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Most real estate experts believe the U.S. housing market is roaring back. Few have anything to negative to say about real estate. But what if they’re wrong?
Real estate analyst Keith Jurow, author of the Capital Preservation Real Estate Report, is warning that the real estate market is not as strong as it seems. Says Jurow: “I never bought into the idea that we had a recovery at all.” His research leads him to conclude that home prices will be heading lower.
Home-price growth continued to decline in June, according to the S&P/Case-Shiller index. Zillow chief economist Stan Humphries explains the struggles in the housing industry.
Why? Largely because home listings are going up but sale prices are not. Jurow discovered that as of June 2014, listings in Ft. Lauderdale increased by 89.3% year-over-year. In Miami, listings are up by 65.7% In Charlotte, N.C. they are up 51%, and in Riverside, Calif. they’re up 28.1%. In 10 major metro areas around the country, listings have increased. Jurow gets his data from Redfin.com and Raveis.com.
“Many people waited for prices to rise before putting their house on the market, and they have,” Jurow says. “But now listings are increasing because everyone has the same idea. Unfortunately, May and June are traditionally the strongest months for sales, and these home sellers have missed the peak season.”
Jurow points out that Redfin.com’s latest figures show that in 21 out of 29 major metro areas, sales volume is down year-over-year. “If sales are weakening and listings are going up substantially, prices will fall,” he says.
The problems in housing are much deeper than many people realize, Jurow contends. Another nagging concern is the large number of homeowners who are delinquent. “Delinquent means you haven’t paid the mortgage,” Jurow says. “The lender or servicer can file an official notice of default, which begins the foreclosure proceeding.” However, to keep prices from falling further, mortgage servicers have sharply reduced the number of homes placed into default.
Millions of homeowners are already seriously delinquent. “The average length of time that houses remain delinquent nationwide is 995 days,” Jurow says. “The worst culprit is New York State. The average delinquency period there is four years.”
Many homeowners are aware that banks are not in a rush to file foreclosures, so they stay in their houses mortgage-free. “The banks are not initiating foreclosure proceedings because once the servicer forecloses, the lender takes a hit on earnings,” Jurow says. “They also have to manage the property, and most banks don’t want to do that.”
Rent, not buy
Because so many homeowners are still “underwater,” a popular alternative is to rent out their home instead of selling it at a loss. Then they buy a second property, hoping their first house gets back to even so they can sell.
“The decision by underwater homeowners to rent out their house instead of selling it is an act of desperation,” Jurow says. “It leaves them with two mortgages. They would not have done this if they had the equity to sell their home and trade up to another.”
According to Jurow, this is creating a perfect storm. “The housing boom allowed people to sell and trade up to another house. Now that the trade-up market has essentially disappeared, investment firms who were swept up with the buy-to-rent craze are competing with the millions of underwater homeowners who decided to rent out their property.” These properties will eventually hit the market and affect housing prices, he says.
Many analysts counter Jurow’s arguments by quoting the Case-Shiller index, which has given mixed monthly results. Jurow argues that Case-Shiller is an index that gives different weight to home sales so that the raw data is distorted. Rather than relying on an index, he prefers to look at the actual data, which now suggests that sales are weakening across the country.
Time is money
What should you do if you are underwater or thinking of moving? Here are two of Jurow’s suggestions:
1. If you are underwater on your house, do not assume the house will regain its equity. In Jurow’s view, housing prices are likely to weaken further. Take the hit and sell now if you need to move. Put your house on the market at a realistic price before the market deteriorates further.
2.If you have investment properties that are underwater, consider liquidating now while markets are still liquid. Time is not on your side.
The pace of new-home sales fell to the slowest in four months in July, signaling U.S. real estate lacks the vigor to propel faster growth in the economy.
Purchases unexpectedly declined 2.4 percent to a 412,000 annualized pace, weaker than the lowest estimate of economists surveyed by Bloomberg, Commerce Department data showed today in Washington. June purchases were revised up to a 422,000 rate after a May gain that was also bigger than previously estimated.
