2009 Real Estate Forecast
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Fear sells! Sensational headlines of misfortune and gloom are crowding the media. Nothing grabs attention better than an impending catastrophe. Having experienced the terrible downturns associated with the oil crisis and the inflationary time of 1974-1975; the inflation busting period of 1979-1982 with interest rates as high as 23%; the S&L crisis of 1989-1992; the slowdown of 2000-2002; and now the bursting of the 2005 Real Estate Bubble, I know these periods had one thing in common... they all ENDED!
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This current recession started in December of 2007 and it WILL run its course, ending within the next 14 months, in my view. Those who were over-leveraged and used the equity in their homes as an ATM will experience hardship. Those who were caught up in the exciting euphoria of the real estate mania and speculated on gains from ever higher and higher prices will feel severe pain. Those who were unlucky to have purchased their first home during the bubble years have my sympathy; the experience will not be pleasant. Still, all things must come to an end, and this recession will also.
Let me make three predictions:
- By the end of the third quarter of 2009, the price decline, as measured by the Case-Shiller index, will have stopped and prices will be poised for a rebound of as much as 35% by the end of 2010.
- Although there are still foreclosures due to be marketed, the efforts of the government will be successful, and by the end of 2009, the waves of foreclosures will be concluding.
- Due to the lack of new residential and rental construction, there will be a rental shortage and rents will start to significantly increase by the end of 2010.
Southern California is thought by many to account for almost half of all the foreclosures in the nation. The Inland Empire area of Riverside/San Bernadino was one of the hardest hit by overbuilding and excessive speculator demand resulting in tremendous oversupply. Asset managers have aggressively lowered prices in this Metropolitan Statistical Area as well as the MSA's of Las Vegas, Miami, and Phoenix, which in turn has lowered the Case-Schiller house price index. The pundits in mainline national media have exaggerated the decline by accentuating the negative; this has allowed journalists, not home buyers or investors, to influence investment decisions.
Missing from the national news is the fact that lower interest rates across all types of home financing have vastly increased home affordability, the cornerstone of housing. FHA/VA loan limits have been increased to allow much higher loan amounts and include many, many more eligible homes. VA is allowed to finance US Veterans with little or nothing down, and FHA will allow loans with as little as 3% down payment, which can even be gifted by a family member. Both agencies allow for the mitigation of past credit problems with some leniency in underwriting requirements. FNME and FREDDIE MAC are providing financing incentives with as little as 3% down payment and 6 points toward buyers closing costs on their foreclosures. Investors are being offered an aggressive 90% LTV and 3% toward closing costs as an incentive to purchase REOs in inventory. These programs of financing coupled with aggressive pricing of assets have had the desired results; inventory is being cleared.
In January, the Metropolitan Statistical Area of San Bernadino/Riverside has had a sales increase of 149.4% over January of last year. Palm Springs has experienced a jump of 51%, and statewide, California has seen a 100.8% increase in sales. The Phoenix MSA has increased 64.2%, from 2876 closings in January 2008 to 4722 closings in January of 2009. In Phoenix, there are currently an explosive 9615 properties pending closing, placing the sales pace at over 114,000 sales possible for 2009. That would mark a tremendous increase over the 59,000 closed in 2008. The same pattern of sales is being repeated in Las Vegas: single family sales are up 24%, for the 10th monthly increase. Miami's gains were measured improved as well. Single family sales were up 47% and condos up 29%. Excess inventory is being absorbed.
"The construction of new homes has dropped to under a 400,000 unit pace, well below the million needed to accommodate US population increases and household formations."
The construction of new homes has dropped to under a 400,000 unit pace, well below the million needed to accommodate US population increases and household formations. Furthermore, the US Government and all its agencies are focused on preventing more foreclosures. The result will be a balancing of the supply-demand equation and the STABILIZATION of the real estate market across the United States.
Construction of residential rental communities are also severely limited by the lack of financing and the risk aversion of developers. Currently there exists a surplus of rentals with vacancy factors here in Phoenix approaching 19.5% for apartments. However, there is a downward trend of available rentals since the peak of 9838 available rentals in December 9, 2008 - to a drop of almost 1000 units, to 8680 as of March 5, 2009. Normal equilibrium is around 7500 units available.
Available residential units listed for sale in Phoenix peaked at 47,787 on October 26, 2007. The inventory slowly declined until October of 2008, when absorption started in earnest. Currently, Phoenix inventory has dropped to 39,800, a level not seen since March 16, 2007 when inventory was 39,645. Even with the addition of new listings coming to market, the recent absorption rate has measured roughly 300-500 net decrease each week. Also, even though there is a diminished population growth expectation, there exists demand for 35,000 additional new units in the Phoenix MSA. At the current pace of new construction, there will be a significant shortfall, again positively impacting absorption of existing inventory. Currently in Phoenix, there are 9615 residential properties in pending status. At that rate, there is less than a 4.5 month supply.
Just as many factors contributed to the real estate crisis, many factors are contributing to the solution. With extremely diminished new construction activity, demand is finally catching up to supply. The efforts to modify loans and reduce foreclosures is having the desired effect of helping distressed homeowners remain in their homes, further reducing supply. Asset managers have discounted prices to levels where REO listings are generating multiple offers within weeks if not days, which is reminiscent of the 2005 mania.
"The discounts available today will disappear and home prices have a strong possibility of a 35% gain by the end of 2010."
Further discounting to generate sales is not needed. The Case-Schiller index should stabilize in the next few months and start to rise toward year end. Financing limits have been raised by FHA, VA, FNME, and Freddie Mac to include thousands of additional sales. Without additional rental construction, a rental shortage will develop within 22 months with the accompanying increase in rents. As the current supply is absorbed, there will be a lag until new home developments are on line. This will cause the supply-demand equations to again shift, this time higher, with prices reverting from below historical value to above the mean historical value. The discounts available today will disappear and home prices have a strong possibility of a 35% gain by the end of 2010. Beyond 2010, the effects of $9.6 Trillion Dollars may re-flate assets and spark inflation. Real estate as an asset class does extremely well in an inflationary environment. SO, IT'S ALL GOOD!
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