Tags: barry | elias | Real Estate | Economy

Real Estate Drives Our Economy

By Barry Elias   |   Friday, 01 Apr 2011 07:55 AM

“[These] data suggest further increases in supply of real estate over the next six to 12 months due to foreclosures in process, serious delinquencies and an increase in inventory adjustment. An increase in supply, coupled with anemic demand, portends further price declines in real estate over the ensuing six to 12 months.”

The aforementioned quotes were from my Moneynews piece over one month ago.

According to a recently released report from Standard & Poor's Case-Shiller Home Price Indices for January 2011 housing, ‘“These data confirm what we have seen with recent housing starts and sales reports. The housing market recession is not yet over, and none of the statistics are indicating any form of sustained recovery. At most, we have seen all statistics bounce along their troughs; at worst, the feared double-dip recession may be materializing.”

They go on to state, “As of January 2011, average home prices across the United States are back to the levels where they were in the summer of 2003. Measured from their peaks in June/July 2006 through January 2011, the peak-to-current decline for the 10-City Composite and 20-City Composite is negative-31.7 percent and negative-31.8 percent respectively. The improvements from their April 2009 trough are plus-2.8 percent and plus-1.1 percent, respectively.”

In Detroit, prices are now at July 1994 levels. (That was 16 years ago.)

David M. Blitzer, Chairman of the Index Committee at Standard & Poor's, said “Keeping with the trends set in late 2010, January brings us weakening home prices with no real hope in sight for the near future.”

At a recent American Bankers Association Government Relations Summit in Washington, D.C., Federal Deposit Insurance Corporation (FDIC) Chairwoman Sheila C. Bair stated, “More than 9 million residential mortgages have entered foreclosure in the past four years, and the backlog of seriously past due mortgages stands at more than 2.5 million.”

This suggests further downward pressure on future housing prices.

The National Association of Realtors reported the 10 percent decline of existing home sales (from January to February) was “much worse than expected.”

The Census Bureau indicates the new home sales in February (versus January) were 14 percent below forecasts, and the annualized rate of 250,000 sales was the lowest since 1963.

The pessimistic housing sentiment was echoed by the National Association of Home Builders when they claimed: “There has been little news to cheer about in the housing sector of late, including the most recent data. Housing demand is weak, with new-home sales reaching a record low and existing home sales falling 10 percent in February. A steady increase in distressed home sales is putting downward pressure on prices, with both the Case-Shiller composite indexes and the Federal Housing Finance Agency index down again in January. Following the rise and fall associated with the home buyer tax credits, the trend in house prices has been relatively flat since the trough in early 2009."

Consumer confidence was down in March, with surveys from both the University of Michigan and the Conference Board finding increasing pessimism about the future amidst concerns over rising inflation and the sustainability of recent economic and employment growth. Economic growth accelerated in the fourth quarter of 2010, but the potential for setbacks is large, raising the possibility of slower near term growth.”

Moreover, the loan modification program did little to alleviate the mortgage default crisis.

Applicants were largely rejected by this mismanaged program. The Congressional Oversight Panel suggests Treasury seriously erred when they hired Fannie Mae and Freddie Mac (for $212 million) to manage the process, since they maintain the credit risk for most mortgages (an implicit guarantee in the event of default), and their operations are highly ineffective and inefficient.

The effect has been to delay the increase in housing supply, thereby delaying the inevitable price depreciation.

A White House policy paper issued nearly two months ago by Treasury and Housing stated:

“[T]he housing market remains fragile and will take years to fully recover. An elevated unemployment rate, lower household wealth, and higher credit standards are constraining demand for housing. Sales of new and existing homes are well below their recent peaks. At the same time, the large inventory of unsold homes, including a backlog of foreclosed homes that have yet to appear on the market, will take an extended period to work through the system. As a result of both supply and demand factors, housing construction is at historically low levels, and home prices remain weak.”

It goes on to say, “[O]ur plan also dramatically transforms the role of government in the housing market. In the past, the government’s financial and tax policies encouraged housing purchases and real estate investment over other sectors of our economy, and ultimately left taxpayers responsible for much of the risk incurred by a poorly supervised housing finance market.” “The government must also help ensure that all Americans have access to quality housing that they can afford. This does not mean our goal is for all Americans to be homeowners.” [emphasis mine]

Should the behavior align with the rhetoric, this policy will prove beneficial to the mortgage market and the overall economy.

A ramification of falling real estate prices: lower state and local property tax revenues.

According to the Census Bureau, local and state property tax revenue fell $5.3 billion, or 2.9 percent, in the fourth quarter from a year earlier to $177.1 billion. Combined with the absence of stimulus funds ($150 billion), available funds are plummeting, requiring states and localities to balance their budgets through expenditure reductions. (Very few municipalities are attempting to raise taxes in this environment.)

In fact, “One of the symptoms of a depressed real estate market has been a proliferation of successful tax appeals,” said William Dressel, executive director of the New Jersey State League of Municipalities.

Property tax rates are applied to real estate assessments. Typically a lag of several years occurs between market value declines and the associated decrease in assessments. In the coming year or two, more properties will be assessed at lower values, which will further reduce available tax revenues.

This will add additional pressure to balance budgets with reduced expenditures. Concurrently, business friendly, pro-growth environments will also help navigate these difficult economic waters.


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[These] data suggest further increases in supply of real estate over the next six to 12 months due to foreclosures in process, serious delinquencies and an increase in inventory adjustment. An increase in supply, coupled with anemic demand, portends further price declines...
barry,elias,Real Estate,Economy
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