NEW YORK (CNNMoney.com) -- Despite signs that the real estate market might be lurching forward, prices are expected to fall further this year and next.
The average home price in the United States will fall by about 6% by September 2011, according to a joint report between Fiserv and Moody's Economy.com. And that's after plunging more than 27% in the past three years.
Most of the projected home price decline will occur during the usually slow summer months of 2010. After that, prices should begin to stabilize, according to Fiserv, and stay almost flat through fall of 2011.
The main reason for continued decline, according to Mark Zandi, economist and co-founder of Economy.com, is foreclosures -- the same thing that's plagued markets for the past three years.
"Foreclosure sales will pick up this spring as mortgage servicers figure out who can qualify for a modification and who can't," said Zandi.
He figures there are at least 4.5 million mortgage loans either in foreclosure or clearly headed in that direction. When that additional inventory hits the market, it will provide numerous choices for buyers and encourage sellers to drop their listing prices.
Check the home price forecast in your city
The end of two federal programs, which have been propping up markets, will also tamp down prices.
The Federal Reserve has been purchasing mortgage-backed securities since early 2009, scooping up as much as $1.25 trillion worth. That has dampened rate increases by providing a ready market for the securities. But the Fed's program lapses on March 31, when it cedes the playing field to private investors, who will almost surely demand higher rates.
Any resulting rise in rates will cause some buyers to withdraw from the market and others to look for lower priced homes. Either way, demand for homes drops and so do prices.
A month after the Fed bows out of the mortgage-buying market, the homebuyer tax credit will start to expire. To qualify for the $8,000 credit, homebuyers must sign a contract before April 30 and close by June 30. When the first date passes, many buyers are expected to vacate the market, weakening the demand for homes.
In a broader sense, home prices are ultimately decided by employment. "If [the job market] improvement is stronger than expected, prices will get better. If it's weaker than expected, prices will be worse," Zandi said.
Worst of the worst
The worst performing market will be Miami, Fla. Moody's projects prices there to drop a heart-stopping 29.2% by Sept. 30. That follows a 47.7% decline the metro area recorded in the past three years. Grand total: 64% drop.
Other disastrous performances will be turned in by the Hanford, Calif., metro area, where prices are projected to plummet 27.2% through Sept. 30, 2010 following their 36.9% drop for the previous 36 months. Ft. Lauderdale and West Palm will also register steep drops.
There's some good price news coming out of California's Central Valley for a change; prices will begin to emerge from their free fall toward the end of this year.
In Merced, for example, which crashed and burned by 71.8% in the past three years (through last September), they'll only fall only another 6.2% in the next six months before bouncing back with a rise of 10.1% by Sept. 30, 2011.
Saturday, February 27, 2010
Sunday, February 21, 2010
Real Estate Looks Risky, but Less So for Bargain Hunters
By PAUL SULLIVAN
Published: February 19, 2010
EVEN a cursory glance at recent events in commercial real estate would make you think the next big collapse is upon us.
Skip to next paragraph
Chester Higgins Jr./The New York Times
Thomas N. Bohjalian of Cohen & Steers sees opportunities in real estate investment trusts.
Wealth Matters
Paul Sullivan writes about strategies that the wealthy use to manage their money and their overall well-being.
Chester Higgins Jr./The New York Times
David Frame of J. P. Morgan Private Bank tells investors to be sure that “ ‘bad’ is priced in.”
First, there was the default last month by Tishman Speyer Properties and BlackRock Realty on billions of dollars in loans on Stuyvesant Town and Peter Cooper Village, the huge apartment complexes in Manhattan. When the deal was done, in 2006, it was the biggest of its kind in American history.
And this week, Simon Properties tried to buy General Growth Properties, its shopping mall rival, for $10 billion, a price General Growth says is too low even though the company is in bankruptcy.
Yet in the midst of this, financial advisers are telling their wealthy clients that there is tremendous opportunity in real estate. What is equally intriguing is that these investors are looking again at something as illiquid as a building, which goes to show just how quickly people can reacquire their appetite for risk if it means higher returns.
“The trick with investing in commercial real estate is not knowing if something is bad, but knowing if that ‘bad’ is priced in,” said David Frame, global head of alternative investments at J.P. Morgan Private Bank.
The next few years are expected to be bad for commercial real estate largely because the rosy predictions made when the buildings were purchased in 2005 and 2006 have not come true. First, the values of those buildings have plummeted, as much as 45 percent in some instances. That is going to make it difficult for the owners to refinance their mortgages over the next few years. Second, the recession has reduced the rents and occupancy rates on which those inflated values were based.
