Home Prices Decline Again

Home Prices Decline Again

As I have been predicting for quite some time (see: The Truth About Home Prices), housing prices are declining again in the aftermath of the second ill advised "first time home buyer tax credit" (should be renamed "Fool's Gold Part 2").

According to this article, FHFA Monthly Home Prices: September 2010, home prices have now fallen below their levels in September 2009. (The article states: "The FHFA monthly HPI are formulated from home purchase information collected from mortgages that have been sold to or guaranteed by Fannie Mae and Freddie Mac.").



As you can see by the graph above, the home price trend clearly shows that home prices are declining again. As a result of this further (and expected) housing price decline, there are going to be an elevated level of foreclosures, short sales and other distress sales over the next several years. Due to these issues, the overall poor economy, and the fact that home prices are still historically high, housing will not begin recovering for at least 4-5 years and even then price gains will be very modest.

Nashville and Middle Tennessee Short Sale and Foreclosure Help and Assistance for Homeowners and Property Owners in Financial Distress. If you are a Nashville Tennessee, Franklin Tennessee, Brentwood Tennessee, Nolensville Tennessee, Spring Hill Tennessee, Murfreesboro Tennessee, Smyrna Tennessee, La Vergne Tennessee, or Middle Tennessee homeowner, property owner, condo owner, real estate investor, home builder or real estate developer who cannot pay your mortgage payments (due to losing your job, having your income reduced, illness, health problems, adverse business conditions, slow sales, loss of investment property tenants, vacancy issues, lack of funds to complete the project, feuding business partners, etc.), know that you will not be able to pay your mortgage, have defaulted on your mortgage, are already in foreclosure, or owe more than your home is worth, please contact me to discuss your options including a loan modification and a short sale (a real estate short sale occurs when the sale proceeds are not sufficient to pay off all the mortgages and liens on the property/home). I am a Nashville Tennessee and Middle Tennessee distressed real estate, short sale, pre-foreclosure (preforeclosure) and foreclosure REALTOR, Expert and Real Estate Investor. I primarily help sellers (homeowners, property owners, condo owners, owners of high end homes and properties (estate homes, luxury homes and executive homes), real estate investors, home builders and real estate developers) of distressed real estate, short sales, pre-foreclosures, foreclosures, investment properties, failed new construction projects and struggling commercial real estate developments located in Middle Tennessee (Rutherford County TN, Williamson County TN, Davidson County TN, Robertson County TN, Maury County TN, Murfreesboro TN, Smyrna TN, La Vergne TN, Eagleville TN, Lascassas TN, Rockvale TN, Christiana TN, Brentwood TN, Franklin TN, Nashville TN, Belle Meade TN, Nolensville TN, Spring Hill TN, Gallatin TN, Springfield TN and Mt. Juliet TN). If you do need to short sell your home or property, or you need a quick sale due to being in foreclosure, you can request short sale and foreclosure help and assistance on my website at Get Short Sale and Foreclosure Help and Assistance from a Nashville Tennessee and Middle Tennessee Short Sale and Foreclosure REALTOR, Real Estate Expert and Real Estate Investor.

Housing Prices Declining Again

Housing Prices Declining Again

According to this Real Estate Economy Watch article, Fear Seen Driving Prices Lower than Last 20 Years, the housing markets in most US cities "will see prices fall below the lowest levels of the last 20 years" according to the House Price Forecast from University Financial Associates (UFA) in Ann Arbor Michigan.

The article quotes Dennis Capozza, the Dykema Professor of Business Administration in the Ross School of Business at the University of Michigan, and a founding principal of UFA, as saying the "Detroit metro was the canary in the coal mine this cycle, with falling house prices arriving earlier than in other metros. Other metros that have already or will soon converge to pre-bubble real prices include Las Vegas, Phoenix, the inland California metros and many south Florida metros."

Overall, the UFA's forecast "would take the national median price of a home in most markets below $101,000, the national median in 1990, according to the Census Bureau." This prediction comes after other recent data which shows that housing prices are headed downward again. This will result in more short sales and foreclosures as underwater homeowners and real estate investors walk away from their upside down (i.e. negative equity) homes and properties.

