Allman-Ac Vol XI, August 2008

Bottoms Up: This Real Estate Rout May Be Short-Lived

This real estate rout has been more painful than prior ones, but it may be shorter-lived. Indeed, there are early signs of recovery. The U.S. housing market is in a deep funk, probably the worst in 50 years, according to Harvard’s respected Joint Center for Housing Studies. Yet, such pessimism appears overdone, based on much recent data. Sales of existing homes are showing tentative signs of increasing, while the plunge in prices likely is nearing an end.

Yes, the supply overhang still is humongous, but at least the numbers are moving in the right direction, as even Treasury Secretary Henry Paulson noted last week. Speaking at a Federal Deposit Insurance Corp. conference, Paulson declared that “we are well into the adjustment process.” Inventories of new single-family homes are down 21% from a 2006 peak, he observed, while “existing-home sales appear to have flattened over the past several months, indicating that demand may be stabilizing.”

Still other numbers suggest prices are close to bottoming. The S&P/Case-Shiller Index for April, released just last month, showed the biggest year-over-year price decline yet, of 15.3%. Buried in the numbers, however, and widely ignored in the media, was the news that home prices actually rose, albeit slightly, between March and April, in eight of the 20 markets covered by the index (Boston, Charlotte, Chicago, Cleveland, Dallas, Denver, Portland, Ore., and Seattle). Jim Paulsen, chief investment strategist of Wells Fargo’s primary investment unit, expects home prices to steady by year end, with the pace of foreclosures slackening shortly.

Now sales activity seems to be picking up. According to the latest report from the National Association of Realtors, sales of single-family homes, condominiums, town houses and co-ops edged up 2% in May fromApril’s levels. That might not sound like much of a jump, but May marks only the second month in the past 10 to have seen an increase. NAR economist Lawrence Yun is optimistic home prices will stabilize in the next five months and begin to recover next year, despite today’s gloom and overly stringent lending standards. NAR officials typically are cheerleaders, but Yun advances some reasonable arguments to buttress his view. Home sales, he notes, currently are running at a pace of about five million a year, around the same level as a decade ago. Yet, the population has grown by 25 million in the past 10 years, and the U.S. has created 10 million new jobs. Though the rate of new-household formation requires the net addition of 1.6 million housing units a year, housing starts likely will remain below one million into next year, creating pent-up demand in the years ahead.

In hindsight, the housing bust hasn’t been nearly as calamitous as depicted in the media, or as Wall Street’s woes might suggest. Yes, people have lost their homes, but more than a few were mendacious mortgage applicants and mere speculators, who eagerly sought out 100% margin loans, only to fold just as quickly when prices turned against them.

It is important to remember, as well, that even after a steep drop in the S&P/Case-Shiller Indices, long-term buyers in the top 20 U.S. metro markets have seen their properties appreciate by 70% since 2000. Home prices often take five to 10 years to recover fully from severe declines such as this. But at least the available data suggest the scary dive in home prices soon will be over.

**The complete Barron’s cover story is available from me at Allie Beth Allman & Associates.
Barron’s, July 2008

Dallas #1 for Real Estate Investing

HomeVestors® of America, Inc., the company that advertises, “We Buy Ugly Houses”® on billboards, has named the top 10 markets for real estate investing in the second quarter of 2008. They are as follows:
1. Dallas, Texas
2. Houston, Texas
3. Atlanta, Georgia
4. Denver, Colorado
5. Fort Worth, Texas
6. San Antonio, Texas
7. Charlotte, North Carolina
8. St. Louis, Missouri
9. Milwaukee, Wisconsin
10. Chicago, Illinois; Kansas City, Kansas (two cities tied for tenth place)

HomeVestors, which the company says has bought more than 35,000 homes in the U.S. over the last 12 years, based the findings on the number of houses bought in each market by the franchise network in the second quarter of 2008.
HomeVestors of America, Inc., July 2008

Risk of Price Declines Falls in Most Markets

The risk of price declines continues to intensify in markets where prices shot up the most during the boom, but is falling in most other markets, according to an analysis by PMI Mortgage Insurance Co.

