Home sales prices are dropping and rental prices are going up. Image: Flickr / brokersaunders / CC-BY

The Standard & Poor’s/Case-Shiller index of property values measures home prices in 20 major U.S. cities. The index numbers for February have just been released, and home prices are once again dropping. At the same time housing prices are facing a double-dip, rental prices seem to be going nowhere but up.

Dip in home prices

The February 2010 index of home values measured average home prices and inventory in 20 major U.S. cities. Compared to January of 2011, home prices dropped by 0.2 percent. Compared to February of 2010, home prices dropped by 3.3 percent. The raw numerical index for February 2011 was 139.27. The lowest number the home price index hit during April of 2009 was 138.26. In short, home sale prices are dipping down to close-to-record lows. This double dip is eroding the gains in home prices that have been made during the economic recovery.

Putting home prices in perspective

The specter of a double-dip in housing prices puts many industry watchers on edge. Comparing average home prices and the Case-Schiller’s 110 years of home price data puts this information in better perspective. Between 1915 and 1949, between World War I and World War II, home prices remained between 75 and 81. After World War II, home prices jumped from a low of 70 to 110 and continued an uneven climb. Between 1998 and July 2006, home prices jumped from 109 to almost 210 with the increased availability of short term loans and other financing options. In short, this 3.3 percent drop continues to put home prices closer to what the trend appeared to have been, rather than below it.

Rent getting expensive

In the last three years, rental vacancy rates have been holding steady at about 10 percent. In the last few months, rental vacancy rates have started dropping severely. Between the first and last quarter of 2010, rental vacancy rates dropped from 9 percent to 7.9 percent. Rental experts estimate that average rent in the United States will spike by double-digit numbers, and top $800 per month. Lower vacancy rates and a higher cost of purchasing a house, thanks to 20 percent down payments, make rentals more expensive. In short, paying for a place to live is going to get more expensive.

Sources

Bloomberg
Census.gov spreadsheet
RitHoltz.com
CNN Money

Investors are capitalizing on historically low home prices and interest rates while many Americans question the safety of home ownership. Image: Flickr/Georgivar CC-BY-SA

Existing home sales rose nearly 4 percent from January to February, according to the National Association of Realtors. Most of the home buying is being done by investors snapping up cheap houses in regions where high foreclosure rates are driving down home prices. First-time home buyers are staying away in what is being described as a cultural shift away from home ownership as the American dream.

Investors pad home sales stats

Investors throwing down cash on foreclosures and short sales drove up existing home sales last month to an annualized rate of 5.1 million. Foreclosures and short sales accounted for 40 percent of all purchases. Cash deals accounted for 35 percent of all sales, the highest percentage since the National Association of Realtors began tracking cash deals. The bulk of investor activity took place in markets hit hardest by foreclosures, including Phoenix, Las Vegas and Tampa. The 40 percent foreclosure sales figure could be higher; the Realtor group’s data tracks individual investors but not homes sold at auctions and bought by private equity firms. A tell-tale sign of investor activity is a 10 percent year-over-year rise in sales of homes less than $100,000. In the past year, sales of mid-priced homes fell more than 14 percent.

First time home buyers an endangered species

Sales among first time home buyers fell to 33 percent in March. According to the NAR, that figure would be about 40 percent in a healthy housing market. Although real estate is more affordable than it has been in a generation, a survey conducted by Fannie Mae found that at the end of last year, the number of people who said a home was a safe investment fell to 64 percent from 70 percent when the year began. The December figure was the lowest recorded by the survey, which began in 2003, when 83 percent of respondents believed in home ownership. But even during the housing crisis, owning a home was safer than most investments. During the peak of the housing crisis in 2008 the median home price in the U.S. dropped 15 percent compared with a dive in the Standard & Poor’s 500 Index of more than 38 percent. By the end of 2010, about 11 million homes in the U.S. were worth less than their mortgages, according to CoreLogic.

Re-thinking the American dream

A growing number of Americans are giving up on home buying, even though real estate is more affordable than it has been in 40 years, based on NAR data on home prices, mortgage rates and median U.S. income. The median U.S. home price plummeted 32 percent from its 2006 peak to a nine-year low in February 2011 — worse than the 27 percent decline recorded in the first five years of the Great Depression. Borrowing costs have also been historically low. According to Freddie Mac, the average rate for a 30-year fixed mortgage in 2010 was 4.69 percent, the lowest since 1972. According to the Census Department, the U.S. home ownership rate dropped to 66.5 percent in the fourth quarter, the lowest in more than a decade. In March, the percentage of Americans who plan to buy a home in the next six months fell by 23 percent.

Sources

Associated Press

Bloomberg

MSN Money

Despite the downturn of the past few years, Americans still believe in housing as a great investment. Image from Wikimedia Commons.

A recent survey indicated that most Americans think real estate is a good investment. The value of the average house has dropped by nearly a third since the housing recession began in late 2007, and nearly a third of all homes are worth less than the amount that is owed on them. Housing prices will eventually begin to appreciate, but the process will take a while.