But what’s bad for an owner may be good for an investor.
STATE OF PLAY The opportunities in commercial real estate run the gamut of risk, from buying undeveloped land to buying stock in real estate investment trusts, or REITs, which invest in property and mortgages.
Mike Ryan, head of wealth management research for the Americas at UBS Wealth Management, said while there were risks in commercial real estate, they would not be as bad as many bearish analysts had predicted and certainly not on the level of the residential real estate crash.
“The notion that the other shoe is about to drop and we’ll see a wholesale liquidation of property is overdone,” he said. But, he added, “We’re not saying people should plow in.”
Yet Mr. Frame said he saw the coming refinancing crisis in commercial real estate as a continuum of what has been happening with other securities in the last 18 months. “Our job has been to look through the capital markets and identify where there’s been a scarcity of capital,” he said, meaning where investors sold their positions quickly and fearfully. The first opportunities to take advantage of a turnaround were with convertible bonds and private equity. “Now,” Mr. Frame said, “we think the opportunity in real estate is much broader than it was 12 months ago.”
OPTIONS So how are people seeking to profit in commercial real estate? This depends on whether they are passive investors, who want to allocate some money to real estate, or entrepreneurs seeking to buy buildings.
Many investors who did not make their fortunes in real estate remain cautious. “You have to help them view real estate as private equity because you’re locking up your money for some period of time,” said Joanne Jensen, a private banker at Deutsche Bank Private Wealth Management.
But if they’re going to invest in real estate, they want the security of high-quality investments. “I’m speaking to a lot of real estate investors, and what they’ve been telling me is there’s been a bifurcation between the ‘A’ quality buildings and everything else,” Ms. Jensen said.
One intriguing strategy is to buy the underlying mortgage debt of buildings whose value was inflated. The debt is now trading at a deep discount. This may sound risky, particularly if the owner walks away from that debt, as happened with Stuyvesant Town. But Mr. Frame sees it as a way to make either a little or a lot of money.
He described one possibility: a building was purchased for $100 million in 2006. It is now worth less, but the underlying mortgage is still $50 million, and it is coming due next year. The owner is probably going to have a tough time refinancing the mortgage without putting in more money. That uncertainty is reflected in the price of the debt.
“Say it’s 70 cents on the dollar, or $40 million for the first-lien mortgage,” he said. “If, in the next year, I get paid off, I get a 12 percent return. If not, I own the building at 60 percent off the original purchase price.”
In many cases, he said, clients are hoping they do not get paid back because the return from owning the building could be far greater. But the risk is they may have to hold that property for at least several years.
Some of his other ideas carry the same caveat: they require time. In this category, he included buying land prepared for developments that have stalled or buying loans from the Federal Deposit Insurance Corporation. The agency acquired these from banks and has bundled them into packages to be sold off.
Hotels are one area in which the investment turnaround could come faster. Their occupancy rates plummeted in the recession, and many were further hurt by having too much debt. “The most upside can come from hotels, if we get an uptick in the economy,” Mr. Frame said. “But the risk is high.”
Still, he said he believed that all these seemingly risky investments were actually predicated on caution. “We’re not taking an optimistic view of the recovery,” he said. “As long as it doesn’t get dramatically worse, we’ll be O.K.”
REIT stocks are a more liquid alternative. They went through their own steep decline last year. In March 2009, REIT stocks were down 75 percent from their February 2007 high, according to the leading REIT index. The index had rebounded to half of its peak, but REIT stocks slid again after the Federal Reserve raised its lending rate to banks on Thursday. This is not necessarily a bad thing for long-term investors.
“We think REITs are trading roughly at the net-asset value” of the properties they own, said Thomas N. Bohjalian, a portfolio manager at Cohen & Steers, a real estate investment firm. “And that is not the ceiling; it’s the floor.”
What is more significant than stock price, he said, is Cohen & Steers’s prediction that dividends on REIT stocks will grow by an average of 12 percent over each of the next five years. REITs are legally required to pay out 90 percent of their taxable income annually. In flush times, they were paying out a good portion of their cash flow as well. As income from REIT-owned properties rebounds, so will the dividends.
CAUTION All these investment ideas are predicated upon patience and a healthy stomach for risk. With REITs, for example, Mr. Bohjalian said he did not expect double-digit dividend growth to start until 2011.
