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2011-12-19 21:05:16

2011: The Year Home Values Went Sideways


Few homeowners will remember 2011 with joy in their hearts, and for good reason.  It was a year that began with high hopes that homes would regain a portion of the average 34 percent of value they lost in the housing crash of 2007-2008.  Instead, the year ended with national median home prices down two to four points on the year and 23 percent of homeowners are still underwater. 

A year ago we were recovering from the expiration of the homebuyer tax credits.  Few “experts” predicted the credit would induce people who were thinking of buying a home to move forward their purchase to qualify for the credit, leaving a vacuum in demand after the credit expired at the end of April.  The vacuum caused a slide in values that lasted into the first quarter of 2011 and contributed to a “double dip” in home values, which reached levels even lower than the initial plunge in 2007 and 2008.

The spring housing market and stabilization of the economy brought a measure of relief that stopped short of regaining what had been lost in the first quarter.  By June it was clear to many housing economists that housing markets were floundering around, lacking direction.  Instead of moving up or down, some said home prices were going sideways.  Altos Research called it a catfish market:  home values were sitting on the bottom of the river like a lazy catfish, snapping at a passing morsel now and then but always returning to the bottom.  In the intervening months, nothing has happened to move the catfish off the muddy bottom.

The greatest villain in this scenario has been anemic demand.  Some have blamed lenders for making it difficult to get mortgages, but the real problem has been—and continues to be—consumer fear driven by the fragile economy.  The housing crisis in 2006 may have sparked the national recession, but housing will not lead the recovery.  Not even generation-low prices and rock bottom rates—are enough to attract today’s buyers who fear for their personal financial situation.

The second greatest villain was foreclosures, which seriously depress home values and accounted for 30 to 40 percent of every home sold in 2011.  The Foreclosure Era will end someday, but not in 2012.  Some 4 million homes are currently in foreclosure or seriously delinquent; that’s a lot when you consider that this year we will sell slightly fewer than 5 million homes nationwide.  It will surely take a year and more to flush out these foreclosures and those that will follow.

 This year also was one when homeowners got a rude lesson in Washington promises.  The billions spent on the tax credits and the foreclosure modification and refinancing programs resulted in a net decline in home value.  HAMP and HARP helped many, but not nearly enough to make a significant change for the average homeowner/taxpayer.  Sometimes the old ideas work best.  The seventy-seven year-old Federal Housing Administration worked wonderfully to provide a path to homeownership for about half of all home buyers.

 Perhaps the best that can be said about the past year is that it could have been worse.  New foreclosures have actually been in decline and in 2013 or later the Foreclosure Era will begin to abate.  Demand has been strong enough to sell close to 5 million homes, more than last year, even with the tax credits.  And the housing economy now has weaned itself fully from the impact of the tax credits, laying the groundwork for what economists are calling an “organic” market free from artificial stimulus.

Looking to the year ahead, the crystal ball gazers see some additional slippage in home prices during the first three to six months of the year, followed by a very modest improvement that will, hopefully, bring 2012 a few points higher than 2011.

Many factors—foreclosures, availability of credit, interest rates, the congressional and Presidential elections—will shape next year’s housing economy.  However, by far the most important will be how buyers, especially first-time buyers, see their personal financial situation.  Most have withdrawn from the market and have adopted a wait-and-see attitude until spring.  They are in no hurry.  They are confident prices won’t rise anytime soon and interest rates will stay low.  Their focus is on the overall economy, their personal financial situation and the security of their jobs.  Next year, should the job picture improve and consumer confidence gain, that old catfish just might make a lunge for the surface.

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