2008 Housing Market Outlook For U.S. Investors
by: Brian.Brady on November 27, 2007 05:53:58 12 comments »
The U.S. housing market outlook for 2008 is somewhat bleak. Mortgage defaults continue to rise, flooding certain locales with more inventory, as mortgage lenders seek to rid themselves of poorly performing loans. The first three months of 2008 may very well be a bloodbath for markets that inflated quickly, regardless of the underlying fundamentals. Parts of California, Arizona, Florida, and Nevada seem most likely to suffer from this final downward push as the weak borrowers are culled from the herd.
Why will the first quarter of 2008 be bleak for housing? Mortgage companies have been losing money hand over fist, in 2007, due to defaults and short sales. I think they're delaying the big losses. REALTORs have been reporting that lenders are becoming increasingly difficult to negotiate short sales in the past few months. It is conceivable that many lenders expect 2008 to be worse than 2007 and are delaying foreclosure activity and short sales until next year. They can "hide" the 2007 numbers in the larger numbers of 2008. It's kind of like limiting your fat intake to 25 grams daily then binging on McDonald's on Fridays. The huge spike in fat grams, ingested on Friday, won't be absorbed by your body and will "flush through your system" on Saturday.
It's a case of pent-up supply. If lenders have 3-4 months of bad loans on their books ,and flood the market in the beginning of the year, it is most likely that we'll see foreclosure and short sale activity, in the first quarter of 2008, that is twice as large as what we've seen this quarter. That increased inventory will put downward pressure on prices for the first half of 2008. The downward spiral, however, should be limited to markets that are driven by lending activity. Pockets within those markets will be impervious to the fall. In San Diego County, for example, La Jolla, Del Mar, and Rancho Santa Fe seem to defy gravity as inland communities drop. Those communities are mostly cash buyers (or low loans to value) while their lesser-priced neighbors rely on mortgage financing. Paradise Valley, Arcadia, North Central Phoenix and parts of Scottsdale seem to be the resilient pockets in Maricopa County.
It's the old adage that the rich get, well..."not poorer" ...while the poor get ...well...clobbered. That is not surprising. The irrational exuberance, displayed by the middle class, during the cheap money orgy, was... well...irrational. Freshman algebra shows us that when we solve for x, it can't equal y. The median income, for an area like San Diego County, is $60,000 and the median home price is $493,000. The affordability equation, even when adjusted for the "sunshine tax" is skewed. If mortgage financing costs about $8 per thousand, and we allow for a full 50% of the monthly income for housing debt service, which is quite generous, we still come up with a maximum loan amount of about $325,000 for the median income family in San Diego County. That suggests that a $175,000, down payment from that family; ...that just ain't gonna happen.
Incomes, in these markets, need to rise or....housing prices, in these markets, simply must decline. If new homeowners don't have the ability to service the debt for a home purchase, they can't buy the property at the inflated price. Look for median prices to gravitate towards that median income. In the San Diego County example, that median price should drop to $400,000. If the "rich get richer", meaning those well-to-do pockets won't drop in value, then the lower end of the market wil get hammered. Therein lies the long-term investment opportunity for the astute property investor.
Housing has utilitarian value, which ultimately trumps economic value. In short, there is value to owning a home even if it is a bit more expensive than renting. There is a peace of mind that comes with property ownership. The ability to paint your walls lime green because it's "you own the sumbitch" does allow for a premium to the traditional investment formula. So, in Phoenix, while the economic value of a home that leases for $700/month may be $130,000, the utilitarian value may go as high as $170,000. If a tenant pays $700 to lease that home, a good borrower could own that home, with no downpayment, for $1133/month or about $850 in after-tax dollars. The question then becomes, "Is $150/month worth it for the right to paint the walls lime green?" I think that the answer is yes.
While astute investors will have a virtual plethora of homes to buy, in the first half of 2008, they shouldn't be PAINFULLY picky. Investors should be judicious but painfully picky is a sure-fire way to ensure that no deal will ever make sense. The shift in housing next year will put an upward pressure on rents, over the next five years, as the percentage of home ownership declines from its national high. It is conceivable, in the transition markets of Southern California, Arizona, Nevada, and Florida, that rents could rise as much as 20%, in the next five years, as those former homeowners lease homes. The long-term fundamentals of these markets still make sense. More people move to those locales than leave each year so steady population growth is on an investor's side.
