Tuesday, October 20, 2009

Has The US Housing Market Bottomed?

Lord Wife and I drove back yesterday AM from dropping Running Boy (age 5-1/2) and Mr. Grunt-n-Grab (age 11 months) at their respective stations. We were listening to National Public Radio since it was finally being safe to go back. NPR recently directed its longest-ever local fund drive, ending it only after resorting to stories like "How My Cello Wound Up in Poland."

While we crossed under the freeway, a young reporter quoted a disappointing housing starts report from September. She then invited a Subject Matter Expert from Columbia University onto her segment, and it went like this:
NPR Reporter asks the Expert questions, he fluently rattles off data, we draw closer to home. Reporter asks another question, Expert begins to deliver a matter-of-fact, dismal interpretation of housing market prospects. NPR Reporter suddenly interrupts to say, "I'm sorry--I have to cut you off now."
Lord Wife and I looked at each other with arched brows. Rookie reporter surprised by a vet producer, and-or a "Let A Smile Be Your Umbrella" reporting policy becoming painfully obvious? Not 100% sure, but in context it seemed like an openly Pravda Moment on NPR.

The Main Stream Media has by consensus already called the bottom on the real estate market, often citing a stabilization or drop in the rate of foreclosures. On the surface, that's very comforting data. As a homeowner, I certainly don't want to see more of my remaining equity go up in smoke. But...I also have to face facts, which involves objectively thinking about whether there is cause for being perky, and if so, what it is. This in turn means remembering how bankers think, which is to say, they greatly prefer not to.

In short, at some point banks stop foreclosing on properties in hard-hit locales, so I strongly suspect a lowering foreclosure rate is a false-positive indicator. This local tendency may have become a national reality. Either way, aggregate stabilization is being impacted by banks not wanting to take on properties that won't find buyers quickly. Apart from further driving down a bank's on-hand portfolio value, foreclosure costs and hassle factors are high. From the lender's perspective, a property must re-sell in a reasonable time. It must be appealing enough that someone will bid significant cash for it at a sheriff's auction.

There's an unspoken truth here that banks and real estate professionals are keenly aware of: houses do not go up in value. Unless maintained and updated, their value goes down. This is far more true for a McMansion 5 miles from Microsoft than for a grimy hovel in Detroit: if the McMansion sits unoccupied for two years without regular (and to the bank, bothersome) maintenance, its value plummets. The Detroit hovel is a walk-away, and for the attractive McMansion, everything hinges on how fast it can be re-sold. The bulk of properties are in between those extremes, but they're still subject to the same pressures. The more properties that sit empty, the more reluctant banks are to take on more.

A much stronger indicator for measuring "the bottom" would be to track the number of foreclosure filings compared to the number later sold at auction, observing percentage, time to sale, and foreclosure/auction price ratios. But that data isn't tracked officially. Even that data would fail to measure when someone walks away and the bank simply doesn't bother to file foreclosure. Walk-aways by both borrower and lender have already become common in some of the most depressed markets, as described in this local article from Dayton, Ohio:

In some instances, lenders don’t even bother to file a foreclosure. Figures by RealtyTrac released this week show foreclosure filings in the greater Dayton area are down almost 21 percent.

John Carter, housing inspector with the city of Dayton, finds the decline in foreclosures “very scary,” because houses are continuing to go vacant.

For every 100 houses that he orders boarded up, he said, 40 to 50 properties have a mortgage but no foreclosure filed. When he contacts the banks, they sometimes tell him they have no plans to foreclose.

“That makes it look like the foreclosure numbers are going down, but in actuality the banks are not even starting foreclosure,” Carter said. “So there’s no number to track now.”

I'm not trying to stop anyone from buying or selling a home, rather have pointed out basic problems with the Party Line's reasoning. At best, there are wide blind spots in the metrics being used by top prognosticators, the market really has bottomed, and we got lucky. Yet it seems more likely it has not, and officials are trying to talk the market up while looking through their binoculars backwards. These are mostly the same folks who told everybody you can't get hurt buying a home.

Calling the bottom is generally less important than having cash to put on a porch rail. Just as with previous Recession/Depressions, there are major opportunities for people willing to convert paper into property, and it's hard to think of a safer long-term investment in this environment than free and clear ownership of real estate.

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