Monday, February 4, 2008

Where will the home buyers come from?

On an almost weekly basis, the NAR reports that there is evidence that the real estate market is “turning around.” For cynics such as myself who do not necessarily believe the NAR’s pronouncements, but nonetheless believe that someday, the real estate market will turn around, where will the buyers come from to make that happen? Typically, “new” buyers necessary to create a turn around, come from (1) move up buyers; (2) new household formation; (3) investors; and (4) immigrants (international and interstate).

As for move up buyers, until they can sell their homes (frequently entry level homes) to someone, they are not likely to be a significant percentage of new buyers. And depending upon when/where “the bottom” is, many folks who may not lose their homes to foreclosure, are still likely to have negative equity for years to come.

I have read some reports suggesting that as a result of demographic and culture changes, new household formations are not as robust as recent years. Specifically, one report stated that young males and females are devoting more time to college and career planning, and delaying relationships and new household formations.

I have read anecdotal reports that investor purchases represented 50% of the2007 home sales in Sacramento. I do not know how deep those investors pockets are (to keep buying up inventory), but I expect most of their purchase will be limited to entry level and lower priced homes. And if prices continue to drop, the homes the investors purchased in 2007 are likely to decline in value potentially discouraging the investors from more purchases. (Contrarians would say that we will only reach "the bottom" when all of the investors "capitulate.")

As to immigration, we are only likely to see immigration if we have plenty of good paying jobs to offer. The labor department reports a decline of 9,000 jobs in the Sacramento region over the last 6 months of 2007, and an increase in the unemployment rate from 5.4% to 5.9%. (I think many people underestimate the significance of a 10% increase in the unemployment rate in only 6 months time.) I suspect that due to declining property and sales tax revenue, we will see a measurable decline in local government employment over the next year or two. (I recently quizzed the staff in one Bay Area city. I was told that this particular city is looking at 8% budget declines this year, and “guessing” at 10% budget declines next year.)

Additionally, I think it is reasonable to conclude that lenders will be very slow to return to offering subprime mortgages. This suggests to me that all of the millions of families (nationwide) who have lost or are likely to lose their homes to foreclosure, will have credit ratings that will negatively impair their ability to re-enter the home ownership market. And if lenders actually require buyers to make a down payment (What is this world coming too? A down payment?), this is likely to further reduce the number of potential buyers.

Those of us who fall into the “happy renter” category are ready to pounce when the prices appear to be near a bottom, but statistically, I don’t think there are enough of us to turn the market around.

Where do you think “new” buyers will come from for us to have a turn around in the local real estate market?

33 comments:

snoop dog said...

China, India and dubai?How about mars?
There are some buyers out there but word on the street is that prices will continue to fall.

Sippn said...

Real data from the street in SAC area is that REOs in the 200-300K range are moving under 60 days now, mostly to 1st time home buyers beating out invesor/buyers. Many of them are participating in available 0-5% down programs believe it or not. That price range/buyer profile was not really the problem and you are competing with rent at that price.

("short sales" take longer as lenders often do not answer quickly)

In the higher price ranges, $800K-$2mil+ the # of sales since 1/1/08 on a daily or monthly basis looks like the stronger 2007 months due to typical January bounce (spring sales) on top of multiple interest rate reductions and the market anticipation of higher conforming limits.

Young men often consider college when lucrative construction jobs aren't there. (Then I remember the 20 year old HS grad woman looking for a job after the dot.com bust - "I was making $75K...") Of course, they could just be procrastinating or snowboarding... economists just have to put their own labels on it.

Jacob said...

The new buyers are being born right now, but they may not be able to buy anything for 20 years or so...

What we really need is for the prices to bottom out quickly, that way homes can start moving again and people will start to want to buy again.

And I dont think the bottom is now, unlike NAR that seems to think each month is the bottom... When the price of the median homes are in line with the median wages that we can start to recover.

I'm hoping for 09 being a good time to buy. We'ss see...

Patient Renter said...

I think the patient renters/bubble bloggers among us are the only ones left to buy.

Or Mars...

Patient Renter said...

"And I dont think the bottom is now, unlike NAR that seems to think each month is the bottom... "

I argue that we can't see a bottom in home prices until the mass of pending ARM resets are purged. That means, not till 2012 (see the credit suisse chart). How can prices remain flat when we still have resets and forclosures?

