Real Estate Update
According to Esmael Adibi, Ph.D., director of Chapman's A. Gary Anderson Center for Economics Research, the current real estate market is much steadier than you think.
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| Track It To graph the housing market yourself using the S&P/Case-Shiller Index, go to macromarkets.com/ csi_housing/sp_caseshiller.asp |
You know the old saying: “Numbers don’t lie”? Well, that may be true, but it turns out they can twist the truth harder than a kid's party balloon artist. And in the real estate market, you can think of the loss and gain numbers as the three-foot pink octopus on the birthday girl’s head. In other words, during the bleak years of 2007 to 2009, your home likely didn’t drop in value as much as the alarmist daily headlines suggested. Of course, during the recent recovery, it may not have appreciated to the tune of double digits, as widely reported. At least that’s what one of the state’s leading economists, Esmael Adibi, Ph.D., director of Chapman’s A. Gary Anderson Center for Economics Research, says. And he’s been right most of the time over the past decade.
Most recently, Adibi accepted an invitation to join a distinguished new national panel of economists and housing market analysts who will participate in a monthly survey of expected future home prices in the United States. The panel, organized by renowned economist Robert Shiller of MacroMarkets LLC, bases their projections on the respected S&P/Case-Shiller Index. The projections are based on comparing sales of the same house, instead of the median value of homes sold. In tough, slow times, this gives a much more accurate picture. And the first snapshot is relatively good. Specifically, their May report stated that “the onset of price recovery in U.S. single family real estate is widely expected by 2011, and home prices will increase by more than 12.4% between 2010 and the end of 2014.” Also, it stated that home prices nationwide “are expected to have risen 4.9% in the 12-month period [that] ended March 2010.”
And while Adibi is quick to point out that that is nationwide and Orange County, with its large high-end market, might be slightly different, his bottom line message is clear and steady. A lot steadier than the roller coaster of daily headlines surrounding the subject, anyway. Recovery is in place, he says, but don’t expect to get rich overnight – again. And concerning real estate, if you’re looking for the right reasons, now may be the time to look for that dream house. First, here are a few things to know. Consider it a free consultation right when you really need it.
We read a lot of headlines regarding housing values declining drastically a few years ago and now rebounding. How much faith should buyers and sellers put in those?
First, I don’t think our dailies are doing a good job. Let’s concentrate on the housing market the way it evolved to where we are now. Here are a few numbers that help paint the picture. Resale single-family homes hit a high of $747,000 in April of 2007. That was the peak. That went down by 43% and hit $423,000 in January of 2009. Since then, prices have rebounded and the median now stands at $491,000. But that’s where I want to qualify it. From $423,000 to $491,000 is an increase of 16%. So we went down 43% and came back up 16%. But I believe that neither that decline nor the increase really suggests what’s happening to the housing market. In my opinion, those numbers are bogus, both on the down and up side.
Why are you so skeptical, even of the decline?
When home prices started going down, most of the activities were, of course, in the sub-prime mortgage area. Defaults, foreclosures, short sales, all that kicked in and they were all in the sub-prime area. And sub-prime mortgages were concentrated on relatively cheaper homes. Further, the measure was on the median price of homes sold, and when you have limited sales activity and a bunch of sales are concentrated in the low end of the market, then the median is going to come in very low compared to the previous month or previous year. This is what happened at the beginning and why we saw the 43% decline. Most of the homes sold were again sub-prime, etc. and they were moving. So most of the activity was under $500,000 and that was the reason for the [so-called] huge decline.
In other words, in a hard, slow market, the median fluctuates more, and is less reliable?
Yes. For instance, let’s say we sold five houses and the cheapest was $200,000 and the most expensive is $300,000. The median, home number three, is going to fall between $200,000 and $300,000 obviously. Now say the next month we sell another five homes, but the cheapest one this time is $300,000 and the most expensive is $400,000. Now the median is between those. If you compare these two numbers you get an exaggerated price change. It doesn’t suggest that the price of an existing home has gone up or down.
So why don’t you believe in the 16% increase?
Because it merely indicates that the problem is stretching into prime borrowers now. This is where it’s tied to the economy. In the beginning people couldn’t make their monthly payment and their mortgages got adjusted. They had jobs, just not ones that would qualify them for those size loans. So they started walking away. Then later on the real economy collapsed, unemployment started rising, and that caused some people who were prime borrowers at the time to lose their homes. So the activity has shifted to the more expensive homes and that’s why we see the median going higher. So that’s what my point is: These numbers are biased because of the mix of homes sold, not necessarily the existing values of the homes.
There’s been a lot of anger over the fact that the public bailed out these huge banks with one of the reasons being for them to free up credit. However, they’re not. Is that a fair outrage?
