From the insider:
The housing market will experience a tepid recovery in 2010 but continue to ail for the next couple of years, according to Zelman & Associates.
“Most economists are more optimistic than I am,” noted Ivy Zelman, CEO, of the research analytics firm. Zelman spoke Wednesday about the future of housing at a Dallas loss mitigation conference sponsored by SourceMedia.
While affordability is at record levels, consumers’ balance sheets are hurting, she noted. Before the housing crash, from 2002-2006, home prices rose 28 percent while income grew only 13%, she said.
The good news, Zelman noted, is that affordability (deflation) has brought investors back into the market.
“I call it ‘Investors Gone Wild Part Two.’ For homes under $100,000, about 50% are cash purchases.” As a result, there is less risk around these investment purchases than previous ones that included exotic securities. Nonowners represented about 11-12% of purchase mortgages in Q110, she said.
Once the home becomes more expensive, investors with cash become scarcer. For homes priced from $150,000-$249,000, only 21% are cash sales, she said.
“I say, thank God for the investor.” If we didn’t have the investor, we wouldn’t have the absorption of the housing stock.
Problems compounding the housing market include the continued tight lending market as banks hoard their capital due to large numbers of nonperforming loans and problem balance sheets. They’ve tightened underwriting standards even for those with good credit who wouldn’t have had any problem getting a home loan before the housing crisis hit, she said.
Lending won’t pick up again until bank failures have peaked, Zelman predicted, but didn’t say when she thought that would be.
To illustrate the magnitude of the problem, Zelman noted several times during her talk the 4.45m homeowners who are 90-plus days delinquent on their mortgages. While Zelman doesn’t expect all of those homeowners to lose their homes, estimates from servicers are that as many of 80% of those eventually could lose their homes.
“There will be a continuous flow of foreclosures for several years,” she said.
JtR note: I disagree with her comment in bold. During the heyday of the subprime-REO liquidation of 12-24 months ago, there were plenty of owner-occupier buyers who got beat out by cash investors. Today on the lower-end, the investors are drying up because the list-prices are higher, yet owner-occupiers are still buying.
JTR – My interpretation of the BOLD comment is that without the prior investor purchases early on in the dark days of the market all that inventory would have piled up and we’d be way backed up today.
Think Phoenix where investors were everywhere like roaches (myself included in that kind description). There were not the volume of credit worthy owner occupants 18 months ago to abosrb that massive inventory that the investors consumed in these non-san diego markets.
I’ll live with that, but always cringe at the thought that it could have been different here – but maybe it was?
I went back 18 months, to 1Q09. Here were my REO-listing stats:
LP/SP/fin type
$184,900/$220,000/FHA
$384,500/$385,000/Conv
$264,900/$273,000/Conv
$189,900/$205,000/FHA
$117,900/$117,500/Conv
$188,800/$207,000/Conv
All were owner-occupiers, as far as I know.
I was a proponent of taking the highest price, even with financing, when many LAs were pushing asset managers to take the all-cash investor deals under the illusion that they were better.
From the beginning of my REO experience with Countrywide, which was April, 2008, there were always several owner-occupier offers submitted.
P.S. I quit tonight as REO listing agent with Bofa. You may have heard the hints in the last few REO videos, because it’s been coming. The workload is too high, the properties too crappy, and the rewards too low.
Well, I bristle at the roach description, but Clearfund is right. I certainly did my part in Phoenix. San Diego and the other highly desirable markets with constrained supply will always perform differently, i.e. better. There is so much pent up demand in San Diego that price does fix everything, and does it quickly.
I don’t understand the logic in taking an all cash offer when there’s a higher financed offer. I suppose the thinking is that there’s a chance that the finance offer will fall out of escrow-well then, use the cash offer as a backup! Seems simple to me.
Vultures get a bad reputation, but they clean up messes. The investors and flippers may drive prices up, but they also provide liquidity and rehabilitation. And, if it’s cash, they’re probably risking their own money – more than can be said for many mortgage originators.
SD is an odd market. In 90% of the country you can invest for cash flow which is fairly predictable and allows you to pay off debt over time and earn a decent yield in the meantime.
In markets like SD, investors focus nearly exclusively on Appreciation in value…which is anything but predictable.
Its a fun ride up but a painful one down.
Somewhat of a Tortoise vs. Hare saga. When it comes to your retirement funds investing in real estate, buy the Tortoise and option the Hare.
Jim,
Congratulations on freeing yourself from the beast. Everybody should cut all ties with BofA. The banks are not your friend. Realtors are the stewards of the real estate market. Banks should not be dictating how the RE markets are handled, Realtors should. When the banks get out of our business, thats when it will start to improve.
The WSJ article yesterday included the rankings of the top 28 metro markets in the country.
http://s.wsj.net/public/resources/documents/retro-HAGERTY.html
San Diego was ranked #1 in the country, twice:
Price change: +7.4%
Inventory change: +33.1%
“Lending won’t pick up again until bank failures have peaked, Zelman predicted, but didn’t say when she thought that would be.”
That’s the money quote. Bank failures won’t peak until banks recognize their non-performing assets and the concommitant losses. This means the FDIC has to start getting serious about its core mission again.
Another thought to consider when looking at investors is that you have to look at them on balance. I do business with a generation of baby boom and older investors who are now entering the liquidation phase of their lives. They have multiple investment and secondary homes which they or their heirs desire to liquidate. Will the newer generation of investors(demand) exceed the older generation of investors(supply)?
OT here. if someone can bear with my total bizarre question and not ask, wtf, I’d really appreciate some insight. I’m toying with the idea of building a house (one of these uber green things) that is going to cost about 50% more than the market will bear in the neighborhood I’m scoping out. (I found some empty land, for sale, right under my nose, so hence that location.) What will the base value be on which the house will be taxed? Does it have anything to do with construction costs, or it is strictly appraisal as if it were for sale that sets the tax base on new construction?
Thanks.
Emmi — appraisal.
I had a couple build a house in 2007, the county assessor came out after the cert. of occupancy was issued and appraised the house as of that date to set the basis for tax purposes.
Thanks guys. That made sense, but I’m learning that “makes sense” is no guarantee of reality.
Go into debt for a great home – Keep living in the hovel and have tons of cash to play with. HMMMM.