Double Dip or Double Your Money?

Last week, MacroMarkets LLC announced the results of the March 2011 Home Price Expectations Survey, compiled from 111 responses of a diverse group of economists, real estate experts and investment and market strategists. Many media sources reported on the survey’s comment about a projected ‘double dip’ in prices. What the media didn’t aggressively cover was the other projection in this same report. Today we want to shed light on both portions.

Double Dip

There is no doubt the survey looked negatively on house prices through the rest of 2011. Robert Shiller, MacroMarkets co-founder and chief economist said:

“Overall, the sentiment among our expert panel regarding the U.S. housing market outlook continues to deteriorate. Now they are expecting only a weak recovery, and even that is not until 2013. This uninspiring view must be influenced by the persistently weak market fundamentals – high unemployment, supply overhang, an unabated foreclosure crisis, and constrained mortgage credit.”

Terry Loebs, MacroMarkets managing director commented on the dreaded ‘double dip’.

“Many more experts are now projecting a double-dip after witnessing the double-dead cat bounce that came in the wake of expired government stimulus programs. In December, only 15% of our panelists were projecting that a new post-crash low would materialize for national home prices. Now, just three months later, almost 50% foresee a double-dip happening this year, and not a single panelist expects national home prices to recover to the pre-bubble trend in the coming 5 years.”

However, the longer term view of home prices was much more optimistic.

Double Your Money

The experts projected that by the end of 2015 home prices would attain a cumulative level of appreciation of almost 10% (see chart below from the report).

This means, if you purchased a house today with a 10% cash down payment, you could double your cash in five years; even taking the projected double dip into consideration.

Shiller also noted that there continues to be significant dispersion among the panelists regarding their individual home price forecasts:

“A few respondents do see a real recovery, predicting prices up 20% or so by 2015.”

If that happens, you would have TRIPLED your cash.

Bottom Line

If you are thinking of selling in the next 12 months, you should do it before the projected ‘double dip’. If you are thinking of buying and you plan to live in the home for at least five years, your financial investment will be fine.

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Did Modification Programs Work?

The government decided early on that the market would not be able to absorb the number of foreclosures that the financial crisis was creating without crushing house values. This was one reason that they funded the Troubled Asset Relief Program (TARP). This past week, the Congressional Oversight Panel (COP) weighed in with their opinion on TARP’s success.

Today we want to concentrate on the parts of the report that pertain to real estate. TARP funds were to be used:

…in a manner that protects home values, college funds, retirement accounts, and life savings; preserves homeownership and promotes jobs and economic growth; maximizes overall returns to the taxpayers of the United States.

Did TARP Accomplish Its Housing Goals?

One way TARP was to accomplish ‘protecting home values and preserving homeownership’ was through the Home Affordable Modification Program (HAMP). According to the COP report:

…when the President announced the Home Affordable Modification Program in early 2009, he asserted that it would prevent three to four million foreclosures. The program now appears on track to help only 700,000 to 800,000 homeowners.

We want to say that, if hundreds of thousands of families averted the devastation foreclosure can bring, we consider the program as worthwhile. Successful? That’s a different story.

Another program initiated to help was HOPE for Homeowners. It was established by Congress in July 2008 to permit the FHA to insure refinanced distressed mortgages. However, as the report explains:

HOPE for Homeowners was initially expected to help 400,000 homeowners, but it managed to refinance only a handful of loans. This was likely due to the program‘s poor initial design, lack of flexibility, and its reliance on voluntary principal write-downs, which lenders were very reluctant to make.

The Only Good News?

The only silver lining is that TARP didn’t cost the taxpayer as much as was originally estimated. At what expense to troubled homeowners? In discussing the falling cost of the program COP stated:

… a separate reason for the TARP‘s falling cost is that Treasury‘s foreclosure prevention programs, which could have cost $50 billion, have largely failed to get off the ground. Viewed from this perspective, the TARP will cost less than expected in part because it will accomplish far less than envisioned for American homeowners.

Bottom Line

TARP was set up to avoid home values being crushed under the weight of foreclosures. To that regard, it seems to have done nothing but delay the inevitable.

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Homeownership: What Americans Think

There is a growing number of people debating whether the government should continue its level of support for homeownership. Mortgage assistance is being pulled back and even the mortgage-tax-deduction is now up for debate. We want to look at how the people of this country view owning a home and the reasons they buy. Last week, Fannie Mae released the National Housing Survey. Here are the survey’s more interesting findings.

Belief in Homeownership

-96% of all homeowners said homeownership has been a positive experience.
-84% of Americans still believe that owning a home makes more sense than renting. Even 68% of renters believe owning makes more sense.
-64% consider buying a home as a safe investment. Buying a home was considered safer than buying stocks by over three times the number of people (64% vs 17%).
-2 in 3 Americans believe that lifestyle benefits of homeownership (65%) are superior to the financial benefits (32%).

