April 25, 2011

Falling home prices should give aspiring homeowners the upper hand this Spring, but in a growing number of locations, it doesn’t feel like a buyer’s market.

Blame the nearly five-year slide of home prices. Those declines, which accelerated over the past two quarters, have left many sellers unable or unwilling to lower their prices. Meanwhile, buyers remain gun shy about agreeing to any purchase without getting a deep discount.

That dynamic has fueled buyers’ appetites for bank-owned foreclosures. Those homes often hit the market at bargain prices, but they are being snapped up by investors who are paying in cash.

At a focus group earlier this month, the mood among buyers was “nasty,” says Glenn Kelman, chief executive of Redfin Corp., a Seattle-based brokerage that operates in nine states. “There’s a shortage of attractive inventory,” he says. “Customers just keep getting outbid on the houses that they want.”

It took Susan Hunter just one month to unload her home in Redondo Beach, Calif., last fall. But she has been outbid on four homes at a lower price point in Eagle Rock, an emerging neighborhood in northeast Los Angeles. Some sold to investors who paid cash. Other listings, she says, are being resold by investors at prices that she says are too high.

“It’s the Wild West out here. It’s a daily, tireless search,” says Ms. Hunter, who works in television production and marketing. Demand is up because “we haven’t been able to find homes here below $500,000 since the 1990s.”

Last year, software engineer Young Hammack gave up looking to buy after being outbid on three properties. This year, he has his eye on a four-bedroom foreclosed house with a pool in Citrus Heights, Calif., that hasn’t yet hit the market. He hopes to pay about half the $492,000 it fetched six years ago.

But the 32-year-old, who is relying on a 3.5% down-payment mortgage backed by the government, is at a disadvantage against buyers who can pay cash. “It’s a false buyer’s market,” he says. “If you think prices are cheap, wait until you start putting offers in.”

Many buyers are looking for discounts because they lack confidence that prices have reached a bottom, and sellers won’t have much pricing power as long as buyers such as Mr. Hammack and Ms. Hunter are in no hurry. “It may take some time, but I’m willing to wait,” Ms. Hunter says.

The Wall Street Journal’s quarterly survey of housing-market conditions in 28 major metro areas shows inventories of unsold homes remain high but fell during the first quarter. Listings were down by nearly 25% from one year ago in Miami and Orlando, and by 12% in Phoenix and Portland, Ore., according to figures compiled by John Burns Real Estate Consulting.

Other markets, including New York’s Long Island and Charlotte, N.C., still face imbalances. At the current sales pace, it would take more than 16 months to sell all homes listed for sale in each market. A balanced market typically has a six-month supply.

Meanwhile, home values fell in every metro area for the second straight quarter, according to data from Zillow Inc. Prices were down by more than 5% in Chicago and Detroit, the largest quarterly drops, to levels not seen in more than a decade.

Values have fallen so far that many sellers with equity aren’t willing to drop their prices. Those without equity can’t cut the prices unless the bank agrees to take a loss in what is known as a short sale. Such sales can take months to complete and fall through at the last minute, deterring some buyers. Still, short sales hit a new high, accounting for 9% of all transactions in January, according to CoreLogic Inc.

“Frankly, until we start building some equity, the market is just going to sit here and do pretty much nothing for the next few years,” says Christopher Thornberg, a housing economist at Beacon Economics in Los Angeles.

Homes that don’t need much repair work and that are located in choice neighborhoods near transit hubs or with good schools are in demand. “What’s selling is the cream of the crop, and they sell fast,” says Steve Capen, a real-estate agent with Keller Williams Realty in St. Petersburg, Fla. “If it’s not cream of the crop, it’s getting hammered.”

Mike Morea and his family have outgrown the 800-square-foot, two-bedroom home he bought eight years ago in Seminole, Fla. He hopes the bank will approve a short sale for about $85,000 for a $50,000 loss. In December, Mr. Morea saw first-hand why buyers are more attracted to foreclosures: he bought one for himself, a $200,000 three-bedroom home in a nicer neighborhood 10 minutes away.

“That’s what every seller is running into,” says the 31-year-old police officer. “Nobody is going to buy your home at retail price if there are 30 foreclosures available.”

