S&P Reports On The State of the Housing Market

One of the founders of what has really become the industry’s (and media’s) bible for real estate statistics and forecasts, S&P Case Shiller, recently participated in a Q&A about the state of the housing market. Robert Shiller, a Yale University economist, discussed the housing market and the implications of lower interest rates. I found it quite conservative yet insightful and in my opinion, on target with what is going on in today’s market.

That is why for this edition of Weekly Market Watch, I am going to provide you with an excerpt from his interview:

Is the slump in U.S. home prices bottoming out?

Shiller: The situation has definitely changed. With our numbers — the S&P/Case Shiller home price index — going up sharply. It looks like a major turnaround. We’ve been watching that for three months now, and we have some concern that it could be an aberration and temporary. But, at this point, it seems to be evident in just about every city in the U.S. That suggests it’s real. But it probably isn’t the beginning of a major boom, just because the economy is in such bad shape. There’s also a chance that it will reverse. It’s still only three months old, so it’s very hard to be sure at this point. The most likely scenario is that it won’t continue at this high rate of increase, but that it will neither go down a lot, nor up a lot.

So the index will move sideways for a while?

Shiller: Yes, for a while, meaning five years.

What are the main factors driving U.S. house prices? What could push them up, or cause another slump?

Shiller: The main factor is the world economic crisis and the efforts of governments around the world to stimulate the economy. Parts of those efforts have been directed at the housing market. In the U.S., there is an 8,000 dollar first-time home buyer’s tax credit which expires at the end of November. That’s a reason for concern, as it comes to an end. Also, the Federal Reserve has a plan to buy $1.25 trillion worth of mortgage-backed securities to support the housing market. They are most of the way through the program and anticipate phasing it out at some time in 2010 - that’s another thing that will go away. We’ve yet to see how the housing market will continue. Part of the problem is that people are buying now rather than later. When later comes, there could be a downturn in the market.

Is there an oversupply of houses in the U.S.?

Shiller: That’s been a problem. The inventory of unsold houses has been high, but has come down a bit. On top of that, there will be more foreclosures, more homes are going to be dumped on the market as people default. Now, that may show down as home prices will start going up again. But I suspect that this isn’t going to happen. Also, banks have more REO, or real estate owned, that they’re holding on to for the time being. But eventually those REOs are going to be dumped on the market. So that’s why it doesn’t look particularly encouraging from a supply consideration.

Turning to interest rates, which are at exceptionally low levels: Is there a risk that this eventually will cause irrational exuberance?

Shiller: There is always a risk of that. Those things are hard to predict. However it seems like the present time is least conducive to bubbles of any time. We’re in what some people call “pretend-and-extend” economy, which means that banks that have commercial loans are often extending those loans and pretending that the property is worth something. That’s because they don’t face reality. This kind of economy isn’t really suited to a beginning of a real bubble. Now, everything could change… It’s surprising how strong the residential, single-family home market looks right now. It makes me think that it’s hard to predict animal spirits.

How long can central banks afford to keep expansive policies in place?

Shiller: In principle we can keep this in place for a long time. That’s what Japan did… But confidence is definitely coming back. The depression scare is over at the moment. So it would be plausible that central banks could be raising interest rates — both in the U.S. and Europe — [as early as next year]. But I just have a worry that this isn’t going to happen and that it’s not going to be so easy to extricate [themselves from the low-rate environment].

Will the sharp increase in global debt levels drive up inflation over the medium to long-term?

Shiller: My best guess is that we won’t have inflation, that central banks will pull it back as inflation starts to begin. But I think that there’s a chance of it; people have to be defensive in their investments. It always amazes me that people are so trusting and that they want nominal debt as much as they do… So a good long-term strategy is to invest a good part of one’s portfolio in inflation-indexed bonds, even though it doesn’t particularly look like the time to worry about inflation right now.

I tend to agree with Shiller on many of his statements, specifically that we are probably in the midst of a turnaround. Having said that, it is important to point out that this isn’t going to be a sharp “V” recovery with a sudden jump in prices or units. In all probability what we will see is a long “L” shaped broad recovery in which prices are relatively stagnant for some time before eventually inching up.

Now, let’s take a look at this week in real estate:

· Auburn—Agents are trying to stay upbeat but they are pretty beat up by the buyers regarding the lack of inventory. We did get one short sale approved this week even after the mortgage insurance company said no. We will have another short sale approved by the end of this week. It is great seeing some of the short sales come to closing.
· El Dorado Hills—The market remains the same. The pending listings are about the same as the new listings coming on the market so the inventory is still at about 361 active listings. Short sale listings continue to rise but the REO listings are still under 10% of the inventory. More NODs are being filed so Agents need to be aware when working with investors.
· Placerville—The entire El Dorado County market is pretty much the same. We’re seeing a few more REO’s come on the market but they are almost always priced competitively and sell with multiple offers. We’re seeing a lot of FHA first time homebuyers. The short sale listings make up almost 40% of the Placerville area inventory.
· Rocklin-Lincoln—We had a great speaker that stressed getting back to the basics and then CoreFact showed us some of the tools that they have that might help the Agents become successful. We have several Agents participating in the Move up buyer program.
· Roseville/Granite Bay—Look for opportunities. The push is on for saleable listings with REO lull in current mode.
· Sacramento Metro—Good priced properties in East Sacramento, Land Park and South Land Park continue to sell very quickly.
· Sacramento-Sierra Oaks—The inventory is very low. A LOT of “frustration” from the Agents in getting appraisals and loans. The whole process is getting bogged down and taking a lot longer.
· Tahoe/Truckee—Active Inventory Summary: Active Listings: The listing inventory for the Tahoe-Truckee market went down slightly for the week to 2,223 active listings - 1,536 residential properties and 687 Lots and land listed for sale. The reduction in listings is part due to sales and in part to expired listings and homeowners taking their homes off the market for the winter. Active Listings - REOs and Short Sales: Of the active listings, there are 160 properties listed as short sales, (7.2%) and 57 properties listed as REO sales, (2.6%). While less than 10% of the active listings are short sales and REO’s, roughly 24% of the properties selling are short sales and REOs. Months of Inventory: Based on the current inventory and sales for the previous 30-day period, the market has roughly 15-months of inventory available. There is definitely a large inventory of homes for buyers to choose from at great prices. Sales Summary: Last Week’s Sales: For the week of September 21st through 27th there were 30 properties which closed in the market which is a slight increase from the previous week. Of the properties sold last week, five (5) of those sold at a price above $750,000. Pending Sales: Pending sales decreased to 226 properties from the previous week. Market Activity Summary: With the end of the summer season and beginning of fall, visitor traffic has slowed and open house activity is fair. However, sales this past week were consistent with weekly sales averages since early August. Buyers for competitively priced properties continue to be strong. Coldwell Banker currently has over 54 homes in escrow scheduled to close in the next 30-60 days.

Without a doubt, locally what continues to push our market in the right direction is the $8,000 first time home buyer tax credit. Currently in Washington D.C., real estate industry representatives and government officials are lobbying for either a $15,000 all home buyer tax credit or at minimum, an extension of the $8,000 first time home buyer tax credit but the result of that debate is still in the air. If the tax credit does disappear we are likely going to see an emergence of investors in the first time home buyer arena which may cause problems with housing prices and a continued erosion of the first time home buyer market. Please contact your local representative to call upon his/her support of this important initiative.

Next week I will release the October edition of Reality Check. This month’s edition will feature a Q&A from me on the local housing market and what we may expect for 2010.

Until then,
Make it a great week,

Bob Bronswick
Coldwell Banker Residential Brokerage Sacramento/Tahoe