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Price Increases Coming in Foreclosure Hot Spots?

Another report based on Metropolitan Regional Information Systems data says the supply of for-sale homes in the Washington area fell in July, to 5.3 months' worth. "That level of supply is considered at or below equilibrium," according to the folks at Metrostudy, a consultant hired by MRIS, the local multiple listing service. And because supply is below the six-month threshold that marks a balanced market, they expected prices to rise soon.

"We are expecting significant -- more than 10 percent -- year-over-year increases in resale prices to begin in Loudoun in August and in [Fairfax and Arlington counties] and Prince William in September," said Ken Wenhold, director of Metrostudy's mid-Atlantic region. The report says the inventory of for-sale homes also shrank in the District and Maryland suburbs, except for Charles and Calvert counties, where it increased slightly.

Big surprise: Prince George's County could be one of the first in Maryland to recover. The supply of homes has been shrinking rapidly lately. "Prince George's could potentially approach equilibrium (where demand and supply are balanced) early next spring, an idea nearly inconceivable just last year," Wenhold said.

However ... not everyone agrees. A new report from the Center for Economic and Policy Research and the National Low Income Housing Coalition, "Hitting Bottom? An Updated analysis of Rents and the Price of Housing in 100 Metropolitan Areas," says home prices in the Washington area are still too far above the rent for a comparable home, and therefore home values will continue to fall. In fact the Washington-area market (extending out to West Virginia) is in for bigger losses in home equity than we experienced last year, according to study authors Danilo Pelletiere, Hye Jin Rho and Dean Baker.

And then there's the ultra-gloomy prognosis released last week by analysts at Deutsche Bank. According to Bloomberg News, Deutsche Bank analysts expect U.S. home prices to fall through the first quarter of 2011. Prices will fall an additional 14 percent, on average, the bank says. It says 48 percent of all mortgages could end up underwater -- greater than the home's value -- by that time.

Everybody has their own interests at stake. Real estate companies like MRIS root for improving markets; Deutsche Bank worries about continued lending losses; CEPR and NLIHC want to boost the supply of affordable housing. Who do you think has it right?

By Elizabeth Razzi  |  August 12, 2009; 6:00 AM ET
Categories:  Foreclosure , Mortgages , Statistics , The economy , The market  
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Comments

As I pointed out last time you brought up the 6 month rule of thumb, I don't think that's applicable to the DC metro area. In the last downturn the MOI stayed under 6 months for years while prices still declined or stayed flat. Inventory was kept down because no one wanted to sell at a loss (due to transaction costs if nothing else).

However, the median sale price will start going up soon, as soon as REO's start drying up. REO's becoming a smaller share of the market, entry-level housing coming back to being it's normal share of the market, both will move the median up, while prices on individual houses can continue to fall, as the motivation for buying those nicer homes will be that their prices are lower.

So, it's not just who's telling, but faulty metrics as well. The only thing that matters is can you buy a house you will enjoy for a price you can easily afford without totally draining your emergency cash. If you can't, then wait, and hope that prices continue lower. If you can then go ahead and buy if the time is right for you and you're okay with the premium you'll be paying over renting, or the potential future losses when you go to sell.

Posted by: kingstowne_renter | August 12, 2009 10:07 AM | Report abuse

I wonder if the proposed increases would be statistically significant? The most recent and widely bandied about 11% was not statistically significant. Can you get a copy of the report and give us a confidence interval for the estimated year over year increase?

Posted by: burkemic99 | August 12, 2009 10:33 AM | Report abuse

So, if not 6 months' inventory, what would you say is the mark for a balanced market in the Washington area?

Posted by: Erazzi | August 12, 2009 10:40 AM | Report abuse

Supply of for-sale homes a poor metric for DC area. The differential between rent and your net monthly "mortgage" payments is a better metric.

Posted by: yarz | August 12, 2009 12:00 PM | Report abuse

http://money.cnn.com/2009/08/12/real_estate/record_home_price_fall/index.htm?postversion=2009081210

DC area fell 14%

Who is right? I'd go with the ultra-realistic Bank who says they'll continue to fall.

Lets talk about realism here. The economy is not improving for the majority of people and the stock markets gains are based on government programs propping the sector up. What happens when that stimulus goes away? KABOOM. We haven't even touched the commercial real estate market disaster that is about to befall on banks. What happens when they get pounded again on losses? Then we haven't even touched the 3rd wave of foreclosures that will come from people just walking away from their homes due to the burden of paying.

Posted by: cavatellie | August 12, 2009 12:28 PM | Report abuse

And it seems everyone wants to get back to housing appreciating and being the $$$ for the economy and themselves. If we go back to that, the US will collapse again. We need to stop viewing real estate as some money machine for the average person and also as the main reason for economic growth.

