When 2009 began, the stock market was in the grip of a terrible bear-market sell-off that didn’t end until early March. By that time, the Dow Jones Industrial Average was half the level at which it had peaked just two years before. Credit was so limited that the situation was termed the Credit Crisis. The housing market had just taken another large leg down, and even high-end housing segments were feeling the effects of a pervasive housing price collapse that had begun two to three years before. Negative headlines assured wary home buyers that the end was not yet in sight. So 2009 was off to an abysmal start.
However, inventory absorption and recovery were evidently taking root in the most affordable and most depreciated housing segments. Buyers were encouraged to re-enter the market as the Federal Government enacted an $8000 tax credit for first-time home purchasers, which was subsequently extended (on a more limited basis) to all consumers. This federal tax credit has been believed to have spurred activity throughout the American economy. In March, the stock markets began to recover as investors took a chance that the worst was behind us. Aside from the tax credits and stock market recoveries, there were several other reasons for the stabilization of housing in 2009:
1. Low Mortgage Rates: The Federal Reserve Board kept mortgage rates low at approximately 5% throughout 2009 by purchasing $1.25 trillion in mortgage-backed securities. Buyers, aware of these historically low rates, believed that there would be a small window of opportunity to buy before financing costs increased. The result was a sense of urgency that spurred an increase in home purchasing as well as mortgage re-finance applications.
2. FHA Loans & Fannie Mae and Freddie Mac: After nearly disappearing during the market boom, FHA loans have returned. One half of all sales nationwide to first-time home buyers were insured by the FHA during the peak buying period in 2009. Also, Fannie and Freddie, now wholly owned by the federal government, purchase nine of ten mortgages.
3. Loan Modifications: In 2009, at the encouragement of federal and state governments, banks and other lenders increased their efforts to modify troubled mortgages. This provided borrowers with alternatives to foreclosure, and prevented (or perhaps only postponed) many foreclosures. According to Clear Capital’s Home Data Index (HDI) Market Report, the REO saturation rate dropped from 41.5% in the first quarter of 2009 to 25.5% in January of 2010. This decline served to limit the foreclosure inventory and thereby assisted price stabilization.
As a result of these stimuli, and as demonstrated by our market-bymarket analysis of California, by the end of 2009 values in most markets began to stabilize and, in home select markets, show consistent appreciation for the first time since 2006. According to RealtyTrac CEO James Saccacio, new foreclosure filings had been declining since peaking in June. This decline was due to trial loan modifications as well as state legislation extending the foreclosure process. The U.S. Treasury Department reported that as of early December 2009, more than 700,000 homeowners had received trial modifications. In the fourth quarter, foreclosure activity fell by 7% from the previous quarter.v All these factors have served to limit the supply of foreclosed homes and to help support a stabilized market. According to Clear Capital’s HDI Market Report, the Western United States Region, including those states that previously registered the largest decline in values (Nevada, Arizona, and California), showed a 1.2% quarterly gain in the fourth quarter. The Inland Empire (Riverside-San Bernardino-Ontario) MSA showed a 4.2% quarterly increase despite having an REO saturation rate of 51.3%. This increase provides evidence that the appetite for discounted REO homes is strong, and that the presence of these REOs is not having the expected depressing effect on the market that some anticipated.
Based upon our research, it seems evident that the least-affordable housing markets are not experiencing the balance in supply and demand that a stable housing market would demonstrate. This disparity is evidenced by high housing inventory and few sales at prevalent prices. High inventory relative to sales has, in past years, indicated that a price correction is on the horizon. Top-tier housing may be generally defined as homes valued at more than $1,000,000; but as average prices for a neighborhood increase, it appears that the sales decline. The factors driving this phenomenon include home owners in these markets being more fiscally resilient and more financially able to patiently wait to sell a home at a high price while making mortgage payments in the meantime. However, demand for these homes remains tepid, as would-be buyers experience difficulty in finding financing that does not require a large down payment to qualify. For example, in Los Angeles County, FHA and conventional loans are available to the amount of $729,750, which is expected to expire at the end of 2010. So presently, a borrower pursuing a $1,000,000 home purchase would have to bring to the transaction at least $270,250 of his or her own cash. Note the two graphs below, which are Multiple Listing Service snapshots of listing and sales activity in expensive Beverly Hills and Malibu markets from February 2010. It is evident that demand for housing at the prevalent prices is very low, and typically we would expect this to foreshadow a price correction.
Published with permission from "A STATE IN TURMOIL: Why The California Residential Real Estate Market Has Just Begun To Fall" By Eli Tene, Gil Priel and Jeff Woodsworth. This text may not be redistributed or reproduced without the written consent of its authors.
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