While foreclosures are in demand, mortgage companies’ processing problems have sharply curtailed the flow of bank-owned properties onto the market in states such as Florida, New Jersey and New York, where courts must process foreclosures.

To be sure, some of the challenges facing the housing market are easing as the economy adds jobs, boosting demand and easing mortgage delinquencies.Depressed prices coupled with low interest rates have made housing more affordable than at any time since 1975, according to Zillow.

But the legacy of the housing market’s collapse has left two big structural problems. First, the huge erosion in homeowners’ equity has deprived housing markets of the all-important “trade up” buyer. Even those with equity often aren’t willing to sell at current market prices, exacerbating what housing analyst Ivy Zelman calls the “stuck factor.”

Second, foreclosures are still weighing on housing markets. While mortgage delinquencies are down from their 2009 peak, an all-time high of 2.2 million loans were in foreclosure at the end of March, according to LPS Applied Analytics.

Economists say the “shadow inventory” of another 4 million potential foreclosures will keep a lid on prices for years. Even in markets with rising demand and falling inventory, prices won’t go up because “there’s too much on the horizon, so nobody’s in a hurry,” says Ron Leis, a broker in Sacramento, Calif.

Tighter credit standards have also left markets with fewer buyers at a time when more would help. When he needed to move into a bigger home four years ago, Todd Loewenstein sold his Redondo Beach home and began renting. “Now, we want to get back in, but it hasn’t happened,” says the 44-year-old technology entrepreneur.

He fell out of escrow one week before closing on an $850,000, three-bedroom home in October after the lender turned down his loan. Mr. Loewenstein, who was prepared to make a 20% down payment, says he has never missed a payment in his life and has enough savings to last several years.

But he wasn’t able to meet the bank’s tight income-documentation requirements. The home, which sold for $1.25 million in 2005, is still on the market. Mr. Loewenstein says he scans listings every day and is still looking to buy.

by: Shanda Novak

A failed downtown-area condominium project could be revived as apartments, and a fast-food restaurant could give way to a boutique hotel-condominium project, as developers move to take advantage of Austin’s strengthening economy and an improved climate for construction financing.

Crescent Resources is evaluating whether to revive its former Aquaterra condominium project at 210 Barton Springs Road, as apartments, albeit under a different name, said Scott Makee, regional director for Texas and Tennessee for Crescent.

Makee said Friday that it was too early to speculate about the future of the site but noted, “Crescent is excited about the Austin multifamily market, which is experiencing rising rents, limited supply and shrinking vacancies.”

At Lamar Boulevard and Riverside Drive, California-based Post Investment Group is looking at the possibility of building a six-story boutique hotel with about 150 rooms. The 1.15-acre site is now occupied by a Taco Cabana, whose lease expires in February 2012, Post said.

Preliminary plans for the $40 million project also call for 12 condominiums on the hotel’s top floors, with units priced in the $600,000 to $700,000 range, said Jason Post, president of Post, which acquires and develops multifamily properties around the country.

Post said his company is in discussions with several hotel brands about the project, which would have a rooftop pool, a restaurant and bar and other amenities.

If Post can’t get financing for a hotel, the company would build an apartment building with 120 units or a condo building with 110 units.

“We’ll do something for sure,” said Post, whose company bought the site Jan. 31 for an undisclosed price.

Several developers also are looking at a site at West Seventh and Rio Grande streets, where CLB Partners once planned the 34-story 7Rio condominium tower.

Dallas-based CLB shelved the project in 2007, and Will Cureton, a CLB founder and partner, said his firm dropped its long-term option on the land in December.

However, he said, the company is scouting sites for apartment projects in the downtown area and “absolutely” would consider the site again.

Other developers also have expressed interest in the tract, although landowner Mike McGinnis declined to comment.

“The apartment market is recovering very nicely,” Cureton said. “Demand for apartments and rents have risen substantially.”

On the financing front, he said: “The institutional investor is much more interested in investing in Austin than it was six months ago. And the private equity firms are also very interested in what’s happening in Austin, Texas.”

In the case of Aquaterra, Crescent already has entitlements for the site and would not need to go through a new zoning process.

Aquaterra, announced in 2006, was designed to be 19 stories high, with 173 units. But Crescent shelved the project during the recession.

