The front page headline of yesterday’s Wall Street Journal proclaimed “Fear of Double Dip in Housing.” That would imply that we’ve gotten out of the first one. Housing, both new and resale, has shown beginning signs of stablization and, pumped up by the First Time Homebuyer Credit, some minor year-over-year increases. However, this is certainly not a recovery and it is going to get worse before it gets better.
When discussing the national housing market, I don’t see a lasting recovery until 2011 at the earliest, but most likely into 2012. We sell around 5 million houses a year. There are currently over 7.5 million houses with mortgages that are not current on their payments. Since it is so difficult to get caught up once just the first payment is missed, I think it is quite safe to say that at least 7 million of those will end up in foreclosure. How in the world will we absorb 7 million more houses over the next 18 months (keep in mind that while Texas has the shortest foreclosure process in the US, states like Illinois can take 13 to 14 months)? Of course, that 7 million isn’t the final tally. Unemployment is over 10% with no signs of dropping anytime soon, so the number of homeowners who can’t pay their mortgage will continue to rise. As unemployment continues to rise, the number of buyers will also shrink. One aspect that foreclosures and short sales creates that I never hear discussed is that the dominoe effect is cut off. In a typical market, a first-time buyer purchases a house, then that seller buyers a bigger one, and so forth, usually creating a chain of a few purchases. With so many foreclosures on the market, when someone purchases one of these, there are no other purchases to follow. The bank that owns the house does not go out and buy a bigger one to replace the one they sold. The other thing to keep in mind is that many banks are intentionally delaying the foreclosure process. Many banks don’t want the “toxic asset” on their books for the accounting problems they present. Therefore, some are taking longer to actually begin the process which will stretch out the time it takes for all of these homes to go through the system. This will likely help prices from falling further in a short time frame, but it will extend time until recovery (I’ll leave it to you to determine which is a better method).
Another related item with the foreclosures has to do with when the foreclosed-upon homeowners will be able to purchase another home. If current lending standards hold, these former homeowners will not be able to purchase again for at least 5 to 7 years. That means the pool of buyers is going to be that much smaller for quite some time. Yes, some of that slack will be picked up by investors who will then rent homes to these folks, but investors won’t cover all of the slack. This is another great reason for homeowners who are behind in payments to pursue a short sale instead of quietly giving into foreclosure. When a owner goes through a short sale, they are generally eligible to purchase again in 2 to 3 years instead of 5 to 7 with foreclosure.
The extension of the first-time homebuyer credit and the expansion to cover existing homeowners who wish to move up will certainly increase purchases. The question is whether or not we are just stealing future buyers from tomorrow.
Another wrinkle is that there still are loans being made to folks who can’t afford them. Buyers can still get an FHA mortgage with 3.5% down. In most areas of the country, this loan is worth more than the house within 12 months. Private sector lenders are requiring higher down payments.
Some market ranges are being hit harder than others. The entry level is doing better, because of the first-time buyer credit. The luxury market is having a harder time. With jumbo mortgages being harder to get and having higher interest rates, it is certainly impacting the $500,000 to $1,000,000 segment.
I personally am not optimistic on a national recovery for housing in the short term. I would love to be wrong. There is nothing I’d like more than to have to admit that this blog entry was way off the mark. Unfortunately, given the current environment, I don’t see it any other way.
As for the Austin market, I find it a bit harder to predict. While our market has declined, it has been much better here than many parts of the U.S. While the Texas economy has held on well, the reality is that we aren’t isolated from the rest of the country. Our unemployment rate is climbing and so is the foreclosure rate. In fact, in September, our increase in foreclosures (43.8%) was notably higher than that of the rest of the country (29.2%). I believe that we will continue to fare better than the country as a whole. To what degree it is hard to say.
In summary, while I’m not gung-ho on the near-term for real estate as a whole, keep in mind that for individuals, it can be a great time to buy and sell right now. While you may not be thrilled with what your house will sell for in this market, you’ll get a good deal on the purchase side. If you are ready to buy or sell,
contact me at 512-650-7300, by email, or the form below,
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