Real Estate
Will Home Prices Hit Bottom in 2008? Yes, but . . .
A rate freeze on some subprime mortgages may prevent more foreclosures, but this real estate market won’t show improvement until 2009.
By Pat Mertz Esswein, Associate Editor
From Kiplinger's Personal Finance magazine, January 2008
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We at Kiplinger's Personal Finance magazine believe housing prices nationally will bottom out in 2008, but the recovery for housing markets will be slow. While lenders and loan servicers, the federal government and consumer credit counselors work out a plan to relieve some homeowners facing unaffordable rate adjustments on their subprime ARMs, home values continue to slide.
Just take a look at where we've been; consider Punta Gorda.
Low-key, low-rise and (prior to the housing boom) low-cost, Punta Gorda sits on Florida's west coast, halfway between Sarasota and Fort Myers. Residents love their slice of paradise. In Punta Gorda and neighboring Port Charlotte, owners of homes that back up to the canals built in the 1950s can dock their boat in their backyard and sail out to Charlotte Bay and on to the Gulf of Mexico.
Barb Hiebner describes gathering with friends on their boats to drink "docktails" and watch the sun set over the Gulf.
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But Punta Gorda has the dubious distinction of weathering the steepest drop in median home price for the past year -- a humbling 17%, according to Fiserv Lending Solutions, a home-price research firm in Cambridge, Mass. Until about three years ago, the home-price bubble had largely bypassed the area. You could buy a typical 2,000-square-foot home on a canal, with a swimming pool, lanai and boatlift, for less than $300,000, says Hiebner, a real estate agent.
Then Hurricane Charley struck, in August 2004. In the wake of Charley's destruction, a buying frenzy ensued, as local residents sought to replace their homes and investors and builders flocked to the area in search of opportunity. New construction, especially condos, took off. Investors began to flip homes, and prices soared.
Hiebner says that just before the downturn, that "typical" house was selling for $600,000. Then the housing meltdown swept over the area, in its own way wreaking as much havoc as the hurricane.
How We Got Here
Punta Gorda represents an extreme of boom and bust, but it's hardly unique. The same forces that sank prices there struck elsewhere around the country. In the aftermath of the crash of tech stocks in 2000, investors seeking the next big thing turned to residential real estate.
They flocked to affordable markets and bid up prices. Local home buyers joined the frenzy -- first-time buyers because they feared being priced out of the market, and move-up buyers because they wanted to cash in their rising equity and buy their dream home. Easy credit -- including loans for subprime borrowers with sketchy credit histories -- fueled the fervor. In more than 40 of the 100 biggest markets, the median mortgage payment exceeded the traditional lending guideline of 28% of household income.
During the five years that ended with the second quarter of 2007, annualized price gains in more than three-fourths of those cities exceeded the historical average -- 6.6% annually since 1968, according to the National Association of Realtors (NAR). In more than half the cities, prices grew by double digits. Miami came in first, with 18%; only Warren, Mich., near Detroit, showed negative results (-0.3%), indicative of the state's troubled economy.
In stark contrast, the NAR expects the national median home price to fall by 1.5% in 2007, the first decline nationally since it began keeping records in 1968. Sales decreased throughout the past year, while the number of homes on the market increased. According to the latest numbers, the supply of single-family homes was the largest since 1988.
The downturn accelerated last summer as the subprime credit meltdown morphed into widespread credit tightening. Many no-down-payment and exotic mortgages disappeared altogether, and interest rates on jumbo mortgages (those exceeding $417,000) rose beyond the reach of many buyers. So although buyers now had the advantage, many were prevented from reentering the market or were too spooked to commit.
In the hottest markets -- California, Nevada, Florida, and to a lesser extent Washington, D.C., and parts of the Northeast -- investors and homeowners are watching helplessly as home values fall and mortgage costs rise (ARM resets will peak this spring), and they can neither sell nor refinance. Result: Foreclosures are soaring.
Reader Comments (10)
Posted by: bob the wandering LO at 12/14/2007 05:31:31 PM
arms are not going to top out in spring 2008 its just begun. I am impressed with your command of some markets and percentages, but feel that qualifying the affordability factor in actual numbers of buyers is necessary to make a more meaningful prediction of prices going up. when 1 person manages to sell a home for a little better then psychology kicks in and problem solved? i dont know im asking. is the definition of values going up what people will pay for a house?
