Housing Recovery: Where Will Demand Come From?

If housing is to recover, we need buyers, and lots of them, to soak up the existing inventory. Or I guess we could just keep bulldozing them into the ground.

Anyway, this from Zillow.com:

U.S. home values continued to slide for the ninth consecutive quarter, declining 14.2 percent from a year ago, and falling 21.8 percent since the market peak in 2006. Additionally, one-fifth (21.9%) of all homeowners in the United States is in negative equity, and one in five homes sold in the past 12 months was a foreclosure.

So, homes are more affordable, good news right? Dig deeper folks.

From the Big Picture:

About a third of homes have no mortgages whatsoever. The unencumbered properties improve the homeowners equity data from the Fed’s Flow of Funds report. Add in 33% of homes with 100% equity and it skews the data. The total looks better.

before you say “So What?” co the following: We know that those homeowners that do not have mortgages — i.e., 100% equity — cannot default. So if we want to understand the potential further mischief real estate land can cause, it is the mortgaged properties we should be watching. Back out the third of home owners that have no mortgage — the 33% of homes with 100% equity — and the Fed’s measure of 43% net equity drops precipitously.

What is the number then? 67% of homes with mortgages have an equity of 15%. The worse number? 37% of the homes with mortgages are underwater.

Has anyone been able to secure a mortgage today on a new purchase for under 20% downpayment? Simply put, when you subtract broker commissions 2%-5%, it is safe to say selling home "a" and buying home "b" with the proceeds are over unless the buyer is doing a significant trade down or putting up near 10% of the new purchase price themselves.

This rolling of equity into a new purchase was a huge part of the bubble in housing as prices appreciated. It is gone for the most part now.

Here is the dilemma. Falling home prices are making homes more affordable, of that there is no argument. The problem is that falling home prices also sap equity from those sellers looking to use it to afford the next purchase. When you add tighter lending and higher down payment requirements you further restrict demand as you eliminate more marginal buyers from the pool.

Now, let's add the 2 million additional homes estimated to be foreclosed on this year, and another near 3 million people to become unemployed as the unemployment rate creeps to the 10.5% level now estimated. The pool of potential homes buyers? It is becoming a puddle...

"BUT", you say, "What about the mortgage free homes? They may sell and the proceeds used to buy new ones". What about that?

From Realtor.com

According to an analysis of census information by USA Today, there are 123 areas of the country where 40 percent or more of home owners don’t have a mortgage.

Many of those areas also never had any sort of boom in prices, either because they are in declining areas that have suffered job losses and dwindling population or because they are thriving retirement communities.

Cities with the highest percentage of owner-occupied properties that are mortgage free:

• Bluefield, W. Va.: 57 percent
• Sebring, Fla.: 56 percent
• Odessa, Texas: 54 percent
• McAllen-Edinburg-Mission, Texas: 54 percent
• Weirton, W.Va.-Steubenville, Ohio: 53 percent

Unless anyone thinks they can convince me why/how economically depressed residents of Odessa, TX or retirees in Sebring, Fla. are going to pack up and move to Southern California and buy enough homes to soak up huge inventories, let's just put that argument to bed now.

Housing busts take years to work through, not months or a couple of quarters. Please keep that in mind when using housing in projections....we are nowhere near done with this yet.

Comments

[Jimmy K:]

Todd- great article. Well said, very easy for everyone to understand... things are going to get much worse in RE by the end of this year...

May 07 07:37 AM

[abetterplace:]

Take a 25% figure of mortgages underwater.
Take a 10% unemployment figure. Would that mean that 2.5% of underwater mortgages are at risk? No.
How many of the 10% are renters? How many of the 10% have a spouse or other relative that will help maintain that mortgage until employed again? How many will get odd jobs or have a little stash to back them up, along with unemployment benefits?
There are lots of unknown variables. Most people will strive to stay in their home for many reasons. Three in particular.
1. To protect their credit. 2. To avoid the trauma of losing their home and having to move. 3. A man's home is his castle.

May 07 07:43 AM

[Mad Hedge F...:]

Great question. The real estate tracking firm Zillow.com estimates that 30% of all US homes are now underwater on their mortgages, equivalent to 27 million homes. There is a “shadow inventory” of a further 30 million homeowners who want to sell their houses on the any improvement in prices. Newly tightened lending criteria have permanently knocked another 10 million potential buyers from the market. Some five million of the nation’s 90 million houses are either for sale, in foreclosure, or held in bank inventories. I have a question. With 72 million on the sell side, who is going to power the much heralded rebound in prices? It could be a veeery long wait. I realize there is a lot of double counting here, but you get my meaning. It all bodes for an “L” shaped recovery in the real estate market, which means no recovery. Keep that rental. No principal risk, no property taxes, and just a phone call unclogs the toilet.

