When will the Housing Market return to Normal?
by Henry S. Harrison

Last June, I answered an “Ask Henry” question from a reader: “When will the Residential Real Estate recession end?” My answer was that I thought that it would end beyond the term of whoever was elected President in November 2012. Between June and when Barack Obama was reelected President, the news media was full of press releases and commentator predictions that the country was well on its way to a real estate recovery.

On February 12, 2013, I listened to the President’s State of the Union Address. Here is what he said about the real estate recovery:

“Our housing market is healing, our stock market is rebounding, and consumers, patients, and homeowners enjoy stronger protections than ever before… Together, we have cleared away the rubble of crisis, and can say with renewed confidence that the state of our Union is stronger…Part of our rebuilding effort must also involve our housing sector. Today, our housing market is finally healing from the collapse of 2007. Home prices are rising at the fastest pace in six years, home purchases are up nearly 50 percent, and construction is expanding again… These initiatives in manufacturing, energy, infrastructure, and housing will help entrepreneurs and small business owners expand and create new jobs. But none of it will matter unless we also equip our citizens with the skills and training to fill those jobs. And that has to start at the earliest possible age…We’ll work with local leaders to target resources at public safety, education, and housing.”



When Will the Residential Real Estate Recession End? (Part II)

On October 11th, the Federal Reserve lowered its forecast for growth slightly this year and forecast that the economy would grow slightly in 2013. I stated in my June Editorial (below, dated 6/03/12) that the key to the overall economic recovery, and especially to the recovery of the residential housing market, is new construction.

Here are the annual housing starts as reported by the US Census:
US census data

You don’t have to be an economist to understand what these figures are saying. To me, this table shows that all things being equal, we can absorb about 1,500 million single family houses per year, and starting in 1999, we started to over build. To absorb these extra houses, lenders sold homes to people who previously would not have qualified to buy them.

housing data graph

Once we absorb these extra houses, we should be able to build and absorb another 1,500,000 houses per year. Think what this will do for the economy! Millions of new jobs just to build the houses and millions more to produce what goes into them.

The bottom line is that it is hard to sell news when comparable used houses can be purchased at a much lower price. So far I don’t see much happening to rehabilitate and sell off the houses that have been foreclosed, plus at least another million houses that will be foreclosed in the next few years.

So to repeat my forecast made below from June 2012: In spite of what you read as part of the election campaign rhetoric, nothing much is going to happen in the next few years to improve the overall housing market. Keep in mind that as there will be local markets that buck the national trend and will improve sooner, and others that will improve slower.



When Will the Residential Real Estate Recession End?

Soon, later or never? I predict it will last beyond the term of whomever is elected president this fall.

In 2005, my neighbor, the Yale economist Robert Shiller, predicted in “Irrational Exuberance, 2nd Edition” that the Housing Bubble would soon burst. He was called Dr. Doom in the media, and ignored by most people, especially those in government who might have done something to avert the pending crisis.

The bubble did not burst all at once, as in a stock market crash, but rather, values fell more gradually in some markets and much faster in others, proving once again that there is no "national" real estate market in the country, but rather many different markets, each highly dependent upon location (location, location, location).

Now we are coming up to a national election in the fall of 2012 and we keep hearing murmurs that the end is in sight. This may be true in some localities, like the San Francisco Bay area, but I believe it is wishful thinking in most places in the United States. During 2011, over a million houses were actually foreclosed or sold via short sales. Almost double that number entered into the foreclosure process. The current slow down in foreclosures is not due to the improved economy but rather to a slow down caused by the courts, who are now insisting that the foreclosure documents be legally correct. (Revelations of widespread fraud in document preparation has led to what is probably a temporary reprieve for many homeowners who are currently under water.) There are now about 100 million detached single family homes in the United States of which nearly 15 million are underwater. Furthermore millions of them are vacant.

Here is my own experience, which I believe is typical for Florida and many other parts of the country. The house that we purchased three years ago was built in 1995, at a cost including the site of about $225,000. At its peak in 2005, it was worth about $375,000. We bought it for $130,000 and today it would sell for about $110,000. The cost to build it today would be about the same as in 1995, that it, about $225,000. In our solvent 55+ development with nearly 800 units, about 10% of the houses are on the market. This figure has been constant for the past three years, because as fast as houses are being sold, others come on the market. There are practically no new houses being built in our market area. And there is nothing on the horizon that I can see that is going to significantly change this picture in the near future.