It’s not fair. I hate to defend some of these institutions, but we bailed them out because we were worried about systemic risks. In other words, if one of these “too big to fail” institutions failed, the impact on the general economy would have been catastrophic. We also used the word bailout but in many cases these institutions paid hefty prices. CitiGroup, for instance, was charged 6.5%. For AIG, some of those loans were over 8%. Third, one reason these banks got into trouble was that they were lending recklessly, so now they are being extremely careful about who to lend to. They are taking it to extremes, however. People never had to go through this stringent of a regiment, which at times is ridiculous.
How tough is it to qualify for a loan these days?
It’s extremely tough. That by itself puts pressure on the housing market. Especially since currently, in some cases, even 20% might not be enough of a down payment.
So the bank is worried that the home might actually go down another 20%?
No, not necessarily. It’s not the question of whether the prices will go down, but they’re afraid people might walk if they lose their job and don’t have a lot of equity in the home.
What government decisions have you agreed with and what have you disagreed with?
Some of the things the government did were total wastes. Basically, they panicked. That said, I think bailing out the financial institutions was necessary because of the systemic risk. But then came the “Cash for Clunkers” program. That was wasted away because all they did was stimulate car buying for a couple months, then the [car market] was right back in the same place. Secondly, the tax credit they gave for first-time buyers was wasted because it’s just temporary. Same with the mortgage modifications.
What would you like to see done now?
We need to say enough is enough and let the market solve the problem, even if that means a little more pain. But anything else at this point is wasting taxpayers’ money. Unfortunately, right now, our government is looking for short-term gain and not worrying about long-term pain.
What about the latest bill regarding regulations on institutions. Is that meaningful?
No, not at all. First of all, they didn’t address one fundamental issue, which is “too big to fail.” It’s not even mentioned. Most of the stuff they did is cosmetic, or preventing banks from making money. Even the [parts] restricting trading derivatives is vague and they’re leaving the mechanics of how to handle it to regulators to be named later. So they just got something in concept out.
Is a “double dip” recession likely?
No. The possibility of double dip has always existed, of course, but the probability I would put down at 20%. I think we can still squeeze out positive growth.
What about the long-term?
For the long-run we have created quite a mess. We have huge deficits, and the only way for those to go down is to increase taxes, which is never popular. At the same time, the Federal Reserve pumped so much money into the system by lowering [the prime rate] to zero and buying [bad] paper like mortgage-backed securities that if they don’t take it back in a timely fashion, it could become inflationary. I’m talking three years from now, not 20.
How do they “take it back”?
They have to sell them back. And usually, in a healthy market there are always buyers. But right now no one wants to buy securities attached to mortgages, auto loans or credit cards, so the government bought them. At some point they have to get them back into the system. But they are afraid to do it now because that might destroy the housing market.
Taking all this into account, is real estate still a good investment?
If someone has a long-term perspective and wants the home for the long-term, yes, they should shop for their dream home. For that, it’s a good time.
So perhaps the adjustment is good in the sense that people will now buy a home for the “right” reason, in other words, less as an investment and more as a home.
Exactly. Buying a home for your principle residence should not be for investment purposes. Now, if it works out that the price goes up 20% to 40%, you’re lucky but you should buy it because you want to live there. There are also tax and other advantages.
And what about sellers? What should they know?
Sellers should be realistic. If they’re selling something way over the median, they might want to price it eight to 10% less than comps are suggesting. If they do, it will move.
Is the economic recovery real?
Yes, I believe recovery is in place. However, the strength of the recovery is going to be weak. It’s not going to significantly bring unemployment down or create tons of income. So the message in the broad sense is that the recovery is in place and should continue. We are going to start generating jobs, some by the end of this year and then next year more.
What does that mean for housing, especially the higher end?
In the high-end we will see stabilization next year. Next year, we’ll see maybe a few percentage points increase.
What about interest rates?
If you would have asked me two months ago, I would have said they’re going to start increasing at the end of this year, but now, with what’s happening in Europe and the expected slowdown in China, rates are going to stay where they are now until early next year. Then, early next year, if everything we anticipate holds, they will start increasing the rates, mainly to prevent the inflationary problem of too much cheap money out there.
So should people worry that that increase will hurt the housing market again?
No. In the eighties, the housing market was doing great and interest rates were 9%. Jobs and income are more important when it comes to buying. And again, I think we’ll start generating jobs, though at a low rate.
Interestingly, your recent consumer confidence report came out positive.
Yes, consumer confidence came out pretty good. Probably because everything is relative. Last year things were falling apart, but this year, at least those people who kept their jobs are more confident. What was ironic was when we asked them if they were planning to spend more money, they said no. Basically, they’re more careful. And that’s why recovery is going to be somewhat anemic, because consumers are 70% of the economy and if they’re cautious and only increasing spending by 2%, that means 70% of the economy is growing at 2%. So overall, the economy can’t grow at 5%. But it will grow.