I've yet to see a single counter-argument that addresses this.

Paul said...

Patient Renter: I agree. We can't bottom until we exhaust the resets and subsequent pressure from REO's. Any efforts by the gub-mint to prop up prices with "rate freezes," merely delays the bottom. Frankly, I'm tired of renting and want to own, but I'm not going to pay $100k-200k more than I have to for a house just for the pride of ownership.

Jacob: I agree 100%. I wish politicians understood that we need to bottom, not prolong the downturn with rate freezes. (I assume that even if the rate freezes, the neg amort continues?)

And there is increasing evidence that prime ARM's are increasingly defaulting as they reset and the homeowner's discover they have negative equity. I think this lends credence to the need to wait out all of the resets, which means 2010-2011 ... as much as I hate to think that. (Yes, I'm looking at the Credit Suisse AND B of A reset charts. B of A is more depressing than Credit Suisse!)

One of the Fed governors spoke this a.m. about 1.5 million subprime resets in 2008, and another .5 million in "09. Then come the ALT-A's and primes into 2010-2011. Now I'm making myself depressed!

Sippn said...

"How can prices remain flat when we still have resets and forclosures?

I've yet to see a single counter-argument that addresses this"

On the supply side, new home builders have cut back in numbers that are similar to the number of REOs coming on the market AND prices are sinificantly lower AND interest rates are significantly lower.

I don't expect prices as measured to remain flat - as closings occur on REOs, this will drive the median price down. Many of the prices you see on listings are not reflected on the median prices (for closings). Medians are typically lagging.

Patient Renter said...

"interest rates are significantly lower."

Short term rates, sure. But I'd venture a guess most ARM holders don't want another short term loan, they want a long term fixed loan, the rates of which haven't come down as much. In fact, some long term rates rose after the last Fed cut.

smf said...

"How can prices remain flat when we still have resets and forclosures?"

They are not quite flat.

My theory is this:

The 'investors' with less means were the ones that bailed out first.

Now those with higher incomes and higher risks (more $$ homes) are hoping for the best, as otherwise their losses will be huge.

I have noticed a few higher priced homes slowly going down in price.

But as I pointed out, there is a very, very large surplus of expensive homes awaiting sale.

Patient Renter said...

"The 'investors' with less means were the ones that bailed out first. Now those with higher incomes and higher risks (more $$ homes) are hoping for the best,"

The prime loan holders likely have higher incomes, sure, but they were still stretched to the max just the same and will not be able to afford the rate resets just the same. The debt to income ratio for the prime folks is probably just the same as it was for the subprime folks, so the outcome of resets will be the same.

The interesting part is this: what has a bigger effect on prices - a default on a $700,000 home purchased by a high income "prime" borrower or a default on a $300,000 home purchased by a lower income subprime borrower?

There is nothing in the world that will prevent price declines from halting until these alt-a and prime resets are purged.

smf said...

"so the outcome of resets will be the same."

Yes, they will be, that is my ultimate point. They have been able to hold out the longest, but their problem is still the same, if not worse.

Why worse?

Because the market for higher priced homes is ultimately a lot smaller than the market for more affordable homes.

After all, even if you have a 'cheap' 4000 sq.ft. custom-built
mansion at $700K, not many can actually afford it.

Jacob said...

And as those higher priced homes come down in prices they will destroy the "value" of the homes in the brackets below.

anon1137 said...

I don't know where the home buyers will come from but I know where the demand for more bedrooms (= more houses) is coming from:

Baby boom for fertile America (http://www.telegraph.co.uk/news/ . . .)

"The figure for 2006 - nearly 4.3 million births - was the largest number born in the US since 1961. The rise was due mostly to a bigger population, especially a growing number of Hispanics, but non-Hispanic white women and other racial groups were also having more babies."

Mike said...

"Where will the home buyers come from?"

It looks like buyers are already here..One of my relative just put in an over the asking price offer on a bank repo home.

It turns out, the spring dead cat bounce is taking place (Thanks to Idiot Bernake) and therefore the offer did not get accepted.

Apparently there were competing 14 offers for this house. All within few days of this house coming on market. Disgustingly unbelievable !!! Probably Bay Area "Investors"

Patient Renter said...

"And as those higher priced homes come down in prices they will destroy the 'value' of the homes in the brackets below."

