ownership and getting what may well turn out to be the deals of their lives.

James B. Stewart, a columnist for SmartMoney magazine and SmartMoney.com, writes weekly about his personal investing strategy. Unlike Dow Jones reporters, he may have positions in the stocks he writes about.
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