Have We Reached Bottom? by Peter G. Miller
It has been intriguing in recent weeks to hear various pronouncements saying that the current housing downturn is done, finished and history. Forbes, as one example, flatly tells us that "the housing market is about to hit bottom." Not to be outdone, Treasury Secretary Henry Paulson told CNBC that the housing slide is "largely contained." If we had a federal department of seers and soothsayers then predictions about the future might be somewhat credible, but in the absence of astrologers on the government payroll we are forced to stick with reality. One reality is that we do not know how much longer, if at all, the current slump will continue. One would prefer that the current slowdown would not continue at all, but what one would prefer and what actually happens may not be the same. A second reality is that today's trends -- as well as any short-term real estate indicators -- are largely irrelevant to most buyers and sellers. Indicators are necessary to report and interpret, they have an historic value, but they also have less value than many breathless headlines would suggest. A third reality is that all real estate is a localized commodity. It is only a matter of pure chance when neighborhood trends and national trends track exactly, or when the markets in Seattle and Secaucus or any other two locations share identical profiles in terms of sale activity and prices. Consider someone who is selling and bought seven or eight years ago, a not-unusual circumstance. In most markets our seller has seen a substantial ramp-up in values and thus now is a dandy time to sell. Maybe not the top of the market, but substantially higher than when the property was bought. For instance, in 2000 the typical home sold for $139,000 while in 1999 the median price for an existing home was $133,300 according to the National Association of Realtors. Today's median price, as of April, is $220,500. Or, consider buyers. Most buyers are in the market for the long term -- that seven or eight years and perhaps longer. For them, news of slow sales is just dandy, the best time to be a buyer. Alternatively, opportunities to quickly buy and re-sell are rapidly disappearing, or have already disappeared in many markets. Just ask large numbers of short-term condo investors in Florida. As to what homes will be worth in a few years, who knows? What we do know is that current indicators look as follows: - New home sales in April were 10.6 percent below the level of a year ago, according to the National Association of Home Builders.
- The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) in May hit the lowest level since September 2006.
- Existing home sales tumbled 10.7 percent in April when compared with a year ago, according to the National Association of Realtors.
- Pending sales for April -- a good indicator of future closings -- dropped 10.2 percent when compared with a year earlier, says NAR.
- Building permits, which have value in projecting future new home construction, were down 28.1 percent in April from a year earlier, the slowest pace since 1997 according to NAHB.
The last two items are especially important if we're going to play fortune teller. If the good times are about to roll, you would see builders grabbing building permits to meet the onrush of enthusiastic buyers. And if existing home sales in the next few months were on the upswing, then more contracts would be awaiting settlement. The truth is that several huge problems continue to hang over the marketplace. First, there are massive numbers of foreclosures, up 62 percent in April when compared to a year ago according to RealtyTrac.com. The homes that cannot be saved from foreclosure are likely to be sold at discount -- and such discounts impact the value of homes which are not in foreclosure. Second, interest rates are remarkably low, less than 6.5 percent for 30-year, fixed-rate financing according to Freddie Mac. Given the size of our budget deficit and the gross imbalance of payments we have with other countries it is an absolute miracle -- and incredibly fortunate -- that we have not seen higher rates. If rates go up then foreclosure actions are likely to increase as millions of borrowers with ARMs face new and stiffer monthly payments. If you now have an ARM you might want to seriously look at the opportunities to refinance, especially if you have an interest-only or option-ARM. If not, at least do the math and see what will happen to your monthly payments if rates head higher. | 
