The lowest mortgage interest rates in almost 60 years, plus affordable homes in cities where buyers had been priced out for years, should be turning the housing market around. But the market also labors under some heavy burdens: a glut of foreclosures that are dragging down home prices, high unemployment and tight credit. Sales fell off a cliff after the home-buyer tax credit expired. And "foreclosure-gate" -- legal squabbling about the process used to repossess many homes -- postponed the sale of many foreclosed properties and struck yet another body blow to confidence in the housing market.
For the four years beginning with the downturn in mid 2006, the median price of an existing home nationwide fell by 27%, or 7.7% annualized, according to Fiserv Case- Shiller, a home-price research firm. (At the worst of the decline, a year ago, prices had fallen 30%.) The median home now sells for $177,000, a bit more than what it would have fetched in 2003.
Among the cities that Fiserv tracks, Merced, Cal., fared worst, with a 68% plunge in its median home price in the four years since the peak, followed closely by Modesto, Salinas and Stockton, Cal.; Cape Coral-Fort Myers, Fla.; and Detroit. Prices rose in just 12 cities -- in upstate New York, Tennessee and Pennsylvania -- that missed the boom and plugged along at their usual slow pace of appreciation.
The home-price plunge has left 23% of mortgage borrowers (out of 53.5 million) underwater -- that is, they owe more on their mortgage than the market value of their home. Unless they can ante up the difference -- an average of $75,000, according to CoreLogic, which analyzes mortgage data -- they can’t sell and they can't move. Their choices? Stick it out, ask the lender for permission to sell for less than they owe (a short sale), or default.
In Norwood, Mass., south of Boston, Al and Shannon Becker wish they could buy a bigger home, but they're underwater by about $50,000. But the couple have a plan. They bought their 1910 farmhouse, with three bedrooms and two baths, for $389,000 in 2005. By 2006, the property appraised for $423,000 and the couple refinanced, taking cash out for home improvements. Now it's worth $350,000. Still, they can afford to move -- and could come up with the cash to pay off the mortgage. Instead, they are paying an extra $500 a month on the second mortgage they took out when they purchased the house and anticipate the day when debt pay-down and home-price growth will converge. Walk away? No. "That would be un-American, and my parents would kill me," says Al.
The price gains that would put the Beckers and the millions of homeowners like them in the black have been tantalizingly out of reach, though glimmers of hope exist. Median home prices rose by 3.6% during the year ended June 30. Many California cities saw double-digit increases. Prices rose by at least 5% in many cities in California’s beleaguered Central Valley and Inland Empire (such as Riverside-San Bernardino), a few cities in Florida, and in Phoenix, Washington, D.C., and Minneapolis-St. Paul.
David Stiff, chief economist at Fiserv Case-Shiller, says those price increases, artificially propelled by the home-buyer tax credit, weren't sustainable. The tax credit expired on April 30. By June, sales had begun to slide, and in July they tanked. In late summer, sales of existing homes (including single-family houses, townhouses, condos and co-ops) began to climb again, but in the National Association of Realtors' most recent report, they were still 19% below a year ago. The lower the price tier, the greater the decline in sales, which reflected the pullback of first-time home buyers.
Although this recovery may seem unendurably long, Stiff says that five to seven years is historically a "pretty standard time frame" for prices to stabilize after a large correction. But in the past, some regions suffered longer than others. For example, Dallas home prices took 12 years to recover after they fell from their peak in mid 1986. This time around, however, the downturn hit more areas because the mortgage-credit bubble was so widespread.
The Foreclosure Factor
Now, short sales and foreclosures are the driving force behind continued price declines. Throughout 2010, they accounted for about one-third of home sales, with an average price discount of 26%, according to RealtyTrac. Everyone agrees that more such sales are on the way, but estimates vary.
Moody's Analytics chief economist Mark Zandi says the foreclosure pipeline holds about four million loans that are delinquent by 90 days or more -- or headed that way -- and he thinks half of those will end up for sale. He thinks that delinquency rates have peaked and that foreclosures will peak in 2011. He reckons that, given current supply and demand, it will take two years to work through the excess inventory (which is concentrated in Florida, the Atlanta area, Arizona, Nevada, California's Central Valley, the Rust Belt and a few other spots in the Midwest). The longer it takes to put to rest the foreclosure-processing issue raised in October, the greater the backlog of properties -- and the more they will suppress prices when they hit the market. But Zandi says foreclosure-gate will be resolved within a few months, not a few quarters. Even so, foreclosure moratoriums have ensnared plenty of bargain hunters, including Kerry Deland of St. Cloud, Fla. Deland moved to St. Cloud, near Orlando, in 2005. A kindergarten teacher, Deland quickly figured out that she couldn't afford to buy a home -- especially one with enough land for her horse -- on her salary.
A friend tipped her off to a property that appeared destined for foreclosure -- a 5-acre spread with a three-bedroom, two-bath house that would have sold for $300,000 in 2005. Deland watched and waited. In July, the foreclosing lender listed the property for $114,000. Deland made two offers. The first time she lost out to a higher bidder, whose deal fell through. In late August, she made a winning bid of $111,900. Closing was scheduled for early November, but in October Deland learned that the seller, Fannie Mae, had imposed a foreclosure moratorium. Fortunately, it offered to extend Deland’s contract until December 5. "I've waited this long," she says. "I can wait some more."
A Glass Half-Full
The worst-case scenario for home prices? Slow economic growth and high unemployment drive up the foreclosure numbers, which push down home prices. Consumers refrain from spending, further dampening economic growth and job creation. Demand for homes decreases because would-be buyers either don't have a job or don’t have confidence that they'll still have one in months to come. Confident buyers hold off because they expect further price declines.
But Zandi thinks the job market will begin to turn around by mid to late 2011. And the Federal Reserve will ensure that mortgages stay dirt-cheap at least until employment picks up again. Zandi says that the best reason for a bit of optimism is this: With few exceptions, the market is fairly valued based on the relationship of home prices to income and apartment rents. Some markets have actually become undervalued, which will attract more buyers and investors.
Bank of America Merrill Lynch economist Michelle Meyer says that to frame the housing outlook in a more optimistic light, "everything has to go as planned."To buoy consumer confidence and put home sales on a strong, upward trajectory, job growth will have to be considerable and the unemployment rate clearly receding. Meyer agrees that we could see that begin to occur in the second half of 2011, but, she says, "it will be a slow process." Fiserv expects the housing market to finally hit bottom in mid 2011, with another 7% decline in the U.S. median home price for the year ending June 30, 2011. The firm's forecasting model says that prices are 90% of the way back to being in line with household incomes. Stiff says that the housing market is now "bouncing along the bottom," with buyers and sellers creating price volatility as they try to match bid and ask prices. The firm predicts that in many cities, prices will begin to tick upward again in 2012.