Archive for the 'Other States' Category

An Economist's View of the National Housing Market

Economists are divided as to the direction of the national housing market. Some believe that the environment is stabilizing and that prices will increase from here. Others see further price decreases once the government support fades away.

Barry Ritholz is one economist we follow regularly, through his posts on The Big Picture blog. Right now, he has a strong negative view on the future of the US housing markets. One of yesterday’s posts broke down his views in more detail.

Looking back at how we got to where we are today, Mr. Ritholz notes that that low interest rates throughout the 2000s caused a credit bubble, which in turn caused a housing boom. Lots of people bought houses they couldn’t afford because poor lending standards and very low mortgage rates allowed them to jump into the real estate markets. Five million homeowners have been foreclosed upon, and he expects five million more foreclosures to come.

His forward-looking thesis is that even after a 33% fall from the peak, prices are still too high when looking at traditional valuation metrics like prices vs income and the cost of owning vs renting. Supply is high, with more waiting in the wings. Demand is well below the inflated peak levels, caused by tighter credit and high unemployment. And when markets correct from severe imbalances, they usually move well below the mean.

How does his thesis translate to Greater Hartford?

Our markets did not appreciate nearly as much as markets in some other parts of the country, which has also meant that we have not seen as severe a correction. However, housing in the northeast is generally more expensive than it is/was in the boom areas, so there is more room to fall. And there is no guarantee it will always be more expensive up here.

Inventory: Real estate inventories in Hartford County checked in at just over 6 months of sales activity at the end of the first quarter. That’s right on the boundary between a neutral market and one that favors buyers, so we’re not seeing any major warning signs here. The number at the end of the second quarter should be comparable, or even better, since the tax credit created a huge spike in deals that will close by the end of June.

Foreclosures: The number of foreclosures has increased dramatically in the past few years. A recent Hartford Courant article focusing on the amount of money marshals earn indicates that “five or six years ago there were 3,000 or 4,000 foreclosures” per year in the state. Compare that to a statistic later in the article stating that 20,000 foreclosures were filed in 2009, which was 40% more than 2008.

Employment: The employment situation in Greater Hartford has improved over the past year. People we talk with say that companies are adding employees, though many positions remain unfilled and may never be filled. We are also seeing more relocation buyers coming from out of town, which of course means that they have jobs waiting for them. That’s the short-term view. The long-term view is more negative. One of our major employers has gone on the record saying that they want to move jobs anywhere outside of Connecticut. The comment made headlines, but nobody seemed especially surprised by the news. The housing market depends on buyers with steady income, which depends on employment.

Credit and Mortgage Rates: Buyers with good credit are able to get mortgages, and are currently seeing very low rates. However, buyers with poor credit are having trouble financing a purchase and often have to sit out of the market for a year or two to repair their credit. We know of numerous buyers in this situation – all of whom are gainfully employed.

Overall, the environment in Greater Hartford is trending in the same direction as the national picture for three out of four areas that Mr. Ritholz identifies as concerns. It’s difficult to know how severe our readings are relative to the national average, but it seems like we may be at risk for falling prices if his analysis turns out to be correct.

Extending the Home Buyer Credit

The National Association of Realtors (NAR) has been leading a push to get part of the Federal Home Buyer Tax Credit extended. But don’t get too excited – their proposal won’t give allow anyone new to claim the credit.

Before diving into the details, here is a quick review of the current rules of the game:
1. First time buyer or existing owner (extra criteria).
2. Binding purchase contract by April 30, 2010.
3. Closing by June 30, 2010.

In a June 11th press release, NAR argues that 180,000 buyers met the first two rules but are at risk of missing out on the credit because their lenders will not be able to underwrite the mortgage in time. In fact, they state that “as many as one-third of qualified applicants have been notified by their lender that their mortgages will not close before June 30th.” NAR would like to protect these buyers by extending the deadline for closing to September 30th.

NAR’s main concern is that the surge in purchases at the end of April is overwhelming lenders. Others seem to believe that the tighter lending standards and the new appraisal rules that fall under the Home Valuation Code of Conduct (HVCC) are a big part of the delay. A number of articles, including Senator Reid’s press release on the issue, state that there is “growing concern” that short sales will be impacted.