PMI said the risk of price declines fell during the first quarter in 326 of the 381 metropolitan statistical areas (MSAs) tracked, or 86 percent. Of the 55 markets where PMI gauged the risk of price declines had increased, all but five were in California, Florida, Nevada and Arizona.

PMI’s U.S. Market Risk Index is based on home-price data, labor market statistics, housing affordability, household income, past trends in price appreciation, and mortgage rates. The index generates a score estimating the chance that home prices will be lower in two years.

Dallas is one of the lowest risk markets in the nation.
PMI Mortgage Insurance Co., July 2008

Survey Shows Consumers Optimistic on Real Estate

Consumers are apparently optimistic about the future of the national real estate economy, according to a new survey conducted by Housing Predictor. Nearly 1 out of 2 polled say they believe the national real estate economy will improve within the next two years.

Some 25% polled said they believe things would improve in a year or less. Housing Predictor regularly surveys on real estate related issues, in more than 250 local housing markets in all 50 U.S. states.
Housing Predictor, July 2008

Best Places to Live – Money’s List of America’s Best Small Cities

The August issue of Money Magazine reveals its list of the best places in America to live, with emphasis on small cities – three North Texas communities and one south are among the Top 25:

#7: Round Rock, TX
#14: McKinney, TX
#15: Carrollton, TX
#20: Allen, TX

** These are all within the “Central Texas Triangle” which will house the majority of Texas’ population – from just north of DFW to just south of San Antonio and Houston.
Money Magazine, July 2008

Harvard Study: Growth In Households to Drive Recovery

The current housing slump is far from over and is shaping up to be the worst in 50 years, according to an annual report on the state of the nation’s housing markets from the Joint Center for Housing Studies of Harvard University. The report, “The State of the Nation’s Housing 2008,” is more optimistic about medium- to long-term prospects, estimating that unless there’s a serious, prolonged economic decline or a marked cutback in immigration, the nation will gain 14.4 million new households between 2010 and 2020, compared with 12.6 million between 1995 and 2005.

“At some point demand will bounce back,” Center director Nicolas Retsinas said. “Historically, housing markets recover only after the economy has entered a recession and a combination of falling mortgage interest rates and house prices have improved housing affordability. It is difficult to judge how far away from these conditions we may be. It will take longer this time to rebound given the unusually high levels of foreclosures and constrained credit markets.”

If the economy slips into a severe recession, the prolonged contraction could drive down the sustainable level of housing demand by slowing the loss of older units, forcing more households to double up, and reducing sales of second homes, the report said. But in the case of a mild downturn, which most economists expect, the fundamentals of demand are likely to drive a strong rebound in housing once prices bottom out and the economy begins to recover. Once the oversupply of housing is worked off and home prices start to recover, the use of automated underwriting
tools, a return to more traditional mortgage products, and the strength of underlying demand should put the number of homeowners back on the rise, the report said.

A weak economy could slow the rate of immigration, which is largely driven by the availability of U.S. jobs. The report identifies the main risk to the long-run outlook as a dip in the level of immigration from its recent 1.2 milliona-
year pace due to weaker labor markets.

Minorities contributed more than 60 percent of household growth in 2000-2006, and they now account for 29 percent of all households, up from 17 percent in 1980 and 25 percent in 2000. The minority share is likely to reach about 35 percent by 2020, the report said.

The report projected that minority household growth among 35- to 64-year-olds should remain strong in 2010-2020, while the number of white middle-aged households will begin to decline after 2010 as baby boomers reach retirement age.

People living alone are expected to account for 36 percent of household growth between 2010 and 2020; 75 percent of the 5.3 million projected increase in single-person households will be among those 65 and older.
Joint Center for Housing Studies, Harvard University, July 2008

Investor Report: Section 1031

Congress has backed off its latest plan to narrow the definition of “like kind” for real estate swaps. That’s important because under current tax law, real estate investors have broad flexibility in choosing properties and structuring
exchanges. Given the tight statutory timetables to choose qualified properties for exchanges, that flexibility can be crucial. If you could only swap a rental condo for another rental condo, cornfields for cornfields or commercial buildings for commercial buildings, there’d be a lot fewer exchanges every year — and probably a lot more IRS audits of taxpayers to make sure the properties swapped met all the “like kind” requirements. Tax reformers tucked away a tiny, technical amendment deep inside the massive federal farm bill pending in Congress, hoping they could sneak it through with nobody looking. But instead, alarm bells went off among real estate lobbyists who get paid to read through thousand-page bills like the farm legislation to make sure there are no unpleasant surprises lurking for real
estate.

