Real Estate – No Bottom Yet
by Hiland Doolittle
Part Two:
The National Association of Realtors reported that May Existing Sales rose 2.4% in May. The group projects annual sales of 4.75 million units in 2009. New construction sales are expected to top 350,000 this year and rise to 440,000 units in 2010.
When it comes to real estate and especially residential real estate, when Coldwell Banker speaks, everybody should listen. Recently, Jim Gillespie, CEO of Coldwell Banker Real Estate, reported that spring sales in 2009 were modest. While first homebuyers dominated the marketplace, “move-up” buyers, critical to the reduction of inflated inventory, were sorely lacking. Prior to the recession, American families were changing residences once every seven years. Since the recession began, people are staying in their current homes and lateral or upscale movement is simply not happening.
The current inventory of existing homes for sale consists of more than 3.8 million units. Even with an aggressive $8000 first homebuyer tax credit, it will take 9.6 months to sell this inventory. In addition to the current inventory, there are millions of Americans waiting to put homes on the market once prices show any signs of stabilization.
“Move-up” buyers face a host of problems. Demand continues to erode and with the erosion prices are tumbling downwards in freefall fashion. On July 2, 2009, Barclays Capital’s economist Michelle Meyer issued a strong warning.
After Standard & Poor’s/Case Schiller Home Price Index showed an 18.1% year-to-year decline, Meyer projected a 40% downturn in home values from their 2006 highs with the market bottom coming in late 2010, when foreclosures are expected to peak. By that time home prices will have fallen another 11% from current price levels. Lawrence Yun, the chief economist for the National Association of Realtors confirmed that foreclosures will top 2.5 million units in 2009.
Mortgage Crises
The real estate crisis is reflected in the May summary provided by The Mortgage Insurance Companies of America, a trade association group. According to the summary, 87,904 insured borrowers were at least 60 days late on payments in May. This marks an 8% increase over April numbers and a stunning 29% above year-over-year tallies.
In May, only 52,590 mortgages were brought current. The figure represents a 10% decrease since April and the fewest since January.
Purchasers with less than a 20% down payment must acquire mortgage insurance. Mortgage insurance protects the lender in the event of default. Mortgage insurance in force amounted to $922 billion in May.
Staggered by losses from subprime loans, the mortgage insurance companies have been pulling back. Lenders are now forced to request a 20% down payment to eliminate the need for mortgage insurance.
This increased down payment requirement is pressuring the demand side and especially first homebuyers. Even after Freddie Mac began to permit first homebuyers access to the $8000 tax credit at closing, many young families came up short.
Encouraged by the government, many home loan providers initiated mortgage modification programs late in 2008. These modifications were intended to keep borrowers in their homes and stave off foreclosure actions. Many of these programs expired in March and are now contributing to the high rate of defaults.
In a coinciding report, the Mortgage Bankers of America announced a reduction of $84 billion in projected mortgage originations for 2009. The reduction was attributed to fewer sales and significantly lower home values.
Coldwell Banker Plugs Incentives
The housing market is entrenched in the deepest downturn since The Great Depression. Housing values peaked in early 2006 and have steadily declined ever since. The Obama Administration endorsed the 2009 First Homebuyer tax credit, but Coldwell Banker CEO Gillespie thinks a broader incentive is necessary.
“Congress is focusing on the foreclosure problem, which is a good thing, but they need to focus on the demand side,” said Gillespie, a strong supporter of the new $15,000 tax credit that is presently before Congress.
The 2009 first homebuyer bill served a purpose but had limitations such as the first homebuyer stipulation and income levels. The new proposal would have no income limitations and all homebuyers would be eli9gible.
David Kittle, Chairman of the Mortgage Bankers Association, commented on the proposed tax credit; “Stimulating the housing market is one of the best ways Congress can help accelerate the recovery of our national economy.” Enhancing this credit would help to stoke the economic engine at a key point in our recovery.”
Naturally the new bill is supported and recommended by homebuilders and realtors alike.
Seven Crippling Factors
To mount a recovery, the real estate market must correct seven negative factors:
- Unemployment
- Tight Credit
- Consumer Confidence
- Price Pressure
- Short & Foreclosure Sales
- Appraisal Revisions
- Interest Rates
Part Three of our real estate series will delve into remedies for each of these seven components of the real estate recovery.
Tags: 2009 Stimulus Package, Commercial Real Estate, depression, Economy, GDP, housing, interest rates, Real Estate, Real Estate Market, recession, Residential Real Estate, Stimulus Plan, unemployment, US NonFarm Payrolls, US Unemployment
About the Author - Hiland Doolittle
Hiland is a professional writer with extensive entrepreneurial experience. He is a graduate of St. George’s School Newport, RI and the State University of New York at Albany where he majored in history. He has been active in the real estate business for 30 years and has founded and sold several businesses.
Hiland currently writes for several financial sites and is a published author of the novel The Last Parade. He has recently completed a manuscript for a children’s book entitled Sami and The Minnow Man.