I know two families whose homes have been in foreclosure for over a year. Neither of them make any payments on their mortgage, or pay any taxes. If they were served papers today, it would take six months to a year to actually foreclose their homes and get them out. The lender would then have to fix up the houses, which both have deferred maintenance, and will likely take a 25% to 50% loss on both properties. Their neighbors who have been making their payments all along feel like fools whenever they learn that a delinquent homeowner is not only not being foreclosed on, but often having their mortgage renegotiated with more favorable terms. It makes those folks who are "playing by the rules" feel duped by the system.

I don’t see any quick fix to this problem. What will happen if the government forces the banks to "write down" the mortgages for delinquent homeowners — and doesn't do something similar for those people who've been making their payments all along, even though the value of their home has fallen below the unpaid amount of their mortgage?

I know from what I hear first hand and read that these two examples are duplicated in millions of situations throughout the country. When the bubble burst, those of us who predicted it would take at least 10 years for a recovery were accused of being "gloom and doomers." I predict that in 2015, we will be thought of as too optimistic!



How to Appraise in a Declining Market
An Analysis by Henry S. Harrison, MAI, SRPA, ASA of
APB Valuation Advisory #3: Residential Appraising in a Declining Market

The Appraisal Practices Board (APB) of the Appraisal Foundation has just released “APB Valuation Advisory #3 – Residential Appraising in a Declining Market” dated May 7, 2012. This 33 page document is available at the Appraisal Foundation Website: www.appraisalfoundation.org (When you land on their Homepage, single click on the left side column “Appraisal Practices Board (APB)” ; and then single click on “APB Valuation Advisory” and then on “APB Valuation Advisory #3.”)

The most frequent question I’ve received in my “Ask Henry” mailbox over the past few years is “How does an appraiser make an appraisal of a property in a declining market?” The majority of these questions come from residential appraisers and express their confusion as to how to include (or not include) consideration of distressed sales, short sales, foreclosure sales, etc. — and if such comps are to be used, how they should be adjusted. I will address these problems in more detail as I summarize and comment on the eight subjects that make up the Valuation Advisory #3.

I. How Should an Appraiser Define a Declining Market?
Since there is no universally accepted definition of a declining market, it is incumbent upon the appraiser, when they report that the subject property is in a declining market, to include in the appraisal a definition of the term “Declining Market.” Support must be presented that demonstrates that the subject market area fits the provided definition.

For example, you might say: “A declining market is one where the median house prices go down for two consecutive 3-month periods.” To use this definition, you would then have to supply the necessary data about median sale prices in the subject market, showing that they have gone down during the past two 3-month periods. Keep in mind that an appraisal is based on historic information and is not a forecast of future conditions. It is not good appraisal practice to forecast the market direction or trend for the subject market into the future.



Editorial: The Debt Bill (Budget Control Act of 2011)

It is easy to become depressed when you follow the news these days.Unemployment seems to be stuck at a rate near 10%, millions of people are about to lose their homes by foreclosure, and the American dream of owning a home has turned into a nightmare for many Americans.

This past Tuesday, August 2, 2011, ends one of the most outrageous episodes of legislative nonsense I can remember. Our government shot itself in the foot -- inflicting an injury upon our economy and our people that will take years to heal. Recent polls show that the public's faith in their government has reached an all time low. This feeling crosses party lines and includes virtually every group polled. The selfish and self-serving behavior of too many of our so-called legislators is disgusting.

What in the past made America a great country was that the people believed in democracy and enjoyed the benefits of being free as a direct result of our democratic form of government. Hopefully, it will sink into the heads of voters of all persuasions that we want and need an effective government. Then we will wake up and through the power of the vote put into office people who will once again make our government function.

Having gotten that off my chest, let's examine what this Budget Control Act of 2011 did for housing and us real estate professionals. To answer this question, you need to look at the actual bill. Here is the URL:

You will see that the bill is just 74 pages and if you look carefully you will see at the top that there is a search function. Try it out by typing in the word "budget" and see what happens. The result is that it appears 35 times, and each time is shaded yellow. Now try "Housing". Guess what? The word "Housing" does not appear anywhere in the 74 pages. Try "mortgage". Same result. Try "foreclosure". Struck out again. No results for "taxes" either.

The bottom line is that the government officials -- the President, the House and the Senate -- continue to ignore the best way to jump start the economy and create millions of jobs: fix up all the foreclosed houses and sell or rent them.

I invite you (if you haven't already done so) to read my
Editorial in the June 2011 Issue of REV, entitled "Economics: How to Solve Housing Market Chaos & Help Relieve Unemployment." [Click on the highlighted word "Editorial" at the top of this paragraph to go there.]



Just The Facts, Ma'am

You knew it was bad. But did you know just how bad?