Top Non-Financial Reasons to Buy a Home

Lifestyle Benefits: The broader security and lifestyle benefits of homeownership, such as providing a good and secure place for your family and children, where you have the control to make renovations and updates if you want, and in a place that’s in a community and location that you prefer.

1. It means having a good place to raise children and provide a good education
2. You have a physical structure where you and your family feel safe
3. It allows you to have more space for your family
4. It gives you control over what you do with your living space (renovations & updates)
5. It allows you to live in a nicer home
6. It allows you to live in a location that is closer to work, family, or friends

Top Financial Reasons to Buy a Home

Financial Benefits: The financial benefits of homeownership: its value as an investment (especially compared to paying rent), its value as a way to build up wealth for retirement or to pass on to your family, and the tax benefit.

1. Paying rent is not a good investment
2. Buying a home provides a good financial opportunity
3. Owning a home is a good way to build up wealth and pass it along to my family
4. It is a good retirement investment
5. Owning a home provides tax benefits
6. Owning a home gives me something I can borrow against if I need it

Bottom Line

The people of this country have always seen great value in owning their own home. They still do. We believe we should never underestimate the importance of homeownership as a crucial piece of the American Dream.

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Real Estate: Like a Phoenix Rising from the Ashes

The real estate market has experienced difficulty over the last five years. From 2000-2006, house values climbed to unsustainable heights. Since then, we have seen much of this appreciation disappear. Now many look at the housing market as dead and lying in the ashes of its previous glory. However, there is growing evidence that, just like the Phoenix, there is a new market currently rising from those ashes.

Buyer activity is increasing

The first sign of an improving market is buyers again beginning to shop for a home for themselves and their family. That is taking place right now.

Pete Flint, CEO of Trulia said in a recent press release:

“We’re seeing a national resurgence of buyer and seller activity on Trulia.com. In January alone, we experienced an unprecedented level of site traffic including 11 million unique visitors – which is more than 70 percent year-over-year growth… (We) are now experiencing 100,000 property views per minute.”

The latest Credit Suisse Monthly Survey of Real Estate Agents reports:

Our Monthly Survey of Real Estate Agents pointed to another month of improved traffic – the third straight month, and the highest level for our traffic index since April 2010, the last month of the homebuyer tax credit. The improved economy and stronger consumer confidence has translated into an increase in homebuyer traffic.

But have they actually started purchasing?

The best news is that buyers are not just looking. The latest National Association of Realtors’ (NAR) Pending Sales Report, which quantifies the number of homes going into contract, shows continued improvement:

Pending home sales improved further in December, marking the fifth gain in the past six months.

Bottom Line

Buyers are back out looking at homes and the number that are actually purchasing is steadily increasing. It appears the housing market is on the verge of a rebirth. The Phoenix is beginning to flap its wings.

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The Cost of Waiting for Price to Fall

Many purchasers have been sitting on the sidelines waiting for home prices to hit bottom. They want to guarantee that they are purchasing at the best possible price. Like them, we also believe that prices still have some room to fall in most markets. However, we disagree that waiting is a good financial decision. The buyer should not be concerned about housing prices. They should be concerned about cost.

The cost of a house is made up of the price and the interest rate they will be paying. Two different pieces of news released yesterday highlight this point.

PRICES

The National Association of Realtors (NAR) released their 4th quarter housing research report. In the release, they reported that home sales rose 15.4% in the 4th quarter over the 3rd quarter. They also showed that prices remained stable during the year:

The national median existing single-family price was $170,600 in the fourth quarter, up 0.2 percent from $170,300 in the fourth quarter of 2009.

A buyer who delayed a purchase might find solace in the fact that prices have not increased. However, the other news released yesterday paints a different picture.

INTEREST RATES

The Primary Mortgage Market Survey was released by Freddie Mac which showed that the 30 year fixed rate mortgage was at 5.05%. Frank Nothaft, vice president and chief economist of Freddie Mac said:

“Long-term bond yields jumped on positive economic data reports, which placed upward pressure on mortgage rates this week…As a result, interest rates on a 30-year fixed-rate mortgage rose to the highest level since the last week in April 2010.”

So prices have remained stable but interest rates have risen dramatically in the last 90 days. What does that mean to a buyer looking to purchase a home this year?
The price is the same. It just costs more.

Let’s show you what the news means:

By sitting on the sidelines for the last 90 days a purchaser lost:

* $89.44 a month
* $1,073.28 a year
* $32,198.40 over the thirty year life of the mortgage

If you buy a $340,000 home, double all these numbers.

Bottom Line

Even if prices fall another 10% this year, the cost of a home will increase if interest rates go up more than 1%. Buyers should not worry where prices are going. They should be concerned where costs will be later in the year.

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