Brett Rhode, an Austin architect who designed the original project, said the project is being reconfigured for apartments.

“The atmosphere is much more positive now than even a few months ago in terms of moving forward with projects in the downtown area,” said Rhode, principal with Rhode Partners. “It’s likely we will see some of our stalled projects come back to life, giving us a chance to rethink and improve our designs.”

Charles Heimsath, an Austin real estate consultant who has done preliminary consulting on both the Crescent and Post projects, said that in the current economy, it is “very unlikely” a developer could get financing for a downtown condominium project.

Switching to apartments would be “an obvious choice” for developers who own sites that already have entitlements, he said.

The American-Statesman reported in March about another potential project. Riverside Resources, an Austin-based investment and development company, had put the former Whitley Printing Co. site at Third and Brazos streets downtown under contract for a possible apartment project, although the company said it was leaving all options open.

Greg Miller, vice president of CWS Capital Partners, an Austin-based real estate investment company, said, “I think capital is interested in Austin again, and particularly in the urban environment, so a lot of developers are either looking for development opportunities or dusting off old plans.

“Since the beginning of the year, the capital markets have loosened up, and the apartment fundamentals have gotten better,” he said.

Locally, job growth, newcomers moving to town and scant new apartment construction are combining to drive apartment rents up.

Earlier this year, Greg Willett, vice president of research for MPF Research, which tracks the apartment market, said rents began rising in the second half of 2010 and will continue climbing for the next two years,

“If you had to pick a half-dozen markets that are on everyone’s radar list, Austin is one of them. Everybody wants to buy or build something in Austin because the outlook is strong,” Willett said.

According to the National Association of Home Builders, this “pent-up demand” for new homes is expected to increase only slightly in the coming months, but the new homes to enter the market will be tailor-made to fit Americans’ changing needs and desires in the post-recession years.

“What’s driving it all is affordability,” says John McIlwain, senior fellow for housing at the Urban Land Institute in Washington, D.C., who notes that high unemployment, credit and student loan debt, stricter mortgage rules and a surplus of foreclosed homes will likely continue to scare many first-time buyers from the housing market and keep new home construction relatively slow.

The McMansion home of pre-recession years is on the way out, but a quality home with “well-designed bones” that is relatively inexpensive to operate has become more desirable, says McIlwain.

MainStreet talked to homebuilding experts to learn more about some of the key features home shoppers can expect to find in the new American home this year. Read on to learn all about the modern-day dream home and what not to expect on your house-hunting adventures.

Utility & Value

Homebuilders will continue to scale back on luxury add-ons, which are becoming more of an afterthought, says McIlwain, as homebuyers opt for a more modest and functional home, rather than a McMansion with a Jacuzzi and a heated pool.

“People are looking for shelter and value,” says Stephen Mellman, director of economic services for the National Association of Home Builders in Washington, D.C. “Everyone has their own lifestyle and they want to find a home to enhance their lifestyle and make it more efficient.”

Also with affordability still a huge factor for homebuyers, buying a new home no longer entails “doing fancy things” just for the sake of making a boom era statement, nor does it mean sinking the greater chunk of your cash into a long-term investment, as “the likelihood that that house value will appreciate is extraordinarily remote,” notes McIlwain.

The most noteworthy trend this year is that homebuyers are beginning to see their home as an extension of their lifestyle, whether that means making a strategic move from the suburbs for a shorter commute, having more proximity to downtown hotspots or finding a way to downsize after the children have flown the coop.

“This is shelter,” Mellman agrees, “it isn’t just an investment to sell in a year; you’re going to live here and raise your kids here and that colors everything: how you design it and what you’ll enjoy.”

Fuss-Free Kitchens

Whether your lifestyle is fast-paced or decidedly more conservative, Americans are spending more time in the kitchen and less in the formal dining room, which is starting to disappear. The reasons behind this shift vary from more Americans deciding to cook their own dinner to save on the costs of eating out or our increasing dependence on a usable kitchen that can entertain family and friends. As a result, spacious, eat-in kitchens that open up to the common room are now a huge trend for homebuilders in 2011, and the dining room, once its own separate space, is now simply designated by a table and chandelier, as people “try to do more with less,” says Mellman.

