Recent "Sales Uptick" Not Really Good News for Real Estate

According to this Forbes.com article, Riskiest Places for U.S. Homeowners, there are several places in the country (mainly parts of CA, FL, MI, TX and parts of the Midwest) where things will get significantly worse.  However, even outside of those places things are not likely to improve.

"While the National Association of Realtors estimates existing-home sales rose 5.1% nationwide in February, foreclosures are still on the rise. Dr. David Berson, chief economist of mortgage insurer PMI Group, says the sales uptick simply reflects re-sales of foreclosed properties.

"Sales will turn up before the recession ends," says Berson, but they will be at lower prices. That does little for those who already bought homes during the boom and now face the dual forces of negative equity and job loss. "Delinquencies and foreclosures lag behind unemployment," he says, "and unemployment lags behind the recession."

I think it is clear that while the recent sales uptick is nice and presents some people hope it is more likely just a sign that prices were dropped on distress sales and foreclosures.  It is only when the distress sales and foreclosures decline significantly and regular sales increase and prices increase can this poor real estate market be deemed "over".  Until then the market is still in decline.

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.

More Job Losses Will Cause More Foreclosures and Bank Failures

According to this New York Times article, Job Losses Hint at vast Remaking of Economy, job losses are increasing rate.  This will definitely lead to more foreclosures and more bank failures.  The job losses have escalated since December with the job loss numbers for December and January being revised higher.  In my opinion this is proof that businesses and Wall Street have no faith in the Obama administration as it seems that things have gotten worse since he won the election with even more rapid deterioration since the unveiling of the "Stimulus Plan".

Reuters: One in 8 U.S. homeowners late paying or in foreclosure

According to this Reuters article, One in 8 U.S. homeowners late paying or in foreclosure, 1 out of 8 US homeowners is behind on their mortgage, or already in foreclosure. This is absolutely stunning. According to the article even prime loans are experiencing higher foreclosure rates caused by job losses and overbuilding. The author of the article did not seem optimistic that Obama's foreclosure plan would work. I agree. This will certainly lead to more short sales and foreclosures and result in hurting the housing market even more. Since Tennessee has a higher than average number of foreclosures I expect the TN housing market to be hurt more than average over the next several years.