As housing experts cross off 2009 as the fourth year of the real estate downturn, they see a “dim light at the end of the tunnel” and a “glimmer of hope” in 2010.
“It’s not great, but it’s less bad than it was six months ago,” said Alan Gin, a University of San Diego economist who addressed USD’s annual real estate outlook conference yesterday.
Gin said his glimmer of hope means that San Diego “is on the verge of bottoming out” in the economic downturn. USD economist Ryan Ratcliff’s dim light means, “The recovery is about to begin, but we have a long way to go.”
Alan Jay Brinkmann, chief economist at the Mortgage Bankers Association in Washington, said California will find recovery difficult because it, along with Arizona, Florida and Nevada, saw high housing price appreciation and construction during the boom and now is wrestling with massive foreclosures and widespread construction shutdowns.
He said homes for sale have dropped from 322,000 in October 2007 to 187,000 this past October. That’s a sign that buyers have reduced the large inventory of unsold properties that existed at the outset of the recession. But, over the same two-year period, distressed properties that are 90 days delinquent or in foreclosure have skyrocketed to 690,000 from 160,000. If 75 percent of those properties — 517,500 — eventually end up on the market, that would swell inventories and depress prices.
“I see the market holding on in the low end,” he said, but falling at the high end, above the $700,000 mark.
Operating against such a big boost in distressed properties, Brinkmann said, is the Obama administration’s preference for mortgage modifications rather than working to streamline short-sales — deals in which homes are sold for less than the mortgage balance.
“Washington sees people in their homes, and short-sales are not favorably viewed,” he said.
But there might not be much choice to foreclosure, he said, because distressed properties carrying 30-year, fixed-rate prime loans are multiplying fast as unemployment lingers above the 10 percent level. Those are the most difficult mortgages to modify because they are generally held by households with plummeting income and no easy replacement close at hand.
While low prices should entice buyers, Brinkmann forecast a rise in interest rates starting in March, when the Federal Reserve plans to stop buying mortgages from lenders. Rates are at or near historic lows — 4.7 percent for 30-year fixed-rate loans last week, according to one survey — so a half-point increase that Brinkmann expects would raise rates to 5.2 percent or more. He did not agree with some economists who expect rates to rise one to two percentage points when the Fed exits the secondary mortgage market. Either way, higher rates mean less affordability to buyers.
And making purchases more difficult will be continued tough lending standards, he said.
Even with all these forces working against a rapid housing recovery, Ratcliff said economists are watching the housing market closely, because it is historically one of the first sectors, along with car buying, to emerge from a downturn and then serve as a trigger for more general economic growth.
Gin expressed the most optimism at the conference, citing his index of leading economic indicators for San Diego, which has risen for seven straight months — more than enough to indicate a turnaround.
Next year, he said, home sales should rise from the current year-to-date total of 30,000 and prices may go up, too, despite continued high levels of foreclosure. The current median price for San Diego County calculated by DataQuick stands at $325,000, up 2 percent over the last 12 months, and Gin said he believes it will rise in the single digits in 2010. That would carry the median price, potentially, up as much as 9 percent to $354,250.
But Gin cautioned against any expectation of a quick turnaround. He characterized the likely housing price recovery as a chart with an “elongated ‘U’ ” rather than the “V” shape seen in the past.
Hopefully “extend and pretend” will come to an end and people will actually be able to buy these houses.
If we total the two sides of that chart, we get:
2007: 482k CA houses for sale or about to be foreclosed
2008: 682k CA houses for sale or about to be foreclosed
2009: 877k CA houses for sale or about to be foreclosed
So even though it appears that inventory is down to the lowest levels in 3 years, things are about to get much, much worse than they’ve ever been. I mean the numbers are not even close. Or am I missing something here?
We will never get out of this mess until they realize the “recovery” occurs when prices are going down to their historical trendlines, discounted by the loss in purchasing power of most families (think elimination of defined-benefit pension plans, stock market losses, lack of job stability, increased energy, education, and healthcare costs, etc.).
Agree with John, the **real** numbers look like there’s a lot more downward pressure to come. If lenders want to keep inventory artificially low, they do so at their own expense, because when word gets out that you don’t have to pay your mortgage anymore (because “Washington sees people in their homes, and short-sales are not favorably viewed”), it’s all over.
@3 this is why banks are raising capital / ie selling stock. They realize the govt gravy train is now political suicide and they need more cash to continue selling / writing down bad assets (i.e bad mortgages)
Interesting view on why banks are raising capital. It definitely reduces govt.’s influence. But the banks seem to be mostly servicing the loans, not owning so won’t we need to see the owners (e.g. Pension Plans) raise capital or start to admit to losses before extend and pretend ends? Or do the banks own enough securitized loans that they have an impact?