“You want an open kitchen because when you’re doing the cooking and entertaining, everybody gathers in the kitchen,” McIlwain says, noting Americans’ casual lifestyle and our ongoing obsession with food. “You don’t have a maid in the kitchen, but [when you’re cooking] you want to be part of the action. Cooking has become part of the whole entertainment process. And for couples, cooking together is a team sport, rather than an individual sport.”

But despite being the center of attention, the new American home’s kitchen doesn’t look quite as glamorous as it used to.

“The gourmet kitchen is on the way out,” says Mellman. “You don’t need eight burners” or a Vulcan stove, Mellman says. Americans post-recession are focused on standard appliances that they know they will use every day.

“A great stove, a fridge with an ice-maker and water filters, two sinks, a quiet wash dishwasher, or the equivalent—it doesn’t have to be commercial kitchen grade, but a decent quality kitchen that’s easy to move around in, and therefore cook in, with plenty of counter space and that’s easy to hang out in” is where the homebuilding trend is going, McIlwain says.

To save on kitchen construction costs, Dan Sandoval, a homebuilder with Republic Homebuilders in Fredericksburg, Va., says homebuyers are also forgoing traditionally pricey granite countertops for standard laminate countertops.

“Five years ago, they wouldn’t have sold, but now they’re OK,” he says of the materials. “It’s nice-looking, but very affordable,” unlike the dining room, which buyers now consider “wasted space” and an unattractive feature, says Sandoval.

“What I hear from customers is that they just don’t use it,” he says. “They don’t eat in there every Sunday, like their parents used to do. That’s not their lifestyle.”

Smaller Square Footage

It isn’t your imagination—the new American homes are actually getting smaller, according to a National Association of Home Builders’ report, The New Home in 2015.

In it, the NAHB found that the average size of single-family homes completed in 2009 dropped to 2,438 square feet, and in the first half of 2010, the average size of new homes completed continued its slide, dropping to 2,378 square feet.

What’s more, according to the NAHB study, bedrooms and baths have also downsized as well, as the share of single-family homes with four bedrooms or more has declined for three consecutive years, from 39% in 2005 and 2006 to 35% in the first half of 2010, and most new homes completed in 2008 and 2009 had either 2 or 2.5 baths (68%).

So what’s the story behind all these shrinking homes? “New homes that are being built by and large are tending to be smaller because that makes them more affordable,” explains McIlwain, who adds that “even the very wealthy will buy a home much smaller than they could afford,” just to cut back on living costs or perhaps to funnel their money into retirement savings and other mid-life goals.

As a result, certain rooms, like the formal dining room and traditional living room, are becoming extinct species or taking new forms in the combination spaces that are beginning to crop up, such as the eat-in kitchen and dining area, or the second or third bedroom, which has begun to do double-duty as a home office, McIlwain says. “Whether they’re working at home or having a room to keep personal information, such as taxes, an in-home office is more to take care of personal matters,” adds Sandoval.

Meanwhile, Mellman says stairways are moving from their traditional post in the front of the house, or entrance/foyer, to the back and the side, in yet another effort by homebuilders to curtail construction costs and provide more room.

Energy-Efficient Materials

EnergyStar homes have become the gold standard, but homebuyers remain hesitant to splurge on solar roofs or eco-friendly siding, says Mellman.

“Some of my customers inquire about those systems, but they don’t see the return on it,” Sandoval explains about pricey green add-ons. “It’s too costly at this time. Unfortunately, a lot of our customers have lost a lot of their retirement in the stock market, and they’re just trying to get a basic house to last them in their retirement. They would love to have those sorts of things, but they have to think of the costs.”

Tax breaks also play a role, and the lack of them in Virginia makes them even less appealing for prospective homebuyers, says Sandoval. Adds Mellman: “People want to have a green home and incorporate those features, but to a certain extent they’re not going to stretch themselves to get those things. Also, appraisers weren’t including those things for awhile, so a home would sell for less than its actual value and the cost of construction.”

Still, energy-efficiency has become a mainstay for empty-nesters looking to cut down the costs of heating and cooling a home, while other amenities, like EnergyStar windows, are becoming more commonplace and widely embraced.