Posted by: cavatellie | August 12, 2009 12:30 PM | Report abuse

Need to go back to basics. If people don't have down payments and cannot qualify under traditional mortgages, you can say goodbye to the skyhigh prices.

There are still a lot of people underwater on their mortgages and the "experts" from the past 10 years have had the benefit of an easy money environment.

It all goes back to the income and assets of a buyer.

Posted by: asdf9876 | August 12, 2009 1:03 PM | Report abuse

People can't wait to start a new bubble. We never learn.

Posted by: jckdoors | August 12, 2009 3:32 PM | Report abuse

Yep jckdoors, another bubble indeed.

And I agree on getting back to basics (which will bring housing down and affordable).

If you require a 10-20% down payment (which should be the norm), then not only will it remove all the people who shouldn't be buying a home, it will bring housing prices down to affordable levels because you cannot have a downpayment with sky high prices that is affordable unless it's all credit or on paper (which is how prices shot up in the first place). Credit is the culprit. We need to reign it in and limit it.

Posted by: cavatellie | August 12, 2009 4:18 PM | Report abuse

In the neighborhood in which I have been looking, I believe that prices have risen slightly over the last few months. As I have said before, inventory of regular sales (could include foreclosed homes being sold by whoever bought them at auction, but not short sales) is virtually none. At any given moment, there are zero regular sales on the market and any number of short sales. Houses go under contract immediately upon listing, and sometimes before listing.

But I know from all my looking that there are a fair number of empty homes that are not on the market, which will presumably foreclose at some point, and it is uncertain how many short sales foreclose prior to selling. I know at least one in the neighborhood foreclosed after an offer was accepted and the buyers thought all was well. So I think that as these homes foreclose, prices will dip again. I think the home prices are still inflated as compared with 10 years ago (that is, the value has increased more than you would typically expect a home's value to increase in ten years).

In the neighborhood I am currently living in, there is a much greater percentage of unoccupied homes. But again, practically no inventory. It is a small neighborhood, but all homes go under contract within days of listing, even the short sales. But with the number of unoccupied homes, it is clear to me that as these foreclose, home values will decline again, possibly more rapidly than markets with a smaller percentage of empty homes. However, the price of homes in my current neighborhood does seem to be creeping up for the moment. I just think that it is a temporary upswing.

Posted by: janedoe5 | August 12, 2009 9:14 PM | Report abuse

It's all a ruse....

Foreclosures are up again..so obviously we're recovering right?

http://www.msnbc.msn.com/id/32393282/ns/business-mortgage_mess/

Gotta love the people thinking the worst is over.

Posted by: cavatellie | August 13, 2009 2:16 AM | Report abuse

ERazzi,

Thanks for asking.
It's a tough question, and I do think the rise of internet searching has changed this number for the equilibrium MOI.

Given that the equilibrium MOI is set by having an equal flux of buyers (and sellers too) entering the process and exiting through closed sales, I would say that the MOI must reflect the typical time it takes for a buyer to find and close on a home. With so many similar houses in the DC metro area, TH's, 60's SFHs, McMansions, I don't think it takes more than 1 month to find a few houses you'd like to bid on if the prices are in line with what you're willing and able to pay. Add in 1 month to actually get a successful bid, plus 30-60 days to close, and you've got 4 months.

But honestly we won't know what that number is until we witness houses keeping up with inflation again for 2 years or more.

However, much of FFX County had under 4 months of inventory for the entire period from 1990-1998, despite falling or stagnant prices. I think this was due to the sheer amount of similar housing stock.

But for different market segments, different towns, etc I would guess that anything between 3 and 8 MOI could be considered "healthy". Outside of the ranges indicates that either buyers are vastly outstripping supply (8).

What I personally pay attention to? Zip code by zip code, MRIS data broken down by price, and then compare the number of new contracts/contingencies with the number of new listings. In my target area, these have held almost exactly equal for 5 months now, despite there only being 2.8 MOI. As seller's see that things are selling easily and at list, they put their houses up for sale.

Posted by: kingstowne_renter | August 13, 2009 10:16 AM | Report abuse

oops using less than and greater than signs broke my comment a bit. Hopefully you can fill in the details, as they were fairly obvious.

Posted by: kingstowne_renter | August 13, 2009 10:19 AM | Report abuse

The problem with using this or that pet metric is that it ignores the situation on the ground. Same thing with this or that story from a national perspective that pays little or no attention to the DC area specifically.

MRIS just registered the first year over year median price increase since April 2006. Case shiller in DC has just registered the second seasonally adjusted price increase since June 2006. These stats do not really "blip" they show long term trends that continue for years at a time.

Some metrics now say price should go up, some metrics now say prices should go down. The fact of the matter is prices are up for the first time in over 3 years. Ignore that fact at your own peril.

Posted by: SJ43560 | August 14, 2009 11:13 AM | Report abuse

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