COMMENTARY: Why Many U.S. Housing Markets Continue to Weaken
In the first quarter of this year, the Case-Schiller U.S. National Price Index was 2% higher than in the same quarter a year earlier. Many housing market analysts concluded from this statistic that the housing market was stabilizing.
Let's see whether the really significant numbers support such a conclusion.Home Sales Are Now Tanking
Each week, the Mortgage Bankers Association (MBA) releases a "seasonally-adjusted" index of mortgage loan applications. Five weeks after the April 30 expiration of the first-time buyer tax credit, the unadjusted figure for purchase loan applications was down 49%. The figure for the first week in June was 44% lower than the year earlier number. In fact, the unadjusted index has been lower than the year earlier figure throughout 2010. It appears certain that the tax credit has indeed pulled home sales from the future.
Until the tax credit expired, analysts had been claiming that the market was strengthening. After all, the Case-Schiller 20-city home price index had finally turned positive on a year-over-year basis. Core Logic's Home Price Index (HPI) had shown the same result for February and March.
Even cautious data providers such as MDA DataQuick were pointing out that in April, the median sale price for homes sold in the nine-county San Francisco Bay area was up 22% from a year earlier. Median prices had actually been higher on a year over year basis for the previous six months as well. In San Francisco, the median price had risen from $628,000 in April 2009 to $692,000 a year later.
Sounds like a strengthening market in the Bay area, doesn't it? Take the 94132 zip code in San Francisco. The median sale price was $720,000 in April, 75% higher than April 2009.
When you look at the details, however, the picture is quite different. A review of this zip code on trulia.com shows that 87 of the 120 listings on June 9 were foreclosures. Although we cannot tell how many of these April sales were foreclosures, MDA DataQuick reported that 30% of all sales in the Bay area were foreclosures and Radar Logic found that 31% of all San Francisco sales in February were foreclosed homes. Clearly, a majority of the sales in this zip code were either foreclosures or short sales and that is also the case for the rest of San Francisco.
With such a high percentage of "distressed sales" in San Francisco, you might be surprised that the median sales price has been rising over the last year. Here is why. As early as July 2009, an important study from zillow.com had reported that 30% of all foreclosure sales nationwide in the previous month were houses in the top third tier of home values in their local market, up from only 16% three years earlier. Foreclosures had steadily moved up from lower priced homes to expensive ones. If you take a look at San Francisco foreclosed properties on realtytrac.com, you will see that this is certainly the case with San Francisco foreclosures. The website is littered with homes that have mortgages of $500,000 and more.The Percentage of Homes Sold for a Loss Hits a New High
Among its many real estate market reports, zillow.com issues a report on homes that are sold for a loss. The latest report for April is based on 159,000 actual sales of homes that had been listed on zillow. The website takes the selling price of a house and then compares it to the price for which it had sold in the previous property transfer. Thus the figure has nothing to do with median prices which nearly everyone now focuses on.
What the report reveals is that the percentage of houses which were sold at a loss by homeowners was only 7% at the beginning of 2007. This percentage dipped briefly in the first half of 2009, but has risen steadily since then to a new nationwide high of 30% at the end of March. The April figure dropped only slightly to 28%. This figure does not include foreclosed homes which were sold (or any non-arms length transactions).
The percentage of home sold for a loss is substantially higher than reported figures for short sales. That's mainly because some home sellers who had provided a substantial down payment at the time of purchase may have had an outstanding mortgage balance which was less than the sale price. Thus they would not have needed to do a short sale even though their selling price was less than what they had paid for it
Nearly 49% of all homes sold in Atlanta in April were sold at a loss. The figure is 47% for Miami, 40% for Las Vegas, 35% for San Diego, and 30% for Chicago. For those of you who think the housing collapse was confined mainly to the four states of California, Florida, Nevada and Arizona, the figure is 35% for Toledo, 36% for Minneapolis, 24% for St. Louis, and 21% for Seattle.
The number is a surprisingly low 18% for the New York metro area. But that is due to the collapse of sales volume throughout the entire New York metro area in the past six months largely because sellers have refused to drop their asking price.Most Sellers Are Reluctant to Lower Their Asking Price
Trulia.com was the first website to track what percentage of home sellers had dropped their listing price since posting the house on their site. In April 2009, trulia reported that 27% of all listings had lowered their asking price. A year later, that figure had declined to 20%. The CEO of Trulia described the change in this way: "We're beginning to see early signs of stabilization in the housing market." Is that really what it indicates?
A mid-April Gallup Poll published in the Washington Business Journal announced that 34% of respondents thought that home prices would rise in the next year. Only 23% of them believed that prices would fall. For respondents on both the east and west coasts, 39% thought that prices would climb.
