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2008-11-24 18:37:35

Housing Is In An Overcorrection, Not A Recession

It would be easy to look at major trade association housing news and be discouraged, but there’s some evidence a rebound is just around the corner.

If you look at some metrics besides housing prices and sales, there’s good reason to be optimistic. Here’s why:

Affordability is greatly improved for home buyers

The National Association of Realtors announced last week that median housing prices are down to $200,500, nine percent lower than third quarter 2007, and that’s following more than two years of price declines. Only 28 out of 152 metropolitan statistical areas tracked by the NAR showed increases in median existing single-family home prices from the same quarter in 2007. 

Prices have rolled back in many areas to 2003 or earlier. The result is number of potential home buyers nationwide who can afford to buy a new or existing home is the highest in four years, says the National Association of Home Builders/Wells Fargo Housing Opportunity Index. 

According to the index, the median home buyer income of $61,500 allowed 56.1 percent of homes to be sold as “affordable.” That’s 15 percent more than the 40.4 percent of families who could afford homes at the peak of the housing boom, says the report. 

Now this figure is based on those that stepped up and purchased. The news gets better for those on the sidelines. 

The national median family income is $44,928 in NAR’s latest housing affordability index which would qualify those families for a home costing $257,700 using conventional lending criteria with 20% down. First time buyers could qualify for about 80 percent of that amount, says Walt Molony, a NAR spokesperson.

That means the median price home is $57,200 less than the median income qualifies to buy. That’s affordable, folks. May not apply in your area, but it’s good news nonetheless.

Housing Inventories Still High

Yes, that’s good news, too. For buyers. While foreclosures and short sales were a whopping 35 to 40 percent of transactions in the third quarter, homebuilders kept adding to the inventory by continuing to build the wrong products according to the U.S. Census.

"The underlying trends in fundamental demand factors point toward the need for 1.9 to 2.0 million housing units per year —composed of 1.5 million single family units, between 350 and 400 thousand multifamily units, and between 100 and 150 thousand manufactured homes.”

That’s just great, but only 48 percent of home buyers have children under the age of 18, the greatest market for single-family homes. 

In 1970, women married at the age of 20. Now they’re marrying at 26. That’s five years they could own another product (condos, townhomes) post college before they marry and have kids and move to the ‘burbs. That’s an incredible opportunity for the real estate community to get behind multi-family housing. Keep in mind, one-third of home buyers are single. Would they rather have a yard, or a piece of their own building? Condo buyers move every four years, single-family home buyers every six. Why would the real estate community not want a piece of this business?
That means we still have too many single-family homes, not enough multi-family homes and that inventories will take several years to go through.
Nonetheless, the National Association of Home Builders followed the NAR monthly sales report for October with the news that housing starts and permits hit record lows in October. Housing starts reached a new nadir of 791,000 annually paced, while permits fell a record-breaking 12 percent to 708,000.  
Says Molony, “Our assumption is 97% of single-family starts will be completed. We're projecting single-family starts this year to be 498,000, which works out to about 483,000 on the ground.”
Households are still forming, albeit slowly
The NAR believes that based on historic trends, the nation should be adding between 1.2 and 1.5 million new homes, due to the slowing of household formations.
New homes starts are based in both demand, spurred by new household formation, and obsolescence. According to the U.S. Census, household formation growth was 887,000 year over year by the third quarter.  Housing starts are well below new household formations, even if they are building too much single-family.  

“Household formation is running below historic levels,” says Molony.
That supports the statement that buyers are on the sidelines, paralyzed by fear, debt, job loss and other scary factors. Grown children are failing to launch from their parents’ basements. 
“The market is underperforming by historic standards - sales and affordability are the same as they were 10 years ago, but we've added 25 million to the population and 13 million jobs,” says Molony.  
That’s a new bubble waiting to happen, as soon as incentives improve for buyers, including the belief that the bottom is near or here.

The bottom is a moving target
We’ve been in a housing correction for over three years. We’re at the point where low interest rates, low prices, and high inventory have formed the Buyer’s Trifecta. It’s time to think in terms of vantage point, getting the best possible home for the money and enjoying the tax benefits, as well as lifestyle.
“A small recent member survey showed nearly a quarter of potential buyer clients are on the sidelines,” says Molony.
They can buy – they’re waiting for the bottom. But when is that? If you were to ask, says Kathy Roberts, association executive for the Sarasota Association of REALTORS®, most would say when sales and prices improve.
“If you’re waiting for the right signs, it means you’re going to miss it,” says Roberts.   


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