Signs of life

This is from the August/September 2012 issue of Commonwealth. I had been watching and collecting statistics and the overall market for several months, and I originally wrote this as a blog post. But it got so popular — and passed around so much — that our CEO decided to make it the magazine’s cover story.

Yes, Virginia, the housing recovery is here, it’s well past the beginning, and it’s moving strongly and steadily.

But I don’t expect you to believe that.

Back in March 2005, the cover story for this very magazine was “No Boom, No Bust, No Bubble.” In it, various respected economists — including then-chairman of the Fed Alan Greenspan — insisted there was no immediate danger to the housing economy. There was no bubble to worry about.

A year later, that non-existent bubble burst. You know the rest.

What that means is that you’re expected to everything you read here with a sizeable chunk of salt.

You should, in fact, take everything with that same piece of salt, because it’s obvious that even “foremost economists” don’t always have a clue. And a Realtor association saying “The recovery is here” may not carry a lot of credibility. But don’t dismiss it. Read this story and check for yourselves. See if you see the same things.

There’s no sugarcoating here. VAR has enthusiastically called shenanigans on everything from journalists’ stories to NAR’s stats to government figures — whether they’re too positive or too negative. We realize that the extremes of breathless enthusiasm or Eeyore-like negativity are sure ways to lose your credibility.

But when the news is good, we’re darned sure going to tell you about it.

The news is good.

You won’t find reams of statistics here, or pages of charts comparing this year with the Great Housing Crisis of 1825 or whatever. It’s not about individual pieces of data. Instead, it’s a look at the gestalt — the bigger picture — based on the housing news coming through the wire.

And that news is more often good than bad. The endless tide of negative news has been replaced, bit by bit, with positives.

You can certainly argue something like, “Well, the inversely-correlated regressive dollar-value figures show that housing still has 28.412 percent (+/- 3.54%) to fall,” but numbers don’t tell the whole story. Context does. Consider hockey’s Gretzky brothers: Wayne and Brent Gretsky are the highest scoring pair of brothers in NHL history. But Brent only scored a single goal. Numbers can be accurate and misleading.

We’ve passed bottom. We are in a recovery.

Good news

When I say we’ve hit bottom I don’t mean that every metric is going to be going up. Prices, for example, have a bit of ways to go down, and won’t be climbing back to 2006 levels for a while. I mean that the overall bottom of the housing crisis is past us.

You’ll see this if you look at the broader economic news, and if you drill down to housing-specific data — as housing goes, so goes the economy… and vice-versa.

Unemployment is down. Sure it’s not as low as we’d like, but it’s well below its peak and has been dropping steadily. More jobs mean fewer delinquencies (and thus fewer foreclosures and REOs).

HARP is working. Letting more people refinance at lower rates puts more money back into the economy, and the Obama administration’s Home Affordable Refinance Program (now on its second iteration) is doing just that. It’s got traction, too: Refinancing jumped in the first quarter, and if HARP expands again (to allow borrowers with FHA loans to take advantage of the program), even more people will get a lower rate — and more money in their pockets.

Granted, they aren’t using that money to buy a new house, but they will spend it — and that means jobs, and jobs means housing.

Delinquencies are down. Thanks in part to these first items, more people are able to pay their mortgages. Fannie Mae and Freddie Mac’s single-family serious delinquency rates have been dropping since early 2010, and the Mortgage Bankers Association says the delinquency rate for multifamily mortgages is also dropping.

Meanwhile, since January the national consumer credit default rate — which measures how good a job consumers are doing paying credit card bills, car loans, and so on — has been falling. People are getting back on solid ground, albeit slowly.

Interest rates are still crazy low. Despite some economists’ predictions of rates beginning to climb any day now, it hasn’t happened. And even if they did begin to inch up, it’ll take a while for that to affect buyers. The average consumer isn’t going to say, “I would have bought at 3.95%, but not at 4.1%.” In fact, if rates start to inch up it may pull some iffy buyers off the fence — they won’t want to miss out on record-low mortgages.

Lending is loosening. The Federal Reserve Board found that borrower demand for mortgages is increasing, and thus lenders are preparing to “increase their exposure to such loans.” Put another way, the pendulum is starting to swing back.

It’s not just the Fed recognizing the increasing demand. Credit information service Experian just released a white paper aimed at lenders, “Expanding the marketable universe.” Its goal is to help those lenders expand their offerings beyond top-tier borrowers — to find and target “near-prime” clients — because Experian sees that lenders are finally ready to get back in the game.

Rents are rising. At one point, people turned to renting as a less-expensive (at least in the short term) alternative, especially when they couldn’t afford or qualify for a mortgage. But thanks to that increased demand, rental rates are going up. And up. In some places they’re setting records, and they’re making home ownership look like a better option — something that bodes well for the long-term.

