Home Buyers to Re-Enter Real Estate Market In 2012

Real Estate

Wall Street Greek's Real Estate Columnist Michael Douville tells us the penalty box is full of potential home buyers, but the power play will be over for many toward the end of this year. In Douville's home market of the Sand States of the West, that release comprises some 65% or so of buyers back onto the real estate ice.

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Home Buyers to Re-Enter Real Estate Market In 2012

The penalty box is full! Fannie Mae (OTC: FMCC.OB), owner of upwards of 90% of the conventional home loans in the United Sates, has restricted new loans to troubled borrowers. Distressed home sellers liquidating their properties either through a gut-wrenching foreclosure or a sale with a negotiated settlement via the "Short Sale," are prohibited from re-purchasing for 24 to 84 months depending on loan default status.

Distressed sales comprise upwards of 65% of current sales in the Sand States of California, Nevada, Florida, and Arizona. The buyers that fueled the bubble of 2005-2007 are liquidating their underwater properties. This segment of the population is huge. Everyone was buying at least one property in the 2005 to 2007 span, and 65% of those buyers fell into trouble in the 2008 to 2010 period. They are now contributing to the distressed sales flood.

"65% of potential home purchasers cannot buy now."

Let me make my point clearly here: 65% of potential home purchasers cannot buy now. There is a vacuum, a void being filled by savvy and return driven investors able to purchase these greatly discounted properties. There is a quantum difference between the manic buyers of the bubble and today's buyers. Today's buyers are looking for "Investment Return". Today's buyers are purchasing to generate current income, visible immediately after closing, unlike a possible gain years from now; consequently, a much tougher and discerning buyer exists.

Investment buyers are estimated to comprise 40-60% of all real estate sales. Current profit is the only motive; there is no emotional tug by backyards with swings, or homes close to family or schools, or wallpaper to match the baby's blanket. It's about profit! If one investor pays $100,000 for a property, the next investor down the street wants to pay less! The components necessary for a balanced market are absent. The adage for value: "A fair price is what a non-distressed seller is willing to take and an educated buyer is willing to pay," has become obsolete at the moment. The "Housing Clearance Sale" continues. Distressed sales have taken the leading edge of the pricing trend, and until the traditional buyers return, price appreciation and economic activity will continue to be muted in real estate related industries.

In a normal sales year, a homeowner sells their home and re-purchases a different home. In the transaction, capital changes hands and there is a "velocity of money," as loans are originated, commissions are paid, and titles are insured. Further, home improvements are planned, painting and accessories are bought, and typically new furniture and electronics are bought to update the new home; thus the economy greatly benefits. This chain of events has been interrupted; jobs have been lost that are structurally not available. Roofers and framers need to be retrained; retail furniture space needs new utilization; loan officers, escrow officers, and real estate agents need new career paths for the next 12-24 months.

Furthermore, the relaxed underwriting standards of 2005-2007 have been replaced with guidelines that are far more stringent than may be necessary, as loans originated after 2009 have the lowest default rate in decades. Many underwriters are concerned a bad loan may be construed as an illegal loan, and credit score requirements have continually crept higher and higher - raising the bar to home ownership. Verifying information has always been sound business practice, however, the knee-jerk reaction from the far-too-relaxed standards of the bubble years may have driven far too stringent standards in today's lending practices.

If the economy continues to improve, consumer debt will continue to be reduced, lenders' reserves will grow, and eventually standards will loosen - qualifying more and more potential buyers to enter the housing market. The time restrictions mandated by Fannie Mae will expire and millions of buyers will become eligible to buy. Look for flat prices through 2011 and abundant potential properties through the second quarter. However, as properties are slowly cleared, fewer will enter the market. Toward year end, the first wave of penalized buyers will start to become eligible and will compete with investors for properties. By 2012, enough former home owners may become buyers to squeeze the investors out of market dominance. When owner occupied sales regain their dominance in mid-2012, true appreciation should result with prices recovering until the next recession.



Editor's Note: Article should interest investors in Bank of America (NYSE: BAC), Freddie Mac (OTC: FMCC.OB), Fannie Mae (OTC: FNMA.OB), Goldman Sachs (NYSE: GS), Morgan Stanley (NYSE: MS), Wells Fargo (NYSE: WFC), Toronto Dominion (NYSE: TD), UltraShort Real Estate ProShares (NYSE: SRS), Ultra Real Estate ProShares (NYSE: URE), ING Clarion Global Real Estate Income Fund (NYSE: IGR), Xinyuan Real Estate Co. (NYSE: XIN), Rydex Real Estate Fund H (Nasdaq: RYHRX), T. Rowe Price Real Estate Fund (Nasdaq: TRREX), Toll Brothers (NYSE: TOL), Hovnanian (NYSE: HOV), D.R. Horton (NYSE: DHI), Beazer Homes (NYSE: BZH), Lennar (NYSE: LEN), K.B. Homes (NYSE: KBH), Pulte Homes (NYSE: PHM), NVR Inc. (NYSE: NVR), Gafisa SA (NYSE: GFA), MDC Holdings (NYSE: MDC), Ryland Group (NYSE: RYL), Meritage Homes (NYSE: MTH), Brookfield Homes (NYSE: BHS), Standard Pacific (NYSE: SPF), M/I Homes (NYSE: MHO), Orleans Homebuilders (AMEX: OHB), Vanguard REIT Index ETF (NYSE: VNQ), PNC Bank (NYSE: PNC), J.P. Morgan Chase (NYSE: JPM), Hooker Furniture (Nasdaq: HOFT), Ethan Allen (NYSE: ETH), Pier 1 Imports (NYSE: PIR), Williams Sonoma (NYSE: WSM), Home Depot (NYSE: HD), Lowes (NYSE: LOW), AMEX: VAZ, AMEX: NKR, AMEX: MZA, AMEX: NXE, AMEX: NFZ, Nasdaq: XNFZX, Nasdaq: FSAZX, Avatar Holdings (Nasdaq: AVTR), Apartment Investment & Management (NYSE: AIV), Equity Residential (NYSE: EQR), Avalonbay Communities (NYSE: AVB), UDR Inc. (NYSE: UDR), Essex Property Trust (NYSE: ESS), Camden Property Trust (NYSE: CPT), Senior Housing Properties (NYSE: SNH), BRE Properties (NYSE: BRE), Home Properties (NYSE: HME), Mid-America Apartment (NYSE: MAA), Equity Lifestyle Properties (NYSE: ELS), American Campus Communities (NYSE: ACC), Colonial Properties (NYSE: CLP), American Capital Agency (Nasdaq: AGNC), Sun Communities (NYSE: SUI), Associated Estates (NYSE: AEC), PennyMac Mortgage (NYSE: PMT), Two Harbors (AMEX: TWO).

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