More than 80 percent of Americans have confidence in real estate

A recent survey revealed that despite the economic downturn, most Americans still have confidence in real estate as an investment. The Pew Research Center, according to Reuters, found that 81 percent of Americans felt real estate was still the best long term investment. More than 2,000 adults were surveyed by phone by the Social and Demographic Trends project, part of the Pew Research Center, and 37 percent “strongly agreed” that a house is the best long term investment, and 44 percent “somewhat agreed.” Most people believe that housing values will recovered within three years, but 23 percent said that they wouldn’t have bought their house if given the choice again.

April showers and May flowers

Realtors, according to MSNBC, are hoping that sales pick up during the spring and summer of 2011 and the current trend of slowing sales is reversed. Realtors and real estate industry analysts are concerned that the number of underwater homes and lower demand will keep home sales and home values down for some time. However, the National Association of Realtors is expecting an increase in home sales of 7.4 percent this year. One of the biggest complaints from the real estate industry has been that lenders are being too stingy, and standing in the way of the recovery that would benefit them by being too conservative with loan capital.

Downturn fuels skeptics

Skeptics and critics of the real estate industry have intensified their stance against home ownership, a cornerstone of the American Dream. An article on the USA Today website quoted Robert Shiller, co-founder of the real estate tracking Case-Shiller Index, as saying that people buy houses for security or lifestyle reasons. Another economist in the same piece found that a house only yields a 6 percent return on average. With depressed prices, along with agent fees and other closing costs, it may be far lower than that for many people.

Sources

Reuters

MSNBC

USA Today

Put into perspective, consumer spending is being canceled out by inflation, and the housing market could be bottoming out. Image: CC Mr. T in DC/Flickr

An increase in pending home sales in February was not enough to offset the big slide in contract signings reported in January. A February gain in consumer spending was also neutralized after being adjusted for inflation driven by rising food and energy prices. But the minutely positive data on pending home sales and consumer spending boosted stocks Monday, and some real estate experts think the housing market may have bottomed out.

Inflation and consumer spending

Consumer spending in February increased 0.7 percent compared to the month before, according to the Commerce Department. Consumer spending has risen eight months in a row, but February’s increase, adjusted for inflation, is just 0.3 percent, matching the increase reported in January. Rising food and energy prices pushed up inflation in February. After rising 0.3 percent in January, the Commerce Department said the personal consumption expenditures price index rose 0.4 percent, the fastest rate recorded since June 2009. The increase in the consumption expenditures price index effectively canceled out February’s 0.3 percent increase in personal income. Households have also been dipping into savings to cover rising food and energy prices. Savings dropped from $710.5 billion in January to $676.7 billion in February.

Pending home sales as an economic indicator

Pending home resales increased 2.1 percent in February after dropping 2.8 percent in January, according to the National Association of Realtors. Compared with February 2010, pending home sales fell 9.3 percent. Because they represent signed contracts, pending home sales are considered a leading economic indicator. The number affects existing home sales data a month or two later, when the contracts close. As for February, existing home sales — 95 percent of today’s housing market — dropped 9.6 percent from the month before. The median price for existing homes dropped 5.2 percent from February 2010, erasing all increases in home values since February 2002. New home sales plunged 17 percent in February to the lowest rate ever recorded. The median price for new homes dropped 8.9 percent from February 2010.

Has the housing market bottomed out?

Because home prices continue to fall, the National Association of Realtors expects existing home sales to eventually rise 5 to 10 percent overall in 2011. Very few people are buying despite the fact that housing has become so affordable it should be one of the most attractive investments in the U.S. According to Deutche Bank, it’s now cheaper to pay a mortgage and other major homeownership costs than to rent the same house in 28 out of 54 major markets. Optimistic real estate analysts are betting that this affordability will eventually entice potential homeowners into pulling the trigger. The re-emergence of homebuyers could start raising housing prices in many markets, which could get even more homebuyers off the fence.

Sources

Bloomberg

New York Times

Fortune

The actual value of homeownership is being questioned by a growing number of skeptics. Image from Wikimedia Commons.

One of the longest standing hallmarks of the “American Dream” is becoming a homeowner. However, a growing number of skeptics are beginning to question whether it is actually a good idea for people to buy a home at all. There is some evidence that could support home-ownership skeptics’ argument.

Housing prices may not perform that well as investments

There are a number of experts within the finance industry that are coming to seriously question the long-held assertion that owning a home is a good investment, according to USA Today. In 2000, highly influential Yale economist Robert Shiller, for whom the Case-Shiller Index is named, released a book in which he looked at home values from 1890 and 1990. After adjusting for inflation, Shiller found that home values had barely moved at all in terms of real value. Former Federal Reserve economist Jack Francis found that stocks on the Standard & Poor’s index yielded an average return of 11 percent, but real estate yielded only 6 percent. Given the fluctuations in real estate values during the past several years, it would seem plausible that not as many people are realizing that much of a profit.

Prices and equity plunging

Overall home prices have been plunging since 2008, and the decline has not slowed drastically as yet. Home sales and home prices both declined in February 2011, according to Reuters. Existing home sales declined four percent during February 2011, and home prices declined 5.2 percent between February 2010 and February 2011. A more disturbing, but less prominently disclosed statistic in the press is the amount of equity the average homeowner holds. In the most recent “Flow of Funds Accounts of the United States” release by the Federal Reserve, the average household was estimated to hold 39.5 percent equity in the family home as of September 2010.