Short Sale and Foreclosure Help and Assistance for Real Estate Investors, Home Builders and Developers in Nashville TN and Middle TN. If you are a Nashville Tennessee, Franklin Tennessee, Brentwood Tennessee, Nolensville Tennessee, Spring Hill Tennessee, Murfreesboro Tennessee, Smyrna Tennessee, La Vergne Tennessee, or Middle Tennessee real estate investor, home builder, condo developer or real estate developer who cannot pay the property/project mortgage payments (due to the poor economy, adverse financing conditions, slow sales, loss of investment property tenants, vacancy issues, lack of funds to complete the project, feuding business partners, etc.), have already defaulted on the mortgage, or are already in foreclosure, or owe more than the property/project is worth, please contact me to discuss your options including a short sale (a real estate short sale occurs when the sale proceeds are not sufficient to pay off all the mortgages and liens on the property/project). I am a Middle Tennessee distressed real estate, short sale, pre-foreclosure (preforeclosure) and foreclosure REALTOR and Expert. I primarily help sellers (property owners, real estate investors, home builders and real estate developers) of distressed real estate, short sales, pre-foreclosures, foreclosures, investment properties, failed new construction projects and struggling commercial real estate developments located in Middle Tennessee (Rutherford County TN, Williamson County TN, Davidson County TN, Murfreesboro TN, Smyrna TN, La Vergne TN, Eagleville TN, Lascassas TN, Rockvale TN, Christiana TN, Brentwood TN, Franklin TN, Nashville TN, Belle Meade TN, Nolensville TN, Springfield TN, Gallatin TN and Mt. Juliet TN). If you do need to short sell your home or property, or you need a quick sale due to being in foreclosure, you can request short sale and foreclosure help and assistance on my website at Get Short Sale and Foreclosure Help and Assistance from a Nashville Tennessee and Middle Tennessee Short Sale and Foreclosure REALTOR and Real Estate Expert.

Prices Still Need to Decline to Make Homes Affordable Again

According to this Forbes.com article, How Low Will Real Estate Go?, home prices need to decline substantially in or der to bring them in line with median incomes, especially given the rising unemployment and increasing foreclosures environment.  Predictably, the article lists the top 10 (or worst 10) markets as being in Florida, California, Arizona and Nevada.  However, even outside these devastated markets other markets in the US will still decline with may seeing double digit declines.  This will result in more homeowners being underwater (i.e. negative equity), which has been shown to increase foreclosures, which in turn increase the rate of home price decline thus creating a nasty cycle of home price declines.  This will continue to get worse for the next 1-2 years.

President's "Making Home Affordable" Program Not Enough to Stop Foreclosures

According to this Inman News article, Negative Equity: a housing timebomb, President Obama's Making Home Affordable Program (MHA)  will only have a small impact on reducing foreclosures because it igores one of the key drivers of foreclosures: negative equity.  The article also mentions that investors being excluded is also a problem with MHA.

As usual, I predicted this before the "real media".  Per my blog post on March 5, 2009 regarding the new government foreclosure programs, since investors are excluded and many people have negative equity in their homes the government foreclosure programs (now labeled MHA) will not be successful in significantly reducing foreclosures.

A Brief Synopsis: How We Got Here and Where We Are Going

How We Got Here

• Government - The problems were caused by the relationship between Fannie Mae/Freddie and the Community Reinvestment Act (pushed by social agenda politicians (think Bill Clinton, Barney Frank, Chris Dodd, etc.).  The result was that more and more high risk loans were made to financially unstable and under-capitalized borrowers under the guise of social justice.
• Greedy Bankers - Pushed by the government, bankers soon realized that they could make more money lending to unstable and under-capitalized borrowers as a result of being able to make more loans and charging higher rates and fees.
  
• Foolish Consumers - Consumers started viewing buying a home as an "investment".  While that may sound good, the problem is that what most people classify as an "investment" is really noting more than speculation (i.e. gambling).  As a result people took on more and more debt to buy bigger and bigger homes since they were "investments".  In reality, the only investment part of owning a home is that in the old days you would buy a home and eventually own it free and clear instead of perpetually paying rent.  Now, "homeowners" just perpetually have a mortgage which is not much different from perpetually renting other than you benefit if the price goes up and get hurt if the price goes down.  This is made much worse by leverage (think 0-5% down mortgages).  In reality, owning a home was never meant to be an investment other than you would eventually own the home free and clear and maybe get some appreciation, which would protect you from inflation (not 20-50% annual appreciation, but more like 3-7% per year).  Owning a home was primarily meant to provide a lifestyle.   People just had the common sense not to buy a lifestyle that they could not afford.

