Every year since 2007 there have been folks calling the bottom. And every year they've been wrong. The WSJ has been particularly enthusiastic in this pursuit. Yet in order to consider that there's a "recovery" taking place, the financial status of the American family as well as these three charts must be ignored. This is exactly what's happening.
"Traditional" buyers and sellers exist in one market while underwater or unemployed owners, banks, and investors exist, for the most part, in another.
So buyers and sellers are taking note. What is currently being touted as the "bottom" and the "recovery"--whatever they are-- may be all there is. In Charlottesville Albemarle, which have suffered big drops in sales and prices since the bubble's burst (graphs, below), informed sellers with equity are hopping off the proverbial fence and listing. And buyers who see what they need, or like, are inking deals.
Of course, in certain segments prices aren't finished declining or hitting "bottom." And true "recovery"--a return to the way things used to be--isn't possible. But what experts and amateurs expected, hoped, and feared would happen, just didn't. For today's buyers and sellers, the past and the "other" market matter less than ever.
Below is a look at persistent housing market myths and the current "reality" as selling season 2012 comes to a close.
Myth #1 - When the Shadow Inventory is released on the market, home prices are going to plummet.
There may be nearly 10 Million homes in the US in distress and owned by banks, which need to be relisted and marked to market value. The optimistic WSJ hopes the number is far lower, asserts that there will be tornados but not floods, and that low levels of new construction will help the problem.
In Charlottesville, the number is absolutely unknown and possibly significant (podcast: listen to minutes 18-28).
Analyst Josh Brown, The Reformed Broker, explains why the shadow inventory means little to today's market:
[T]he Fed is making it so the banks can keep millions of foreclosed properties on their books forever and never mark them down. Elsewhere, there's also been some accounting changes that allow the banks to mark-to-make-believe to some extent....They put the banks in a position of flexibility in terms of pricing and the timing of when they sell them off.The good news: Whatever the number, keeping all that junk off the market has preserved equity for some folks, and has helped prevent the United States from sinking into a lasting Depression.
There are buyers for foreclosed homes - Wall Street is raising billions of dollars in new vehicles to scoop them up. Hedge funds are buying them up as well.
The typical housing permabear [doesn't] get it - [the inventory] won't be coming to market at all. At least not until such time as the banks want to offer it. And now there are hungry buyers, negating that aforementioned stale thesis even further. [emphasis added]
And the result of this is:
Myth #2 - The United States has hit a housing "bottom" and is now in a housing "recovery."
Reality: Yes, the exclusions make it look like we are in a housing recovery. Fake, engineered, manipulated--whatever it can be called, it's the current market.
Read this. And this.
Click on image for larger version.
More data on the "bifurcated market": to call current conditions the "bottom" or the "recovery," one ignores, locally and nationally, all the negative equity numbers and effective negative equity numbers and fails to recognize that even many of 2010's buyers took a hit.
There are segments of, and buyers and sellers in, this market who are permanently hobbled, at all price points. Many of these folks won't buy again for years, if ever. Included among the walking wounded are the most spectacular demises, ever, in Charlottesville: Patricia Kluge; and Halsey Minor; and failed development and developers of Biscuit Run; and failed Western Albemarle subdivisions; and failed development Bundoran Farm.
Without the shadow inventory, and all those underwater "owners" who can't move up, there are fewer houses available.
Which leads to:
Myth #3 - Lower Inventory = A Healthy Market With Higher Prices.
Reality: True and False. It's not a "healthy" market. But prices will indeed rise and have already in certain segments.
This blog started to cover the lower inventory issue back in October 2011. The WSJ reported the national trend that month. It is an ongoing phenom. Here's a plethora of charts on low inventory from the Matrix. Lower inventory may in certain sectors drive up prices and lead to multiple offers. See this post from Twin Cities Real Estate Blog.
But, again, for current buyers and sellers, the "health" of the overall market doesn't matter. The important point is the rising prices.
Myth #4 - The Charlottesville Albemarle real estate market is "protected."
Reality: From the days of Thomas Jefferson to 2006, True. 2007-2011, False.
2012 onward is ???. For homes priced between $250k-$575k and proximal to the center of the City, and easy access to UVA, the answer may well be True. And now that the recent unpleasantness is resolving (though not quite over), things are looking forward. That old "protected" mantra referred to the buffer offered by UVA, defense, biotech, the hospitals, insurance company. It was annihilated for years. But now...?
The City of Charlottesville is the flower of Central Virginia, and Albemarle County is its handmaiden in ease of access. There's a lot of progress here that looks like economic health: A major new outdoor shopping mall (though it ironically comes just as the death-knell sounds for brick-and-mortar stores); a Wegman's and Fresh Market supermarkets; a luxury hotel may finally be completed on the historic Downtown Mall; the (ok, controversial) Western Bypass may be built; and there may be more biotech growth. Nothing to sneeze at.