The tax reformers had inserted a provision that would have affected only certain agricultural property exchanges by narrowing the window for what constitutes “like kind.” But any restriction on “like kind” for real estate would be the proverbial “camel’s nose in the tent.” It would open the door to still further revenue-driven restrictions that could seriously limit the utility of tax-deferred exchanges for all real estate owners. Real estate investors nationwide benefited from the alert action.
Realty Times, June 2008

Census Data Shows Home Sizes Growing

The Census Bureau reported in its Characteristics of New Housing report for 2007, released this month, that the average new single-family home completed had 2,521 square feet, up 2.1 percent from 2,469 square feet in 2006.

And the average square footage of new homes completed has grown about 46.6 percent since 1977, when the average was 1,720 square feet.

About 26 percent of all new single-family homes completed in 2007 had 3,000 or more square feet of space, the Census Bureau reported, up from 24 percent in 2006 and 11 percent in 1988. And the percentage of new single-family homes completed with 1,200 square feet or less of floor area shrank from 25 percent in 1973 to 4 percent in
2004, holding steady through 2007. Likewise, the percent of homes ranging from 1,200 square feet to 1,599 square feet has shrunk from 31 percent in 1973 to 14 percent in 2006 and 2007.

But in the latest American Institute of Architects Home Design Trends Survey, recently released, respondents were more than twice as likely to report a decline in home sizes than a rise in home sizes (33.5 percent vs. 15.5 percent).

By comparison, the group’s 2006 survey found that participants were more than twice as likely to report gains in home sizes than shrinking home sizes.
Inman News, July 2008

Washington Report: No Mortgage Masquerade

Though its details have gotten almost no media coverage, pending legislation would create a vast new nationwide system of licensing and registration — complete with mandatory fingerprinting for submission to the FBI — for anyone who fits the definition of a mortgage “originator.”

That means anyone who works for a bank and makes retail home loans. It also means the tens of thousands of mortgage brokers and loan officers at mortgage companies. And, in certain situations, it could also cover real estate brokers or agents who are paid by lenders to help originate loans. Politically diverse groups of advocacy organizations sent a protest letter just before the July 4 recess to Senate leaders, demanding that the fingerprinting provisions be dropped. The groups said, “the bill’s lack of safeguards for the data collected” are especially troubling, given the
increasing involvement of fingerprints in identity theft — which “is becoming a major concern among data security professionals.”

Proponents of the licensing and registration system argue that the only way regulators can track — and crack down on — predatory and fraudulent loan officers as they move from state to state is to maintain a national database with
detailed information on prior offenses, consumer complaints, annual licensing and educational requirements. They also insist that they can maintain the appropriate security measures to make certain that the privacy of loan officers is protected.
Realty Times, July 2008

Real Estate Outlook: Resales Up, Rates Down

In NAR’s latest home resale report: Sales were up by 2 percent nationally in May, and condo sales also jumped 5.5 percent nationwide.

Prices continue to rise in Texas, Louisiana, Arkansas, Oklahoma, Kentucky, Tennessee and Mississippi. Dozens of metropolitan markets in the mid section of the country never participated in the boom, and they are showing steady increases in prices.

Still another plus: Mortgage rates took a surprise dip last week — reversing the previous week’s sharp increases. Thirty year fixed rate loans are back down to a low 6 percent and fifteen year rates are under six percent again.
Realty Times, July 2008

First-Time Home Buyers: NAR Survey

Over the past 12 years, first-time home buyers were responsible for buying 42% of all the homes purchased in the U.S. In 2006, that number dipped to 36% but in 2007 it again increased to 39%. Overall, 12% of first time buyers were not born in the United States, versus 8% of repeat buyers, and 70% bought a home because they wanted to own real estate and establish a household.

• First-Time Home Buyers Made 39% of All Home Purchases.

