U.S. housing lays foundation for recovery as buyers coaxed back
By John Gittelsohn, Steve Matthews and Chris Christoff Bloomberg News
BOSTON - Dan Kowalyshyn figures he owes about $200,000 more than what his four-bedroom house is worth today. It faces a cul-de-sac where three of the six homes have been lost to foreclosure since his $570,000 purchase in 2006.
The software developer has decided to keep up on his mortgage payments because he sees signs of improvement outside his window. Trucks drive by to deliver lumber for houses being constructed by PulteGroup Inc., KB Home and Meritage Homes Corp.
“Either those builders are insane or they’re getting some traction selling new homes,” Kowalyshyn, 40, said in a telephone interview from his house in Eastvale, Calif., 45 miles east of Los Angeles. “I think we’re seeing the beginning of a recovery.”
After several false starts, housing is flashing the strongest signals yet of a sustainable rebound. While foreclosures continue to depress prices, buyers are wading back into the market, lured by rising employment and record-low mortgage rates. Six years into the biggest real estate collapse since the Great Depression, housing may become a net contributor to the U.S. economy for the first time since 2005.
“There are definitely green shoots in the housing market, no argument about that,” said Peter de Bruin, an economist at ABN Amro Group Economics in Amsterdam. He is the most accurate forecaster of new-home sales, along with his colleague Maritza Cabezas, in the two years ended Feb. 1, according to data compiled by Bloomberg. “Housing will contribute modestly to recovery this year and we will see a sustained recovery in 2013” that probably will continue through 2015, he said.
The Federal Reserve, in its regional Beige Book business survey issued Feb. 29, said the housing market has “improved somewhat in most districts” with “several reports of increased home sales and some reports of increased construction.” Among the Fed’s 12 district banks, “Boston, Cleveland, Richmond, Atlanta, Kansas City and Dallas reported growth in home sales,” and “Philadelphia reported strong residential real estate activity.”
Speculation that new home sales will rebound has boosted shares of homebuilders, with the 11-member Standard & Poor’s 1500 Homebuilding index up 17 percent this year, compared with a 9.3 percent gain for the Standard & Poor’s 500 Index.
Early signs of a recovery haven’t revived prices, which have continued to fall as distressed real estate sales depress values. The S&P/Case-Shiller index of 20 U.S. cities fell 3.9 percent last year to a post-crash low, sinking prices on repeat sales to 34 percent below their July 2006 peak, according to a Feb. 28 report. Short sales, when owners sell for less than the amount owed, and foreclosures accounted for 35 percent of January transactions, according to the National Association of Realtors.
Declines Leveling Off
The rate of price declines is reaching the leveling off point this year, even as the the flow of foreclosed homes to market will probably accelerate following a Feb. 9 settlement between the five largest mortgage servicers and state attorneys general over their methods for repossessing homes, said Paul Dales, an economist with Capital Economics Ltd. in London.
“The bottom is behind us,” said Dales, top ranked for his home-price estimates by Bloomberg. “I don’t think we will return to anything like the exceptional booming market we had five years ago. We will have a very steady, slow recovery but a recovery nonetheless.”
After falling two years ago to the lowest level since records were kept in 1947, household formations may hit 1.2 million this year, de Bruin said. New households will help absorb the so-called shadow inventory of homes that are vacant or facing foreclosure, and fuel demand for construction of new apartments and houses in areas with growing populations.
Existing Sales Rise
Existing home sales reached their fastest pace in 20 months in January and more Americans than forecast signed contracts to buy, according to the National Association of Realtors.
In a sign that demand may be catching up with supply, the inventory of homes listed for sale fell to 6.1 months, down from a peak of 12.1 months in July 2010 and the lowest level since April 2006, when the real estate bubble was nearing its crest, the Chicago-based Realtors group said.
Banks loosened standards on both prime and nontraditional loans such as adjustable-rate mortgages in the third quarter of 2011 for the first time since at least 2007, the Federal Reserve reported Nov. 7 in its survey of senior loan officers. An increased number of banks reported stronger demand in the fourth quarter, when lending standards didn’t change, the Fed reported Jan. 30.