While the forecast for 2008 is grim, there are silver linings amidst this black cloud. Investors will have opportunities to own great properties if they understand that while we may not be touching the bottom, we can see the bottom through clearing water. Investors should analyze property investments and consider purchase offers with both economic and utilitarian values in mind. In the aforementined Phoenix example, digging your heels in and proclaiming that "the property ain't worth a dime over $130,000" is futile. Understanding that a range of $130,000 to $170,000 is reasonable will allow an investor to negotiate towards the middle of the range and pick up a bargain.
Rather than leverage investments with low down payments, property investors should consider 20% or even as much as 25% down payments to limit negative cash flow. As rents expand and prices firm up, lending guidelines will loosen and remortgaging to withdraw cash, for another property investment, will be available in 2-3 years.
Today, we can feel the bottom amidst the muddy waters. Tomorrow, we'll be able to see it as those waters clear. Next year, we may very well have touched bottom and will be floating towards the surface; we just won't know it until we've come up for air.
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· http://www.bawldguy.comI said this time next year, in my opinion, we may be able to look back and pinpoint when the 'recovery' from this correction began.
Best post on the subject I've seen so far.
Permalink November 27, 2007 23:14:08 · http://www.SanDiegoPreviews.comBrian:
Excellent article. We are already starting to feel the muddy market bottom in San Diego, evidenced by the multiple offers that come with under-market listings. We currently have such a listing and it is reassuring to see this activity.
And for what it's worth, the buyers are not investors. They are well-qualified homebuyers who have been waiting for this opportunity.
Permalink November 28, 2007 05:37:31 · http://BeachcityRealEstateInfo.blogspot.comFinally an article that makes sense. You are right on target with our California markets. The South Bay beach cities around LAX have really been holding their own.. there are foreclosures but so far they are few in number and inventory continues to be lower then last year .
Like Roberta we are seeing multiple offers on well priced properties. The ones that contiinue to languish are thoses that have been on the market for a long time, were overpriced when theywere listed 6-10 months ago and are still overpriced.
Prime property along the Strand continues to increase in value and is selling at a premium price.. usually all cash in 10 days or less.
Permalink November 28, 2007 07:42:44 What will be well-priced? This game's gonna get fun in the next few months. How will we explain why a condo in Fullerton drops 10% while a townhouse in Costa Mesa rises 5%?
Conforming loan limits aren't going up in 2008. No lifeline for the masses this year.
Permalink November 28, 2007 08:22:43 · http://www.WeAreAZRealEstate.comGreat piece Brian. I can always rely on you to put out your thoughts clearly and eloquently. I have tried to make this point with clients, but you state it so much better.
Permalink November 28, 2007 13:49:50 · http://burbankmarketreport.com/You are spot on Brian! Great post on this topic.......I think figuring out what is well priced and convincing sellers is going to be two different things. Next year should be very interesting, to say the least.
Permalink November 28, 2007 19:03:13 intelligently written. I think the problem is that most of the properties have loans on them for much more then $400000; therefore, what has to happen is either a shortsale(major pain in the ass) or foreclosure(already happening) or the current owners suck it up and hold out through the storm. Mrs. Stay at Home mom needs to go back to work to supplement the family income, now.
Permalink November 29, 2007 21:11:44 You're right. Mom going back to the office would salvage the situation for the long-haul homeowner.
Permalink November 29, 2007 23:54:34 · http://www.SuburbanVillageRealty.comWell written Brian. The price slashings in Las Vegas are already looking very appealing as the first snow storm comes rolling into Chicago.
The big drop in prices, drop in new home permits and the projected job growth for Las Vegas over the next four years should certainly not be ignored.
Permalink December 01, 2007 12:26:41 · http://www.bbqcapital.comBrian,
Investors will only prosper so long as the lending doesn't continue to be a problem. I've got a deal now with "golden" buyers, pristine properties, 80% ltv and I am getting stipped to death. It's annoying. And it's spooking people.
It's just crazy.
Permalink December 06, 2007 15:16:50 · http://www.redwagonteam.com/blogWe are working with a lot of buyers despite the media's down play on the real estate market. And, I'm running into a lot of multiple offer situations for my clients.
Permalink June 07, 2008 22:29:34 · http://www.longbeachrealestatehome.com/Starting to see a light at the end of the tunnel here in Long Beach. Buyers are out shopping and buying, lots of multiple offers on properties that are priced to sell as they hit the market. Putting one into escrow tomorrow, hit the market priced to sell, wrote offer then showed the property same day it was listed. 2 offers came in as my offer was accepted.
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