Any parent who has ever been on a trip with a child knows the all too frequent question of “Are we there yet?” That question is no longer exclusively relegated to children on trips—it is now the mantra of homeowners and prospective homebuyers across the country. So, in terms of home prices, are we there yet—at the bottom, that is? In one word, no. First the caveats. When discussing home prices everyone needs to be reminded that there is no such thing as a National Real Estate Market. All real estate is local in nature and responds to the supply and demand in each respective market. Even within a city, price changes impacting each and every home are different at the same point in time depending on neighborhood, price range, product type and specific location. Nevertheless, we will still address a national price. So how much have home prices declined? The answer to that depends on which source is utilized. The National Association of REALTORS® (NAR- of which I am a member) shows the median home price decline of 9.5 percent from August 2007 to August 2008. That is an accelerating drop from the 7.1 percent decline from July 2007 to July 2008. The Case-Shiller Home Price Indices indicate a 16.3 percent decline from July 2007 to July 2008 for the 20-city composite, and a 15.4 percent decline on a national basis from the second quarter of 2007 to the same period in 2008. The Office of Federal Housing Enterprise Oversight (OFHEO) estimates that home prices declined 4.8 percent in the second quarter of 2008 from the same period in 2007. The difference is that each source has a different dataset used to generate their statistics. NAR bases its data on a sample of multiple listing services across the US. NAR data, including national and state sales numbers and national and metropolitan area homes price and methodology can be seen at http://www.realtor.org/research/research/ehspage. OFHEO’s data are available monthly on a national, regional, state and Metropolitan Statistical Area basis at http://www.ofheo.gov/hpi.aspx. OFHEO uses a similar methodology to Case-Shiller in that repeat sales are weighted and used to calculate an index. The data, however, are all conforming loan data from Fannie Mae and Freddie Mac transactions. The Case-Shiller index is based on tracking of same-home resales over time. They make available a 20-city index and aggregation of those cites on a monthly basis through the parent company Standard & Poors. They also release a national estimate quarterly. http://www.standardsandpoors.com The latest Case-Shiller Home Price Indices covering data though July 2008 reveals significant differences in price changes across the 20 metropolitan statistical areas covered ranging from the smallest one-year price change of 1.8 percent reduction in Charlotte, North Carolina, to the largest decline in Las Vegas, Nevada, of 29.9 percent.
Real estate bubbles were not responsible for all of these declines. Look at Detroit, Michigan, for example, showing a decline of 26.6 percent from the high in December 2005 through July 2008. They never had a real estate bubble—but what they had was a massive reduction in the number of jobs in the Detroit market. Since August 1999, the Metropolitan Detroit area has gone from 874,000 jobs to 742,100—a decline of 15.1 percent or 131,900. That decimates a housing market and is vividly shown in the decline. Which do I like the best? Probably the Case-Shiller National Index. As a former appraiser, matched pairs are hard to beat in extracting trends and these pairs are the same homes selling at different times. Granted, OFHEO’s index is calculated in a similar measure, but since it is limited to just loans passing through Fannie and Freddie it misses much of the truly distressed real estate that had sub-prime, Alt A loans or other exotics such as option-payment ARM mortgages. All three indicate an accelerating rate of decline. Trends basically continue until something changes the trend. Thus, I believe that these trends will continue, and we have yet to reach bottom. Further examination into supply and demand, the cost availability of loans and the economy (read that as jobs) all provide further details of a declining economy. The news on jobs is bad. Really bad. Since January 1 this year, the US has lost 760,000 jobs. And when you consider we need to add roughly 100,000 new jobs per month just for the people entering the workforce for the first time, we are now short 1.6 million jobs. Just like housing price declines accelerating, so are job losses. Total jobs lost from August to September this year were 159,000 compared to a monthly average decline this year in the first eight months of 75,125. No jobs lost due to Hurricane Ike were included yet, so the number of lost jobs will likely rise even more in October. Other than retirees, most people need a job to buy a home. We continue to overbuild—much akin to doubling down on a losing black jack hand. In the past 12 months, the US has lost 519,000 jobs but at the same time has issued 1.35 million permits for dwelling units (single family, duplexes, condos, townhouses, coops and apartments). In a normal market and economy, you need 1.25 to 1.5 net new jobs per new dwelling unit. We have lost 2.6 jobs per new dwelling unit. So the hole we have to climb out of is getting deeper every month. We are not overbuilding everyplace, however. Laredo, Texas, has created 2,300 net new additional jobs in the past 12 months while only starting construction on 1,154 new dwellings. Ditto Anchorage, Alaska, which had posted 900 new jobs and 548 new dwelling units—for 1.64 new jobs per new dwelling. On the other end of the spectrum, for example, was Phoenix, Arizona which has lost 41,700 jobs in the past year while adding 33,167 new dwellings. A great source for easy access to building permits data and employment statistics for the US, States and all Metropolitan areas can be found at the Real Estate Center at Texas A&M University at: http://recenter.tamu.edu/. What are the implications on home values and future real estate lending of the just-passed Emergency Economic Stabilization Act of 2008? Unfortunately not very positive on real estate. In my opinion there is very little that will slow the fall of residential home values (in those markets where they are declining). These actions were more targeted at keeping banks solvent rather than making new loans. It is highly appropriate that the portion of the Act that allows either guarantees or outright purchases by the US Government or mortgage-related securities is known as the Troubled Asset Relief Program, (TARP) rather than the Commercial and Residential Property Economic Tourniquet (CARPET). Why so? Because you can hide a whole lot more dirt under a TARP than a CARPET, and that is exactly what Congress has done with this Act. While the TARP segment of the bill is $700 billion, congressional members added another $112 billion of pork projects and earmarks. To name just a few of the more than 2,300 earmarks swept under the TARP:
- $192 million rebate of excise taxes to US Virgin Island and Puerto Rican Rum produces
- $33 million reduced corporate taxes on income earned in American Samoa
- $478 million tax incentive to Hollywood movie and TV producers to do US productions in the next 10 years
- $2 million tax break to Oregon manufacturer of wooden toy arrows
- $49 million tax benefit to plaintiffs involved in the 1989 Exxon Valdez oil spill
- $100 million in tax breaks to racetrack owners in the next seven years
- 2008 repeal for 20 million tax payers from the alternative minimum tax
- Renewal and expansion of renewable energy incentives and alternative fuels
- Tariff relief to US wool fabric manufacturers, $148 million
- Fringe benefits to bicycle commuters from employers, $10 million
So where will home prices go? Down is the primary direction. Fewer jobs, a more stringent qualifying requirement for loans, lack of liquidity in the market place and ongoing over-construction, all point to sustained price declines. We still are facing more than two million foreclosures in the next 18 months. The primary question is whether we will be seeing the sequel to TARP a year from now.