This patience works two ways. Ms. Jensen has several clients who have made their fortunes in real estate but have struggled to find properties at the discounts they expected. “They’re not willing to do a deal that doesn’t make sense,” she said.
That may be a good mantra for any investor.
Published: February 19, 2010
EVEN a cursory glance at recent events in commercial real estate would make you think the next big collapse is upon us.
Skip to next paragraph
Chester Higgins Jr./The New York Times
Thomas N. Bohjalian of Cohen & Steers sees opportunities in real estate investment trusts.
Wealth Matters
Paul Sullivan writes about strategies that the wealthy use to manage their money and their overall well-being.
Chester Higgins Jr./The New York Times
David Frame of J. P. Morgan Private Bank tells investors to be sure that “ ‘bad’ is priced in.”
First, there was the default last month by Tishman Speyer Properties and BlackRock Realty on billions of dollars in loans on Stuyvesant Town and Peter Cooper Village, the huge apartment complexes in Manhattan. When the deal was done, in 2006, it was the biggest of its kind in American history.
And this week, Simon Properties tried to buy General Growth Properties, its shopping mall rival, for $10 billion, a price General Growth says is too low even though the company is in bankruptcy.
Yet in the midst of this, financial advisers are telling their wealthy clients that there is tremendous opportunity in real estate. What is equally intriguing is that these investors are looking again at something as illiquid as a building, which goes to show just how quickly people can reacquire their appetite for risk if it means higher returns.
“The trick with investing in commercial real estate is not knowing if something is bad, but knowing if that ‘bad’ is priced in,” said David Frame, global head of alternative investments at J.P. Morgan Private Bank.
The next few years are expected to be bad for commercial real estate largely because the rosy predictions made when the buildings were purchased in 2005 and 2006 have not come true. First, the values of those buildings have plummeted, as much as 45 percent in some instances. That is going to make it difficult for the owners to refinance their mortgages over the next few years. Second, the recession has reduced the rents and occupancy rates on which those inflated values were based.
But what’s bad for an owner may be good for an investor.
STATE OF PLAY The opportunities in commercial real estate run the gamut of risk, from buying undeveloped land to buying stock in real estate investment trusts, or REITs, which invest in property and mortgages.
Mike Ryan, head of wealth management research for the Americas at UBS Wealth Management, said while there were risks in commercial real estate, they would not be as bad as many bearish analysts had predicted and certainly not on the level of the residential real estate crash.
“The notion that the other shoe is about to drop and we’ll see a wholesale liquidation of property is overdone,” he said. But, he added, “We’re not saying people should plow in.”
Yet Mr. Frame said he saw the coming refinancing crisis in commercial real estate as a continuum of what has been happening with other securities in the last 18 months. “Our job has been to look through the capital markets and identify where there’s been a scarcity of capital,” he said, meaning where investors sold their positions quickly and fearfully. The first opportunities to take advantage of a turnaround were with convertible bonds and private equity. “Now,” Mr. Frame said, “we think the opportunity in real estate is much broader than it was 12 months ago.”
OPTIONS So how are people seeking to profit in commercial real estate? This depends on whether they are passive investors, who want to allocate some money to real estate, or entrepreneurs seeking to buy buildings.
Many investors who did not make their fortunes in real estate remain cautious. “You have to help them view real estate as private equity because you’re locking up your money for some period of time,” said Joanne Jensen, a private banker at Deutsche Bank Private Wealth Management.
But if they’re going to invest in real estate, they want the security of high-quality investments. “I’m speaking to a lot of real estate investors, and what they’ve been telling me is there’s been a bifurcation between the ‘A’ quality buildings and everything else,” Ms. Jensen said.
One intriguing strategy is to buy the underlying mortgage debt of buildings whose value was inflated. The debt is now trading at a deep discount. This may sound risky, particularly if the owner walks away from that debt, as happened with Stuyvesant Town. But Mr. Frame sees it as a way to make either a little or a lot of money.
He described one possibility: a building was purchased for $100 million in 2006. It is now worth less, but the underlying mortgage is still $50 million, and it is coming due next year. The owner is probably going to have a tough time refinancing the mortgage without putting in more money. That uncertainty is reflected in the price of the debt.
“Say it’s 70 cents on the dollar, or $40 million for the first-lien mortgage,” he said. “If, in the next year, I get paid off, I get a 12 percent return. If not, I own the building at 60 percent off the original purchase price.”
In many cases, he said, clients are hoping they do not get paid back because the return from owning the building could be far greater. But the risk is they may have to hold that property for at least several years.