Where We Are Going

• Some recent real estate news shows existing homes sales up 5.1% and new home sales up 4.7%, but home prices only improved 1.7%.  This is likely the result of more builders dumping their homes for cheap, but their median prices are still higher than resale homes so the overall prices went up a bit.
• Despite sales increasing a bit the number of homes in inventory increased for the first time since July 2008.  This means supply will likely increase.  Not good for prices.
• As soon as the general public thinks the market has improved there will be additional inventory added to the market as all those sellers that gave up on selling flood the market with their homes.  Again, this will not be good for prices.
• The problem now is the absurd Obama stimulus plan, which will surely drive up inflation (and as a result interest rates) and drive up unemployment as investors and companies pull back investments (i.e. in start-ups, equipment, facilities, etc.) due to higher future taxes (necessitated by the huge government spending in the Obama plan) reducing their future returns.  This is what will likely break the back of the real estate market in the mid to long term.  So while prices may increase a tiny bit in the short term, in the long term they will suffer.  As a result I do not see the real estate market rebounding back to the pre-2006 price levels any time soon.
  

Manhattan Real Estate Will Decline in Value to 50% of Market Peak

According to this New York Times article, Looking for Bottom in N.Y. Real Estate, Manhattan real estate prices hav already fallen by 25% according to some people involved in New York real estate.  In the summer of 2008 I told my wife that the Manhattan real estate market would collapse since it was absurdly over valued combined with the beginning of the financial meltdown layoffs.  I believe that prices will end up being 50% or less of the previous market peak.

Bloomberg.com Article: U.S. Existing Home Sales, Prices Slumped in January

According to this Bloomberg.com article U.S. Existing Home Sales, Prices Slumped in January.

The gist ofthe article is that the declining economy is going to going to continue to drag down the housing market as consumer confidence also declines.

According to the article the economy will likley not rebound with respect to unemployment until 2011.

The article quotes Lawrence Yun, the chief economist for the National Association of REALTORS (NAR), as saying that the recent goverment actions may lift home resales by as much as 900,000 units this year.

Being a REALTOR myself, I have read Mr. Yun's predictions many times over the past 3 years. 

I have to say that he has said the market would improve in 2006, 2007 and 2008.

Each time he was wrong and he will be wrong this time as well. Despite what NAR would like

consumers to believe, homes are still not affordbale. NAR's way determining home affordability is

to factor in financing (see the NAR Home Affordability Index). The problem is that when financing

is abnormally cheap (i.e. like during the market boom) it lends itself to over-inflated prices (like during the market boom).

The result is that when rates increase the home owners cannot sell their home for as much as they paid and a whole

new problem starts just like what we see now. The fact is that prior to the huge run up in home prices that started

around 2000, the median home price in a given area was more related to the median income in that area.

For homeowners to be financially solvent the ration of home prices to median income needs to be around 2 to 1

with an absolute maximum of 3 to 1. Now even after the market declines that started in 2006

the median price of a home in most areas of the US is 3-4 times the median household income

meaning that 2 people now need to work to buy a home as opposed to just one worker in each

household. Two family incomes helped push up the median price and this was worsened by

consumers accepting more debt as being OK. Historically, the values of real estate were

determined by the quality of life that the location offered, the size and type of property and

local employment prospects. Unfortunately, during the most recent run up in prices the major

factor was the monthly housing payment versus household income. As rates went lower and

financing became more available, prices increased until the prices reached a popping point.

That cannot happen again, otherwise, we will see the same problems all over again. The solution

is that real estate prices need to continue to decline for a while longer in order to bring affordability

more in line with common sense criteria, not monthly housing payments.

In Bloomberg Interview, Harris of Barclays Capital Says President Obama is doing the "Right Thing" for U.S. Housing

Accroding to this Bloomberg interview with Ethan Harris, Co-Head of U.S. Economics Research for Barclays Capital, President Obama is Doing the "Right Thing" for U.S. Housing.

I disagree with his assessment.  This entire financial crisis was caused by:

1. Too much total consumer debt including real estate and non-real estate debt.
2. A natural waning of housing prices after a "too good to be true" run up in real estate prices.
3. A decline in the secondary market for debt instruments largely due to concerns about issues above.