Exactly. I forsee us needing to dish out another hefty round of pity and bailouts, in a year or two, for whoever is buying today.

Paul said...

Patient Renter: If the stories are true that 50% of the buyers are investors, I won't be so sympathetic in 2 years.

Mike: I suspect the factor was location, location, location. REOs that are priced right in a good location, are going "pending" in CP within days or hours of going on the market. But large areas of REO's still sit in Elk Grove with no offers.

Anon: I hope we don't have to wait for all those babies to grow up, to bail us out of this housing downturn! That will really throw off my projections ("guesses").

Patient Renter said...

"If the stories are true that 50% of the buyers are investors, I won't be so sympathetic in 2 years."

Ditto. I was joking about the pity and bailouts, but only since so many people seem to have no problem with the idea of giving their tax dollars to any idiot who took out a mortgage they couldn't afford.

You wanna give your tax dollars to these fools, fine, but I'm not going down without a fight.

smf said...

"If the stories are true that 50% of the buyers are investors, I won't be so sympathetic in 2 years."

Did anyone catch that little blurb in HBB, where it was stated that 160,000 homes were built in Riverside County from 2000-2007.

If we use 3 people per house, that comes out to be 480,000 people to fill up these homes. Which I guess don't include resale homes.

Anyways, about 500,000 'should' have moved to the Inland Empire to fill out the housing built.

The only statistic I could find about population growth was from 2000-2005. The county population grew a total of...

...50,000 people...

Sounds like they are a little short on people, doesn't it?

Sippn said...

SMF

http://quickfacts.census.gov/qfd/states/06/06065.html


Showing about 480,000 increase in population.

Housing units appears similar to your numbers although the labels are different.

sacramentia said...

smf - your data is bad on the IE- the population of the Temecula valley alone doubled during that timeframe (+140,000), which is only a small portion of the IE. I know, I lived there during that time.

They are overbuilt, yes, but not 10x. Most of the imports from Asia go through the IE, so there were a lot of jobs being created in the 35k range at the time.

I think your median income argument is a good one for the IE, not necessarily the population one. But, a lot of people there are self employed and 50k self employed always seems to support a bigger lifestyle than 50k W2.

What I think is most interesting is that the IE is hanging on to the gains a little better than Sac and I really don't have any theory on this. The people there seemed to overspend so much more??

smf said...

Yes, indeed, I did misread the data...

But it still points out to overbuilding, but not as much.

Now. my question would be if the State is estimating population according to # of homes built, or is there some other way.

Would be interesting to dig thru some of that data.

G Spot1 said...

"Sounds like they are a little short on people, doesn't it?"

Maybe if some of these teaser-rate, no doc loans can come back, maybe a bunch of people can move in there and get jobs cleaning each other's houses and mowing lawns. And don't forget selling them new houses every 2-3 years. Everyone move one house to the left!

Seriously, there is nothing going on economically in Riverside that's going to support that kind of migration to the Inland Empire. Construction was the major driver, and now it will go back to being the "909" that no one wants to live in.

smf said...

OK, so here is my question:

We know that many people wrongly assumed a certain population growth according to the # of homes built. Retail buildings were put up according to expected requirements.

Even some school districts built more than required by incorrectly assuming population growth according to the houses built.

Now, population numbers after the 2000 census are estimated by a method unknown to me. Is there a chance that the census bureau overestimated the numbers by using incorrect assumptions as well?

With the prevalence of fake owner-occupied housing, I may assume that population #s may be higher than actual numbers.

Observant One said...

Resets are becoming a non-issue. The Fed is ensuring, and will continue to ensure, that rates are held at levels such that resets will not materially burden further existing ARM & ALT-A borrowers.

Paul said...

IE. I was was working in Riverside yesterday. I wished I had time to drive around and look at listed homes for sale, but such was not the case ... I guess that is why it was called work. Anyway, I did drive quite a distance on University Avenue and observed (1) the many empty storefronts in what used to be a better street in Riverside and (2) the number of check cashing stores. Both told me a lot about the local economy.

And for those of you with any real knowledge of the IE, I will admit you know more than me, so my few minutes of observations while I refused to ask directions and drove aimlessly (that's what some of us guys do!) trying to find something as big as UCR, I will defer to your knowledge of the area.

Patient Renter said...

"Resets are becoming a non-issue."

