What’s ahead for home prices?
Sales are ticking up, but don’t expect prices to follow until the middle of the year.
By Pat Mertz Esswein of Kiplinger's
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In the second half of 2009, the housing market seemed to catch its breath after struggling to recover from the most severe downturn since the Great Depression. The first-time homebuyers tax credit and low mortgage rates lured buyers who’d been dithering and helped move the glut of foreclosures that has been dragging down home values. Sales began ticking up, and home prices stabilized after a three-year downward spiral.
But the correction isn’t over yet. Credit is still tight, unemployment is high and more foreclosures are coming. Even with the extension and expansion of the tax credit to include move-up buyers and an upward trend in sales, home prices will continue to edge lower through next spring. The U.S. housing market won’t begin to look healthy again until at least 2011.
The price picture
From the beginning of the downturn in mid-2006 to June 30, 2009, the median price of an existing home nationwide fell by 30%, or 11% annualized, according to Fiserv Lending Solutions. The median home now sells for $174,000 — about what it sold for in 2003. Among the cities that Fiserv tracks, Detroit — victim of subprime lending and sky-high unemployment — suffered the most, with an annualized decline of 22% in its median home price over three years and a 33% plunge in the year that ended June 30. Detroit was followed closely by Las Vegas; Phoenix; Merced, Calif.; Miami; and Modesto, Calif. — all at the epicenter of the boom-bust quake.
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Over the past year, prices dropped 15% across the U.S. and rose in only two cities: Clarksville, Tenn. (up 1%), and Johnson City, Tenn. (2%), reflecting demand for homes by an influx of retirees to the Blue Ridge Mountains.
But between the first and second quarters of 2009, the nationwide median home price rose slightly, by 1.4%, according to Fiserv. That’s the first such increase since 2006 and, says Fiserv chief economist David Stiff, “the first good news we’ve had.” But Stiff is quick to warn that one grace note doesn’t make a tune.
Given that prices tend to stabilize about a year after sales begin to recover, Fiserv expects prices to bottom out in mid-2010. It forecasts that the median home price will have fallen by 7.5% in 2009 and will drop an additional 9.2% in 2010, to a level not seen since 2001.
Sales have been picking up steam since April, and, in July they increased year-over-year for the first time since November 2005. The increase was driven by first-time buyers seeking to capture the $8,000 tax credit and by bargain hunters and investors lured by discounts of 15% to 20% from market value on foreclosed homes and short sales (properties sold for less than what was owed on the mortgage). Federal intervention in the credit markets helped shore up mortgage lending at super-low rates.
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View more MSN videosGo to CNBCIn its most recent report, the National Association of Realtors said that sales of existing homes (including single-family houses, townhouses, condos and co-ops) rose 9.4% in September compared with the year before, with the strongest rebound in the Northeast (12%) and the weakest in the West (6%). Inventory fell by 15% from the year before, to just under eight months’ supply (the time it would take to sell the current inventory at the current pace of sales). That’s the lowest level in two and a half years, but above the four- to six-month supply that indicates a market balanced between buyers and sellers. The condo market still staggered under an 11-month supply.
Strong buyers benefit
Affordability is the outlook’s silver lining. Fiserv’s data show that, nationally, the ratio between median family income and the median home price has fallen to 2.8 — just under the long-term historical average of 2.9. Renewed affordability combined with historically low mortgage rates present an opportunity for homebuyers who have sterling credit, secure jobs and a plan to live in their home for many years.
Eager to get a good deal, David and Kiara Powell of Minneapolis shopped for a home last summer. The couple, both 31, had been living in Kiara Powell’s condo, which she purchased near the top of the market in 2005. Because the condo market in Minneapolis is still glutted, says Cotty Lowry, the Powells’ agent, condo sellers who bought in 2005 or just before should expect to list their units for 80% of the original purchase price. Instead of taking the hit, the Powells chose to keep their condo as an investment property and rent it out.
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The Powells found their home on the day they began looking — a house with three bedrooms and two bathrooms on one-fifth of an acre. Built in 1926, the 1,898-square-foot home was smaller than they wanted, but it was completely renovated and overlooked a park on the shore of Lake Harriet. Plus, it was a 10-minute commute to their jobs downtown. They made an offer the next day.
The seller had originally listed the home for $985,000 but had dropped the price four times over four months. The Powells signed a contract for $695,000. They made a substantial down payment and financed the purchase with a conforming first mortgage ($417,000), at a rate of 5.25%, and a line of credit for the balance. They closed and moved in August.
The Powells benefited from the stagnating trade-up market, which in Minneapolis and many other metro areas has too much inventory, too few buyers and too many sellers who refuse to face reality. “They still believe their homes are special,” Lowry says. He points out, for example, that his South Minneapolis Lakes market has a glut of homes for sale priced between $600,000 and $1 million. In August, the National Association of Realtors reported that more than two-thirds of all sales were for entry-level homes, priced less than $250,000.
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Fiserv’s Stiff says the trade-up market will remain weak for a long time because of stalled household incomes, high unemployment and the desire by many consumers to cut debt. He expects that the expansion of the homebuyers tax credit to include higher-income and trade-up buyers will shore up demand until the job market begins to recover, mostly by inspiring those intending to buy anyway to buy sooner. It would be nice if the tax credit also helped boost average prices (the greater the number of higher-priced homes that sell, the higher the median home price), but another wave of expected foreclosures may overwhelm any benefit.
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Continued: The face of recovery
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