We have heard about mortgage delays with some of the larger national lenders and with special programs (like CHFA) that require additional steps or approvals. However, buyers using standard mortgages with local and regional lenders are seeing their loans go through without much trouble. Appraisals can be an adventure when someone is assigned from outside of the area (like from Rhode Island!), but they have occurred in an expeditious manner. Short sales are a whole different animal, and the concerns identified seem to lead to a discussion about when the purchase contracts becomes binding – not a debate for today.

Buyers in Greater Hartford are seeing some of the same challenges that have been reported in the country overall, especially when they use national lenders. Hopefully we won’t see too many closing delays as the month of June comes to an end. And if the “closing by June 30th” rule is relaxed, that will help ensure everyone gets the incentive they were expecting.

Demolition in Detroit

Friday’s Wall Street Journal article about the demolition of historic homes in Detroit came at an interesting time. The previous evening we had attended the Hartford Preservation Alliance awards event, a gathering to celebrate the architectural history of our city and the efforts of community members to restore and reuse buildings rather than knock them down.

Detroit has a rich architectural history, as can be seen on sites like Forgotten Detroit and Detroit1701.org. Some of the historical homes are currently in use, and in good condition, while others appear to be abandoned. The city has lost a substantial number of residents over the past 50 years and there are apparently blocks with few inhabited houses. A piece on the Land+Living site from 2006 shows some images of Detroit’s residential landscape.

The WSJ article raises an important question that we face here in Hartford too … how much should we preserve? Is preserving the exterior sufficient? Is bulldozing ever the right thing to do?

Houses are large, and they’re expensive to maintain. This makes preserving them much more difficult than paintings, sculptures, or other works of art. However, like a work of art, each house is often unique since it reflects the site on which it was built and may have been customized for the owner. Therefore homes are different from cars, stamps, or guns, where having one example of each “model” could be considered sufficient.

I like to think of myself as a practical, if not pragmatic, person. Houses need to be functional; otherwise they’re not going to survive. I think that older homes should evolve over time to meet the needs of modern society. They need regular maintenance, and the best way to achieve that is by continuing to serve their primary role as a shelter and an oasis from the outside world. However, in making the updates property owners have a responsibility to make changes within the spirit and character of their home. They should make historically appropriate choices as often as possible.

The larger challenge is when neighborhoods and regions evolve. This is the primary issue that Detroit faces, and is also a relevant topic in the City of Hartford. What happens when it no longer makes economic sense for homeowners to maintain and restore their property? Or a block of properties? Or an entire neighborhood?

Detroit has chosen to sacrifice some of their history in an effort to move their city forward. Without living in the area and experiencing their problems first-hand, it’s difficult to fully understand that decision. I can only imagine the intense debate that led up to the final demolition orders. Mayor Bing’s State of the City address on March 23, 2010 outlines Detroit’s major challenges and initiatives, of which the demolition program is just a small piece.

It’s always sad to see grand old homes in disrepair – you can still see their beauty shining through the years of neglect. At some point taking them down may be the only option. Hopefully here in Hartford we can continue working to protect our historic properties as we confront many of the same challenges as Detroit, just on a smaller scale.

Housing and Young People

Yesterday was the first session in a five-part series on public housing policy. Housing: The Hub of Public Policy 2010 is presented by The Connecticut Housing Finance Authority, The Connecticut Department of Economic and Community Development, and The Partnership for Strong Communities; it is hosted by The Lyceum. The pre-event briefing memo touched on many issues and gave examples of what is happening in other parts of the country – it’s an interesting read. We learned about the event through our involvement in HYPE, and stopped by to check it out.

One of the recurring themes of the discussion was Connecticut’s difficulty in retaining our young adults, which is reported regularly via both official statistics and anecdotal experiences. It is a source of concern because of the ratio of workers to retirees in the state – currently 4.5:1 and expected to fall to 2.6:1 by 2030. The baseline assumption for the group was that housing played a critical role in the flight of the youth; our graduates move to other states because they can’t find affordable housing in Connecticut.

We have lived in three different states as working adults, with each move motivated by a specific opportunity. We moved to Boston because of a job, to Charlottesville because of a school, and then to Hartford because of a job. Housing costs only entered the discussion during our most recent move, as we were interested in understanding the cost of living relative to the available salaries. Hartford was more affordable that both Boston and Vermont, the other destinations we considered. So housing was a consideration for us, but it was a secondary factor after the available opportunities, and only became a factor because we expected to be in the area for a long time building a career.

