One of the founders of what has really become the industry’s (and media’s) bible for real estate statistics and forecasts, S&P Case Shiller, recently participated in a Q&A about the state of the housing market. Robert Shiller, a Yale University economist, discussed the housing market and the implications of lower interest rates. I found it quite conservative yet insightful and in my opinion, on target with what is going on in today’s market.
That is why for this edition of Weekly Market Watch, I am going to provide you with an excerpt from his interview:
Is the slump in U.S. home prices bottoming out?
Shiller: The situation has definitely changed. With our numbers — the S&P/Case Shiller home price index — going up sharply. It looks like a major turnaround. We’ve been watching that for three months now, and we have some concern that it could be an aberration and temporary. But, at this point, it seems to be evident in just about every city in the U.S. That suggests it’s real. But it probably isn’t the beginning of a major boom, just because the economy is in such bad shape. There’s also a chance that it will reverse. It’s still only three months old, so it’s very hard to be sure at this point. The most likely scenario is that it won’t continue at this high rate of increase, but that it will neither go down a lot, nor up a lot.
So the index will move sideways for a while?
Shiller: Yes, for a while, meaning five years.
What are the main factors driving U.S. house prices? What could push them up, or cause another slump?
Shiller: The main factor is the world economic crisis and the efforts of governments around the world to stimulate the economy. Parts of those efforts have been directed at the housing market. In the U.S., there is an 8,000 dollar first-time home buyer’s tax credit which expires at the end of November. That’s a reason for concern, as it comes to an end. Also, the Federal Reserve has a plan to buy $1.25 trillion worth of mortgage-backed securities to support the housing market. They are most of the way through the program and anticipate phasing it out at some time in 2010 - that’s another thing that will go away. We’ve yet to see how the housing market will continue. Part of the problem is that people are buying now rather than later. When later comes, there could be a downturn in the market.
Is there an oversupply of houses in the U.S.?
Shiller: That’s been a problem. The inventory of unsold houses has been high, but has come down a bit. On top of that, there will be more foreclosures, more homes are going to be dumped on the market as people default. Now, that may show down as home prices will start going up again. But I suspect that this isn’t going to happen. Also, banks have more REO, or real estate owned, that they’re holding on to for the time being. But eventually those REOs are going to be dumped on the market. So that’s why it doesn’t look particularly encouraging from a supply consideration.
Turning to interest rates, which are at exceptionally low levels: Is there a risk that this eventually will cause irrational exuberance?
Shiller: There is always a risk of that. Those things are hard to predict. However it seems like the present time is least conducive to bubbles of any time. We’re in what some people call “pretend-and-extend” economy, which means that banks that have commercial loans are often extending those loans and pretending that the property is worth something. That’s because they don’t face reality. This kind of economy isn’t really suited to a beginning of a real bubble. Now, everything could change… It’s surprising how strong the residential, single-family home market looks right now. It makes me think that it’s hard to predict animal spirits.
How long can central banks afford to keep expansive policies in place?
Shiller: In principle we can keep this in place for a long time. That’s what Japan did… But confidence is definitely coming back. The depression scare is over at the moment. So it would be plausible that central banks could be raising interest rates — both in the U.S. and Europe — [as early as next year]. But I just have a worry that this isn’t going to happen and that it’s not going to be so easy to extricate [themselves from the low-rate environment].
Will the sharp increase in global debt levels drive up inflation over the medium to long-term?
Shiller: My best guess is that we won’t have inflation, that central banks will pull it back as inflation starts to begin. But I think that there’s a chance of it; people have to be defensive in their investments. It always amazes me that people are so trusting and that they want nominal debt as much as they do… So a good long-term strategy is to invest a good part of one’s portfolio in inflation-indexed bonds, even though it doesn’t particularly look like the time to worry about inflation right now.
I tend to agree with Shiller on many of his statements, specifically that we are probably in the midst of a turnaround. Having said that, it is important to point out that this isn’t going to be a sharp “V” recovery with a sudden jump in prices or units. In all probability what we will see is a long “L” shaped broad recovery in which prices are relatively stagnant for some time before eventually inching up.
Now, let’s take a look at this week in real estate:
- Boulder/Longmont—The Boulder office reported the biggest change in the Boulder County market over the past week was the big jump in showings for our office, up 18%. Listings and sales showed smaller changes, up 6% for listings, down 12% for sales. Increased showings seem to be the result of lower interest rates and Agents report more activity as first time buyers fear that the clock may run out on the $8000 incentive. The Longmont office reports showing activity is slowing just a bit. First time buyers and those in the lower price ranges are the main shoppers. Listings under $250,000 are being shown and sold. Right now, with the final push for the $8000 credit, any home under $250,000 that is NOT a short sales is snapped right up! Investors know that this is the time to buy. They are fine with the down payment. The rental market is strong. Now is the time to start your "Property Ladder"!
