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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.
POSTED BY: JoeD (January 01, 2008 07:52 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 (February 10, 2008 12:36 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 (February 28, 2008 09:05 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