May 07 08:38 AM

[markg:]

It is entirely possible to buy a house with less than 20% down. I just did it. And I put 5% down. I have good, (actually great) credit, a good job with stable history, and some other assets. But, and this is the big one, even with PMI my after tax payment is equal or less than renting the same value house. And my payment to income ratio is good. In other words, I bought well within my means. Yea I know, what a weird concept.

May 07 09:33 AM

[LouieK:]

markg

How about costs such as depreciation on that home? Figure 1% to 3% on average depending on age. And just because you give yourself the job of managing the home doesn't mean there exists no cost to you for doing it. Rents are almost always lower than the costs of ownership. It is the appreciation that the homeowner looks to gain from ownership for the most part.

May 07 10:08 AM

[2houndz:]

Louie - Where can I claim depreciation costs on a home? Depreciation costs aren't even real costs, so I'm not buying your argument.
I have always saved money every time I've moved from renting to ownership. I agree that a homeowner needs to have money set aside for repairs, but in multiple cases for me, the overall costs were lower than renting.
Hopefully Markg will be smarter than I was and will stay put. I move around a lot (due to job assignments) and because of that I have been hammered in costs a few times. If I had stayed in the first nice house I could afford, there's no question that I would be better off than renting.

May 07 10:50 AM

[henarl:]

Twice as many sales of existing foreclosed homes at prices 40 to 50% below what it costs to build an equivalent new home does not make a housing recovery. It will not help the homebuilding industry when the inventory of those cheap existing homes runs out and people still can't afford to buy a much more expensive new home. Only new job creation will result in a housing recovery. Either that or the young middle class buyers will have to settle for a much lesser house than the suburban McMansions they have become used to.

May 07 10:51 AM

[2houndz:]

henarl - Well said. So where does that leave us with all the McMansions coming back on the market and/or into default as of late? Where I live, people are buying homes for $20-25K, spending 20K in fix up, and flipping them for $50K profit, but the $1MM second homes are just hitting the market for the first time.

Todd - here's another avenue to explore. I haven't seen much about the length of time a house can sit vacant before humidity and lack of maintenance destroy it. In places like AZ and SoCal that's a relatively long time, but here in the Southeast and probably the Northwest, it's not very long. Add to that the fact that homes seal up (for conservation reasons) better than ever before, and some products like the wood in window casings are not as durable as years past, and I'm concerned that we'll eventaully be tearing down homes because they are uninhabitable.

May 07 11:25 AM

[Bestsolutio...:]

As Einstein said,"The solution...make it simpler"
End all foreclosures by allowing ,the 85% that wish to stay in their homes and the other 15% that wish to purchase that portion of the over 8 million homes ,TO HAVE AFFORDABLE PAYMENTS.
This can be done within 120 days at a PROFIT to the taxpayers.
THE SIMPLER SOLUTION:
1. Modify all loans at 100% of fair market value.
What a hell of a stimulus gift to the banks!
2.Give a new mortgage with EXTREMELY LOW
AFFORDABLE PAYMENTS.What a hell of a stimulus to the comsumers.
"The Everybody Wins Plan" calls for a mortgage payment of
@ $475....per month....TOTAL P.I.T.I. for each $100,000
note amount!!!!!!!
And no new legislation required just tweek the
"Economic Recovery Act Oct 2008"
by removing age requirement and allowing 100%
FHA,HUD guarantee FDIC insured loans.!!
To get the total ,stupid details just let me know someone out there is reading this and promise to post it so it can be challenged or endorsed.I'll take the heat.I use Volcker,Shiller,Yunus ideas as a basis along with a low interest rate with a longer term.
BASILOVECCHIO

May 07 11:35 AM

[ain't no fo...:]

I have to fall on the side of renting. I rent a 2BR/2BA condo directly on a beach in FL (winter) for $1000/month for 7 months. It is furnished very nicely, and my rent includes electric and cable, and I rent a 2BR/2BA condo on a ski mountain in VT (summer) for $800/month the other 5 months. It too is nicely furnished and includes cable.

Everything I own fits in my car and I just moved back for the summer season in VT. It took two days and cost me about $200 for the entire trip - gas, tolls, one night in a motel.

I get the best seasons at both ends, and if I don't like the neighbors I simply don't come back to that same complex the next year.

