This information provided by Mitch Wilcox, Mortgage Consultant for Bank of Oregon.
Greetings, Before we get into the review and forecast, here’s wishing you a Happy New Year! Please make it a safe and profitable one!
This is a long one; my longest and most detailed to date as these times demand it. So you may want to get a cup of your favorite beverage and settle in before you begin; don’t be pouring anything in that cup that you shouldn’t. I do have a rather bold prediction in the forecast and you’ll need a clear head.
2010 in review: I would say 2010 was quite a ride but I got bucked off awhile back and bent my forecaster….the truth is my 2010 forecast was actually pretty accurate so if you’re a glutton for punishment and saved it you can go back and see if I’m stretching the truth or not. A local Certified Financial Planner tells me I’m often more accurate than the national guru’s so I guess I’m in trouble for sure now.
2010 was a year of adjustment and frustration. We all learned new ways of bending our mental golf clubs (some of you literal types bent real ones). As new disclosure and lending guidelines were implemented, we learned that the real estate and lending landscapes were significantly altered. Some would say for the good, some not. One thing is certain; you will need to be prepared to thoroughly document why you wear your hair like you do, in addition to everything else a lender wants to see, and be prepared to get a required new hairstyle right before your loan is supposed to fund. True.
What were (are) the big issues? Lender underwriter guidelines (more strict), and dare I say it: appraised values. If you have the stomach for it, check this recent appraisal commentary from Reuters via Mortgage Daily: http://www.mortgagenewsdaily.com/12172010_appraisal_hell.asp. Distressed inventories have severely impacted values, there’s just no getting around it.
What about home sales? They were up! No, down, Wait, up! No, down. Huh? Exactly. How about interest rates? Mostly down, for the most part. Pretty much.
So, who won and who lost in 2010? I believe I am safe in saying that the required disclosure, appraisal, and underwriting practices now in place have added cost and confusion to what was already an expensive and confusing process. The required consumer protections will protect consumers until those limited few who are inclined to be unscrupulous figure out how to circumvent these new rules. It’s tough to legislate morality, folks. I’ll let you know when I find out who won, but for certain the losers are you & me.
Fact is, if you are reading this, not only will your sanity be questioned; you have actually survived another year. Hard to imagine going through this entire mess if we knew what we were going to face in advance. Some of you are doing quite well with the distressed property inventories and more power to you! Now, to the other 98.7%; hang in there if you dare.
2011 Forecast Housing; let’s take the big one first.
Housing is lagging while the economy rebounds. Declines in home values are a constraint on consumer spending. “The housing sector continues to be depressed,” Fed officials said in a statement after the 12-14 meeting, at which they reiterated a plan to expand record monetary stimulus and said economic growth is “insufficient to bring down unemployment.”
Even so, economists in the past two weeks have boosted projections for fourth-quarter growth, reflecting a pickup in consumer spending and passage of an $858 billion bill extending all Bush-era tax cuts for two years. The legislation also continues expanded unemployment insurance benefits through 2011 and cuts payrolls taxes by 2 percentage points next year.
What will happen to home values in 2011? Here’s a little 2010 info to digest first:
The following table shows the historical price change according to the S&P/Case-Shiller home price indices. Cities are ranked by largest monthly gain using non seasonally adjusted data.