Old model breaking down

A home paying off as an investment depends on a lot of assumptions that cannot necessarily be taken for granted. If a person buys a home with a 15 or 30 year fixed rate mortgage and pays the mortgage off, the homeowner has property free of encumbrances that is not costly to live in and can be sold to raise a retirement nest egg. However, few families occupy the same home long enough to accomplish that task. Also, if a person sells a home for a greater price than it was purchased for, that profit may actually be nullified. Costs such as home repairs, property taxes, real estate agent fees and closing costs can add up to thousands of dollars, and very quickly. Furthermore, a home can be repossessed or foreclosed on by the mortgage loan lender if the home owner defaults on the mortgage. In comparison, stocks, bonds and mutual funds only have to be kept until they appreciate in value.

Sources

USA Today

Reuters

Federal Reserve on household holdings (PDF – Requires Adobe Reader)

Federal Reserve Flow of Funds Accounts report

Consumer lending, especially for housing, has been slow to recover from the recession. Image from Wikimedia Commons.

Consumer lending — loans lent to individuals — has been slow to recover from a two-year lull. Loans such as mortgages, auto loans, home equity lines of credit and personal loans aren’t impossible to get but are harder to get approved for. Banks are loathe to repeat mistakes that made them run for government cover.

Federal Reserve data indicates borrowing has slowed

Data compiled by the Federal Reserve indicates that debt levels from consumer loans have been falling since the summer of 2008, before the recessionary period began, according to Bloomberg. Total consumer debt, which includes most loans that lenders make to consumers such as personal loans, installment loans and auto loans, but excludes mortgages, stands at $2.4 trillion. That is 6.6 percent below July 2008, the peak period before the recession. Debt from housing loans has declined by more than $530 billion since 2008 with $10 trillion in housing debt still owed by homeowners in the United States. Fed Chairman Ben Bernanke was recently quoted as saying that conditions for credit markets were tight and that he didn’t expect a significant turnaround for some time in the housing market.

Housing market still lagging

The recession began in the housing market, and the return to healthy levels of activity in the housing market has been pursued for some time. Though improvements have been made, there have also been setbacks. From December 2010 to January 2011, home sales increased by a modest 2.7 percent, according to MSNBC, but the share of first time home buyers was only 29 percent of all purchases. Foreclosure properties made up 37 percent of the homes that were sold, and 32 percent of all purchases were made with cash. Given that a high number of foreclosure properties are being sold, a lot of purchases are being made with cash. The Case Shiller Index noted that high-end home sales are rising again, according to CNN, and there is every indication that this is a fantastic market for investors, not for prospective middle-income homeowners.

New models emerging

An increasing amount of regulations, such as the CARD Act and the proposed cap on interchange fees, makes it harder for large financial institutions to be able to turn the kind of profits they are used to. Some consumer credit may not be as easy to come by in coming years. For instance, since the CARD Act was enacted, free checking accounts have been disappearing from major banks, and JPMorgan Chase has been hinting at capping debit card purchases at $50 to $100 if the interchange fee cap is passed.

Sources

Bloomberg

MSNBC

CNN

Wealthy Americans are taking advantage of depressed prices and low jumbo mortgage rates while the housing market continues to decline. Image CC kennarealestate/Flickr

Sales of homes that cost millions rose dramatically in major U.S. cities last year. Wealthy Americans prospering from a rebound on Wall Street are taking advantage of low interest rates on jumbo loans and falling home prices to land unprecedented bargains. Meanwhile, home sales overall are stalling, and analysts expect home prices to decline another 25 percent as a flood of foreclosures hits the housing market in the months ahead.

Stock market wealth fuels luxury real estate

Million-dollar home sales increased last year in all 20 major metropolitan areas monitored by DataQuick, a real estate analytics firm. After four straight years of decline, high-end home sales increased 18.6 percent. Wealthy people are feeling more financially secure as stock values have nearly doubled since March 2009. The luxury home market in San Jose, Calif., led the way in 2010 with a 27.4 percent increase in sales of homes priced more than $1 million. In New York, Wall Street bonuses drove a 25 percent increase in high-end home sales. In Washington, D.C., richly compensated government workers boosted luxury real estate sales 20 percent. In contrast, Phoenix, one of the most depressed real estate markets in the nation, saw just a 0.4 percent increase in luxury homes.

Jumbo mortgage rates plummet

The boost in luxury home sales is also being driven by a dramatic decrease in jumbo mortgage rates. Buying a $1 million home requires a jumbo loan. A jumbo loan has a higher interest rate than a regular mortgage because it’s considered too risky to be backed by Fannie Mae or Freddie Mac. In 2009 jumbo mortgages had interest rates 1.8 percent higher on average than regular mortgages. In 2010, the difference narrowed to 0.6 percent. However, even though that decrease translates to about $780 a month savings on a million dollar jumbo loan, many luxury home buyers pay cash. Last year 29.4 percent of buyers who bought homes that cost more than $1 million paid cash, according to DataQuick. For home sales valued at more than $5 million, 62.2 percent of buyers paid in cash. For million-dollar homebuyers who got jumbo loans, the median down payment was 40.1 percent.