Some of his other ideas carry the same caveat: they require time. In this category, he included buying land prepared for developments that have stalled or buying loans from the Federal Deposit Insurance Corporation. The agency acquired these from banks and has bundled them into packages to be sold off.
Hotels are one area in which the investment turnaround could come faster. Their occupancy rates plummeted in the recession, and many were further hurt by having too much debt. “The most upside can come from hotels, if we get an uptick in the economy,” Mr. Frame said. “But the risk is high.”
Still, he said he believed that all these seemingly risky investments were actually predicated on caution. “We’re not taking an optimistic view of the recovery,” he said. “As long as it doesn’t get dramatically worse, we’ll be O.K.”
REIT stocks are a more liquid alternative. They went through their own steep decline last year. In March 2009, REIT stocks were down 75 percent from their February 2007 high, according to the leading REIT index. The index had rebounded to half of its peak, but REIT stocks slid again after the Federal Reserve raised its lending rate to banks on Thursday. This is not necessarily a bad thing for long-term investors.
“We think REITs are trading roughly at the net-asset value” of the properties they own, said Thomas N. Bohjalian, a portfolio manager at Cohen & Steers, a real estate investment firm. “And that is not the ceiling; it’s the floor.”
What is more significant than stock price, he said, is Cohen & Steers’s prediction that dividends on REIT stocks will grow by an average of 12 percent over each of the next five years. REITs are legally required to pay out 90 percent of their taxable income annually. In flush times, they were paying out a good portion of their cash flow as well. As income from REIT-owned properties rebounds, so will the dividends.
CAUTION All these investment ideas are predicated upon patience and a healthy stomach for risk. With REITs, for example, Mr. Bohjalian said he did not expect double-digit dividend growth to start until 2011.
This patience works two ways. Ms. Jensen has several clients who have made their fortunes in real estate but have struggled to find properties at the discounts they expected. “They’re not willing to do a deal that doesn’t make sense,” she said.
That may be a good mantra for any investor.
Property owners were overcharged
ByMichelle E. Shaw
Published: Feb 18, 2010
Briana Henry-Frisby and Rae Anne Harkness both own homes in DeKalb County, and both suspect they’re paying too much in property taxes. The fact that both work in the DeKalb tax commissioner’s office doesn’t actually help.
“Now is not the time to leave any money laying on the table, or anywhere,” Henry-Frisby said.
But she may well be leaving behind a tidy pile of cash when it comes to property taxes.
A report to be released today concludes that property owners in the five core metro Atlanta counties overpaid their property taxes by an average of $244 in 2009. And people who live in areas hard hit by foreclosures, as do Henry-Frisby and Harkness, overpaid by even more, says an analysis commissioned by the Atlanta Neighborhood Development Partnership.
AJC findings confirmed
The Atlanta Journal-Constitution in December reported that tens of thousands of homes across metro Atlanta were overvalued last year by county tax assessors, who didn’t adjust values sufficiently after the historic real estate collapse. Homeowners, the newspaper reported, were being taxed on values their property no longer held. The report today tends to confirm the AJC’s findings and also, for the first time, calculates an average overpayment.
John O’Callaghan, ANDP president, said the report focuses on property tax values from 2009 for neighborhoods with the highest foreclosure rates in metro Atlanta.
“What this does is give a picture of the average homeowner,” he said. “Some are underpaying and others are overpaying by a larger margin. We hope this data and research will lead to changes in the system.”
Calvin Hicks, chief assessor in DeKalb County, balks at the idea that people have “overpaid” taxes.
“County services still cost what they cost,” Hicks said. “So maybe it is that property [valuations] should have gone down, but the millage rate should have gone up. That still may have equaled the same amount of tax money, but coming from different directions.”
Hicks said foreclosures affect neighborhood values in different ways and said county officials are working on the best way to reflect those properties in future valuations.
ANDP’s report, prepared by Robert Charles Lesser & Co., breaks out the three ZIP codes with the most foreclosures in Clayton, Cobb, DeKalb, Fulton and Gwinnett counties and the average amount homeowners overpaid their taxes for 2009.
The study took sales values from the second half of 2008 and contrasted those numbers to the value the county set on the same property.
Analysts then calculated what the tax assessment would have been based on sales figures, compared to actual assessments on the same properties.
Ammo for appeals?