Housing has advanced in fits and starts this year as tight credit and slow wage growth kept some prospective buyers from taking advantage of historically low borrowing costs. Bigger job and income gains, along with a further slowdown in price appreciation, would help make properties more affordable.
“It’s a little bit disappointing,” said Thomas Simons, an economist at Jefferies LLC in New York and the top forecaster of new-home purchases over the past two years, according to data compiled by Bloomberg. “The new-home sales data have no traction whatsoever and don’t seem to be gaining at all.”
In contrast, purchases of previously owned properties have climbed for four straight months, reaching an almost one-year high in July, according to data from National Association of Realtors. Combined annualized sales of existing and new homes totaled 5.56 million in July, the fastest since October.
Photographer: Mark Elias/Bloomberg
A cabinet specialist adjusts doors on a pantry in a model home in Jupiter, Florida, on Aug. 20, 2014.
“The housing data when you look at all of it together is still, on net, encouraging,” Simons said. “Everything is moving in the right direction, just a little more slowly.”
New-home sales, which last year accounted for about 5 percent of the residential market, are tabulated when contracts are signed, making them a timelier barometer than transactions on existing homes.
Existing Homes
Demand for existing homes picked up last month as low borrowing costs and an increase in inventory drew buyers. The annual pace of purchases climbed to 5.15 million in July, the best showing since September, according to the Realtors group.
Homeownership Reconsidered
Builders and their suppliers see room for growth as the job market improves. As foreclosures and other distressed property sales become a smaller share of the market, housing growth will accelerate, said Robert A. Niblock, chairman and chief executive officer of home-improvement chain Lowe’s Cos., based in Mooresville, North Carolina.
“Signals from the housing market appear mixed,” Niblock said on an Aug. 20 earnings call. “We believe home-improvement spending will continue to progress in tandem with strengthening job and income growth.”
Stocks Rise
Stocks rose, briefly sending the Standard & Poor’s 500 Index above 2,000 for the first time, as corporate dealmaking and prospects for economic stimulus bolstered confidence in the bull market. The S&P 500 advanced 0.5 percent to 1,997.94 at the close in New York. The S&P Supercomposite Homebuilding Index dropped 0.7 percent.
European Central Bank President Mario Draghi’s concern is that if inflation expectations keep falling, they’ll affect actual prices as investors, consumers and companies pull back spending in anticipation. On Aug. 22 at a central-banking conference in Jackson Hole, Wyoming, he said the ECB “will use all the available instruments needed to ensure price stability over the medium term.”
The Commerce Department’s new-home sales figures showed purchases dropped in three U.S. regions, led by a 30.8 percent slump in the Northeast. The West declined 15.2 percent and the Midwest fell 8.8 percent. Sales rose 8.1 percent in the South.
The median forecast of 70 economists surveyed by Bloomberg called for all home sales to accelerate to a 430,000 rate. Estimates ranged from 414,000 to 470,000 after a previously reported 406,000 in June.
This Year
Sales of new properties have averaged 429,000 over the last three months, in line with the 2014 average.
More hiring and income growth may persuade some Americans to sign purchase contracts. The economy added more than 200,000 jobs for a sixth straight month in July, the longest such stretch since 1997, according to Labor Department figures. At the same time, wages are barely keeping up with inflation.
A decline in borrowing costs this year is providing some support. The average 30-year, fixed-rate mortgage was 4.1 percent in the week ended Aug. 21, down from 4.53 percent at the start of January, according to data from Freddie Mac in McLean, Virginia.
Limited progress in the housing market is a risk for the economy, according to Federal Reserve Vice Chairman Stanley Fischer. The real-estate market “continues to weigh on the recovery,” he said at a conference earlier this month.
An increase in supply of available homes is limiting price appreciation, which could spur more buyer interest.
Today’s data showed the supply of homes at the current sales rate rose to 6 months, the highest since October 2011, from 5.6 months in June. There were 205,000 new houses on the market at the end of July, the most in almost four years.
The median sales price of a new house climbed 2.9 percent from July 2013 to $269,800 last month.