Short sales are getting more efficient. Earlier this year, the Federal Housing Finance Agency had had enough of lenders taking forever to process short sales. It released a set of rules to speed the process, requiring mortgage servicers to respond to short-sale requests within 30 days. (They can take up to 60 days in certain circumstances.)

Soon after the government gave them what-for, RealtyTrac reported that short sales were up significantly. And in May, in MRIS territory (which includes a large portion of Virginia), there were more short sales than foreclosures — and that’s good for everyone, especially as the total number of distressed sales is going down.

Inventory is down. Nationwide, listings are down more than 20 percent from a year ago, and continue to drop. Virginia’s inventory was down more than 37 percent in May from a year before, although some areas are seeing larger drops than others — Northern Virginia had 16 percent fewer listings in May, for example, while the Richmond-Petersburg area saw a 27 percent drop.

“Shadow inventory” never flooded the market. When banks finally paid the piper for the robo-signing scandal, conventional wisdom held that there was going to be a rush of foreclosures and REOs flooding the market, driving prices down and pushing underwater sellers further out of the market. It never happened. (And Virginia didn’t have much of a backlog anyway.)

In fact, CoreLogic found that shadow inventory — homes not on the market, but soon expected to be — was down almost 15 percent from a year ago.

As housing expert Bill McBride (who writes the well-respected Calculated Risk blog) put it, “[I]t is hard to imagine a huge wave of foreclosures. If anything it will be more like a sustained high tide in certain judicial foreclosure areas.”

Buyers are returning. Maybe they aren’t coming at the rate we all want to see, but buyers are coming back. Whether it’s because people can’t resist the low prices or the low mortgage rates, or simply because they’re feeling more confident, more people are out looking. In some areas, as the Wall Street Journal explained in a headline, “Stunned Home Buyers Find the Bidding Wars Are Back.” In others, it reported, “Buyers Frustrated by Low Inventory, Rising Prices.

Investors are investing. Housing as an investment — in the sense of creating rentals, not flipping — is catching on. Investors are pouring money into the market, both by buying single-family homes and by building multi-family ones. A Wall Street Journal headline sums it up nicely: “Investors See Gold Rush in Foreclosure-to-Rental Properties.” After all, eventually all those 20-somethings who moved back with mom and dad will have to leave the nest… again.

Forward-looking indicators are up. Whether you’re viewing stats from homebuilders (whose confidence level is rising, by the way), or the Census Bureau, or Virginia Tech (which does its own monthly study), the trend is the same: Permits and construction are both rising. So, too, are mortgage applications; in June they hit their highest level since 2009.

Housing starts have risen more than 36% from the market bottom, and homebuilders report a big boost in order growth. Oh, and construction employment is up, too — more than 100,000 jobs from the bottom.

Does it all mean anything?

Yes, yes it does. Sales are going up. That simple. Some places are seeing faster gains than others, and the overall shift isn’t as fast as we’d like, but the numbers are there. (Remember, things drop quickly but they tend to rise slowly.)

In Virginia, since 2010 almost every month’s sales have been above those of the year before. The latest figures (from May 2012) show statewide sales up six percent from 2011; in April the year-on-year gain was 10 percent. In Southwest Virginia, sales were up a whopping 38.2 percent from 2011 to 2012.

Of course it’s possible that your area isn’t seeing any bright spots. Recoveries are uneven. But the market as a whole is improving, and the tide will eventually raise all our boats.

Yes, but what about prices?

Prices are down, and they seem to keep dropping (at least nationally) — 2.9% over the past year. This isn’t surprising. This is what it looks like when the market gets back to normal.

Remember that the housing bubble inflated prices above realistic and rational levels. In other words, we shouldn’t expect them to get back to that level — not for some time, at least. Instead, they’ll drop till they hit historical norms, then roll along with ups and downs, generally tracking inflation. (Case and Shiller have shown that home prices haven’t really changed much — in terms of affordability — in more than a century.)

A recovered market won’t have prices rising every month. They’ll go up and down, month to month, with a bit more on the upside over the longer term.

Of note is the fact that REO prices have actually risen — 5.5 percent over the past year. Investors know good deals when they see them, as do individual home buyers. Higher demand means higher prices, and that in turn means less drag on the prices of non-REO property.

There are also more short sales happening that foreclosures. That’s better for property values, and it’s another parachute keeping declining prices from dropping too fast. And listing prices, according to Trulia, are inching up.

Still, what we saw in 2006 and 2007 wasn’t the norm, so don’t expect prices to get back there any time soon. Talk of prices hitting “bottom” is really talk about prices returning to their normal level.

These changes aren’t always huge or earthshaking or headline making. But they’re consistent and they’re across the board, from lenders to builders to buyers. And they all point to a turnaround in the market.

Is it a guarantee? Of course not — just check out the “Downsides” sidebar. But there is enough good news coming in and coming in regularly to make it fairly clear that the worst of the market is behind us.