1-months 3-months 1-year 2-years 3-years
earlier earlier earlier earlier earlier
US Composite-20 -1.32% -2.39% -0.80% -8.08% -24.70%
Washington DC -0.20% -0.28% 3.65% 1.00% -17.97%
Las Vegas -0.21% 0.06% -3.57% -29.26% -51.61%
Denver -0.57% -1.65% -1.79% -1.90% -6.98%
Los Angeles -0.75% -1.26% 3.34% -3.21% -30.24%
Tampa -0.90% -2.19% -3.61% -18.27% -34.48%
Miami -1.11% -2.60% -3.39% -16.95% -41.06%
Phoenix -1.11% -3.93% -4.28% -21.61% -47.21%
Dallas -1.13% -3.83% -3.13% -3.68% -6.66%
Charlotte -1.14% -2.54% -4.19% -10.90% -14.87%
1-months 3-months 1-year 2-years 3-years
earlier earlier earlier earlier earlier
Boston -1.23% -2.82% -0.23% -3.03% -8.85%
Seattle -1.34% -2.66% -4.11% -16.03% -24.61%
Portland -1.48% -4.16% -5.15% -14.59% -23.20%
San Diego -1.50% -3.05% 2.97% 0.55% -26.28%
Cleveland -1.52% -4.76% -2.64% -6.03% -11.83%
New York -1.61% -1.99% -1.67% -9.58% -16.56%
San Francisco -1.91% -3.07% 2.23% -0.43% -31.28%
Minneapolis -1.91% -4.35% -2.80% -10.79% -25.18%
Chicago -1.99% -3.08% -6.48% -15.95% -25.04%
Detroit -2.45% -3.25% -5.52% -20.02% -36.33%
Atlanta -2.90% -6.11% -6.19% -13.77% -22.83%
This represents a disaster by any measure if you ask me. So, what’s the forecast? Not good in the near term. I am now a proponent of a double dip, subject to other factors. What factors? Inflation, unemployment, and interest rates, to name a few. I believe we will see further retraction in values to some degree in Q1-2 11 as we work through new rules in lending and appraisal, and based on how quickly distressed inventory goes away. All of that being said; lower values, combined with low mortgage rates (increased affordability), may turn the “buy now” light bulb on for many. It really should as the perfect storm of catastrophic economic events may turn into the perfect storm of why it makes sense to buy a home.
Here’s your double dip:
I anticipate a leveling off period by Q3-4 11 and (dare I say it?) a more stable market. Appreciation (gasp!) will begin to poke its tiny little head out of the ground in some areas by then.
I am not a proponent of the gloom and doom forecasters that insist we will see markets ranging from another round of jaw-dropping value reductions to nuclear winter, resulting from a complete meltdown of global markets. Not going to happen. Sorry guys, you’ll need better marketing to sell those books other than screaming sensationalist titles on glossy book covers with catchy colors. I rank most of these in the category of those wanting to be the first to say “I told you so” in the odd event they may actually be right in some small way. We would all be better off to work in our communities and insist on a mindset of improving the economy; it’s often what you and I think that will chart our course. Start thinking positive!
Next up: Inflation
This is a key driver of the overall effect on housing. The Fed is committed to driving this up and we’ll see how successful the Fed strategy is. I believe we will see the rate top out at about 1.00% by Q3 11. No double digits for you gloom and doomers.
Not a rosy picture but I do expect slight improvement in 2011, ending the year at about 9.00% overall. I just don’t see business activity that will generate jobs until about Q2 2012.
Interest Rates-The Fed
30 year fixed rates were in the mid 6’s about 18 months ago, so don’t panic at the recent spike. After years end 10 I expect to see reduction in the .500% range, than back up, topping out in the mid to high 5.000% range by Q3 11.
The Fed has made a concerted effort to drive rates lower, with some success. I believe we will see slightly over 1.00% by Q3 11 for the Fed Fund Rate. This means the prime rate will be in the 3.5 to 4.0% range.
Here’s something to hang our hat on (maybe). Housing is more affordable now than it was in the 70’s. We are at a point, or will be soon that will represent the best time to buy a home in about the last 50 years, relative to affordability.
And finally, a Housing Shortage as soon as 2012.
OK, now I’ve gone and done it; I drove right off the edge. Really? Better check this out as I believe we are singing a different tune by 2012. Hey, wait a second; you can’t predict 2012 for a 2011 forecast! Sure I can, it’s my dang forecast!
After personal research, I’m going to say it, and recently found out that I am not alone in this opinion (Google it!). We are likely going to see a housing shortage sometime in 2012.
The first economist to warn of a coming housing shortage was Brian Wesbury, chief economist at First Trust Advisors in Wheaton, Ill., who told Forbes magazine last month that “we’re starting one-third of the houses we need just to keep up with population growth” and that shortages could develop in some areas as early as 2011.
Not all economists share this view. Rick Sharga, chief economist at foreclosure tracker RealtyTrac in Irvine, Calif., told the Inquirer that he found a looming shortage “hard to fathom.”