“Green is no longer an amenity,” says McIlwain. “EnergyStar, EnergyStar windows, very efficient HVAC systems, siding to take advantage of solar power—those are the homes that are selling and they’re becoming the standard. They’re materials you’ve got be attuned to.”

From: Austin Business Journal - April 7, 2011

A Central Austin condo project on Enfield Road will soon be complete after sitting half finished for three years.

The project at 1603 Enfield Road has gone untouched since developer Tadd Coates of Bolter Corp. fired contractor Qmet Building Co. in August 2008, and the two wound through a bitter legal battle. A private investment group led by Eddie Butler and The Butler Family Interests, called 1603 Enfield Ltd., purchased the property from First State Bank four months ago.

Austin-based Fortis Realty Services revived the project. It will total 25 units and be called Pease Place. The company described the units as “sophisticated” and offering a “green living experience.” Builders will use the existing steel and concrete frame, but remove the exterior elements and modify the design. The outside will use an organic color palette with stucco and stone.

Architecture 365 Inc. was the designer. It will utilize energy efficiency systems and sustainable design elements. The apartments, ranging from 500 to 1,300 square feet, will have Hill Country and skyline views, balconies, granite counter tops, Energy Star-rated appliances and wood flooring, the release said.

They will range from $150,000 to $395,000. Construction is expected to wrap up this fall.

Austin city officials recently announced a proposed deal with San Jose-based eBay Inc. (NASDAQ: EBAY) to create 1,000 jobs over the next 10 years. The jobs would actually come from eBay subsidiary PayPal, which employs more than 250 here already.

The city is offering a $1.2 million incentive to the company if it meets its goals, according to the announcement. The average annual salary is pegged at $122,576.

City Council will consider the deal on April 12.

News of the proposed deal first broke on Feb. 28.

The company declined to comment.

“PayPal is committed to our development center in Austin,” where it employs about 300 people, a spokeswoman said a couple of weeks ago. “We’ve been very happy with the support of the local government, the business-friendly environment and the pool of talented workers in the Austin area. We look forward to continuing our operations in this market in the years to come.”

“With economists forecasting 2% to 2.5% job growth in Austin in 2011 (which will result in our unemployment rate falling below its current 6.8%), along with the continuation of strong population growth in the region, the level of pent-up demand for for-sale housing in our area is likely intensifying,” said Eldon Rude, director of Metrostudy’s Austin Region.

Regarding the new home market, in 2010, Austin saw 5,855 starts, down 10% from 2009. Austin closed 6,458 homes in 2010, down 14% from 2009. Because closings outpaced starts, new home inventory stands at 2,897 at the end of 2010, the lowest total inventory in Austin since 1993. “We anticipate the move-up market will strengthen in 2011, with minimal new home inventory levels possibly resulting in some pricing pressure in certain sectors of the resale market,” said Rude. “These numbers all put Austin in postion to begin its housing recovery in 2011.”

Metrostudy is the leading provider of primary and secondary market information to the housing industry and related industries nationwide. In addition to providing its own primary housing data collected by a staff of 650, the company is recognized for its consulting expertise on development, marketing and economic issues, and is a key source of research studies evaluating the marketability of residential and commercial real estate projects. Services are offered through an extensive network of offices located in major metropolitan areas throughout the U.S. For more information, visit www.metrostudy.com.

“Apartment occupancy levels approaching 95% and virtually no new construction at this time will help the housing recovery,“ said Rude. Austin Investor Interests pointed to continued strong migration to the Austin region, as well as apartment renters starting to seek their own units again after doubling up over the last several years, as the primary reasons for the firming up of the apartment market over the last year.

“Also, the resale market inventory stands at healthier levels,” said Rude. As of November 2010 there were 9,906 active listings, resulting in a 6.0 month supply of listings based on the current pace of closings. In November 2009 there were 9,836 listings which translated into a 6.8 month supply.

Think greener, smaller, simpler and more contemporary.

