Home prices around the U.S. are still falling. But in a sign that the worst may soon be over, sales of homes are ticking up in many areas. The question is, will the housing recovery be derailed by tight credit and the struggling economy?
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A slight rise in sales of existing single-family homes last fall was driven largely by big increases in sales in California, Florida, Arizona and Nevada -- the states most afflicted by the housing bust. Sales have also risen in Minnesota, Rhode Island and northern Virginia. Plus, the number of homes on the market declined for the first time since March 2005.
Historically, home prices begin to rise within nine to 12 months of a sales uptick. But sales in September (the latest data available) reflect contracts negotiated in June and July, when the economic climate wasn't so dire. Numbers reflecting later fall sales could nip the trend in the bud.
Maybe it's poetic justice that the financial crisis that's wreaking havoc on the housing market is rooted in the housing boom.
A Deeper Downturn
Sales aside, prices continued to fall throughout 2008, with the bottom shimmering out of reach like a mirage in the desert. The National Association of Realtors, which tracks sales throughout the U.S., expects the national median home price for existing single-family homes to decline by 8% in 2008, on top of a 1.8% drop in 2007. That would be only the second time since the NAR began keeping records in 1968 that prices fell two years in a row. Our data supplier, Fiserv Lending Solutions, tracks 110 metro areas, where price changes have been even more volatile. Fiserv predicts a more dramatic decline of 15% in home prices for 2008 on top of 2007's 9% drop.
For the year that ended June 30, 2008, prices rose in only five of the 100 biggest U.S. markets tracked by Fiserv: Albuquerque; Burlington, Vt.; Clarksville, Tenn.; Lancaster, Pa.; and Pittsburgh. But the increases are just a blip, with Lancaster's 1.6% being the biggest of the bunch. See prices in 381 cities.
During the past five years, only one-fifth of the 100 biggest markets saw annualized price gains exceeding the historical average of 6.4%. Prices in the bottom fifth -- metro areas representing the leading edge of the downturn, mostly in the industrial Midwest and inland California -- failed to grow or fell by up to 5% annually.
In many smaller cities that missed the speculative bubble, prices plodded along at average or below-average rates and never exceeded the limits of local affordability. And they avoided the subprime binge that brought on the foreclosure mess. By the end of 2008, however, even their price gains had slowed. In Texas, where the market had been pumped up by affordability and population and job growth, prices will be flat in 2009, says Jim Gaines, of the Texas Real Estate Center at Texas A&M University. (Our table of home prices omits Texas because it's a "nondisclosure" state; our data provider, Fiserv, can't get the information it needs to track prices.)
Motivation for Buyers Delinquencies and foreclosures rose throughout '08 to the highest levels ever. The NAR reports that 35% to 40% of sales in September were "distressed" properties. And the pain isn't over yet. Interest-rate resets of subprime mortgages peaked in 2008, but resets of many adjustable-rate mortgages made to above-sub but less-than-prime borrowers won't peak until 2011. Mark Zandi, of Moody's Economy.com, says that job losses and cutbacks will tip homeowners who are underwater -- some 12 million currently -- into foreclosure.
Still, says Edward Leamer, of the UCLA Anderson Forecast, the low prices on foreclosures and short sales (when the lender agrees to accept less money than the mortgage amount) are a vital part of the "price-discovery process"; they create a sense of urgency among fence-sitting buyers who are waiting for the bottom. Without that motivation, buyers are loath to commit. The average discount from market value for properties in all stages of foreclosure stands at about 30% nationwide, according to Realty-Trac, an online marketplace for foreclosed properties.
To head off more foreclosures at the pass, banks such as Citi, JPMorgan Chase and Bank of America have announced they will reach out to troubled borrowers to modify the terms of their mortgages. In mid November, the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, announced a program to help borrowers at risk of foreclosure. The goal: Modify loan terms so that the monthly mortgage payment consumes no more than 38% of a household's monthly pretax income. The plan is certain to stir up controversy and could interrupt the natural, albeit painful, process of reaching rock bottom.
Falling prices have also made homes more affordable for first-time buyers. Between mid 2007 and mid 2008, the national median home price fell a notch, from four times the median family income to three times, and the median mortgage payment (with an interest rate of 6.5%) fell from 23% to 20% of pretax income. In September, about 15% of the buyers who had dived in were investors, according to the NAR. But they're not the dilettantes of the boom years. Investors now must use more of their own money, buying outright with cash or making a large down payment to get financing.