Debate Rages about Real Estate's Future

Posted by: Prashant Gopal on September 18, 2009

Such prominent analysts as Meredith Whitney are raising alarms about the prospect of a deepening slump despite recent signs of improvement in home sales, prices, construction, and inventory levels.

Just as optimists see signs of life in the market, it’s just as easy to point to the danger signs.

As my colleague Chris Palmeri wrote yesterday, even though total housing starts, including apartments, rose slightly last month, single-family home starts, which make up most of the market, actually fell for the first time since January. The Mortgage Bankers Association’s index of loan applications for the week ending Sept. 11 dropped 8.6% on a seasonally-adjusted basis.

And the widely watched S&P/Case-Shiller 20-city home price index, which cheered Wall Street with its back-to-back increases in May and June — the first month-over-month jumps since 2006 — only seemed to spark more debate.

Daniel Alpert, Managing Partner at Manhattan boutique investment bank Westwood Capital, says that home prices could fall another 14% by the time the slump is over.

To understand why, it helps to divide the metros into two separate categories, rather than to lump all of them together, he argues. According to his analysis, home prices in 13 of the 20 metros included in the Case Shiller index could continue to drop: Denver, Washington D.C., Atlanta, Chicago, Boston, Detroit, Minneapolis, Charlotte, New York, Cleveland, Portland, Texas and Seattle. The former bubble markets where prices fell early and fast are likely closer to the bottom, he said. They are: Phoenix, Los Angeles, San Diego, San Francisco, Miami, Tampa, and Las Vegas.

In the seven bubble markets, where foreclosures have already pulled down prices to attractive levels, sales soared 29% in the second quarter compared to the same period last year. On the other hand, home sales in the 13 metros, which saw neither huge price runups during the boom nor massive declines afterward, dropped 22%.

Home prices across the country were artificially boosted during the boom by creative mortgage products and easy credit. And now prices in markets such as New York and Seattle need to fall some more to reach historic affordability levels, he said.

“It was very easy to look at housing crisis nationally for two years,” Alpert said. “The housing crisis — at first —looked like it was everywhere. As it bottomed out, you have to look at individual markets again.”

Reader Comments

Squeezebox

September 18, 2009 12:29 PM

If you want to predict the housing market for a given area, look at the job market for the area. Areas that are hiring will rise. Areas that are downsizing will plummet. That explains Cleveland perfectly.

RRG

September 18, 2009 3:30 PM

" you have to look at individual markets again"

Yes, absolutely,even to the community level.
What is happening on the ground is not the same as what`s been presented.

The information and mis-information being presented and then regurgitated collectively paints too broad of a stroke across Our Nation and hurts the entire market.

The use of 20 cities as a gauge leaves too many cities
unaccounted for.

Bill

September 18, 2009 3:53 PM

The first bubble burst, but we have yet to see the "Real Estate Crater".... When all of the Baby Boomers finally retire, they're going to want to sell their big homes, and there won't be any buyers for them, at least not at the current prices.... What we're going to see in the next 3-5 years is a huge drop in Real Estate prices, which make the current situation look like CandyLand. Mark my words, it isn't going to be pretty, and to buy a home in this market is insane... Patience is a virtue, and until current prices come down about 70% more from current levels you shouldn't even consider buying a home.... Just take a look at the glut of homes in the 700K + market... They're not moving at all... If you're a first time home buyer, you need to rent an apartment until this situation gets to the bottom... If you buy now, you're setting yourself up for what happened in the past 3 years, as your home's value will be less than what you paid for it.

noname

September 18, 2009 3:54 PM

Thankfully, some data was provided in the link to understand Daniel’s assertion that there could be an additional price drop in the 13 markets. A cursory review of this data quickly suggests that the 13 markets may actually be more fairly priced than the “bubble 7”. If home values in 1997 are indexed to 100 in both markets then the 220% appreciation in the “bubble 7” markets (1997-2006) followed by the 2006-2009 decline of 44% would leave a current index value of 180. Whereas, the 13 markets that Daniel claims are still at risk appreciated would have a current index value of 163 (113% increase followed by a 22% decline); indicating that vs. 1997 the 13 markets are actually more fairly priced. The article and the attachment of course ignore this comparison and other factors such as psychology, employment, rentals, etc to divine their conclusion. Reporting poorly worked up data from some suit on Wall Street to drive either euphoria or panic is par for the course for financial “news” outlets.