This trend is a bit of a departure from the longtime design desires of Central Texans, which have tended toward a “bigger is better” attitude, with traditionally styled single-family houses set on chunks of land, and an ever-increasing number of rooms for almost every aspiration, from collecting wine to creating state-of-the-art home theaters. However, in recent years, the changing economic and social conditions have had an effect on what Central Texans want and expect in a home. Housing prices plummeted and banks tightened their purse strings — and at the same time, there was an increased emphasis on connecting with and protecting the environment. Homeowners have dealt with those realities by scaling back on the size of homes and focusing more on conserving resources. They care less today about home automation and more about simplicity and comfortable outdoor living spaces.  Central Texans are also becoming more open to a contemporary take on traditional design. The traditional Mediterranean and Hill Country styles will most likely always be present, but we have seen a movement toward a more contemporary architectural style. Contemporary architecture, with its cleaner, fresher look, also plays into two trends that really matter to today’s home-owners: it works well with the green movement, and it’s amenable to the indoor-outdoor living connection we seek.

Sustainability is an emerging trend that is becoming evermore important to homeowners. Ten years ago, sustainability, energy efficiency and other green-building fundamentals were novelties, with just a fraction of homeowners demanding those traits in a house. Now those days are over, especially in Austin, which has always been at the forefront of the green building movement. Homneowners are more aware of environmental concerns, and are showing an interest in green-related issues and contemporary architecture. And they aren’t stopping with daily concerns such as recycling; they’re asking about everything from more efficient windows and insulation to nontoxic paints to rainwater and solar collection systems. Although solar and geothermal energy still are cost-prohibitive for most people, the federal tax credits, as well as local and regional rebates, spurred interest in greener products and materials.

The green movement also plays a part in another recent trend: building smaller homes. Smaller homes and condominiums are becoming increasingly popular and the demand is high. One of the credos of the green building movement is a push for people not to build more house than they really need. The trend at least somewhat has made an impact in Austin; if new homeowners aren’t exactly building small, at least they are asking for smaller. They are commissioning a 3,000-square-foot home instead of the 6,000 they might have opted for a decade ago. The focus on environmental stewardship has played a role in that downsizing, as have the economy, high land costs and stricter zoning rules. And because of the struggling home-building market, there’s less speculative home building. People who want to live in the center are forced to live in smaller homes because of land costs, and it’s partly linked to zoning ordinances in parts of the city. Homes are restricted to 40 percent of the lot size, for a maximum of 2,300 square feet, for example, under the city’s 2006-enacted Residential Design and Compatibility Standards, known as the “McMansion Ordinance.” The ordinance has curtailed the size of homes in the city, and this is often enticing to clients buying in Central Austin. A lot of it has to do with maintenance: spending less time cleaning a large home, mowing and landscaping a big yard, pool, etc.  The reality in most cases was that people were only using a small portion of the house 98 percent of the time. In the past, empty nesters kept those big houses. Everyone thought ‘bigger is better. Now they’re downsizing and simplifying their lifestyle. In many cases, it is safe to say that the size of the home is simply less important to people than the location. Indeed, many Austinites are leaving behind their spacious homes in the outlying areas to live in smaller spaces in Central Austin. People are thinking about how they want to spend their life, not how they want to maintain their house. So many Austinites are drawn to urban downtown neighborhood living due to the convenience of being able to live where you can park your car, then walk and/or bike to local amenites in town. 

Downsizing your home, and upgrading your lifestyle:

Giving up square footage isn’t easy, but homeowners are learning to live more casually.What’s (mostly) out: formal living and dining rooms, media rooms, spacious wine rooms, and home automation.  The entertainment system is finding a home in the family room or a combination den/guest room. Wine is being stored in a wall unit. The formal dining room isn’t completely obsolete. Many people still like to entertain, but there has been a shift toward a one-dining-room house. The kitchen island often serves as the breakfast table. What’s morphing into something different: the home office. Fewer people are asking for a dedicated home office because computing is much more mobile than it was in the past. Today’s home office might be just a nook off the kitchen or a desk in the family room where parents can monitor the kids’ Internet habits. Having a smaller house doesn’t necessarily mean settling for less living space either. People are just doing more of their living outside. Many people are trading indoor living for outdoor living. Clients want an outdoor living environment, not a covered porch with bad outdoor chairs. Indoors or out, what home-owners are looking for today is a place to retreat from their busy lives.  They want their lives to be simple. People are looking — and this has always been the case — for a safe place to retreat. But it seems like people are wanting, even more so now, this notion of a retreat.