Banks Come Back
“We are seeing early signs of the banks being willing to come back on a very selective and limited basis,” said Barry Rutenberg, a Gainesville, Florida, builder who is chairman of the National Association of Home Builders. “We are starting to see it loosen up just a little bit. This is the very beginning of this. Let’s not get carried away with euphoria. It is generally loosening up.”
New single-family home sales beat analysts’ expectations in January and sales for December and November were revised upward, the Commerce Department reported Feb. 24. Last year, new home sales declined to a record low of 304,000, according to department records dating to 1963.
Housing starts, including apartments, rose 1.5 percent in January to an annual pace of 699,000, the Commerce Department reported. About 750,000 total new housing units -- 480,000 single-family and 270,000 multifamily -- will be started this year, up 23 percent from last year, and below the 2 million pace in 2004 and 2005, Dales said.
Homebuilder Confidence Improves
Homebuilder confidence improved in February to the highest level since May 2007, according to the National Association of Home Builders/Wells Fargo sentiment gauge. Ninety-eight metropolitan markets had improving conditions for homebuilders, according to the group’s index, including Detroit, Miami and Minneapolis.
“The trend is up, not down,” said Dean Maki, chief U.S. economist at Barclays Capital Inc. and a former Federal Reserve researcher. “That is a big change from where we’ve been over the last several years. So I don’t think we’re going to get to a point over the next year or two where homebuilders and others think these are really good times in the housing market. We’re a long way from that. But what we are seeing is some improved trajectory.”
While existing home sales are mostly “a transfer of assets from one household to another,” new home construction is a direct contributor to economic growth, said Karl E. Case, co- creator of the S&P/Case-Shiller property-value indexes. Each increase of 100,000 housing starts adds about $25 billion to the economy, estimates Case, professor emeritus at Wellesley College in Wellesley, Mass.
New Tax Revenue
Each new house creates about three yearlong jobs and more than $89,000 in new tax revenue, according to the National Association of Home Builders.
KB Home, the seventh-largest U.S. builder by revenue, has begun to raise prices and reduce incentives at some of its 39 communities in Southern California, even as prices on existing homes continue to drop, said Steve Reffner, president of the Southern California region for the Los Angeles-based builder.
The new homes compete with lower-priced existing houses by offering construction warranties and energy-efficient features such as solar-energy panels and insulation that come with tax credits and cut monthly utility bills by as much as 80 percent, Reffner said.
‘At the Bottom’
“Buyers are motivated now because they feel we’re at the bottom,” he said in a telephone interview.
The improvement in construction has led to a run-up in homebuilder-stock prices that led analyst Wilkes Graham of Compass Point Research & Trading to downgrade KB Home, PulteGroup and D.R. Horton Inc. KB Home’s shares are up 68 percent this year, the most of any U.S. homebuilder.
“While our updated 2012 and 2013 estimates assume a continued recovery in the market for new homes, we believe the equities have more than priced the growth that we expect to come in the next two years,” Graham wrote in a Feb. 28 note to investors.
Owners of about 5 million homes have lost their properties to foreclosure since the housing crisis began in mid-2006, according to RealtyTrac Inc. A rout in real estate prices has stripped $7 trillion from home values, according to the Federal Reserve. As a result, more than 11 million owners have mortgages that are bigger than their property values, a figure that increased by about 400,000 in the fourth quarter, CoreLogic Inc. reported yesterday.
More Foreclosures Coming
About 8 million more homes will be lost to foreclosure or sold through distressed transactions in the next five years, according to a Feb. 16 report by analysts at Morgan Stanley. About half will be purchased by investors and converted to rentals, wrote Oliver Chang, Vishwanath Tirupattur, James Egan and Jose Cambronero.
A decline in prices from discounted foreclosure sales along with 30-year mortgage rates of less than 4 percent boosted U.S. housing affordability to a record in the fourth quarter.
“Affordability has increased dramatically as a result of the decline in house prices and historically low interest rates,” Federal Reserve Chairman Ben S. Bernanke said in Feb. 29 testimony to the House Financial Services Committee. Many buyers, however, are “reluctant to buy a house now because of concerns about their income, employment prospects and the future path of home prices,” he said.
Increases in Detroit
Detroit, where prices have fallen to 1995 levels, was the only metro area in the 20-city Case-Shiller index with year- over-year increases in 2011, rising almost 0.5 percent through December as U.S. prices fell almost 4 percent. Prices in the Warren-Troy-Farmington Hills area north of Detroit rose 3.5 percent last year, the most of the 25 largest U.S. metro areas, according to the Federal Housing Finance Agency’s home-price index.