- Evergreen/Conifer—Evergreen reported we had eight new listings for the week. Two listings went under contract including one single family home on the market for three years and one single family home from a floor call, both local buyers. Two buyers put under contract in the last week, one out of state buyer from MD and one local buyer purchase of single family home in Parker, a mid $200,000 property on the market for less than a week. There were 69 showings plus ten agent previews during the week. Conifer reported there were no new listings during the week. No listings went under contract and no buyers were put under contract. Our showing activity increased to thirty-four during the week.
- Denver Central– There has been an increase in first time home buyers looking for properties and wanting to take advantage of the $8000 tax credit. With the deadline fast approaching and the possibility of an extension not occurring buyers are going to have to select a property within the next 30 days in order to close in time. The Denver real estate market continues to get positive national and local press on a weekly basis. We're very encouraged and excited about the future of real estate in Denver.
- Devonshire— Now that our few days of cold, wet weather are over, we're excited about a good open house weekend. Our September was a little quiet as it usually is but October in the Devonshire office is always a busy month. Sellers are anxious to show their homes with fall decorations and turning leaves. Buyers this year are busy getting homes under contract and closed prior to the end of November. We're advising all buyers and sellers to close no later than November 15th if possible due to the rush to get homes closed by the 30th and it'll cause title and mortgage companies to be overloaded. Also, the 30th is the day after Thanksgiving holiday weekend and that in itself may cause backlogs and stress. We're excited to see the activity and energy that fall brings.
- Douglas County—Our Southwest Metro office reports showings have been down the past three weeks especially this past weekend. Open houses were good and our Agents did acquire some good leads. Our Agents do have sellers gearing up to list their homes and do have buyers starting to become worried about the deadline for the $8000 credit. We feel that the public is in a holding pattern. They are waiting, especially buyers, to see if the $8000 credit will be extended or increased. We did have one Agent who had three of their listings go under contract in a week, one in 24 hours! We've had some great floor calls and also two walk-ins. Interest rates are good and we're seeing some buyers ready to start the process just in case the tax credit program is not extended.
- El Paso County—Colorado Springs reports the listing inventory is still very steady, however buyer activity increased drastically last week. This could be an indication that more first time buyers are getting very motivated in order to take advantage of the tax credit which will expire on November 30th. For the same reason, we see a number of multiple offers on energy priced listings that are not short sales! We received twelve (!) offers on one bank owned listing!
- Larimer County— New listings are up in both the Fort Collins and Loveland offices and the showing activity is also up from last week. Homes that went under contract this last week were listed as high as $637,000 down to $110,000 with most of the home sales in the mid-$200,000 range. There were also several homes priced in the $300,000 to $400,000 range. There are some great homes available and FHA rates are still at or near all time lows! More great news - There are still 70+ days to take advantage of the $8000 tax credit, but time is slipping away quickly. Realistically speaking, you need to be out looking at homes today if you hope to close prior to the November 30th deadline. You don't want to be closing at the end of November & risk having your closing pushed back past the deadline. Get out there and find your dream home at a great price and don't miss out on the $8000 tax credit!
- North Metro— Overall business continues to be steady for the month of September. Listing inventories are decreasing as we move into the late summer. Buyers are continuing to take advantage of the buyer program and as a result we're seeing a lot of activity at the $100,000 to $225,000 part of the market. Average prices are edging up and we feel that this will stimulate the listing side of the business.
- Parker— After a slowdown during August and early September, activity is picking up again. First time buyers are now very motivated to get under contract in order to close before November 30th to be able to take advantage of the $8000 tax credit. Power priced listings are still getting a lot of activity, multiple offers & some sell over asking price.
- Southeast Metro— Showing activity has increased and we're back to 500 plus per week. Listing inventory is steadily decreasing and the number of new listings in the market is also on the decline. However, sales activity is busier than ever! We're scheduled to close over 150 properties this month, which is not our typical September. The luxury market continues to be sluggish, however homes in the $700,000 range are seeing more activity than the previous month.
- West Lakewood— Appraisal problems still exist. An appraisal came in yesterday $55,000 below contract price. Anything under $250,000 is almost flying off the shelf on the west side of town. More $300,000 and up listings are selling. Buyers and sellers are calling our office for more information regarding current listings and to list their homes with Coldwell Banker.
Without a doubt, locally what continues to push our market in the right direction is the $8,000 first time home buyer tax credit. Currently in Washington D.C., real estate industry representatives and government officials are lobbying for either a $15,000 all home buyer tax credit or at minimum, an extension of the $8,000 first time home buyer tax credit but the result of that debate is still in the air. If the tax credit does disappear we are likely going to see an emergence of investors in the first time home buyer arena which may cause problems with housing prices and a continued erosion of the first time home buyer market. Please contact your local representative to call upon his/her support of this important initiative.
Next week I will release the October edition of Reality Check. This month’s edition will feature a Q&A from me on the local housing market and what we may expect for 2010.
Until then,
Make it a great week,
Chris Mygatt
Coldwell Banker Residential Brokerage Colorado
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