In the 15 ZIP codes with the most foreclosures, the average overpayment for 2009 was $491, the report says. Here are the ZIPs and the total estimated overpayment in each:
? Clayton: 30238, 30274 and 30296, $17 million overpayment.
? Cobb: 30168, 30127, and 30126, $8 million overpayment.
? DeKalb: 30038, 30058 and 30032, $16 million overpayment.
? Fulton: 30310, 30315 and 30331, $24 million overpayment.
? Gwinnett: 30039, 30045 and 30044, $17 million overpayment.
In DeKalb’s 30058, Henry-Frisby’s ZIP code, the average overpayment in 2009 was $391.
“There is a lot I can do with that money,” she said.
Harkness said she doesn’t have much hope of getting back the $513 ANDP’s report says was the average overpayment in her ZIP, 30032.
“But it is good to know, and it gives me something else to work with when I appeal this year,” she said.
Both said that working in the tax commissioner’s office does them no good when it comes to their own tax valuations.
“No, I only work for the county,” Henry-Frisby said. “When it comes to my house and things outside of the office, I’m in the same boat as everybody else. I’ve got to call the same people they do and I’ve got to wait for them to call me back, too.”
Said Harkness: “The only advantage I can think of is I know how the system works and who to call, but that doesn’t help change my situation at all.”
Charles Bowman, a DeKalb teacher who lives in Gwinnett’s 30039 ZIP code, said he wasn’t surprised to hear homeowners in his area overpaid by an average of $503 last year.
“This information makes me feel more inclined to act and appeal my assessment than before,” he said of the report. “That money, had we gotten a refund from our escrow account, could have been used to do some badly needed repair on our home.”
Bowman, who has two children with his wife, Tamiko, said that money could have gone to a number of other things, including his Ph.D. studies.
“I think everyone everywhere is trying to be smart about how and when they spend money,” he said. “And right now it just hurts to think there may have been some money that could have been used differently, if we’d had the chance.”
Published: Feb 18, 2010
Briana Henry-Frisby and Rae Anne Harkness both own homes in DeKalb County, and both suspect they’re paying too much in property taxes. The fact that both work in the DeKalb tax commissioner’s office doesn’t actually help.
“Now is not the time to leave any money laying on the table, or anywhere,” Henry-Frisby said.
But she may well be leaving behind a tidy pile of cash when it comes to property taxes.
A report to be released today concludes that property owners in the five core metro Atlanta counties overpaid their property taxes by an average of $244 in 2009. And people who live in areas hard hit by foreclosures, as do Henry-Frisby and Harkness, overpaid by even more, says an analysis commissioned by the Atlanta Neighborhood Development Partnership.
AJC findings confirmed
The Atlanta Journal-Constitution in December reported that tens of thousands of homes across metro Atlanta were overvalued last year by county tax assessors, who didn’t adjust values sufficiently after the historic real estate collapse. Homeowners, the newspaper reported, were being taxed on values their property no longer held. The report today tends to confirm the AJC’s findings and also, for the first time, calculates an average overpayment.
John O’Callaghan, ANDP president, said the report focuses on property tax values from 2009 for neighborhoods with the highest foreclosure rates in metro Atlanta.
“What this does is give a picture of the average homeowner,” he said. “Some are underpaying and others are overpaying by a larger margin. We hope this data and research will lead to changes in the system.”
Calvin Hicks, chief assessor in DeKalb County, balks at the idea that people have “overpaid” taxes.
“County services still cost what they cost,” Hicks said. “So maybe it is that property [valuations] should have gone down, but the millage rate should have gone up. That still may have equaled the same amount of tax money, but coming from different directions.”
Hicks said foreclosures affect neighborhood values in different ways and said county officials are working on the best way to reflect those properties in future valuations.
ANDP’s report, prepared by Robert Charles Lesser & Co., breaks out the three ZIP codes with the most foreclosures in Clayton, Cobb, DeKalb, Fulton and Gwinnett counties and the average amount homeowners overpaid their taxes for 2009.
The study took sales values from the second half of 2008 and contrasted those numbers to the value the county set on the same property.
Analysts then calculated what the tax assessment would have been based on sales figures, compared to actual assessments on the same properties.
Ammo for appeals?
In the 15 ZIP codes with the most foreclosures, the average overpayment for 2009 was $491, the report says. Here are the ZIPs and the total estimated overpayment in each:
? Clayton: 30238, 30274 and 30296, $17 million overpayment.
? Cobb: 30168, 30127, and 30126, $8 million overpayment.