I DON'T pay for water, sewer, maintenance/ condo management fees, property insurance, yard work, property taxes, or any other type of upkeep, and my investment hasn't lost 20-25% the past 3 years, and my bank hasn't threatened to foreclose on me, and I don't have to worry about my condo association going down the tubes.

If someone can tell me how I can be better off financially by owning a home or condo, I'm all ears.

May 07 12:05 PM

[mikebrah:]

Rent rates lag the real estate market. In other words, over the next year you will see dramatically lower rent rates.

MM

May 07 12:42 PM

[TLAWLER:]

In re "has anyone been able to secure a mortgage today on a new purchase for under a 20% down payment?" Well, actually the answer is at least 30% of folks buying homes -- that is the current share of fha financing. It is actually pretty easy to get a mortgage with a small down payment, provided you go through all the FHA hoops!

May 07 02:31 PM

[realold:]

Something for nothing? Who pays the bill? Me. Yuck.


On May 07 11:35 AM Bestsolutionsfl wrote:

> As Einstein said,"The solution...make it simpler"
> End all foreclosures by allowing ,the 85% that wish to stay in their
> homes and the other 15% that wish to purchase that portion of the
> over 8 million homes ,TO HAVE AFFORDABLE PAYMENTS.
> This can be done within 120 days at a PROFIT to the taxpayers.<br/>THE
> SIMPLER SOLUTION:
> 1. Modify all loans at 100% of fair market value.
> What a hell of a stimulus gift to the banks!
> 2.Give a new mortgage with EXTREMELY LOW
> AFFORDABLE PAYMENTS.What a hell of a stimulus to the comsumers.<br/>"The
> Everybody Wins Plan" calls for a mortgage payment of
> @ $475....per month....TOTAL P.I.T.I. for each $100,000
> note amount!!!!!!!
> And no new legislation required just tweek the
> "Economic Recovery Act Oct 2008"
> by removing age requirement and allowing 100%
> FHA,HUD guarantee FDIC insured loans.!!
> To get the total ,stupid details just let me know someone out there
> is reading this and promise to post it so it can be challenged or
> endorsed.I'll take the heat.I use Volcker,Shiller,Yunus ideas as
> a basis along with a low interest rate with a longer term.
> BASILOVECCHIO

May 07 02:36 PM

[Bestsolutio...:]

Dear REALOLD,
What bill?
The loan is paid back in full with interest and profit.
You need to understand that it is "too good to be true"
This is not a bailout,it is a loan with TERMS AND CONDITIONS
to pay it back with interest and profit.
The question should be,
"What can the government do with the $150 Billion profit"
Oh maybe PIMCO and BLACKROCK want it!!!!

May 07 03:37 PM

[yk__:]

Demand can come from investors, if the Government will agree to treat them as they would any commercial investor even if they buy single family homes, and if lenders will be willing to take any risk without Government guarantees. It is possible to rent out houses in many parts of the country and make money without relying on appreciation.

May 07 06:17 PM

[WY Broker:]

Just this week in Phoenix, REO's and others are receiving multiple offers, at prices a slight pop from a month ago. Mostly investors. And that should be concerning if there is a sudden pop in investor purchases of homes, it will lead to another brief bubble.

May 07 06:47 PM

[HardwoodFlo...:]

Todd, you bring up some good points but I'm not clear on the first part.

Inventories are down. Down to some pretty low levels. Sure there is a 9.5 Month supply but that supply is predicated on selling 4 million units this year. About half of a normal year which would be in that 6-8 million range.

Builds have been nearly stopped. I think we are in the 400-500 range. That is at or below the replacement level (teardowns etc) that we incur. So we are running a net zero on new housing.

Later on you do bring up a good point. About 50% of the people in this country don't have a mortgage. Of the other 50%- 75% have been in their home 10 years or more. With the drop in the real estate market is many of those people remodeling and figuring to stay in their houses. You might say- this proves my point where are the buyers going to come from.

Well we add about 3 million people to this country every year. That's approximately 1.5 million households. With builds at a net zero, we are seeping up inventory. Those houses that are being built are being built for people- who have bank approval.

The housing bust has been working it's way out for years. The new home build halt started in Jan of 06.

The biggest concern is employment and what I fear is that unless the banks start lending to businesses again so that they can put people back to work the problem, as you said, could be far from over- but not for the reasons you mention.

May 08 03:19 PM

[Northstar10000:]

Banks better not start lending again unless you really want this mess to unravel. It will be hard enough to dig out from the current debt and you want more added. sounds like more government foolishness to me. Wow we really are brain washed as a nation if we think the government has the answers. Sure lets everyone just borrow more.
Long the markets short our kids kind of investment. Brilliant.

May 09 02:27 AM