Outlook remains grim for housing market

Growth in luxury real estate sales is doing little to revive a moribund housing market that is down 80 percent from its peak in 2005. New home sales fell 11.2 percent from December to January. Analysts also predict that home prices may fall another 25 percent. Foreclosures accounted for 26 percent of U.S. homes sales in 2010, and that number is expected to increase. A majority of potential homebuyers are being advised to wait another year to get an even bigger discount. But there is some good news. According to the National Association of Realtors, an annualized rate of 5.36 million for existing home sales in January was higher than forecast. If the trend continues, existing home sales could increase 8 percent in 2011.

Sources

CNNMoney.com

Total Mortgage Services

International Business Times

Up to 27 percent of homeowners could be under water on their mortgages. Image from Wikimedia Commons.

It is estimated that a record number of people are now under water on their mortgages because of falling home values. The value of houses nationwide has been steadily sliding downward as foreclosures, unemployment and tight credit take a toll on real estate. Values could continue to fall.

Nearly a third of all mortgages could be under water

Home prices have been falling for the past few years during the recession. Because of continuing foreclosures, high unemployment and fewer homes being sold, the value of houses has continued to trend downward. It is estimated that 27 percent of American homeowners could be under water on their mortgages, meaning payments to the loan company cost more than the home is worth, according to Bloomberg. Real estate information company Zillow released a report stating that more than 15 million home loans were under water. Home prices are estimated to have fallen by almost 6 percent in the last year and almost 3 percent since September, 2010. Values are expected to decline 5 percent more in 2011.

Deceptive decline in foreclosures

Foreclosure activity has been closely watched over the past year in the hopes that a slowing rate of foreclosure would mean a real estate market close to recovering. A decrease in foreclosures occurred in January, but that doesn’t mean that the crisis is over, according to CNN. Because of the “robo-signing” scandal, where foreclosures were initiated by banks without reviewing the paperwork, the foreclosure process has been held up. The number of homes and installment loans foreclosed on will likely increase once the backlog of foreclosure cases in courts and at loan lenders is reduced.

Areas with inflated value still reeling

Areas where real estate values are the highest are still plagued by high foreclosure and rates of negative equity. Nevada, Arizona and California still lead the nation in foreclosure-affected states. Florida, though, has started to improve, falling to ninth place nationally in foreclosure rates.

Sources

Bloomberg

CNN

A grain of salt may be needed to swallow the latest news of a "surge" in December new home sales. Image: CC quinn.anya/Flickr

New home sales exceeded analysts’ record-low expectations in December. The rise in December new home sales followed an alarming drop in U.S. home prices in November. A temporary spike in mortgage rates is suspected of driving the numbers, as home prices are expected to continue sliding.

Take new home sales with a grain of salt

New home sales registered a 17.5 percent month-to-month gain in December, according to the Commerce Department. New homes sold at a seasonally adjusted 329,000-unit annual rate in December. But these days even the most minor item of good news in the housing market must be taken with a grain of salt. The number of actual homes in the U.S. that sold in December was just 22,000. The Commerce Department also revised new home sales in November down to 20,000, the worst month ever. December 2010 wins the honor of second-worst month ever. Plus, December new home sales in 2010 were down 7.6 percent from December 2009. Overall new home sales in 2010 fell 14.4 percent to a record low 321,000-unit rate.

Why new home sales ‘surged’

New home sales may have received a bump from rising mortgage rates. The rate on 30-year fixed mortgages moved up more than half a point from the last week of November and into December to reach 5 percent. Potential home buyers sitting on the fence until home prices bottomed out may have interpreted the mortgage rate blip as a signal that it was time to get a home loan before the market turns the corner. However, the rate on 30-year mortgages has since returned below 5 percent. According to Freddie Mac, 30-year fixed mortgage rates averaged 4.99 percent for the week ending Jan. 21, down from 5.06 the week before. Another reason for the surge in new home sales may have been foreclosure moratoriums.

New home sales in 2011

A positive trend in new home sales for 2011 may depend on the behavior of home prices. Choosy shoppers in a buyer’s market continue to drive down home prices with cheap counter offers. The Standard & Poor’s/Case-Shiller home price index released earlier this week reported new lows in home prices for nine major U.S. cities. A wave of foreclosed homes is expected to hit the housing market in 2011, which will further drive down home prices. If it becomes evident to potential home buyers that home prices have bottomed out, many more are expected to visit a mortgage lender.

Sources

Reuters

CNBC

Los Angeles Times

A double dip in the housing market is imminent, analysts say, as home prices dropped further than expected in October. Image: CC johpan/Flickr

Home prices dipped lower than expected from September to October according to an industry report. The Standard & Poor’s/Case-Shiller home price index released Tuesday also reported that October’s plunge in home prices was the greatest year-over-year drop since December 2009. Analysts blamed the end of the homebuyer tax credit and warned of a double-dip in the housing market.

The Case-Shiller home price index

In October month-to-month home prices fell in 18 of 20 markets surveyed by the Case-Shiller home price index. Housing industry experts had predicted a flat October following a weak September. The decline in value hit faster and harder than expected after the end of the homebuyer tax credit last summer. Home prices in the 20 markets fell 1.3 percent from September to October, an annualized decline of 15 percent. Atlanta was hit hardest with a 2.1 percent drop in home prices. Five other markets, including Charlotte, N.C.; Miami; Portland, Ore.; Seattle and Tampa, Fla., hit all-time lows since the housing market collapsed in 2007.