• 75% rented an apartment or home prior to purchasing

• The Marital Status of First Time Home Buyers Is:
51% Married Couples
11% Unmarried Couples
25% Single Female
11% Single Male

• Median Age of First-Time Home Buyers Is:
52% were age 24-35 years old
21% where age 35-44 years old

• The Average Income for First Time Home Buyers
$68K married
$68K unmarried couple
$44K single female
$52K single male

• Expected Length of Time to Buy Another Home
28% plan to move within 5 years

• Information Sources for First Time Home Buyers
87% used the Internet to gather information
49% used newspaper ads
44% open houses
56% did a virtual tour online

• How First-Time Buyers Found Agents to Work With.
54% relied on family, friends to help them find a real estate agent
NAR, July 2008

Texas Land Stays Hot

In 2007, at 20 percent, the growth in Texas land sales prices nearly matched the stratospheric 23 percent posted in 2006. At $2,190 per acre, the 2007 statewide price topped $2,000 per acre for the first time. Despite the slight dip in price growth in 2006, the 2007 increase eclipses the 16 percent growth in both the 2003 and 2004 markets. Texas land prices in 2007 were 224 percent of what they were in 2002. That represents a compound growth rate of more than 17 percent annually.

The 2007 market saw a pronounced shift away from larger properties. Size of tract per transaction dropped precipitously to 80 acres compared with 98 acres in 2006. Markets have hovered in the 100-acre range for the past five years.

Small property prices registered a $4,000-per-acre median in 2007 compared with $1,800 per acre for he large properties. Prices for small properties rose 15 percent in 2007 while typical property prices increased 13 percent.

Future Trends:

First, land prices probably cannot indefinitely sustain the rate of increase seen in the past five years. However, trends continue to reflect an upwards price spiral.

Second, a substantial drop in prices would more likely follow a severe economic dislocation, a prolonged, deep recession. It seems increasingly likely that some kind of direct governmental intervention in financial markets will eventually occur. That kind of solution may help avoid or at least limit the financial damage the economy faces without it.

Third, without a severe economic blow, land prices will likely continue to rise but at a more sustainable rate. Based on early 2008, continued growth at a lower level seems the most likely short-term prospect. Over the longer term, prices will probably moderate to growth rates more typically seen over the past 40 years.
Texas A&M Real Estate Research Center, July 2008

Outlook: Strong

Two major events have to occur before the housing market will begin to bottom out. First home prices have to stop falling, and second, investor confidence in the traditional U.S. residential mortgage must be restored. The pace of this turnaround will vary from city to city. If home builders cut back dramatically on new supply, the recovery will occur faster. Communities with fewer foreclosures will work through the excess supply more quickly. Communities with strong job and population growth will create demand that will absorb the excess units faster.

Political action could change the timeline as well. If the Federal government were to offer tax credits for people to buy homes, the excess inventory could be soaked up even faster. This would cause the housing market to bottom and turn around much faster.

Another stimulus that would speed the recovery is gently rising mortgage rates. Typically, when mortgage rates are falling, homebuyers postpone buying. But when they see that mortgage rates have stopped declining and may rise, they hop off the fence and buy. As the economy begins to rebound in 2009, look for mortgage rates to take an upward turn. As long as rates do not increase dramatically enough to impact affordability, this should stimulate housing demand.

The long-term outlook for the Texas housing market is clearly strong. In the 1970s and 1990s, house prices in Texas rose in nine out of ten years. And even in the 1980s – the most challenging decade for Texas in the past 38 years – house prices increased eight out of ten years.

Job growth in Texas has doubled the national average for most of the past ten years. Demographic experts estimate another 13 million people will live in Texas by 2030. Many Texas cities still have tight inventories of homes for sale with prices continuing to appreciate.

The state’s metropolitan areas have strengths and weaknesses in their local markets. Attractive properties located in older neighborhoods close to downtown are still performing well and will continue to do so. The challenges in big city housing markets will be in select sections of the suburban perimeter. If you plan to buy a house to live in for a number of years, this would be a great time to buy.
Texas A&M Real Estate Research Center, July 2008

Bob Edmonson
www.BobEdmonson.com
www.AllieBethAllman.com
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(214)563-8540
http://www.DallasTexasHomefinder.com

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