Unfortunately, President Obama's plan is to try and solve a problem caused by debt with more debt to finance his massive spending plan.   Economists and media pundits are now referring back to the Great Depression to try to analyze the effectiveness of President Roosevelt's New Deal to compare it to President Obama's "Newer Deal".  Increasingly, economists are forced to admit that Roosevelt's New Deal did not stop the Great Depression, and in fact, according to some economists made the economy worse.  While that is still an issue to be debated, there can be no doubt that the current financial crisis differs from the Great Depression in one significant repspect: one major cause of the Great Depression, drought and widespread crop failures, are completely absent from our current situation.  Drought and crop failure is a tangible and understandable problem.  Our current financial crisis, on the other hand, is almost entirely due to poor financial decision making by banks (mortgage companies and investment banks) and individuals (the people who borrowed more than they ever could repay).  Therefore, I fail to see how a small number of infrastructure projects and some other haphazard spending can get us out of a mess caused by debt if those projects are going to be financed by debt.  In order to solve this problem total debt cannot be increased and debt payments must decrease in order to lessen the burden on consumers.

In order to properly address this current financial crisis I think a simpler solution would be for the Federal Reserve to take all the debt off of all the banks' books at current market value by:

• Swapping out all the residential mortgage debt held by US Banks (totals approximately $11.3 Trillion) in exchange for US Treasuries with a guaranteed yield of say 2.5% with provisions for the banks to sell of the Treasuries in controlled allotments in order to raise cash.  Currently the total value of all US Federal debt is $10.76 Trillion.  Therefore, this plan would essentially double the national debt.  However, since it is really a debt swap the total of all US public and private debt would remain the same at about $53 Trillion.
• The Fed would then alter the terms of all the mortgages "purchased" so that all people current on their mortgages and have equity would receive a reduced interest rate of 3%.  People who are current, but have no equity would receive 3.5%, people who have equity, but are delinquent (assuming they can pay the mortgage after the reduction) would get 4% and people who have no equity and are delinquent (assuming they can pay the mortgage after the reduction) would get 4.5%.  Any people with negative equity would have been dealt at the time of the Fed's "purchase" of their mortgages since the Fed would be paying a discounted amount for their mortgages (i.e. the banks would take a haircut by reducing the face values of these assets).  The delinquent homeowners with negative equity would also share the pain by agreeing to pay the Fed 10% of future home appreciation in order to make up for the higher rate of default.
  

The initial cost of this plan would be very little.  The long term cost to the Fed (and US Taxpayers) would be the risk of mortgage default, which would be spread over time anyway.  Since the banks would now have 100% performing and guaranteed assets on their books instead of non-performing mortgage assets they would be saved.  Since there would be a provision for the banks to sell off the Treasuries in controlled amounts their capital would be replenished in an organized fashion thus leading to a return of normal lending.  Since the problem in the economy was and is too much consumer and business debt including, but not limited to, real estate and the near complete evaporation of the secondary market for debt instruments this plan would work by creating the secondary market (the Fed) and reducing debt payment levels by reducing interest rates of homeowners.  In short this would be the same as a tax cut for homeowners thus putting more money back into the economy, some of which would surely be spent.  Since my plan is a debt swapping/debt shifting plan it will not increase total debt, thus not creating any additional burden on taxpayers or the economy.  Conversely, the President's plan of borrowing more money to spend will increase debt and probably make things worse in the long run.

Foreclosures now hitting previously untouched areas of the US

The foreclosure problems in California, Florida, Nevada and Arizona continue to batter those markets.  This has been well covered.  However, now foreclosures are hitting areas previously spared from the problem.  I recently came across this article on the website of the Nashville Business Journal.  According to the article approximately 25% of the Middle Tennessee are home builders are either out of business, or bankrupt and that buyers have been able to buy foreclosures that previously sold for almost $600,000 for only $250,000.  The article also states that part of the problem is "equity calls" (similar to a margin call) that lenders are hitting home builders with that are a result of the declining market value of the builders' inventories.  Based on some research that I conducted it appears that this market is still significantly overbuilt due to a boom in new construction from 2005 through 2008.  It will take some more time and some larger price declines before hitting bottom.