Reality: True. Albemarle County actually is exceptional.
And not just for the conservation tax credits for millionaire faux-farmers. Scroll through the St. Louis Fed pdf "The Afermath of the Housing Bubble" linked here, notice, beginning on pg. 27, what happens to Albemarle County. The foreclosure rate is remaining consistently low.
Myth #6 - At some point, sales are going to return to the high numbers they were at the peak of the bubble.
Reality: False. But they don't need to jump for prices to go up. See #3 and #7.
Despite 100's and 100's and 100's of new units of all types being built in Charlottesville and Albemarle County, and thousands of new citizens, sales are not going to keep climbing. Besides declining prices and negative equity, there's the issue of the sluggish American economy, as well as the issues of the disappearance of the short term buyer and the curtailing of the move-up buyer.
But sales don't need to return to those levels to have a "stabilizing" market. This year's sales are up:
Sales increases year-over-year from RealCentralVA:
Sold in Albemarle County
1/1/11 – 6/30/11 – 588
1/1/12 – 6/30/12 – 654 — Up 11%
Sold in City of Charlottesville
1/1/11 – 6/30/11 – 212
1/1/12 – 6/30/12 – 252 — Up 19%
Myth #7 : Prices plunged, but now they're going to shoot back up.
Reality: False. It could be another decade or so. "Incremental" and "seasonal" are the watchwords here.
Buyers still are reluctant to pay for the financial mistakes of others. Despite the coming job opportunities mentioned in #4, the income of local folks just isn't shifting. Enough.
At the moment there has been a small increase in prices. "Move-ups" are back: after waiting for prices to stop plunging, those who wanted larger homes are transacting. Additionally, the local cost of new construction is rising; and new construction is turning into the choice of many buyers who know they will be there long-term and/or desire "going green." But the "seasonal component" must be kept in mind, where prices go up in the warm months and will decline again for Fall and Winter.
Longer term: In certain sectors--such as close-in and move-in ready--prices may continue an incremental rise. But for the surrounding counties; old and unimproved homes; those priced under $200k; and above $600k; --these prices are not finished declining. The $3M+ market is standing still. At the lower and higher ends of the family market, the problem is the same: lack of buyer capital, but for different reasons.
Peaks: Here's a recap of pricing, as an example of how far prices have dropped. This is for Q1's:
Those are some big drops.
In this age of the "personal," where folks are FBing and Tweeting and Pinning and Google+ing, decisions are more idiosyncratic than ever. It's been a hard landing. The loss of equity and, worse, homes, isn't finished locally or nationally. Charlottesville and Albemarle will remain a fragmented market for some time to come, with a distinct divide between the haves and have-nots. And the local is part of the national where 95% of new mortgages are owned or backed by the US Government. There's still lots of trouble--foreclosure starts are rising again.
But for those who have been waiting to buy and waiting to sell, there's more clarity than ever. The 30 year fixed rate mortgage is currently at 3.6% (Aug. 15). Buyers who have waited for years and are well-cushioned financially aren't looking at a house as an investment but as a home. For those with stable jobs and a 7-10 year event horizon plus a capacity to absorb price wobbles, buying looks attractive. And there are many equity sellers getting off the fence, realizing that they'll never get that dream of the missed bubble price: but acknowledging that moving on or moving up and getting things settled has a value greater than money.
Wahoowa! It's going to be an exciting year here.
*There's always the chance of a Black Swan. Or something lesser to cause reversion to 2011.
**Additionally, rising mortgage rates could cause home prices to drop again. There's only so much the strapped consumer can afford. The Fed isn't expected to change its ZIRP practices until 2015. While there are other issues that impact mortgage rates, the consumer can only afford so much.
***A Romney Administration could negatively impact housing. The Obama Admin is a known quantity, at least.
****A huge headwind in most housing markets is the lack of younger buyers. College Bubble etc.
******This post is an observation of market conditions at the moment. This post is not investment advice, particularly since this blog does not view a consumable that requires constant upkeep and tax payments as an "investment."
A Recap of the First Seven Months of 2012: RealCentralVA
The Obama Administration Housing Scorecard: HUD
Buying Beats Renting in Many Cities: Zillow
The Break-Even Horizon in Charlottesville is 4.2 Years [Really?]: Zillow
The Economic Impact of An Increase in Home Prices: CalculatedRisk
Reliable Sources Analyzing the National and World Economics
The Big Picture
The Automatic Earth