As of June 30th, the data from the Lender Processing Services Mortgage Monitor Report shows the numbers behind the misery:

1) The number of mortgages that are 90 days or more delinquent, combined with the foreclosure inventory at the end of May, totaled 4,084,557!

2) The number of foreclosure sales reached 78,600 at the end of June.

3) In fact, LPS stated that there are "still significantly fewer foreclosure sales" than earlier this year, or last year, and the numbers are actually declining! That means more foreclosure market glut.

4) The May data shows the biggest drop in foreclosure sales is in the East Coast states, with a decline of 96 percent in Washington, D.C., 80 percent in Maryland, 79 percent in New York, and 75 percent in New Jersey.

5) The average time spent in foreclosure continues to extend, with more than 33 percent of borrowers in foreclosure not having made a payment in over two years.

6) Nearly 30% of "current loans" - those not in foreclosure - are "under water", i.e., the mortgage is higher than the value of the collateral property.

7) The loan delinquency rate for the entire country is nearing 8%!

8) Many Americans are just one uninsured illness or one job loss away from losing their homes.

For more details, click here:


Economics: How to Solve Housing Market Chaos
& Help Relieve Unemployment

It is easy to become depressed when you follow the news these days.Unemployment seems to be stuck at a rate near 10%, millions of people are about to lose their homes by foreclosure, and the American dream of owning a home has turned into a nightmare for many Americans.

I keep hoping that I will hear that President Obama and the Congress are taking steps to solve the problem but so far not much is happening.

Many of us lived through the market crash and accompanying collapse of the housing market in the middle 1980s. If they think like I do, these folks feel that history is repeating itself. Back then, about 1,000 Savings and Loans went out of business and the press predicted that bailout would cost taxpayers $500 billion dollars.

What actually happened was that Congress passed the Financial Institutions Reform Recovery and Enforcement Act (FIRREA) enacted in 1989. Appraisers remember FIRREA because it required that real estate appraisers be licensed or certified. Prior to the Act, this was not the case. Each state had its own rules. FIRREA legislation was also responsible for the creation of the Appraisal Foundation and the Appraisal Subcommittee.

Far more importantly, it established the Resolution Trust Corporation which was given the responsibility to solve the housing mess. The RTC did so at far less than the predicted $500 billion dollar figure.

The glut of foreclosed houses is depressing the housing market and at the same time, there are legions of unemployed contraction workers who lost their jobs when the construction of new houses basically ground to a halt in 2008 and 2009.


Are the Big Banks REALLY Too Big to Be Allowed to Fail?

The public relations firms of the big banks in the United States and England are busily grinding out PR releases, trying to convince us that they are critical to reducing unemployment and jump starting our economy. It reminds me of the old joke about the person who murdered his parents telling the judge to show mercy because he is an orphan!

There are many institutions who shared in the creation of the economic mess we are now in, that directly affects appraisers and impacts the future of our profession. My nomination for the top of the list of miscreants are the "big banks." Admittedly, they had lots of company in enabling the housing market implosion, but without their profligate involvement, the subprime mess might have been avoided. The resulting foreclosures and the continuing slow recovery, as well as the malignant unemployment problem, are directly linked to their greed and disregard of everyone’s economic well being — except their own, of course...

Lurid tales of big bank foreclosure shenanigans are being reported in the press regularly. Judges all over the country are up in arms about the careless and often fraudulent papers presented to the courts in many foreclosure actions.I think we are just beginning to learn the true scope of the big banks' financial problems. The four largest banks in the US are Bank of America, CityGroup, JP Morgan and Wells Fargo. Gretchen Morgenson, a financial reporter for the NY Times, writes that these four banks have already set up reserves of about $10 billion dollars for possible mortgage repurchases. However, this may just be a drop in the bucket, considering that $5 trillion in mortgage securities were issued from 2005 to 2007. I think their mortgage losses may be big enough to put one or more of them out of business, and they still have to cope with gigantic credit card losses that haven't really been dealt with yet.

When the Feds put Lehman Brothers out of their misery, we were told that the economy could not get along without them. However, we seem to be doing just fine, as evidenced by the size of the bonuses paid by the other investment bankers to their employees in 2010.

When we are told that one of our big banks will need to be bailed out with our money because they are "too big to be allowed to fail," we shouldn't believe them! We have no shortage of banks in the United States, and bailing them out of self-inflicted bad investments is another example of allowing financiers to gamble with our money, and suffer no ill consequences! It proved disastrous in the 1980s savings and loan scandal, when it cost depositors and investors over $160 billion dollars. It's time for Americans to recognize that "banker mentality" is all about short term profits and bonuses, rather than stability, sound underwriting and sensible lending parameters.
askhenryharrison@revmag.com