? DeKalb: 30038, 30058 and 30032, $16 million overpayment.
? Fulton: 30310, 30315 and 30331, $24 million overpayment.
? Gwinnett: 30039, 30045 and 30044, $17 million overpayment.
In DeKalb’s 30058, Henry-Frisby’s ZIP code, the average overpayment in 2009 was $391.
“There is a lot I can do with that money,” she said.
Harkness said she doesn’t have much hope of getting back the $513 ANDP’s report says was the average overpayment in her ZIP, 30032.
“But it is good to know, and it gives me something else to work with when I appeal this year,” she said.
Both said that working in the tax commissioner’s office does them no good when it comes to their own tax valuations.
“No, I only work for the county,” Henry-Frisby said. “When it comes to my house and things outside of the office, I’m in the same boat as everybody else. I’ve got to call the same people they do and I’ve got to wait for them to call me back, too.”
Said Harkness: “The only advantage I can think of is I know how the system works and who to call, but that doesn’t help change my situation at all.”
Charles Bowman, a DeKalb teacher who lives in Gwinnett’s 30039 ZIP code, said he wasn’t surprised to hear homeowners in his area overpaid by an average of $503 last year.
“This information makes me feel more inclined to act and appeal my assessment than before,” he said of the report. “That money, had we gotten a refund from our escrow account, could have been used to do some badly needed repair on our home.”
Bowman, who has two children with his wife, Tamiko, said that money could have gone to a number of other things, including his Ph.D. studies.
“I think everyone everywhere is trying to be smart about how and when they spend money,” he said. “And right now it just hurts to think there may have been some money that could have been used differently, if we’d had the chance.”
Nearly 75% of all U.S. homes are affordable
By Les Christie, staff writerFebruary 17, 2010: 2:12 PM ET
NEW YORK (CNNMoney.com) -- An amazing turnabout in the U.S. housing market over the past four years has pushed home prices to near record levels of affordability.
The typical American family, who makes the nation's median income of $64,000 a year, could afford to buy 70.8% of all homes sold in the United States during the last three months of 2009, according a quarterly report from the National Association of Home Builders and Wells Fargo (WFC, Fortune 500).
That's off just a tad from the record 72.5% reached during the first three months of 2009, but up substantially from the second quarter of 2008 when only 55% of homes sold were affordable.
"Favorable mortgage rates and sliding house prices that have now started to stabilize nationally have both contributed to a record year for housing affordability in 2009," said NAHB chairman Bob Jones, a home builder from Bloomfield Hills, Mich.
The NAHB judges a home to be affordable if a family making the metro area's median income could devote no more than 28% of their take-home pay toward housing costs.
There was a huge variation in affordability around the nation. As a rule, Midwestern cities far outperformed coastal communities.
5 most - and least - affordable cities
All five of the most affordable major housing markets were in the Rust Belt, led by Indianapolis, which has been the nation's most affordable major metro area for more than four years. More than 95% of all home sold there were classed as within the budget.
Detroit was the second most affordable major market with 93.4%, followed by three Ohio cities, Dayton (93.2%), Youngstown (93%) and Akron (92.2%).
A few small cities surpassed even Indianapolis. In Kokomo, Ind., 98% of homes sold were priced low enough for median-income families to afford. Monroe (97.1%) and Flint (96.3%) both scored high as well.
New York was the least affordable market; less than 20% of homes met the criteria. San Francisco (22.3%), Honolulu (33.8%), Santa Ana, Calif.,. (34.5%) and Los Angeles (36.8%) filled out the bottom five.
The most unaffordable small market was San Luis Obispo in California, where only 32% of homes sold were attainable for median-income families.
NEW YORK (CNNMoney.com) -- An amazing turnabout in the U.S. housing market over the past four years has pushed home prices to near record levels of affordability.
The typical American family, who makes the nation's median income of $64,000 a year, could afford to buy 70.8% of all homes sold in the United States during the last three months of 2009, according a quarterly report from the National Association of Home Builders and Wells Fargo (WFC, Fortune 500).
That's off just a tad from the record 72.5% reached during the first three months of 2009, but up substantially from the second quarter of 2008 when only 55% of homes sold were affordable.
"Favorable mortgage rates and sliding house prices that have now started to stabilize nationally have both contributed to a record year for housing affordability in 2009," said NAHB chairman Bob Jones, a home builder from Bloomfield Hills, Mich.
The NAHB judges a home to be affordable if a family making the metro area's median income could devote no more than 28% of their take-home pay toward housing costs.
