Friday, December 26, 2008

The Housing Market

Will there EVER be a housing market recovery?

Lots of us want the answer to this question. However, none of us has a crystal ball. But we can examine the various forces affecting the market today. 

There are several ideas I have been hearing about which may have helped get us into the current predicament -- everything from Elliot Wave theory about this being a Grand Supercycle Event, to The Fourth Turning's  ideas about the population of baby boomers moving through the economy, causing boom and bust as they age, to's ideas about the compound growth of immorality. And really, I think all these things are related -- Elliot Wave theory tracks the psychology of markets; the Fourth Turning is about psychology; and immorality is yet another aspect of the same thing. 

However we got here, though, where we are today is a situation of credit no one wants, along with homes no one wants to buy with that credit. The oversupply of homes is enormous and likely to grow as the economy continues to slow. A large majority of home sales in Phoenix today are short sales and other foreclosure related transfers. The banks are accepting substantial discounts to market rates for homes; worse yet, more and more homes are coming into foreclosure. 

The next big wave will be option mortgages, where people have a 30 year fixed loan but with an option for interest only for the first 10 years. This is fine except that the fine print on many of these loans indicates that when the home value falls below a certain threshold, full principal and interest payments must be made. Further, for another few years, more and more of the interest only loans will be resetting. At the moment this is not too bad a thing since rates are quite low.

Many of us would have thought that the tighter credit standards would lead to a better rental market, but this has not been the case -- many of the homes listed for sale are also listed for rent; a recent listing I had, both for sale and for rent, finally rented last month after a year, and at a below market rate! 

As the economy has slowed, fewer people have contemplated moving to Phoenix; the huge machine that drove our commercial and residential markets has also dramatically slowed, putting even more pressure on the housing market.

So what has to happen for the housing market to return to some semblance of normality? First, foreclosures must slow significantly. As long as there is massive downward pressure on the market from banks dumping non-performing loans, prices will continue to fall, and people will be less likely to buy a home. Second, there must be some loosening of loan standards in terms of a down payment; in weakening economic conditions, people are reluctant to put 10% or 20% down on an asset which is falling in value. Failing that, we must see the rental market pick up, which will encourage investor purchases. [I might note that there are investors in the market now -- but these are the savvy investors, not the ones that drove the market out of sight -- we need a little of each, I think]

I don't see all the conditions coming together anytime soon; my personal expectation is for further weakness for at least 2-3 years, with some semblance of normality returning after that, perhaps in 2013. 

In the meantime, if you are interested in buying a home, be sure to look at short sales; a short sale takes more time -- often 120 days to close, 60-90 to even get an answer! but the values are there. 


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