Remodeling vs. building

The kitchen remains the heart of the home, and that’s one reason there’s a trend to remodel rather than build a new home. This is where most remodeling projects seem to start. And that means expanding it, bringing it up-to-date and making it a more efficient place to work. Just a few years ago, people were buying old houses and tearing them down, but now there’s less of that and more renovation and additions. And in a way, this trend does tie to sustainability: it’s more sustainable to use what you already have.

But whatever architectural trend homeowners are following — green building, contemporary aesthetic, smaller house size — one thing hasn’t changed: clients still want a place that is theirs alone and unique to them.

For the four years beginning with the downturn in mid 2006, the median price of an existing home nationwide fell by 27%, or 7.7% annualized, according to Fiserv Case- Shiller, a home-price research firm. (At the worst of the decline, a year ago, prices had fallen 30%.) The median home now sells for $177,000, a bit more than what it would have fetched in 2003.

Among the cities that Fiserv tracks, Merced, Cal., fared worst, with a 68% plunge in its median home price in the four years since the peak, followed closely by Modesto, Salinas and Stockton, Cal.; Cape Coral-Fort Myers, Fla.; and Detroit. Prices rose in just 12 cities — in upstate New York, Tennessee and Pennsylvania — that missed the boom and plugged along at their usual slow pace of appreciation.

Stuck Underwater

The home-price plunge has left 23% of mortgage borrowers (out of 53.5 million) underwater — that is, they owe more on their mortgage than the market value of their home. Unless they can ante up the difference — an average of $75,000, according to CoreLogic, which analyzes mortgage data — they can’t sell and they can’t move. Their choices? Stick it out, ask the lender for permission to sell for less than they owe (a short sale), or default.

In Norwood, Mass., south of Boston, Al and Shannon Becker wish they could buy a bigger home, but they’re underwater by about $50,000. But the couple have a plan. They bought their 1910 farmhouse, with three bedrooms and two baths, for $389,000 in 2005. By 2006, the property appraised for $423,000 and the couple refinanced, taking cash out for home improvements. Now it’s worth $350,000. Still, they can afford to move — and could come up with the cash to pay off the mortgage. Instead, they are paying an extra $500 a month on the second mortgage they took out when they purchased the house and anticipate the day when debt pay-down and home-price growth will converge. Walk away? No. “That would be un-American, and my parents would kill me,” says Al.

The price gains that would put the Beckers and the millions of homeowners like them in the black have been tantalizingly out of reach, though glimmers of hope exist. Median home prices rose by 3.6% during the year ended June 30. Many California cities saw double-digit increases. Prices rose by at least 5% in many cities in California’s beleaguered Central Valley and Inland Empire (such as Riverside-San Bernardino), a few cities in Florida, and in Phoenix, Washington, D.C., and Minneapolis-St. Paul.

David Stiff, chief economist at Fiserv Case-Shiller, says those price increases, artificially propelled by the home-buyer tax credit, weren’t sustainable. The tax credit expired on April 30. By June, sales had begun to slide, and in July they tanked. In late summer, sales of existing homes (including single-family houses, townhouses, condos and co-ops) began to climb again, but in the National Association of Realtors’ most recent report, they were still 19% below a year ago. The lower the price tier, the greater the decline in sales, which reflected the pullback of first-time home buyers.

Although this recovery may seem unendurably long, Stiff says that five to seven years is historically a “pretty standard time frame” for prices to stabilize after a large correction. But in the past, some regions suffered longer than others. For example, Dallas home prices took 12 years to recover after they fell from their peak in mid 1986. This time around, however, the downturn hit more areas because the mortgage-credit bubble was so widespread.

The Foreclosure Factor

Now, short sales and foreclosures are the driving force behind continued price declines. Throughout 2010, they accounted for about one-third of home sales, with an average price discount of 26%, according to RealtyTrac. Everyone agrees that more such sales are on the way, but estimates vary.