There was a huge variation in affordability around the nation. As a rule, Midwestern cities far outperformed coastal communities.
5 most - and least - affordable cities
All five of the most affordable major housing markets were in the Rust Belt, led by Indianapolis, which has been the nation's most affordable major metro area for more than four years. More than 95% of all home sold there were classed as within the budget.
Detroit was the second most affordable major market with 93.4%, followed by three Ohio cities, Dayton (93.2%), Youngstown (93%) and Akron (92.2%).
A few small cities surpassed even Indianapolis. In Kokomo, Ind., 98% of homes sold were priced low enough for median-income families to afford. Monroe (97.1%) and Flint (96.3%) both scored high as well.
New York was the least affordable market; less than 20% of homes met the criteria. San Francisco (22.3%), Honolulu (33.8%), Santa Ana, Calif.,. (34.5%) and Los Angeles (36.8%) filled out the bottom five.
The most unaffordable small market was San Luis Obispo in California, where only 32% of homes sold were attainable for median-income families.
Monday, February 15, 2010
Where's housing headed? Follow rents
NEW YORK (Fortune) -- It may not be the most widespread measure of housing prices, but if you want to follow a powerful driver, look at rents.
Specifically, it's the rents Americans pay on condos, apartments or houses that are about the same size, and share the same neighborhood as your ranch or colonial, that in the end determine what your house is worth.
"If you look at the trend in rents to see where housing prices are headed, you're looking at the right measure," says Yale economist Robert Shiller.
In recent reports, Deutsche Bank demonstrates how steady or even falling rents have pulled down housing prices, to the point where in many markets it costs about the same amount to own as to lease. That's a golden mean that America hasn't seen in almost a decade. The DB research also offers convincing evidence that the wrenching adjustment in housing prices is finished for much of the nation, with a bit more pain to come in selected areas.
Housing outlook for 2010
Before we get to the numbers, let's examine why rents exercise a kind of gravitational pull over home prices.
In normal times, people won't pay much less to lease a house than to own it. After all, if you're paying rent instead of a mortgage and taxes, you still get to enjoy the same rec room, chef's kitchen, and casita for visiting grandparents. So the surest sign of a frenzy appears when owning becomes far more expensive than renting. That's precisely what happened during the last bubble.
And the surest sign that prices have fully adjusted arrives when the ratio of what people pay in rent versus what owners spend on the same property returns to its historic average.
That brings us to the Deutsche Bank studies. Its REIT research team first established a benchmark for a "normal" ratio of rents to ownership costs -- what it calls ATMP, or after-tax mortgage payment -- for 53 U.S. cities.
On average, DB found that families across America were spending about 87% as much to rent as to own in 1999. Hence, they were traditionally willing to pay a premium as homeowners, though not a big one.
Why we missed the housing crisis
But by mid-2006, with the craze in full swing, the figure fell below 60%. At that point, Americans were spending an incredible 66% more to own than to rent. It was far worse in the bubble markets: In Las Vegas, Phoenix and Miami, homeowners were paying twice as much as renters, and in San Francisco and Orange Country, owners' monthly payments were triple those of their neighbors with leases instead of mortgages.
So how did that happen? During the bubble, rents -- the real engine that drives values -- were inching along at more or less their usual pace. From 1999 to 2007, apartment rents increased only 32%. But home prices jumped more than three times as fast, around 105%.
DB reckoned that housing prices are more or less reasonable when the ratio returns to its 1999 level. Why 1999? Because the ratio was relatively stable throughout the 1990s, and it was the year the steep rise in prices began in earnest.. At the end of the third quarter of 2009, the overall number stood at 83%, meaning renting was just a tad more attractive than owning.
But the picture varies widely from city to city. In 15 of those 53 metro areas, including St Louis, Indianapolis, and remarkably, Phoenix and San Diego, it's now higher than in 1999, meaning that homeowners' costs actually dropped versus what renters pay, courtesy of the steep decline in prices. In California's San Bernadino and Riverside Counties, it now costs 10% less to own than to rent; in 2006, owners paid more than twice as much as renters.
In another 14 cities, a list encompassing Boston, San Jose, and Chicago, the cost of owning exceeds that of renting by 6% or less. In the remaining 24 markets, housing is still moderately to extremely overpriced. The biggest problem areas are Baltimore, Long Island, and Seattle, where the ratio is still between 24% and 32% above the 1999 benchmark.
What does that mean for future prices?
