Is the Housing Market Actually Recovering?

Everyone wants to know if the housing market is truly showing signs of a recovery. There are conflicting headlines every day. One day, we hear sales are up. The next day it is reported that prices are down. Is the real estate market coming back? The answer is ‘yes’ and ‘no’.

There are two aspects that must be evaluated: house sales and house prices. They will not recover at the same time. Sales are already increasing rather nicely while prices will still soften in many markets through 2012.

Home Sales
The National Association of Realtors (NAR) issues a Pending Home Sales Report each month. We can see by the graph below that sales have been increasing nicely over the last twelve months. Real estate professionals across the country are reporting that activity has increased compared to last year. The sales side of the recovery is starting to show great promise.

Home Prices
Many price indices have shown that national home prices are continuing to stumble. Even with demand increasing, we must look at where the supply of housing stock stands. Though ‘visible’ inventory (homes currently on the market) is shrinking, there is still a large overhang of ‘shadow’ inventory (foreclosures about to come to market as a result of the National Mortgage Settlement). This increase in inventory will outpace the increase in demand and thereby cause prices to continue to soften in many parts of the country.

Bottom Line
Housing is coming back. However, sales will come back before prices. We will not see prices appreciate until we work through the oversupply of homes on the market.

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Fastest Pace for OC Home Market Since 2005

Steve Thomas of ReportsOnHousing.com’s latest study of the Orange County housing market shows the early 2012 home shopping season is a curious mix of rising buyer activity as the number of owners willing to test the market shrinks.

Snippets of the latest Thomas report, based on trends found in brokers’ MLS listings system, as of Feb. 16 …

-Demand grew in two weeks by 435 homes to 3,569. Last year, it wasn’t until March 31 that dealmaking hit this level.

-Thomas mixes his demand and supply math to create a “market time” measure that shows how long it would take to sell all homes on the market at the current pace of new escrows. This time, expected market time for Orange County is 2.1 months — lowest level since August 2005, or 78 months ago. It was 3.65 months a year ago.

-For homes priced below $500,000, demand is up 32% vs. last year with just a “blistering” — as Thomas called it — market time of 1.6 months.

-Active listing inventory actually fell 226 homes in the past two weeks to 7,597 — lowest at this time of year since 2005. “A drop in inventory during this time of year is completely unprecedented,” Thomas said. The number of homes for sale has fallen 29 percent in a year.

Thomas concludes: “For Orange County housing, the beginning of 2012 has proven to be remarkably robust. Demand, the number of new
pending sales over the prior month, has been steadily growing, but the last two weeks have been extraordinary. … This is more than just an encouraging start to 2012, it is a real sign of a much different housing market.”

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What Does Warren Buffet Think About Buying A Home?

Warren Buffet is seen by many as the greatest investor of our time. When he speaks, people listen. Like anyone else in his position of influence, he is criticized by some for using his bullhorn to promote his own business agendas at times. That makes it very interesting when we occasionally learn of how he privately advises those closest to him.

Such a situation occurred this week. Debbie Bosanek, Warren Buffet’s secretary of 37 years, recently purchased a second home in Surprise, Arizona.

In an article in the Omaha World Herald, Mrs. Bosanek discussed her reasons for purchasing a second home and the personal advice she received from Mr. Buffet.

“I just thought it was time to buy a home. Warren tells me that it will be the best opportunity in my lifetime. Mortgage rates are low and prices have dropped dramatically…I share Warren’s view about the future of America, and we believe that our country will do just fine. I’m happy to make this investment.”

The greatest investor of the last century privately has told the people closest to him that buying a home right now “will be the best opportunity in [their] lifetime.”

That’s good enough for us. How about you?

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Where Are House Prices Headed in 2012?

There is no shortage of opinions as to where home prices are headed in 2012. From Clear Capital’s expectation that prices will show a ‘slight uptick’ this year to Fitch’s projection that prices ‘will fall another 13 percent’, there seems to be no consensus as to where real estate values are headed. How can there be such a disparity of opinion among industry experts? Prices are determined by the relationship between supply and demand and there are many unanswered questions regarding both of these components.

Questions about Demand
Will this be the year that the 5.9 million adults between the ages of 25 and 34 that are still living with their parents decide to purchase a home of their own?

With mortgage payments lower than rent payments in the majority of the country, will first time buyers finally decide it makes more financial sense to buy rather than rent?

Will the baby boomers take advantage of the great deals available and start purchasing vacation and retirement homes?

Will investors continue to purchase large quantities of distressed properties?

Will hedge funds negotiate a deal with the banks for bulk purchases of foreclosures?

Questions about Supply
Will 2012 be the year that builders again increase inventories of newly constructed homes?

Will baby boomers put their primary residences up for sale and relocate to their retirement destinations?

Will 2012 be the year that the shadow inventory of foreclosures finally makes its way to market?

If prices depreciate, it will force more homes into a negative equity situation. Will this create another surge in short sales and foreclosures?

Will the government put together a plan to convert large numbers of foreclosures into rental properties?

Bottom Line
With so many unanswered questions regarding both the demand for housing and supply of properties, it is very difficult to determine where prices will be at the end of the year. We suggest you contact a local real estate professional to help you determine where values are headed in your area.

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Real Estate: Today's Golden Opportunity

Everyone wants to comment on the current real estate market. They want to talk about how now is not the time to buy a home. Some even argue owning a house has never been a great investment. Most say it will be a long time before real estate again begins to appreciate. It all sounds so familiar to us. It was just a decade ago that many made the same arguments about gold as an investment.

Gold had dropped from over $400 an ounce to $250 an ounce (a 40% decline) from February 1996 to August 1999. People ran from gold as though it was a plague.

Lord William Rees-Mogg, the current Chairman of The Zurich Club, in 1997 said:

“No investment has been so thoroughly exploded as gold; most people think that there will no more be another gold boom than there will be another boom in tulip futures in The Netherlands.”

Two years later in 1999, Don Wolanchuk author of the Wolanchuk Report explained:

“Everybody hates gold. You can’t have a bottom until everybody is out. And everybody is out of the gold sector.”

Everyone knows what happened next. The proclamation of gold’s death was rather premature. Gold rose from $250 an ounce to over $1,500 an ounce in the next twelve years. We see the same situation with real estate today. We are not predicting that real estate will see the same levels of appreciation. I do believe however that the market will rebound strongly.

Those who continued to believe in gold as an investment were rewarded. Those who continue to believe in real estate as a sound investment will also be rewarded.

Here is what Adam Hamilton wrote in October 2000 in an essay titled Is Gold Dead?
The road for gold investors has been long and parched in the last five years. They have wandered through a seemingly endless desert, occasionally tempted by what proves to be an illusory mirage. Many have fallen beside the sun-cracked path, their white bones picked clean by buzzards and gleaming in the sun. Nevertheless, a brave contrarian core continues to march forward. They have studied history, currency, gold, investments, economics, and finance. They understand the timeless value of gold, the cyclical nature of the markets, and the vagaries of human psychology. They realize it is darkest before the dawn, and the journey most difficult right before the homestretch is reached. Gold is in an INCREDIBLE position, and it will have its day. Nothing goes up in price forever, and nothing goes down in price forever. Investments are cyclical. Gold is NOT dead, it is simply biding its time, waiting for its next earth-shattering mega-rally. The spoils that go to the few remaining gold investors when that day inevitably arrives will be fantastic. The stunning victory will quickly blot out the painful memories of the long struggle…

You could replace the word ‘gold’ with the words ‘real estate’ throughout this essay and it would apply today.

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