Signs Of A Bottom In Real Estate

The Federal Reserve would like us to believe that lowering rates will reverse the decline in housing values.   They have brought interest rates to virtually zero  providing some payment relief to selected borrowers.  In the long run, however, efforts to prop up the price of housing with rate cuts and loan modifications will merely prolong the slide in values.   If the Fed had the power to prevent a decline in housing prices, they would have done so.  In a free market economy, prices will eventually reflect the reality of matching home ownership with income.   The Fed can lean against the primary trend but it cannot change it.

The lending distortions of the past that created the bubble in housing are now gone.   It is no longer enough to say that you make $150,000 – you need to prove it.   It is no longer possible to get 100% financing with poor credit.  The poor lending decisions of the past are causing pain for both borrowers, banks and the economy at large.  Lower rates alone will not clear the market.

The free market has solutions to over leverage and poor lending decisions.   The solutions are called write offs, bankruptcy and foreclosure.   As painful as these measures are, they are the mechanism for building a financially strong base of homeowners who will be far less likely to default on their mortgages.

During the height of the housing bubble several years back, only 10% of California households qualified for a conventional 30 year fixed rate mortgage.  The bubble prices were nurtured and sustained by exotic lending programs with no income verification.  Fast food workers bought $1,000,000 homes.  Now the bubble has burst.  The positive side is that prices are reverting to levels where real buyers with real income can now buy and have an affordable and sustainable payment.

Evidence of a healthier housing market is also seen in the National Association of Realtors housing affordability index.  This index shows an all time high of housing affordability based on income.  The Case Schiller data on price to income ratios also shows a marked improvement of affordability although it is still 20% over the long term average prior to 2000.  This is all good news which is being masked by the ongoing  housing bust.

Hints that we are finally arriving at fundamental values in housing can already be seen in San Diego.

Forbes reports that intrepid investors are buying houses out of foreclosure and renting them out at a profit – often to neighbors who lost their own homes.

Randy L. Perkins amassed a nice fortune in real estate, life insurance and investment banking in southern California over the past 30 years. Since May he has sunk $5 million of it into the one place most investors least want to be: housing.

Perkins has bought two dozen homes in the San Diego area through his Westview Financial Group. One was a dilapidated three-bedroom stucco in Escondido for which Westview paid $158,000–a 61% discount from the previous selling price of $408,000.

Westview eventually spent $40,000 on acquisition costs and improvements. Then it rented the home for $1,800 a month, netting about $18,000 in annual profit after property taxes, maintenance and insurance. That’s a 9% return on the acquisition cost before income taxes…

Currently one in every 32 San Diego homes, a total of 34,854 units, is in foreclosure. That ranks it as the 21st-most-troubled housing market in the nation.

Now first-time buyers and investors like Westview are offering a glimmer of hope. In September the number of San Diego homes sold rose 56% from a year earlier to 3,366, according to DataQuick. More than half were bought out of foreclosure, indicating that Perkins is far from alone in seeing promise amid the wreckage.

Priced properly anything will sell.  Time and price will accomplish what the Fed cannot.  There are oceans of private money looking for an adequate return on capital.  Let the free markets do their work – and the pain of the housing bust will soon be solved.

Leave a Reply