Real Trends – June 2010

COMMENTARY

The Uncertain Return to Normal Times

After years of hearing how home prices are plummeting and foreclosures are mounting, consumers want to feel hopeful about the housing market — but maybe they’re being too optimistic.

In a presentation to the National Association of Real Estate Editors in Austin, Texas Stan Humphries, Zillow.com’s chief economist, pointed to four myths he said consumers are latching onto as they try to make sense of recent housing statistics.

The four myths:

1. The housing recession is over. It’s not, Humphries said. He estimates the bottom in home prices won’t come until the third quarter, at least from a national perspective. Doug Duncan, chief economist at Fannie Mae, agreed with that estimation.

2. After markets hit bottom, prices will rebound to boom levels. Not going to happen, at least for a while, Humphries said. “Once we hit bottom, the bottom is going to be a long and flat affair across the markets,” he said. “What we’re going to see once we hit bottom is the second phase of the housing recession… that second phase is one of being flat.”

3. The worst of the foreclosure mess is behind us. More wishful thinking, according to Humphries. He estimates foreclosures will peak later this year, then remain elevated for a while. Rick Sharga, senior vice president of RealtyTrac, an online marketplace for foreclosure properties, said he doesn’t envision foreclosure activity stabilizing until late 2011.

4. The tax credits saved the housing market. With or without a tax credit, those who bought would have done so anyway, Humphries said. “The biggest impact [in home sales] we believe were low prices… low interest rates and the unsung factor here is the ramped up lending by the Federal Housing Administration.”

Snap survey shows declines in most markets in May

Comment on the future

I recall that in the first quarter of 2010 there was consensus among leading economists that rates would rise after the Fed/Treasury stopped buying mortgage backed securities. Without these purchases rates might rise to 6 percent or higher. So today, we have sub-5 percent mortgages. What happened?

Europe happened. The debt crisis evidently drove many in the world to once again park their money in U.S. debt instruments, raising the supply of capital and lowering its costs. So, why did the smartest people in the world not know this was happening only three to four months before it exploded to the short term benefit of American money supply?

And how does it affect our view of the next six months or year or three years as far as forecasting the housing market? Well it should give all pause as to just how well anyone can predict what will happen to housing and mortgage markets. So it is with our business. The Winter Soldiers are pursuing that time honored tradition of “hoping for the best and preparing for the worst.” It is likely we have seen the “worst” that housing has to offer. It is likely that housing is in the intermediate stage of the birth of a solid rebound. But May retail sales were totally unexpected from all accounts and the declines in May written contracts are another sign that continues to flash ‘yellow’ – proceed with caution. That is likely the best course of action at this time.