Housing market double-dip

The chairman of the S&P/Case-Shiller home price index committee said the housing market is poised on the edge of the double-dip analysts have been warning about. Home prices in October have dropped 30 percent since peaking in July 2006. A backlog of foreclosures waiting in the wings will continue downward pressure on home prices in 2011. Inventory of homes for sale is up 50 percent over December 2009. Millions of homeowners planning to sell are standing by for signs that the housing market will recover.

Housing market winners and losers in 2011

The sustained decline in home prices is bad news for Realtors. However, news about a housing market double-dip is good news for homebuyers. The Case Shiller home price index reported that sales volume was down 25 percent from December 2009 as potential homebuyers wait for the housing market to bottom out. But there’s a catch. The depressed housing market is a drag on economic recovery as it is inextricably connected to high unemployment and low consumer confidence. Even though economists are optimistic about 2011 economic growth, home prices are expected to decline as much as 3 percent further in 2011.

Sources

Bloomberg

CNN

Wall Street Journal

Underwater mortgages declined as foreclosures increased, while negative equity is expected to grow as home prices continue to slide. Image:; CC 666isMONEY/Flickr

Underwater mortgages in the U.S. declined for the third straight quarter for the period ending Sept. 30. The decline in negative equity is a result of increasing foreclosures. Negative equity is expected to increase in the near future as U.S. home values continue to decline.

Decline in negative equity deceiving

The number of homeowners with underwater mortgages fell from 23 percent in the second quarter to 22.5 percent in the third. According to CoreLogic, a housing market research firm, in a healthy housing market only 5 percent of homeowners owe more on their mortgages than the house is worth. The decline in negative equity was credited mainly to a surge in foreclosures taking people out of their mortgages. CoreLogic said homes for sale in foreclosure auctions averaged 110,000 a month from July to September, an increase from 98,000 in the same period last year. Banks foreclosed on a record 288,345 homes in the third quarter, a 7 percent increase from the second quarter and a 22 percent year-to-year increase.

Negative equity feeds on falling home prices

Total negative equity in the third quarter was $744 billion, declining from $800 billion a year ago. Negative equity is expected to rise because about 2.4 million homeowners hold equity of 5 percent or less. Any further decline in prices will pull their mortgages underwater. CoreLogic estimates that home values in the U.S. will have dropped by $1.7 trillion in 2010. The Federal Reserve said the value of residential real estate fell $649 billion in the third quarter to $16.6 trillion. Morgan Stanley issued a report last week stating that home prices could drop another 11 percent before finally hitting bottom in the first quarter of 2012.

A solution to negative equity

Underwater mortgages have a detrimental effect on residential real estate. Homeowners with negative equity quit maintaining their property and many are motivated to default on their mortgages. The Obama administration has been pressuring Fannie Mae and Freddie Mac to give underwater homeowners a few percentage points back on their mortgage. Real estate experts say such an equity handout is a temporary, hollow gesture. The only real solution to the negative equity problem, which is holding back the entire economy, is significant price appreciation in a competitive housing market.

Sources

Bloomberg

Associated Press

MSNBC

The real estate market hasn't completely burned to the ground. It's showing some signs of life. Image from Wikimedia Commons.

There doesn’t seem to be a lot of good news when it comes to real estate in the U.S. However, there is a scant glimmer of hope amid the doom and gloom. It turns out that U.S. home prices have been rising, if only slightly, for the last few consecutive months. The Case Shiller Price Index has been showing slight upward trending of home prices, and a gain was recorded across 20 cities for homes sold between May and June 2010. Some good news is appreciated, as real estate is one of the most depressed markets in the U.S. currently.

Slight gain in home prices

Standard & Poor’s Case Shiller price index, which tracks real estate activity in 20 cities, has showed a gain in home prices in the second quarter of 2010. According to the New York Times, the second quarter posted a 4.4 percent gain in home prices. The first quarter of this fiscal year saw a fall in home prices of 2.8 percent. Also, home prices for second quarter of 2010 are 3.6 percent higher than for second quarter of 2009. For July, home prices rose 1 percent over June.

There is a catch

Along with the rise in home prices, sales are trending downward. The homebuyer tax credit helped to spur home sales, but once the credit expired sales began to drop off. It’s likely that home prices will fall again. Economist Karl Case (for whom the index is named) said that while some of the data was positive, a stabilization of financial markets had not occurred yet, according to Bloomberg. Case thinks it will be another year or so before a more stable market emerges, and begins to grow again.

At least it was good news

The bottom line is that the homebuyer tax credit gave a temporary, which is to say artificial, boost to home sales, and also home prices. A truer state of the market can’t really emerge until governmental encumbrance has been removed. However, on the plus side, things are better than they were a year ago.

Sources

New York Times

Bloomberg

Buying a home isn't the iron-clad investment opportunity it used to be, and economists are saying it never will be again. dvs/Flickr photo.

A home mortgage was known as “the most important investment a person ever makes” for decades. Then the housing crisis arrived and long overstayed its welcome. Overinflated home values soon became artificially low home prices. Home sales are at their lowest level in 15 years. Falling home prices are raising concerns about deflation. A Federal Reserve official recently said it was a mistake to look at buying a house as an investment opportunity. One financial expert advises that when it comes to housing, people shouldn’t confuse an expense with an investment.

