Archive for the 'Other States' Category
National Real Estate Stories
It’s been a big day for real estate in the national news. The Wall Street Journal had three articles that caught my eye. And then Case-Shiller data was also announced this morning.
First was the front page piece titled Price Cuts Spur Home Sales. December existing home sales data was released on Monday. The market had expected another month-over-month decrease after November’s 9.4% drop in the number of transactions. However, the December report showed a 6.5% increase in sales over November. Amazingly, 45% of the sales in December 2008 are reported to be either foreclosures or sales in which the owner sells for less than they owe the bank, also known as a “short sale.”
The article goes on to discuss some of the main factors impacting the falling home prices. The three key factors seem to be local employment opportunities, inventory/supply (amount of new construction during the recent boom), and general confidence in the market. The Greater Hartford region is not specifically discussed, but it is clear that we are in better shape that many parts of the country. Employment remains our biggest threat - more job losses could trigger an increase in inventory and a simultaneous reduction in demand. Overzealous construction is a relatively small risk because most of the land in this region was either already developed or protected as green space before the recent housing boom. Everyone has had their confidence shaken (some on multiple occasions) over the past 18 months, but for the most part I don’t get the sense that we’ve collectively given up hope. People seem to be taking a business as usual approach with an extra helping of caution.
The next interesting article in today’s Journal was a quick blurb titled Many Say Goodbye to McMansions. Recent surveys of both builders and buyers suggest that people are planning to move to smaller homes. This result is not terribly surprising due to the current economic environment (can’t afford as large a home), the shift in attitude away from speculating on residential real estate (don’t believe home prices will rise quickly) and the recent energy shock (can’t believe how much it costs to heat the “great room”). This would suggest that newer, larger, more expensive homes, which are often built at the outskirts of communities, would be most at risk of losing value.
The last item in the Journal, PowerShares Goes Bargain Hunting discusses two new actively managed ETFs that will buy distressed mortgages. The funds will focus on bonds backed by pools of prime and Alt-A (better credit quality than subprime, but not quite as good as prime) mortgages. Experts quoted in the article expressed limited enthusiasm. On the plus side, mortgage backed securities have sold off dramatically over the past few years. No doubt that some bonds have been unfairly punished as investors exited these complex and uniquely individual issues en masse.
The argument against the new ETFs focuses on the timing of the opportunity. Are we really seeing the bottom of the housing market, so that resale values will be sufficient to pay off the mortgages in full? There are additional concerns about whether or not the new ETFs are the appropriate vehicle for investing in the mortgage backed securities markets. ETFs were originally devised as low-cost index investment vehicles that passively replicated equity indexes. The new ETFs are quite different in that they are actively managed and invest in the less transparent bond market. There are other ETFs already on the market that have similar structures, but they are all relatively new.
Finally, multiple sources are reporting the Case-Shiller Index number for November. The index of 20 large metropolitan regions shows prices falling about 18% on average from November 2007 to November 2008. The Hartford region is not included in the data, but our Northeastern surrogates of Boston and New York both experienced smaller price drops than the overall average.
This round of coverage illustrates that home prices continue to be a major point of interest for both the financial markets and the general citizenry. Data continues to show falling prices, and analysis suggests that prices could fall further. For Greater Hartford, the key metrics continue to be employment and confidence. As long as our job markets and wages remain reasonably stable, there is no reason to expect home prices in this area to go into a freefall.
Property Taxes - Troubling Economics
Property taxes are a sensitive subject in Greater Hartford. Just about every year there is a budget referendum in at least one local town as angry residents fight yet another property tax increase. The debate in some towns is more heated than in others (but we won’t mention any names).
You may be happy to know that rising property taxes are a hot topic in other cities and states as well. An editorial in this weekend’s Wall Street Journal highlights a number of areas that are experiencing increasing taxes at the same time as they see falling home prices. In Arizona, where there is a state property tax, property values have fallen 17% on average in the past year. But taxes are on the rise. Ouch!
Unfortunately the root cause of property tax tension throughout the US is likely to get worse. The economics of running a town are deteriorating. Let’s consider the revenue and expenses separately.
Nearly all of town revenue comes from property taxes. Although real estate has historically been an appreciating asset, that is perhaps not the case today. Let’s assume that property values have stagnated. Therefore town revenue has also stagnated.
Expenses, on the other hand, are rising even more quickly than their historical rates. Education (much of a town’s budget) is rising at 2.5x general inflation, healthcare (another significant piece) is rising at 2.0x general inflation. We all know about energy prices, which impact many of the services the town provides (police, fire, trash pickup, snow plowing, heating city buildings, …).
Revenue is stagnant while expenses are accelerating. We all better sharpen our pitchforks and ready our torches because in the current global economic environment, this dynamic looks like it will only get worse. Other than protest, is there anything we could or should do? Or should we just ride it out? This is shaping up to be a big problem throughout the country.
Would You Sue Your Buyer’s Agent?
There is an interesting article in the New York Times today about a buyer in California that is suing her buyer’s agent. Marty Ummel believes that her real estate agent hid information that similar homes in a neighborhood were selling for less, in order to keep a deal together and retain his commission.
There are a lot of things at play here; the real estate agent was also the mortgage broker (which to me seems to be a clear conflict of interest), each party has an appraisal stating a different amount for the time period when the home was purchased, there is no clear agreement if agents should provide price recommendations to a buyer.
The National Association of Realtors says it has no cases that revolve solely on valuation. It will be interesting to see where this case leads and the precedent that will be set. What happens if Realtors are no longer allowed to provide price guidance? How will this affect price recommendations for sellers? Will they need to hire appraisers?