Moody’s Analytics chief economist Mark Zandi says the foreclosure pipeline holds about four million loans that are delinquent by 90 days or more — or headed that way — and he thinks half of those will end up for sale. He thinks that delinquency rates have peaked and that foreclosures will peak in 2011. He reckons that, given current supply and demand, it will take two years to work through the excess inventory (which is concentrated in Florida, the Atlanta area, Arizona, Nevada, California’s Central Valley, the Rust Belt and a few other spots in the Midwest). The longer it takes to put to rest the foreclosure-processing issue raised in October, the greater the backlog of properties — and the more they will suppress prices when they hit the market. But Zandi says foreclosure-gate will be resolved within a few months, not a few quarters. Even so, foreclosure moratoriums have ensnared plenty of bargain hunters, including Kerry Deland of St. Cloud, Fla. Deland moved to St. Cloud, near Orlando, in 2005. A kindergarten teacher, Deland quickly figured out that she couldn’t afford to buy a home — especially one with enough land for her horse — on her salary.

A friend tipped her off to a property that appeared destined for foreclosure — a 5-acre spread with a three-bedroom, two-bath house that would have sold for $300,000 in 2005. Deland watched and waited. In July, the foreclosing lender listed the property for $114,000. Deland made two offers. The first time she lost out to a higher bidder, whose deal fell through. In late August, she made a winning bid of $111,900. Closing was scheduled for early November, but in October Deland learned that the seller, Fannie Mae, had imposed a foreclosure moratorium. Fortunately, it offered to extend Deland’s contract until December 5. “I’ve waited this long,” she says. “I can wait some more.”

A Glass Half-Full

The worst-case scenario for home prices? Slow economic growth and high unemployment drive up the foreclosure numbers, which push down home prices. Consumers refrain from spending, further dampening economic growth and job creation. Demand for homes decreases because would-be buyers either don’t have a job or don’t have confidence that they’ll still have one in months to come. Confident buyers hold off because they expect further price declines.

But Zandi thinks the job market will begin to turn around by mid to late 2011. And the Federal Reserve will ensure that mortgages stay dirt-cheap at least until employment picks up again. Zandi says that the best reason for a bit of optimism is this: With few exceptions, the market is fairly valued based on the relationship of home prices to income and apartment rents. Some markets have actually become undervalued, which will attract more buyers and investors.

Bank of America Merrill Lynch economist Michelle Meyer says that to frame the housing outlook in a more optimistic light, “everything has to go as planned.”To buoy consumer confidence and put home sales on a strong, upward trajectory, job growth will have to be considerable and the unemployment rate clearly receding. Meyer agrees that we could see that begin to occur in the second half of 2011, but, she says, “it will be a slow process.” Fiserv expects the housing market to finally hit bottom in mid 2011, with another 7% decline in the U.S. median home price for the year ending June 30, 2011. The firm’s forecasting model says that prices are 90% of the way back to being in line with household incomes. Stiff says that the housing market is now “bouncing along the bottom,” with buyers and sellers creating price volatility as they try to match bid and ask prices. The firm predicts that in many cities, prices will begin to tick upward again in 2012.

Long-term mortgage rates hit new lows this week, on signs inflation remains in check.
The average rate on a 30-year fixed-rate mortgage in the week ending Oct. 7 was 4.27 percent, down from 4.32 percent last week. A 15-year fixed-rate mortgage fell to an average of 3.72 percent, down from 3.75 percent last week.

Both are the lowest long-term rates have been since Freddie Mac (NYSE: FRE) began keeping track.

“The 12-month growth rate in the core price index for personal consumption, which the Federal Reserve closely tracks, has been drifting lower over the last six months ending in August and suggests inflation is running at a tepid pace at best,” said Freddie Mac chief economist Frank Nothaft. “This allowed mortgage rates to ease to new or near record lows.”
A report this week from the National Association of Realtors showed pending sales of existing homes rose for the second consecutive month in August, up 4.3 percent. The group also revised July’s pending sales figures higher, indicating housing sales continue to recover even without the now expired homebuyer tax credit.

The hopeful news nationally and could spur sales after the recent tax credit expiration slump. Austin home sales fell 15 percent year-over-year in August, while sales so far this year have outperformed 2009, the Austin Board of Realtors reported. The Multiple Listing Service data showed total homes sold fell to 1,490 homes in August, while the year-to-date total increased 2 percent from the same eight months in 2009.