Three other points that were raised during the discussion:
1. Housing costs can influence employment opportunities since companies have an incentive to locate their facilities in low-cost areas.
2. Because Connecticut is so geographically small, and located between Boston and New York, our young adults are often still close to home even if they live in another state.
3. Perhaps many of our young adults will return to the state when they are ready for a more suburban lifestyle.

What’s your take? How important are housing costs to the young adults that you know? What motivates them (you) to choose Connecticut or to choose other parts of the country/world? If you know people who have left the area, what might have kept them here if it had been available?

Real Estate Stories of the Past Couple Weeks

There have been a number of interesting articles about real estate in the financial press over the past couple weeks. Here’s a quick wrap-up of what you may have missed while you were off for the holidays…

Wall Street Journal, December 23rd: Data from the National Association of Realtors shows that Home Sales, Prices Brighten (subscription required). Though the current data is positive, the author expresses concern about “a continuing flood of foreclosures and the eventual withdrawal of government life support.” They note that the housing has been strongest in “middle-class homes with short commutes,” something that rings true in the Greater Hartford markets.

Wall Street Journal, December 24th: The next day, the headlines reversed to New-Home Sales Drop 11.3% as Impact of Stimulus Fades (Subscription Required). This time the data came from the Commerce Department, which noted that the measure was very volatile (it had risen 7.4% the previous month) and new home sales make up less than 15% of total home sales. And in our area, new home sales are far less than 15% of the total.

Wall Street Journal, December 24th: On the same page, we learn that Resession Alters Migration Pattern in US. Although this story isn’t directly about real estate, it is interesting to consider the implication of people moving around the country on local real estate markets. A large map shows the population changes by state for 2004-2005 and then for 2008-2009. Florida and Nevada showed the most dramatic shifts, from strongly growing to modestly decreasing populations. Connecticut appears to be consistent across the two time periods with both reflecting losses of between 0 and 50,000 people.

Wall Street Journal, December 29th: Everyone who loves a good house hunting story definitely needs to read this tale as A Picky Home Buyer Pursues an Epic Hunt for ‘the One’ in the San Francisco Bay Area. It took over two years and 298 properties for Lidia and Doug Pringle to find the right place to call home. Wow.

Calculated Risk, December 30th: During the past two declines in home values (early 1980s and early 1990s), prices did not bottom until the unemployment rate peaked.

The Big Picture, December 31st: Morgan Stanley released a research piece suggesting that the 10 Year Treasury could rise to 5.5% in 2010. What caught our eye was that they estimated that the higher Treasury rates could push rates for 30-year fixed mortgages up to between 7.5% and 8%. These rates are, of course, much higher than buyers are used to seeing. The commentary basically says that Morgan Stanley must be concerned about inflation increasing, and that the charts the commentators use to look at the market show strong increases in inflation expectations over the past year.

Wall Street Journal, December 31st: The Department of Housing and Urban Development have had Rules to Clarify Cost of Mortgages in the works for a while, tightening the requirements around Good Faith Estimates that lenders give to buyers when quoting mortgage rates. Their overall goal is to force lenders to report all of their fees and rates in a way that allows borrowers to more easily compare rates between lenders. It will be interesting to see how this transition goes as lenders and real estate attorneys adjust to new regulations.

Wall Street Journal Blogs, January 1st: The Five Key Housing Issues to Watch in 2010 are 1. mortgage rates; 2. the future of Fannie, Freddie, and the FHA; 3. loan modifications; 4. more loan resets; and 5. the tax credit.

New York Times, January 1st: Some feel that the Federal Government’s effort to modify loans is Adding to Housing Woes. They argue that allowing homeowners to remain in their homes by modifying their mortgage has been counterproductive. Homeowners have their hopes falsely raised and waste money trying to keep a home they simply cannot afford before finally defaulting on the modified mortgage.

So that’s the word on The Street as the real estate markets move into 2010. The headlines seem to have a negative bias, highlighting concerning data, unsuccessful recovery programs, and the unfortunate reality of many Americans struggling. We’ll have to see how it all plays out here in Greater Hartford. And as always we’ll hope for the best and plan for the worst.

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