Why housing is no longer a good investment

Real estate experts believe home ownership will never again generate wealth like it did in the second half of the 20th century. The New York Times reports that the inventory of homes for sale may soon rise to a 12 month supply — twice the level of a healthy housing market. As all those sellers compete for buyers, home prices will continue to fall after already losing as much as 30 percent in value. Dean Baker, co-director of the Center for Economic and Policy Research, told the Times it will take 20 years to recoup $6 trillion in housing wealth lost since 2005. Adjusting for inflation, home values will never catch up.

Housing has become a living expense

Treating a house as an investment is the biggest personal finance mistake a person can make, according to Charlie Farrell at CBS Money Watch. Farrell said housing should be looked at as a lifestyle expense like buying a car. A house is a depreciating asset, just like a car. It falls apart unless money is constantly pumped into it. Economists say in the next 20 years home values will only keep up with inflation. A home will return the money an owner puts in each month, but will not multiply the investment in the mortgage. Even when the mortgage is paid off,  paying maintenance costs and taxes on a home means owners will have put more money into houses than they get out of them.

Getting a mortgage:  having something still better than nothing

In the aftermath of the housing bubble, the U.S. housing market is the last place people should put their hard-earned money, according to Thomas Hoenig, president of Federal Reserve Bank of Kansas City. During testimony at a hearing held by the House Financial Services Committee’s oversight and investigations subcommittee, he said “If the American people are looking at the housing market to be their investment opportunity, I think they are making a mistake.” Linda Stern, Farrell’s colleague at CBS Money Watch, said Hoenig is right, but it could still be a good idea to lock in the price of a depressed asset and pay for it with other people’s money at 4.5 percent. Paying rent for 30 years returns nothing. With a mortgage, there’s a house at the end of the tunnel. Regardless of what it’s worth, it’s something.

Vulture investors are taking advantage of depressed home prices and securing long-term profit by renting, instead of flipping. mikebaird/Flickr photo.

Vulture investors are feasting on the depressed U.S. housing market. Deflating home prices, rock-bottom mortgage rates and a rental market surging with people who have lost their homes are attracting swarms of vulture investors who are after distressed properties. But in this weak U.S. economy, their strategy is changing. In boom times, vulture investors were home flippers looking for quick cash. In these troubled times, they are landlords raking in hefty, steady incomes.

Vulture investors swoop down on dead housing market

Vulture investors get their name because they swoop down and buy distressed properties on the cheap. CNN reports that places wracked with foreclosures and short sales like Las Vegas, Phoenix and Miami are popular because home prices there have dropped as much as 70 percent. Vulture investors used to be known for flipping often and helping to bid up home prices to unsustainable heights. Now they consider potential rental profits, a far more stable, long-term investment these days. Vulture investors today may actually be helping stabilize neighborhoods.

Vuture investing changes strategy

Several factors presently occurring in the U.S. housing market have changed vulture investing strategy from buyer and seller to buyer and landlord. Mortgage resource HSH.com said ever-rising home prices, the meal ticket for house flippers, are a distant memory. It no longer works out to buy cheap and sell cheap. Plus, millions of foreclosed borrowers have to wait years before they can buy again have no choice but to rent, often from vulture investors who bought the properties for pennies on the dollar.

Vulture investing: the cash flow advantage

Vulture investors that pay in cash can start making money from the first month they start renting the homes. The CNN article uses Las Vegas as an example, where prices have fallen about 70 percent and rents have only declined about 20 percent. Las Vegas vulture investor Glenn Plantone told CNN he is getting cash flow, or net return on investment, of 12-to-14 percent. The advantage of cash flow is that even if real estate prices decline further, the money coming in stays the same.

The S&P Case Shiller home price indexes have shown some gains, though still depressed. Photo from Wikimedia Commons

The S&P Case Shiller home prices indexes have reported gains, of sorts, in home prices.  The price indexes in February showed a rise in home prices compared with the previous February, showing a modest spike, but the prices were still technically modestly declining.  Though the housing market is not fully recovered, it is believe to be showing signs of improvement.  With home prices still somewhat declining, some people are looking into mortgage loan modification to get out from underwater mortgages.

Case Shiller reports first gain since 2006

According to MarketWatch, the current spike in February home prices in major metropolitan areas was the first month of climbing home prices since December 2006.  Home prices gained 0.6 percent in February compared to February of a year ago.  The bump in home prices is credited for that, as many improvements in real estate these days are, to the homebuyer tax credit. The prices aren’t low enough to buy a home with a small loan, but they are low enough to stimulate some into buying.

But there is also bad news

The bad news is that home prices are actually still declining.  The same study indicated that despite the increase in home prices between February present and past, home prices actually are still declining.  February home prices were actually down 0.9 percent from January. According to CNN Money, the Case Shiller home prices indexes for 18 of the 20 cities tracked experienced monthly declines in home prices, and six were at new lows.

Economic recovery can has no cheeseburger yet

David Blitzer, the chairman for the index committee at S&P said that the data would “point to a risk that home prices could decline further before experiencing any sustained gains.” He also indicated that true recovery of the housing market hadn’t truly begun, though it has shown some modest improvements.  There were recent spikes in home sales, but home sales at depressed prices only mean people are buying lower.  (Granted, as more people buy low, that will start trending prices upward eventually.)

