New signs point to end of housing meltdown
With all the negative economic news out there – unemployment rising, Wall Street waffling, Detroit on the brink of bankruptcy, the national deficit soaring toward $1 trillion – it’s easy to overlook the good news that occasionally bubbles to the surface.
But there are some positive – or at least not-so-negative – developments taking place in the economy. Most important for San Diego County is the growing evidence that the long-running decline in the real estate market is beginning to slow and may actually bottom out sometime next year. Visit www.selfloanmods.com, The Best Loan Modification Resource on the internet.
Just last week, the Anderson Forecast at the University of California Los Angeles, one of the state’s premier economic-analysis groups, predicted that California real estate prices will hit bottom by the middle of next year. Unfortunately, the UCLA Anderson Forecast has been unrealistically optimistic over the past couple years, so its rosy prediction may not match reality.
On the other hand, the more accurate economic forecasting team at the Anderson Center at Chapman University in Orange (they produce charts these days showing how much better their predictions are than UCLA’s) predicted a 6.7 percent decline in housing prices next year for California – great news compared with this year’s 34.2 percent.
Even better, Chapman economist Esmael Adibi predicted that the rate of decline would peter out by year’s end, laying the groundwork for a stabilization of the market in 2010.
Sheila Bair, who heads the Federal Deposit Insurance Corp., offered a similar prediction. “We think we’re going to have a tough year next year, and we’re preparing for that,” she told The Associated Press last week. “But we’ll work through it. By 2010, we’ll be seeing the light at the end of the tunnel.”
If you put the three of those predictions together, it seems likely that by this time next year, we will either be at or approaching the bottom of the housing market. And there is growing evidence that the steepest drops in home prices may be over:
Affordability. Home prices in San Diego County and some of the country’s other once-hot real estate markets are finally approaching normal levels of affordability.
Adibi said that on average over the past 20 years, San Diegans have spent roughly 33 percent of their income on monthly home payments. The last time we were at that level was 2002, just before home prices skyrocketed. Now that the median price of homes has returned to 2002 levels, homes are more affordable than the historical average, especially when you consider inflation.
“Prices are getting to the point where it’s cost-effective to get back into the market,” said Bob Schwartz, a San Diego real estate broker who runs a blog on the local market at brokerforyou.com.
He has long been skeptical of the health of the local market. But after two years of price declines, the bargain-basement prices are winning him over.
“Some condos downtown are selling for 50 percent of their peak price,” Schwartz said. “And their affordability is still going up. Instead of talking about how prices are going down now, we should be talking about how affordability is rising.”
On the other hand, during a recession, homes often dip well below their historic averages for affordability before climbing back up.
Lower mortgage rates. Thanks to efforts by the Federal Reserve, mortgage rates last week dipped to 5.47 percent – their lowest point in four years – according to a survey released by Fannie Mae.
Other financial firms, using different databases, said the average mortgage rate was even lower, with estimates ranging from 5.09 percent to 5.33 percent. James Lockhart, whose agency oversees government-controlled mortgage giants Fannie Mae and Freddie Mac, predicted that mortgages could eventually drop to “well below 4 percent.”
That kind of interest rate may be enough to entice potential buyers off the sidelines, though tight lending standards will still keep a damper on sales.
Smaller inventories. A year ago, there was a 16-month supply of homes for sale in San Diego County, and it took an average of 67 days to sell a home, the California Association of Realtors said. These days, the market is much closer to its historic norms, with a 4.5-month supply and an average sales period of 40 to 50 days, said Norm Miller, who teaches real estate at the University of San Diego.
One reason for this decline in supply is that homeowners aren’t putting their homes on the market these days unless they really, really need to. And a reason that homes are being snapped up more quickly is that most of them are foreclosures or “short sales” – homes being sold for a loss by their lenders – which attract bottom-feeding speculators.
Nevertheless, Miller says the decline in inventory is a good sign, pointing to price stability down the road.
Loan modification. It is increasingly likely that Congress will enact a program to modify the mortgages of some cash-strapped homeowners next year, to prevent the homes from falling into foreclosure. Such a program would not halt foreclosures, but it could keep them from rising as rapidly as they have been. That, in turn, would help stabilize the market by tamping down the supply of homes being sold.
Do all these improvements mean that home prices will quickly hit bottom and then bounce back? No. Most analysts think that once the market does hit bottom – whether in 2009 or 2010 – it will stay there for a while. Nobody expects a V-shaped recovery – a sharp downturn followed by a sharp uptick. Instead, the trajectory of the recovery could be shaped much more like an L.
In addition, there are still a few big sharks in the water.
The UCLA Anderson Forecast’s prediction, for instance, is based on the idea that unemployment in California next year will top out at 8.9 percent, which would be its highest point since 1994. But since the state’s unemployment rate had hit 8.2 percent in October – before the nationwide wave of half a million layoffs in November – it seems likely that unemployment could exceed their predictions.
This growing population of jobless workers could lead to a new wave of foreclosures, which will put downward pressure on real estate prices.
Also, there are a number of adjustable-rate mortgages that will reset to higher payments over the next two years, which could push more homeowners into foreclosure.
Local attorney Chad Ruyle, who runs a foreclosure consulting firm with the cheery name of YouWalkAway, predicted a new wave of mortgage resets in 2010. It could take three years before the “foreclosure frenzy” begins to calm down and an additional two years before the market returns to historic norms, Ruyle said.
That having been said, lower interest rates, more affordable homes, smaller inventories and more mortgage modifications could signify that if the market does decline much further, it might be rolling down a not-too-steep slope rather than dropping off a cliff. And in the current economic environment, that qualifies as good news.