Given that analysis, it's likely that prices will fall another 5% or so nationwide. The drop could even be slightly greater. One reason: Rents, the force that govern housing prices, are still falling.
In 2009, apartment rents dropped 2.3%, and the fall continues. And enormous adjustments are needed in still-exorbitant markets such as New York and Baltimore. Thankfully, the improving economy and decline in the rate of job losses means that rents should soon stabilize and could even start increasing by the end of 2010.
But fortunately, for most of the U.S., the sudden, terrifying fall in prices worked its own black magic. The numbers are back in alignment, or close to it. It had to happen. That's what rents, housing's great master, were telling us all along.
Specifically, it's the rents Americans pay on condos, apartments or houses that are about the same size, and share the same neighborhood as your ranch or colonial, that in the end determine what your house is worth.
"If you look at the trend in rents to see where housing prices are headed, you're looking at the right measure," says Yale economist Robert Shiller.
In recent reports, Deutsche Bank demonstrates how steady or even falling rents have pulled down housing prices, to the point where in many markets it costs about the same amount to own as to lease. That's a golden mean that America hasn't seen in almost a decade. The DB research also offers convincing evidence that the wrenching adjustment in housing prices is finished for much of the nation, with a bit more pain to come in selected areas.
Housing outlook for 2010
Before we get to the numbers, let's examine why rents exercise a kind of gravitational pull over home prices.
In normal times, people won't pay much less to lease a house than to own it. After all, if you're paying rent instead of a mortgage and taxes, you still get to enjoy the same rec room, chef's kitchen, and casita for visiting grandparents. So the surest sign of a frenzy appears when owning becomes far more expensive than renting. That's precisely what happened during the last bubble.
And the surest sign that prices have fully adjusted arrives when the ratio of what people pay in rent versus what owners spend on the same property returns to its historic average.
That brings us to the Deutsche Bank studies. Its REIT research team first established a benchmark for a "normal" ratio of rents to ownership costs -- what it calls ATMP, or after-tax mortgage payment -- for 53 U.S. cities.
On average, DB found that families across America were spending about 87% as much to rent as to own in 1999. Hence, they were traditionally willing to pay a premium as homeowners, though not a big one.
Why we missed the housing crisis
But by mid-2006, with the craze in full swing, the figure fell below 60%. At that point, Americans were spending an incredible 66% more to own than to rent. It was far worse in the bubble markets: In Las Vegas, Phoenix and Miami, homeowners were paying twice as much as renters, and in San Francisco and Orange Country, owners' monthly payments were triple those of their neighbors with leases instead of mortgages.
So how did that happen? During the bubble, rents -- the real engine that drives values -- were inching along at more or less their usual pace. From 1999 to 2007, apartment rents increased only 32%. But home prices jumped more than three times as fast, around 105%.
DB reckoned that housing prices are more or less reasonable when the ratio returns to its 1999 level. Why 1999? Because the ratio was relatively stable throughout the 1990s, and it was the year the steep rise in prices began in earnest.. At the end of the third quarter of 2009, the overall number stood at 83%, meaning renting was just a tad more attractive than owning.
But the picture varies widely from city to city. In 15 of those 53 metro areas, including St Louis, Indianapolis, and remarkably, Phoenix and San Diego, it's now higher than in 1999, meaning that homeowners' costs actually dropped versus what renters pay, courtesy of the steep decline in prices. In California's San Bernadino and Riverside Counties, it now costs 10% less to own than to rent; in 2006, owners paid more than twice as much as renters.
In another 14 cities, a list encompassing Boston, San Jose, and Chicago, the cost of owning exceeds that of renting by 6% or less. In the remaining 24 markets, housing is still moderately to extremely overpriced. The biggest problem areas are Baltimore, Long Island, and Seattle, where the ratio is still between 24% and 32% above the 1999 benchmark.
What does that mean for future prices?
Given that analysis, it's likely that prices will fall another 5% or so nationwide. The drop could even be slightly greater. One reason: Rents, the force that govern housing prices, are still falling.
In 2009, apartment rents dropped 2.3%, and the fall continues. And enormous adjustments are needed in still-exorbitant markets such as New York and Baltimore. Thankfully, the improving economy and decline in the rate of job losses means that rents should soon stabilize and could even start increasing by the end of 2010.
But fortunately, for most of the U.S., the sudden, terrifying fall in prices worked its own black magic. The numbers are back in alignment, or close to it. It had to happen. That's what rents, housing's great master, were telling us all along.
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