Sidebar: Downsides (in no particular order)

Political gridlock. Once upon a time, our leaders made decisions based on what they thought was best for the country. They disagreed about what that was, but we were pretty sure they all had our common good in mind.

These days, though, it’s all about partisan bickering. If someone from The Other Side has an idea, it must be bad. Votes that should take hours take weeks. Decisions that are simple are bogged down in minutiae. This means that the people who are actually trying to do things are faced with a long-term uncertainty about what’s going to come out of Washington, and that’s no good for a market looking to stabilize.

Consumer confidence could falter. Yes, how people feel about a situation can affect what actually happens. As consumers become more confident in the market they’re more likely to go out and buy — the spectre of a property-value crash is no longer over them., which had been going up, began to decline.

The reverse is also true, and while consumer confidence has in general been going up, it’s not a steady rise. If consumers lose faith in the markets, it will take a while for it to be restored.

Europe. It’s a financial mess over there. Will Greek leave the euro? Will Spain need another bailout? Will Italy? What does it all mean, anyway? Some of these may be answered by the time you read this, others will remain up in the air. But European messes have a tendency to spill over to this side of the pond — although how it would affect things here is everyone’s guess.

Student loans are a drag on the future. Young folks are the buyers of tomorrow. In theory. Trouble is, they’re finding themselves under a load of crippling debt from student loans that will take many years to pay off — years when they could be saving for a down payment or paying a mortgage. That means that as we predict the market going forward we have to assume a generation with much less disposable income.

Expensive rentals won’t last forever. Although the high demand for rentals has made them more expensive, that won’t last forever. Investors are buying up foreclosures to turn them into rentals (they, too, can read the writing on the wall). That means supply will eventually increase to meet demand and, possibly, drive rents down and make them more attractive.

Lower supply could be a bad thing. Normally after the past few years we’d be glad to see all that excess inventory absorbed by the market, whether by individuals or investors. But low supply is also caused by people being unable or unwilling to sell their homes; if someone is deep enough underwater, he won’t bother listing his home even if he wants to move.

CoreLogic’s economists looked at this very issue and found that yes, there was a solid correlation between how much negative equity there is in an area and how many homes are for sale. More underwater owners mean less inventory. Simple as that.

It gets worse. As more people get out of negative equity situations (though short sales or simply accepting less), it means they’ll have less money for a down payment on their next home. And lenders aren’t terribly interested in no-down-payment loans, meaning owners will become renters.

So when we see that “months of supply” number go down, we’re seeing a symptom — and we don’t know how much of it is caused by something good (more sales) and how much is because of something bad (underwater owners).

Unemployment figures lie. The way the federal government has measured unemployment for the past decade or so is misleading. It doesn’t count people who want a full-time job but have run out of unemployment benefits, or those who are working part-time because that’s all they could get. Real unemployment is actually two or three points higher than the number you hear on the news. And when you read about unemployment going down, that just means people are coming off the unemployment rolls — not necessarily that they’ve found full-time work.


Sidebar: Who’s on the bandwagon?

Harvard’s Joint Center for Housing Studies: While too soon to tell with confidence, the worst may be over. [snip] The FHFA Home Price Index…also showed a year-over-year increase in the first quarter 2012, providing further evidence that home prices are finally stabilizing.

Tom Lawler, independent housing economist: “As always, of course, real estate is local. Nationally, however, I believe the housing market has bottomed, both in terms of production (starts), sales, and, with a lag, prices. Don’t expect rapid rebound…”

Zillow: “With stronger home sales, we’ll see a reduction in the amount of vacant housing inventory and an improved ability to absorb foreclosed homes. This increased demand will eventually start to put a floor under home values.”

Brad Hunter, chief economist for housing-information service Metrostudy: “I think we reached the bottom at least a year and a half ago for housing starts and housing demands. For prices, in some markets we have reached bottom – but not all.”

Glenn Kelman, CEO of Redfin: “We hit the bottom last year. I don’t think that means it’s going to be a V-shaped recovery. There will be ups and downs and sales volume isn’t going to recover in any meaningful way.”

Bill McBride, economist at CalculatedRisk: “Clearly new home sales have bottomed. Although sales are still historically very weak, sales are up 25% from the low, and up about 15% from the May 2010 through September 2011 average.”

Rick Sharga, executive vice president, Carrington Mortgage Holdings: “I think we’re either at or very, very near the bottom, and that prices will stabilize on a national basis this year.”

Budge Huskey, president and COO of Coldwell Banker Real Estate: Besides the obvious improvement in the labor market, “there are some fundamental things that are shifting in the real estate space that bode well for the balance of the year,” says Budge Huskey. “We’ve had several straight months of positive housing data [that’s] really been in line with the more positive economic data. They are going in lockstep.”