The lack of consensus stems from the fact that predicting future housing needs is a complex task, combining both hard numbers — new-house starts, sales of existing houses — and guesswork — forecasting new household formation.
But one set of numbers backs up the economists predicting a shortage to come: data from the National Association of Realtors shows that the United States needs to build 1.3 to 1.7 million new houses annually to absorb both the 300,000 old houses torn down each year and the 1 to 1.4 million new households formed annually; numbers released by Freddie Mac last week show that only 910,000 units were started in 2008 and 550,000 in 2009. The agency predicts an increase in activity for 2010, but still far below what is needed at only 700,000 units.
Even “fuzzy math” would indicate a minimum potential shortage of about 1.7 million units. From The Wall St Journal “Smart Money” published 7-26-10: Real Estate by Lisa Scherzer
A Housing Shortage on the Horizon?
With all the talk of excess inventory and flood of foreclosures, the idea of a looming housing shortage sounds unrealistic if not fanciful.
After all, the most recent data from the National Association of Realtors (NAR) out last week showed a 5.1% decline in existing home sales in June. Meanwhile, total housing inventory increased 2.5% to four million homes available for sale, an 8.9-month supply, up from an 8.3-month supply in May.
Foreclosures, too, are an issue with a vast backlog of distressed properties and underwater loans sitting just below the surface, according to RealtyTrac, an online foreclosure marketplace. The company forecasts that more than three million properties will get hit with foreclosure filings by the end of the year.
But if you take a step back from the current doom and gloom of foreclosures and declining sales and focus on the low construction levels over the past few years, some economists say a housing shortage might be in the offing. A 2009 report by Massachusetts Institute of Technology economics professor William Wheaton says that despite the glut of existing homes, with current depressed levels of construction, there might be “excess demand” for newly constructed homes.
In the past seven years, housing starts first exceeded – but then fell short – of the historical norm of 1.6 million, according to the NAR, with a deficit forecasted to grow into 2011. The chief economist of NAR said last month that the big drop in home construction suggests a shortage could become an issue later.
Longer-term demographics support this theory, says Ross DeVol, executive director of economic research at the Milken Institute, an independent think tank based in Santa Monica, Calif. We’re only adding about 600,000 new housing units a year now, and the long-term growth in new households is 1.3 million to 1.4 million per year, says DeVol.
That household formation rate has fallen off somewhat because of the recession. But that decline is misleading because college graduates have chosen to live at home with their parents while they find their financial footing, and people defer getting married for a year or two. But long term that household growth says that “if we build substantially less than that amount, which we’re doing now, in four, five or six years, if we don’t ramp up housing starts, we could see a shortage,” DeVol says.
There’s a tendency in any market that when you overshoot on the upside – which we did through 2007 in real estate – you undershoot on the downside, DeVol says. But underlying growth in population demographics – namely, how many people will be entering the work force – is somewhere in that range of 1.3 million to 1.4 million, he says. One risk is that so many home builders leave the field during the current downturn that there could be “capacity constraints” in the long term as the U.S. population continues to grow, says John Vogel, professor of real estate at the Tuck School of Business at Dartmouth.
Consider that at the peak of housing bubble in 2005 nearly 2.1 million new units were built. In 2006, that number dropped to 1.81 million; in 2007, as the bubble deflated, new units fell to 1.34 million. By 2009, only 550,000 new units were built, says DeVol.
There won’t likely be constraints in overbuilt places like Las Vegas, Phoenix, Riverside, Calif., or Miami and Ft. Lauderdale. But if the pace of home construction doesn’t pick up, “we are going to begin to see some tightness in some areas of the country that didn’t have the boom and bust occur,” DeVol says.
The region’s most likely to be undersupplied by mid-2012 are those where supply and demand are now in balance, says Celia Chen, senior director of housing economics at Moody’s. Chen includes states like Washington, Oregon, New Mexico and Utah in this group. This is where strengthening demand, combined with construction that will remain below trend, would result in under-supply, she says.
Well, there you have it. If you lasted this long and are reading this you either are desiring information that can help you in your career, you have nothing better to do, or you’re an absolute nut case that should be locked up.