So where are we now?

The S&P Case Shiller index of home prices is about where it was in fall of 2003.  The high point was June of 2006, and since June of 2006, home prices have fallen 32.6 percent.  It may be some time before a full recovery is realized.

Make a wish that the Case-Shiller index isn't a sign that another housing bubble awaits.

So America has recovered from the housing bubble and things are looking better for Real Estate… right?

Not so fast. Marketwatch reports that the most recent Case-Shiller home price index indicates a “not-seasonally adjusted” .2 percent drop for 20 major American cities for December 2009. Prices did rise in a bit of a quick payday for Los Angeles, San Diego, Phoenix and Las Vegas, however. And if you do adjust for the season, prices actually rose .3 percent that month. Perhaps it’s like the math used to depict the actual unemployment percentage in America?

We’re decaying, just not as fast

“The pace of deterioration has stabilized for now,” David Blitzer of Standard & Poor’s tells Marketwatch. “However, the rate of improvement seen during the summer of 2009 has not been sustained.” Over the past year, sources indicate the average national home prices have dropped 2.5 percent.

Home prices decay and so do our budgets

There will always be the obvious connection between a drop in personal wealth and falling home prices. This is because a home is typically the most valuable asset a person has in their financial arsenal. The housing bubble’s bursting put many people in saving mode when the nation needed them to continue spending. Prices, according to the Case-Shiller index, are currently at summer 2003 levels.

That’s good, so long as we aren’t creating another bubble

Joshua Shapiro of MFR Inc. tells Marketwatch we should still be worried. It could be that the homeowner tax credit is propping up the positive signals on the Case-Shiller index. More foreclosures could be on the way. “While much of the impact of the sub-prime disaster on prices at the bottom end of the market may well be behind us, there is likely more pain to come further up the price spectrum,” Shapiro said.

Is Congress creating a new housing bubble?

There are numerous economists who see just such a disaster on the horizon. Quick payday, if artificially induced here, could be a smokescreen. It’s still a good idea to be careful out there when it comes to buying, I think.

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The home price index

The recession is officially over according to experts and now is the time to watch home prices rise. For a long time house values declined causing much stress for homeowners. A new study however, just revealed that for the fifth month in a row US home prices moved upward. According to the Standard & Poor’s/Case-Shiller, the home price index edged upward about 0.4% from September to October. Economists are predicting, however, that there is a winter decline still to come due to the hefty number of foreclosures entering the market and a decrease in government aid. Dean Baker, co-director of center for Economic and Policy Research said, “I’d be very surprised if we don’t go below the lows we hit this year. We still have a very glutted housing market.”

Variations in the market

One of the reasons the US market is still difficult to predict is the varying conditions of cities. For example, Denver and Minneapolis have seen price increases over the past six months. On the other hand Chicago and Florida have seen numbers falling steadily since August. One of the key indicators to watch however is the home price average. Dr. Michael Firesethe, of Harvard School of Economics, said, “Many of the predictors of the market can be tied to public perception. When home values are on the rise, people tend to feel more secure. When they are more secure, they start spending more money.”

Consumer confidence is a huge factor when it comes to gauging the market for success. Two main issues with consumers are the unemployment rate and home values. Now that home values are fluctuating, but moving up slowly, it’s unemployment that people are watching closely. Although the unemployment rate is still high, it grew in December at a slower pace than it has for the past six months.

The real estate market

The real estate market’s performance is really the number one indicator of how the economy is changing. To encourage home buying, the government created a federal tax credit for first-time home buyers. There were thousands of buyers who rushed to close their deals prior to the November 30th deadline. Watching how much activity there was in sales of homes, it’s easy to see how eager people are to take advantage of tax credits. Because of the rush to close on homes, the government extended the tax credit through April 30th.

In addition to the first-time home buyer credit, there is also a program that includes homeowners who relocate after living in one location for five or more years. This credit is up to $6,500. Consumers understand that now is a great time to buy if they can get a loan and many are taking advantage of the “buyer’s market” that the recession created. To keep interest rates low, the Federal Reserve also bought up $1.25 trillion in mortgage-backed securities. The government is doing all it can to continue the growth of the real estate market and push the economy back to a position of positive growth.

Don't forget the bathroom. Image from Flickr.

Many people balk at putting money into their homes in the current situation. Home prices and values are falling, and equity loans for home improvements are all but impossible to get. With falling values, few people have any equity left.

No one can blame homeowners for not wanting to deplete their savings to invest in something that has a depreciating value. However, homeowners must remember that their homes are still their greatest assets, and even if they can’t build value they can slow the fall.

Choose the Project that Fits Your Budget

If getting a loan is not be a viable option, choosing a project that is appropriate for your budget is very important. There are projects that will increase the value of a home that will fit almost any budget level.

You must choose a project that generates the greatest return on  your investment. As always, try to use the bank’s money if possible, but using your savings could still be worth the investment.

High Cost Projects

When choosing more costly projects, the homeowner needs to think infrastructure and not cosmetics. Projects that add to the longevity and energy efficiency of the home should be at the top of the list. One of the up sides of an economic downturn is that prices for services have fallen, too. In relative terms, it may be more cost effective now to make some major upgrades that you have been putting off.