This statement has no basis in reality. The Fed controls interest rates, sure, but it can't hold them low forever without crashing the dollar. Furthermore, long term rates are and will rebel against the Fed's artificially low short term rates.

Observant One said...

Actually, it's your statement that has no basis in reality.

The Fed can hold rates low for such period as it deems necessary. The Fed already has made clear that defending the dollar is not the priority, as the dollar has tanked over the last couple of years. Moreover, it's not going to tank materially further from here, as evidenced by the relatively mild reaction of the dollar to the significant 125 basis points in recent cuts by the Fed over an 8day period.

Furthermore, ARMs etc. aren't tied to long rates. They're tied to short rates, such as LIBOR. And LIBOR now is behaving exactly the way the Fed wants and has dropped to 3.19 (1 month) and 3.13 (3 month) as I write this.

Going forward, the adjustment of ARMs etc. will not be a big deal, much to the dismay of those cheering for it to be otherwise.

G Spot1 said...

"Resets are becoming a non-issue."

Even more important than ARM resets are Option-ARM resets. Debtors will be required to make the fully amortized payments - which they cannot afford - on a house that is now upside down. The only thing that will save them is if home prices rise again and they can sell or refi. Rates could drop to 2-3% and most of these debtors will won't be able to afford the fully amortized payments.

Re the IE, here is a story from the WaPo (via Atrios) talking about similar phenomena in the local economy in Phoenix:


"PHOENIX -- When residents of Maricopa, Ariz., south of Phoenix, vote in the presidential primaries Tuesday, it will be against a backdrop of vacant storefronts and sprawling, terra-cotta-roofed subdivisions that are studded with for-sale signs as far as the eye can see.

...


And while the region counts the aerospace company Honeywell International and computer chipmaker Intel among its largest employers, housing is the biggest component of the local economy, with construction accounting for nearly one in 10 jobs, or about 50 percent more than the national average.

"Our economy out here is based on residential growth. That's our engine," said William A. Gosnell, a principal in Lee & Associates, one of Phoenix's largest commercial real estate firms. But with housing inventories and foreclosures up and prices down, residential construction slowed to a crawl, crippling the overall economy in the process."

smf said...

"Going forward, the adjustment of ARMs etc. will not be a big deal, much to the dismay of those cheering for it to be otherwise."

Traditional ARMs adjusting are no big deal. Exotic ARMs are another issue, and here interest rates are not significant.

People with exotic ARMs weren't paying a dime of principal, and a vast majority of them weren't even paying full interest owed.

Once their resets hit, they will have to make a full payment, which will significantly increase (becoming unaffordable)their mortgage payment, regardless of current interest rates.

And since a lot of them went negative amortization on their loans, it will increase even further.

Listen, if you recognize that a bubble has occurred, there is only ONE way for it to end. It will undershoot during its 'return to mean', stagnate for several years, and then start and slow rise.

Patient Renter said...
This comment has been removed by the author.
Patient Renter said...

"The Fed can hold rates low for such period as it deems necessary."

I'm well aware that yes, the Fed controls rates and can do whatever the hell it wants.

I am also aware that the Fed branches are essentially owned by banks. Banks are the sole shareowners of the Fed. Several voting members of the Fed's open market committee are not publicly elected but rather placed onto the committee by the member banks. Furthermore, the Presidents of all 12 fed branches sit on the FOMC and are selected by a process controlled by the member banks for each region.

So for short, we'll just say the banks control the Fed. Being that this is the case, it is reasonable to assume that the banks will now allow the Fed to keep interest rates low forever because the inflation eats away the returns on their loans. This is the way it's always been.

"Furthermore, ARMs etc. aren't tied to long rates. They're tied to short rates, such as LIBOR."

No doubt, but my assumption is that the Fed won't hold rates low forever (as explained above). You seem to be making the opposite assumption. Otherwise homeowners are screwed just the same once rates rise again.

HOUSE2008 said...

On the supply side, new home builders have cut back in numbers that are similar to the number of REOs coming on the market AND prices are sinificantly lower AND interest rates are significantly lower

True, true and well...Fact is the Feds can go to ZERO % and won't matter a wit to those h/o w/resets trying to qualify for fixed. As all fixed mortgages are tied to LIBOR rate. NOT the fed rate. Sorrry homeowners...

HOUSE2008 said...

Oops, sorry for the repeat^^^