This poll seemed to show that optimism about the housing market was returning to a growing number of Americans. A great influence in this change was the many real estate analysts who had confidently been announcing over the past six months that housing was "bottoming." If home prices were likely to be higher a year from now, why would a seller drop the listing price?
The May report issued by trulia revealed that the number of listings on their website with price reductions through the end of April had increased to 22%.
Twelve of the fifty cities studied showed more than 30% of their listings with price cuts including Minneapolis, Dallas, Jacksonville, Boston and Nashville.
Regardless of whether the percentage of homes with price cuts is 27% or 22%, the one clear conclusion to draw is that the great majority of home sellers have been very reluctant to lower their asking price.
Most sellers have probably not seen a less-widely reported study by the online brokerage firm ziprealty.com. On May 17, the Wall Street Journal posted this revealing report online which showed the percentage of sellers listing with ziprealty in 27 major metros who had lowered their asking price in the past 18 months. For all 27 metros, the average percentage of home sellers who had dropped their listing price was more than 41%. This means that more than 40% of the homes listed on ziprealty in these major metros had not sold as of April 30 in spite of dropping their listing price at least once in the past 18 months.Soaring House Rental Listings Offer an Enticing Alternative to Buying
A continuing problem for home sellers throughout the country is the attractiveness of renting a house for potential buyers.
As early as 2005, apartment landlords were facing heavy competition for renters from investors and speculators who had purchased houses during the bubble years. An article in an August 2005 issue of the Wall Street Journal entitled "Speculators Push Rents Down" pointed out that a glut of investor-owned properties was dragging rents down and creating a "shadow supply of rental units that doesn't show up in traditional rental market measures." This was a key factor that caused the vacancy rate for all rental properties to climb to record levels of more than 10%.
Even before the subprime market collapsed in the spring of 2007, the Census Bureau reported that the number of vacant homes for sale had soared to a record 2.1 million. The chart below, published by the widely-followed blog, Calculated Risk
, in February 2010, puts this growth in rental vacancies in a long-term perspective.
By early 2008, metros which had experienced a severe speculative bubble faced a worsening glut of rental houses. Take Phoenix, for example. A February 2008 article in the Arizona Republic observed that nearly 13% of Phoenix area single-family homes had been registered as rentals. Local real agents suspected that the actual figure was much higher because many landlords did not register in order to obtain the homestead tax breaks available to owner-occupied houses.
A local real estate investment professional noted that because the rent for most houses in Phoenix was only half the cost of owning that same home, apartment dwellers found it very attractive to move into a rental house. This was a very ominous sign for the housing market.
Another key factor which has added to the glut of vacant houses for rent is the soaring number of multi-generational households stemming from the severe recession and loss of millions of jobs.
In March of this year, the Pew Research Center published a study which reported that roughly 49 million people were living in households with two or more adult generations from the same family at the end of 2008. This number had risen by 3.6 million individuals since the beginning of 2006. In 1980, that figure was a mere 28 million.
Karl Case, co-creator of the Case-Schiller home price index, explained in an interview for a USA Today article published in May 2010 that "It's not just that people are not buying homes. They're not renting either, a sign that more people are squeezing into one unit."
A Wall Street Journal
article published in December 2009 aptly illustrates the problem faced by current home sellers. Entitled "American Dream 2: Default Then Rent," it describes the plight of those who bought during the bubble years in the town of Palmdale, California.
The author pointed out that many of these underwater homeowners are leaving behind their homes and huge mortgages and renting a nearby house. One couple bought a nice home in Palmdale in 2004 with a readily-available no-down-payment loan. They were paying $3,700 a month on their $430,000 mortgage as they watched the house's value plunge to less than $200,000 by 2009.
After trying to modify their mortgage, the couple was faced with a quandary like millions of underwater homeowners around the country. They had found a larger house than theirs just up the street whose rent was only $2,195. Because California was a non-recourse state, the lender could not go after them for the shortfall if they decided to default. But their credit would be hurt for years and they feared that their friends and neighbors might "ostracize" them.
The couple finally decided to stop paying on their mortgage and move into the rental house. A few months later, they sold their home in a short sale for $195,000 which the bank decided to accept to settle the mortgage debt.
A neighbor of theirs made a similar move, going from a $4,800 mortgage payment to a monthly rent of only $2,200. Countless other underwater owners are now opting to make the same change. By switching to a rental home, the reduction in housing cost is proving too great to resist.
With potential home buyers now fleeing the market in droves, sellers extremely reluctant to reduce their asking price, and renting a house still a cheaper alternative to buying in just about every major metro area, the outlook for home prices is pretty grim.