Thursday, May 7, 2009

Pulse Check: The Good, Bad and Ugly

There has been a lot of speculation as of late, in both the media and on the blogs, that some sort of bottom is in sight. To paraphrase Calculated Risk, there are actually two housing bottoms, sales and price. I think Sacramento hit the sales bottom a while ago, with a fimly established year-over-year increase in sales trend.

So the real question is, "When do we hit a price bottom?" I can see why the debate has been lively. There are good arguments to be made for both sides.

Personally, I think we are seeing some seasonal firming, due to usual spring activity, coupled with a reduction in downward pressure from foreclosures (not as many foreclosures due to the effects of earlier legislation), BUT come this fall, we will see additional price declines as the backlog of NODs turns to foreclosures.

So now for the summary:

Good -

  • Inventory is way down compared to the last couple years.
  • Sales are up (which also helps bring inventory down).
  • Pending sales in my (now monthly) screen scrape are close to a high.
  • Interest rates have been hovering at an all time low making homes more affordable in monthly payment terms.
  • Anecdotally, in some lower priced areas bidding wars are becoming common again.
  • There are fewer foreclosures on the market (at least where I had been looking), due to the legislation that was enacted last Fall.
  • People are saving money again and using less credit.
  • Homeowners who are able (i.e. enough equity), have taken advantage of low interest rates and refinanced out of ARMs and into fixed rate loans.

Bad -

  • Rents are falling, increasing the bar for the rent/buy break even calculation.
  • Fewer people qualify for financing due to underwriting standards and lack of down payment.
  • People are afraid to commit to such a large purchase in times of economic instability.
  • Interest rates are likely to rise, which will reduce affordability and lead to stagnation.
  • Tax credits (both Federal and State) artificially inflate demand.

Ugly -

  • For the markets I track, NODs are reaching all time highs, now that the foreclosure moratoriums have been lifted.
  • Alt-A and Prime loans are now starting to go bad. This is especially true for certain products like Option ARM and Neg_Am loans, as well as homes with a 2006 & 2007 vintage.
  • Sacramento unemployment is in the double digits, with no reason to believe will abate any time soon.
  • The state of California is in a massive budget crisis, which means cutbacks and furloughs, disproportionately affecting the Sacramento region.
  • The full impact of the commercial real estate bubble are yet to be felt by the economy.
Hoping I will have time to put up the latest numbers in the coming days (things have been a little hectic for me lately on the day job...but I figure it's good that my skills are in demand).


Husmanen said...

Yes, your skills are still in demand as well as your insight.

BTW, do you assume that prices will not continue to decrease when you write...

"Interest rates are likely to rise, which will reduce affordability and lead to stagnation."

To me this would only mean further price pressure.

Buying Time said...

Thanks Husmanen =)

Regarding stagnation....there are soo many moving parts, it's hard to say. If there is very little inventory, price stagnation seems likely. If inventory becomes bloated with bank owned properties, price reductions are more likely.

I also added a couple other items to the list....both good and bad.

Jacob said...

I don't know about the inventory being low, banks have so much shadow inventory, what would the numbers look like if those were all for sale.

Not even counting any of the moritoriums that held back some foreclosures which will now happen, but previous foreclosures are just sitting on the banks books.

But I think the biggest problems are the job loss numbers. We might lose around 6M jobs this year, and that doesn't count furloughs, or people on commission that are still working but making a lot less. Prices will not find a true bottom until that trend turns for the better.

Buying Time said...

"I don't know about the inventory being low"

We have been hearing about the shadow inventory for some time. But since I have been tracking foreclosures and NODs, I haven't really noticed any type of build-up (except the period of time with bad data for Folsom, which led me to believe there was something to it).