Archive for the 'Other States' Category
Debate About National Housing Markets
Although here in Hartford we’re generally more concerned about the local real estate markets, the national picture is of interest because of its impact on the overall economy. We believe that housing markets need to broadly stabilize before homeowners (consumers) feel comfortable with their personal financial situations and the banks/investors that hold the mortgages feel comfortable with their balance sheets. In other words, finding a bottom in the housing market is an important first step in beginning to move forward as an economy.
Friday’s announcement of June housing data triggered an interesting exchange on two very well regarded economic blogs. Barry Ritholtz, author of The Big Picture, and Bill, author of Calculated Risk, stake out different interpretations of the data. Both are worth reading as they take different approaches and reach different conclusions.
At The Big Picture, Barry feels that housing markets are nowhere near the bottom in terms of either prices or activity. He makes a number of arguments to support his position; historical comparisons, market trends, weak demand (buyers unable or unwilling to purchase), and additional unmeasured supply (foreclosures and investor-owned properties).
At Calculated Risk, Bill initially separates the two independent market bottoms that he expects to see, then follows up with his positive takeaways from the housing report. Although he is still concerned about excess housing inventory, the slight increase in housing starts signals positive developments nevertheless. He argues that the uptick will begin to lift two drags on the economy by limiting additional construction job losses and increasing the Residential Investment component of the GDP.
Here in Greater Hartford our housing markets are in better shape than many others, making it difficult to weigh in with a strong opinion. That being said, we have seen potential buyers unable to purchase due to their inability to get a loan. We have also seen uncertain employment situations delay home buying decisions. Both economists make arguments that seem plausible and logically supported. Like most economic debates, the only way to determine who is correct (well, closer to correct) is to wait to see how the markets develop.
In the meantime we’ll focus on staying informed on the latest thinking and the possible outcomes.
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.