Real Estate Revisited

Real Estate Revisited
By Donald Jay Korn

Have real estate prices finally hit bottom? As far as home prices go, the data says they have. Prices are up across the board in 2010 compared to 2009. Many observers are doubtful, however, predicting further slippage. The pessimists point to the possibility of a double-dip recession, the expiration of housing tax credits and an increase in shadow inventory, as more troubled properties flood the market.

In fact, that inventory may be coming out of the shadows. There were more foreclosures this summer than in any three-month period since the housing bust began in 2006, according to RealtyTrac, a foreclosure listing service. Banks seized 288,345 properties in July through September, and are on pace to foreclose on 1.2 million homes by the end of 2010.

But the pipeline may slow due to a coordinated probe by the top prosecutors in all 50 states into improper foreclosures by the nation's largest loan servicers. The investigation comes after lawyers accused mortgage lenders of "robo-signing," or signing off on foreclosure documents without reviewing them as required by law.

Although the prosecutors have not called for mortgage lenders to freeze all foreclosures, mortgage lenders are taking various measures to ensure that their foreclosures are legal. As we went to press, Bank of America had halted foreclosure sales in all 50 states for a few weeks in October, and GMAC Mortgage and JPMorgan Chase stopped them in the 23 states that require court approval to complete foreclosures.

While the implications of these developments play out in the short term, it is becoming clear that lenders who have become major property owners, by default, may be manipulating the current housing cycle. "There are clear indications that the clogged foreclosure pipeline is being carefully managed on both ends by lenders and servicers," says James Saccacio, CEO of RealtyTrac in Irvine, Calif. In the longer term, such management might promote price stability (or stagnation, depending on one's point of view), both short- and long-term.

THE GOOD NEWS

According to the National Association of Realtors (NAR), the median sales price of existing family homes peaked in 2006 at $221,900. In 2009, that median price was $172,100-a drop of more than 22%. In the first seven months of 2010, the monthly medians ranged from $163,800 to $183,500, with the latest month (July) at $183,400. From July 2009 to July 2010, the median price was up 0.9%. Home prices in two out of four regions were up less than 5%, year over year, while the other two were down no more than 3%. Anyone looking for a statistical example of stability has found it.

Further evidence that housing prices have found a bottom comes from the Case Shiller 20-City Home Price Index. In the latest month to report-July 2010-prices were up 3.2% from a year earlier. "Ten of the 20 cities saw year-over-year gains and only one (Las Vegas) made a new bottom," says David Blitzer, chairman of the index committee at Standard & Poor's. "Judging from the recent behavior of the housing market, stable prices seem more likely" than a return to the lofty levels of 2005-2006.

Some industry observers are encouraged by these statistics. "Home values have shown stabilizing trends over the past year," says Lawrence Yun, the chief economist at NAR. He credits home-buyer tax credits for stimulating sales and bolstering prices.

Yun adds that houses have become more affordable in today's market. According to the National Association of Home Builders/Wells Fargo Housing Opportunity Index, 72.3% of the homes sold in the second quarter of 2010 were affordable to families earning the national median income of $64,400. That's just a shade below the historic peak of 72.5%, in the first quarter of 2009, and far above the level of three years ago, when less than half of the families earning the median income could afford the median-priced home.

"Residential housing may be quite inexpensive now, with prices down and the low cost of servicing debt," says Mark Luschini, chief investment strategist at Janney Montgomery Scott in Philadelphia. "The huge number of homes for sale just adds to the appeal of a buyer's market," he says.

Besides lower home prices, record low interest rates are helping to make housing more affordable. In mid-October, rates on 30-year fixed mortgages remained below 5%, the lowest level since May of 2009, when 30-year rates settled at 4.81%.