Gideon

September 18, 2009 9:09 PM

I live in orangecounty Ca
I only hear people losing jobs so where are people going to have money to buy homes and even people with money to buy are fearful of decreased income and decreasing property value.
No job no money to pay mortgage
I think at lease two more years of lower property prices.
Where is the next driver of economy coming from ... Internet? No
liar loans? No ... Government bailout and free money? No
It is going to get worse before it gets better.

GMonkey

September 19, 2009 1:15 PM

The markets that are showing signs of recovery are entirely dependant on their Foreclosure inventory. Once the inventory of foreclosures decline so will the number of sales. This should be the time when SFR start ups will increase.

Mr Pepper

September 19, 2009 7:54 PM

Let us also not forget that a lot of people are quietly hoarding case, both private individuals and investors. With interest rates at historica lows (and destined to remain so for an 'extended period') people will sooner or later start looking at piling into various asset classes, including property. The big investment companies and hedge funds will lead the way, along with private speculators. Then come the surge of 'normal' investors. This is as much a waiting game (second guessing the market) as it is about fundamental supply and demand, and the real debacle following Lehman's collapse.

JKL

September 21, 2009 6:56 AM

Ok, enough dreaming the American Dream. It´s time people wake up to the reality that the dream was sustained on massive debt. All the "wealth" was just borrowed. Now it´s time to pay up. Since the waste was just that, the means for producing real value have shrunk dramatically. This means: it is very hard (impossible, actually) to produce excess wealth that allows to maintain past living standards AND pay back debt. Living standards will plunge. Either by responsibly working, saving and paying high taxes. Or by just inflating prices and debasing the currency. There is no shortcut out of the mess. So, wake up and stop dreaming. With plunging living standards, consumption will fall, salaries will fall and... yes, asset prices will also fall. In real terms, I mean. Of course, nominal prices could go the other direction with inflation. Ignoring this would be yet another dream!

Stephen

September 23, 2009 12:50 AM

Real estate runs on fraud and always has. That element is now being permanently removed and without it, I'm betting my bottom dollar, that real estate is permanently dead.

Wes

September 23, 2009 8:15 AM

There is no concrete evidence that housing is getting better, and I believe it's getting worse. This is a typical "dead-cat" bounce. There are way too many buyers with expectations that housing will soon again be at 2005 levels, hence the "buy it now as it's the opportunity of a lifetime" ads on the Internet and television. Didn't we hear the same garbage in 2005? According to the media shills, it was then "buy now or be priced out forever" and it's the same again.

Until the middle class understands that housing is not an investment but rather a store of wealth inflation hedge, there will be no housing recovery.

Bill

September 24, 2009 11:29 AM

The government is now using the FHA to guarantee practically no-money-down mortgages to park bench bums to buy the still-overpriced real estate. You ain't seen nothin' yet.

Lawrence

September 26, 2009 10:10 PM

The government needs people to avail of these programs for them to say that their programs work. I just don't know if the government offers these programs to high priced real estate such as [url="http://www.trailsofhorseshoebay.com]Horseshoe Bay Real Estate[/url]

iwishihadabrain

October 22, 2009 7:16 PM

More than a fifth of the homes in my neighborhood stand empty right now. A year and a half ago this wasn't so. Jobs are still being lost. Not good. I don't think its worth the effort to wonder when things will come back. Too busy just trying to hold my own.
Las Vegas

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About

BusinessWeek editors Chris Palmeri, Prashant Gopal and Peter Coy chronicle the highs and lows of the housing and mortgage markets on their Hot Property blog. In print and online, the Hot Property team first wrote about the potential downside of lenders pushing riskier, "option ARM" mortgages and the rise in mortgage fraud back in 2005—well ahead of many other media outlets. In 2008, Hot Property bloggers finished #1 in a ranking of the world's top 100 "most powerful property people" by the British real estate website Global edge. Hot Property was named among the 25 most influential real estate blogs of 2007 by Inman News.

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