Posted by: perceptionsnow at 12/14/2007 07:30:11 PM
Demographic levels are now being re-shaped Globally, as nearly two Billion Baby Boomers have commenced a 20 year transition from being big spenders, to big Retirement savers, to thrifty Retirees, before leaving us forever, in increasing numbers. This will result in a massive aging of the global population, which will completely change the dynamics of the world economy, including housing, as we are now beginning to see. The initial effects have already commenced and next year will see the start of a worldwide recession, which is as good as it is likely to get, for quite some time.
Posted by: Ron at 12/16/2007 01:43:49 PM
2008... Really... Did you think the peak of 1989 would bottom out in 1992? In Southern California, it fell all the way to 1995. When people push the value of a house to ridiculous levels, it depends on how much rent climbs at the same time housing falls to predict where things will settle. Rent for a house in my area has climbed from $1700 to $2100 since houses hit $600,000. These houses are already being short sold in the $450,000 range and if rents hold at $2100 to $2300, prices will eventually be $300,000...This time Las Vegas is getting stung because too many Southern Californians with a warped since of value moved there also.
Posted by: Chuck at 12/19/2007 06:12:24 PM
I sure am glad I live in Clarksville, TN and bought rental property!
Posted by: JoeD at 01/01/2008 07:52:16 PM
In this article you fail to mention when bubble markets such as Los Angeles, Phoenix, Miami, and Riverside CA will bottom out. I believe mid-2008 is a wildly optimistic estimate for the bottom in these areas...(A)fter "subprime" resets taper off, the next wave of resets will be "alt-A" and "option ARMs", and other types of exotic loans...With all of these resets, we will have more foreclosures. Also, in many of these bubble areas, prices rose at unsustainable levels for 6-8 years, and price-to-rent ratios are still completely out of whack...With all of the whacky loans gone, how many people have the cash for a 10-20% downpayment on a house in Los Angeles right now? Very few that I know. Add to all this the fact that inventory is sky high.... With these factors taken into consideration, my prediction for a bottom in these bubble areas would be mid-2011. I'd like to hear a reason the bottom could come any earlier in these places.
Posted by: Hoot at 02/10/2008 12:36:27 PM
We moved to L.A. in 1995 and friends and family urged us to buy a home and not rent. Unfortunately, we were just starting out and could barely afford our $750/month 2 bedroom apt. We worked hard and saved as much as possible. By late 2005, we finally had enough to buy a house. Our families were so proud and - esp. since we bought the house at 50k under asking price. Who knew it would drop another 50k? It makes me ill just to think of it. I can only hope it will recover in our lifetimes - hopefully for our daughter.
Posted by: hjburke at 02/28/2008 09:05:50 AM
i live in cape coral fl between ft myers and punta gorda while prices are lower buying a relatively new house 1900 sq ft under air with a pool, in a fast growing city with all the stores and water sewer trash removal for around $200,000 is still a magnet for seniors yesterday i had the a/c on in the car/house today it will warm up to 70 degrees and not a cloud in the sky its just great about 340 days a year
Posted by: Michael G at 07/10/2008 02:48:33 PM
The housing market has crushed our family, causing us to move from sunny Sarasota, Florida to a more affordable and job providing town such as Asheville, NC or surrounding areas. I am a Sarasota native an have seen the area grow an prosper, and now wonder what will come of this little town that has outgrown it's locals. The retirees overrule the area but do not have the sufficient work force to provide for them. Construction, housing, restaurants and most small business owners have already begun to disappear. Slowly but surely all that will be left are the ALFs and hospitals. One year ago I owned 5 rental properties, now after a recent bancruptcy, I am left searching the internet for any job available and still have not found one. One good hurricane would be the best thing that could happen to the area to bring back the jobs for the average people.(hopefully no one gets hurt)
Posted by: steve at 12/23/2008 10:33:28 AM
the real estate market will bottom in 2010.
Posted by: Jay at 01/01/2009 09:56:43 AM
Yuppies and California nuts, you chose where to live in paradise, now your paying for it.