For example, replacing your current siding with fiber-cement or foam-backed vinyl siding can be done more cheaply now and still net an 87 percent return on investment with energy savings and increased home value upon resale. A valuable room that is often neglected is the bathroom. Realtors estimate that a remodeled bathroom can yield as much as a 71 percent return on investment when you sell a home. Remodeled kitchens net a similar return on investment, as well.

Medium Cost Projects

If you do not have access to enough credit or savings for those projects, there are still significant gains you can make without spending quite as much. One of the highest rates of return on investment is actually found outside the home. The addition of a well-made, well-designed wood deck can get you up to an 81 percent return.

If it cost you $10,000 to build the deck, you could add $8,100 to the selling price of the home. If fiber-cement siding is too costly, upgrading with vinyl siding is still a good investment. Vinyl siding garners about the same return as the wood deck: 81 percent. Even minor kitchen remodeling and upgrades will net you a nice return. Upgrading the countertops alone can bring you a better asking price.

Something is Better than Nothing

Even if you can’t do everything, do something. Your home is the most important piece of your financial portfolio, and doing some work now while prices are down can pay off big down the road. The housing market will rebound someday, and you could get an even higher return when it does.

Downtown Indianapolis

Even if you’re one of the many people who are scrambling to find cash until payday, now may be a good time to buy a house. Plunging house prices and rock-bottom interest rates on secured loans have made housing across the nation more affordable in the second quarter of 2009 than it has been in the last 18 years, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI) released on August 19.

“The increase in affordability — along with the $8,000 federal tax credit for home buyers — is stimulating demand, particularly among young, first-time buyers,” said NAHB Chairman Joe Robson, a homebuilder from Tulsa, Oklahoma, in a prepared statement.

According to the press release:

The HOI showed that 72.3 percent of all new and existing homes sold in the second quarter of 2009 were affordable to families earning the national median income of $64,000, down only slightly from the record-high 72.5 percent during the previous quarter and up from 55.0 percent during the second quarter of 2008.

The NAHB/Wells Fargo HOI is a measure of the percentage of homes sold in a given area that are affordable to families earning that area’s median income during a specific quarter. The NAHB considers a home affordable if a family making the area’s median income would devote no more than 28% of its take-home pay to housing costs.

The winners are . . .

The older, industrial, Midwest cities generally offer the best housing prices. Indianapolis, Indiana, has led the HOI for 16 straight quarters. At the end of July, 2009, nearly 95% of all homes sold there were affordable to families earning the area’s median income of $68,100. Other leaders were Youngstown and Dayton Ohio; and Detroit and Grand Rapids, Mich.

Indianapolis, once again, was the most affordable major housing market in the country during the second quarter. Almost 95 percent of all homes sold were affordable to households earning the area’s median family income of $68,100. Indianapolis has now topped the affordability list 16 consecutive quarters.

Inside the Indianapolis Central Library

Also near the top of the list of the most affordable major metro housing markets were Youngstown-Warren-Boardman, Ohio-Pa.; Detroit-Livonia-Dearborn, Mich.; Dayton, Ohio; and Grand Rapids-Wyoming, Mich.

Several smaller housing markets posted even higher affordability scores than Indianapolis, with Kokomo, Ind. outscoring all others. There, almost 98 percent of homes sold during the second quarter of 2009 were affordable to median-income earners. Other small housing markets ahead of Indianapolis on the affordability scale included Lansing-East Lansing, Mich.; Mansfield, Ohio; Elkhart-Goshen, Ind.; Lima, Ohio; and Bay City, Mich.

New York-White Plains-Wayne, N.Y.-N.J., where just over 21 percent of all homes sold during the period were affordable to those earning the median income of $64,800, was once again the nation’s least affordable major housing market in the second quarter. This was the New York metro area’s fifth consecutive appearance at the bottom of the list. Other major metro areas near the bottom of the affordability chart included San Francisco; Honolulu; Los Angeles-Long Beach-Glendale, Calif.; and Santa Ana-Anaheim-Irvine, Calif.

Among smaller metro areas, San Luis Obispo-Paso Robles, Calif. was the least affordable market, followed by Ocean City, N.J.; Santa Cruz-Watsonville, Calif.; Flagstaff, Ariz.; and Santa Barbara-Santa Maria-Goleta, Calif., respectively.

Some gains are offset by losses

Nothing comes without costs, naturally, and the improved affordability of homes comes at the expense of sellers. Zillow.com reports that the purchase price of more than 30% of all homes sold during the second quarter of 2009 was less than what the sellers originally paid.  Zillow.com data shows that the longer a seller owned a home, the more likely he or she was to profit from the resale, but almost everyone who bought within the past five years and sold during the second quarter of this year lost money on the deal.

According to the S&P/Case-Shiller Home Price index, the average U.S. home price has dropped more than 32% from its peak in the summer of 2006. And for most of the second quarter, mortgage rates were historically low, under 5% for a 30-year fixed-rate loan.

Other gains are offset by heartaches

Many home sales in the second quarter were the result of foreclosures. Foreclosed homes are often sold at rock-bottom prices to produce quick sales. According to Foreclosure.com, there were more than 87,000 repossessions in July of this year, approximately three times as many as there were in July, 2007.