Is The Housing Market Ready To Turn?

by George Anders
published: 05/03/2009

As most of the country struggles with the worst housing slump in 70 years, maybe we could all learn from Fayetteville, N.C.

There aren’t any billionaire real-estate developers in Fayetteville. There aren’t many mansions either. New homes  sell for an average of $202,000, and it’s possible to buy an older three-bedroom house for less than $100,000. At the same time, Fayetteville is one of the places in the U.S. where housing is still appreciating. Values rose a nation-leading 6.9% in 2008, according to the property-estimation firm, and are steady so far this year.

Part of Fayetteville’s edge lies in its strong local economy, particularly the presence of nearby military bases that provide reliable jobs. The area also managed to avoid some of the loose lending practices that caused home prices to boom and bust in other parts of the country. “Our market neverreally got out of whack,” says Greg West, chief of staff of H&H Homes, a local homebuilder.

It’s a different story in much of the U.S., especially in Sunbelt states such as Florida, Nevada, California, and Arizona, which stood out as America’s hottest property markets a few years ago. In certain areas, even $500,000 wasn’t enough to buy a decent three-bedroom house at the height of the bubble.

As prices kept climbing, buyers stretched their finances and took on massive mortgages they couldn’t handle. When credit conditions soured, the illusion of prosperity abruptly vanished. According to the S&P/Case-Shiller Home Price Indices, prices in Phoenix, Las Vegas, and San Francisco all skidded more than 30% last year. Miami was down 29%; Los Angeles, 26%.

In fact, not a single big city came through 2008 unscathed. Prices fell 14% in Chicago, 9% in New York, and 4% in Dallas. While such declines would have been unthinkably dismal a few years ago, they’re better than the average drop of 18.5%- in 20 of the country’s large metropolitan areas.

Who’s at fault? “There’s enough blame to go around for everyone,” says Aaron Johnson, a senior vice president at Heartland Bank and Trust in Champaign, Ill. Lenders’ standards became lax. Buyers lost track of how much debt they could afford. And policymakers got so excited about increasing the ranks of homeowners that Americans were swept into unrealistic purchases.

Ultimately, the U.S. may need to rethink how much of the population really should be property owners, says Kirk Bailey, chairman of Magna Bank in Memphis. The nation’s homeownership rate hovered at 64% for years, reached a high of 69.2% in 2004, then tailed off to 67.5% in recent months, according to the Census Bureau. “It may be that for some people,” Bailey adds, “it makes more sense to be renters.”

For longtime owners, the slump is jarring but not catastrophic. Overall, Americans still have $7.8 trillion in equity in their homes (after mortgage debt), according to data from the Federal Reserve. Most people who bought in the 1980s or 1990s remain well ahead, even though housing prices in many markets have retreated to 2004 or 2005 levels.

For recent buyers, though, it’s all pain and no cushion. Nationwide, 41% of people who became property owners in the past five years owe more on their mortgages than their homes currently are worth. Most of them are continuing to pay off their debt, hoping values will recover. But others are looking for a way out. In the grimmest cases, some have fallen so far behind on their payments that they’re losing title to their homes.

A total of 2.3 million U.S. properties were hit with foreclosure notices in 2008, which was nearly double the 2007 pace, according to RealtyTrac Inc. This can be bad for neighborhoods. Foreclosed houses sometimes fall into disrepair and are sold at distressed prices, dragging down the values of nearby residences by an average of $8667 each, according to the Center for Responsible Lending, a Washington, D.C., research group.

No one wants this hard-luck cycle to continue, so different efforts are under way to help struggling homeowners. The states of Florida and California, as well as several major lenders, have imposed brief moratoriums on foreclosures in order to provide more time to restructure debts or find other solutions. The Obama Administration has announced a $75 billion program that could shrink the debt loads of some borrowers to 31% of their incomes.

“We’re seeing some lenders willing to reduce the amount of principal owed, which helps,” says Hermalinda Jimenez, a housing counselor at Pacific Community Services in Pittsburg, Calif. In Honolulu, attorney Ryker Wada of Hawaii’s Legal Aid Society says that his organization has helped borrowers draw upon financial resources they hadn’t tried before, including personal loans from friends or relatives.

What will it take for the housing market to  bounce back? Right now it’s hard to imagine a return to the giddy days when homes sold within a day or two of being listed and bidders had to exceed the asking price if they wanted to get a particular house. But economists say that consumers should keep an eye on three factors: supply, demand, and affordability.

On the supply side, new-home construction in February was at an annualized pace of 583,000 units, barely half of last year’s levels. This is good news for sellers, because it could help curb the glut of properties on the market.

Optimists see some faint signs of demand reviving from last year’s badly depressed levels. Purchases of existing homes in the United States perked up 5% in February, to a 4.7 million annual rate, according to the National Association of Realtors. Thanks to rock-bottom prices on foreclosed homes, some first-time buyers in Sunbelt states have made the pleasant discovery that they can own homes even on small budgets.

To promote affordability, the government has helped push rates for 30-year fixed mortgages below 5%, the lowest average level in more than 38 years (but not everyone can qualify for those terms). Experts differ sharply on other measures of affordability, including buy vs. rent calculations. Some say house prices are bargains; others aren’t convinced.

In Fayetteville, homebuilder Greg West has been trying to hold his own in this economy by omitting once-desirable—and pricey—features, such as granite kitchen counters, ceramic tiles, Jacuzzis, and multicar garages, and by using cheaper alternatives. Those changes have helped his company trim prices on its houses so they appeal to customers looking to save money.

“Some of the new vinyl flooring looks as good as ceramic,” West says. “You can barely tell them apart. And no one ever uses the Jacuzzis anyway.”