Andy Hargreaves of Coldwell Banker Preferred Realtors in Plymouth, Michigan, said 60 percent of his listings in Detroit’s western suburbs have been getting multiple offers since December, driving up prices. Auto workers are using bonuses of as much as $7,000 for down payments on homes, as the Michigan- based industry rebounds, he said.
One home had 20 offers, Hargreaves said, and his inventory is half the size it was three years ago.
“I can’t keep a good home on the market very long,” he said.
In September, Jason and Rebecca Prone paid $383,000 for a new 3,100-square-foot (290-square-meter) home in Northville, a Detroit suburb, because they couldn’t find an existing house in the area chosen for its quality schools.
“If we didn’t put in a bid by the time we were outside looking at it, we missed it,” said Jason Prone, 34, a transplant from Washington, D.C., who works from home for the U.S. Patent Office.
Demand also has grown for New York City-area condos and for homes in the Boston-to-Washington corridor, said Doug Yearley, chief executive officer of Toll Brothers Inc., which reported that orders for the quarter ended Jan. 31 rose 19 percent and average prices climbed 22 percent to $682,000.
“We’re optimistic,” Yearley, whose Horsham, Pennsylvania- based company is the largest U.S. luxury-home builder, said in a Feb. 22 interview on Bloomberg Television. “We have orders that are up significantly. We’re seeing deposits up. We’re seeing traffic up.”
‘Pockets of Success’
More people are building new high-end homes around Boston and spending has increased on home improvement, said John Ted Mahoney III, president of Windjammer Construction Corp., a closely held home-construction and remodeling business in Bridgewater, Massachusetts.
“There are pockets of success for the first time in a long time,” said Mahoney, who’s also president of the Builders Association of Greater Boston.
In Phoenix, prices rose 2.7 percent last year, including a 7 percent increase in the fourth quarter alone, according to the Federal Housing Finance Agency index, which measures resale prices of homes with Fannie Mae and Freddie Mac mortgages. The turnaround in the Arizona state capital -- where almost 53 percent of homes had negative equity in the fourth quarter, according to CoreLogic -- is carrying over to the new-home market.
‘It’s on Fire’
Meritage Homes raised Phoenix-area prices this year by as much as $1,500, said Larry Seay, chief financial officer for the Scottsdale, Arizona-based builder. In January, developer DMB Associates Inc. selected the name Eastmark for a 3,200-acre (1,300-hectare) project that’s the first new large master- planned community in the Phoenix area since 2005, said James “Nate” Nathan, president of Nathan & Associates Inc., a land broker in Scottsdale, Arizona.
“It’s on fire here,” Nathan said in a telephone interview. “We’re adding jobs, the lot inventory is dwindling and population growth has resumed.”
Even in Florida -- which has the highest percentage of homes in the foreclosure pipeline, according to Lender Processing Services Inc. -- demand for new houses has revived in pockets, said Jody Kahn, vice president of John Burns Real Estate Consulting Inc. Prospective buyers began lining up Jan. 27, the night before closely held G.L. Homes Ltd. opened a new community in Naples where homes start at $379,000, she said.
“Florida builders began raising prices in December,” Kahn said in a telephone interview from Portsmouth, N.H. “It’s kind of mind-blowing because so many people consider Florida ground zero for foreclosures.”
In Denver, prices hadn’t rebounded even as the inventory of existing homes listed for sale fell to 8,800 in January, down 37 percent from a year earlier, according to the Colorado Association of Realtors. That may change as agents have started to receive multiple offers on mid-range properties in recent weeks, said Scott Matthias, the group’s president.
“I haven’t seen multiple offers in four or five years,” said Matthias, a Realtor with Re/Max Professionals in Denver.
Those offers also may spark more interest in new home starts, which fell to 3,600 last year in the Denver area, down 82 percent from the 2006 peak, said John Covert, director for the Colorado region for Metrostudy, a Houston-based company that tracks home construction.
“We expect the market to grow by 15 percent this year,” Covert said. “That sounds like a big number for housing starts, but it’s still only going to get us another 500.”
Hopes for a housing recovery were dashed in 2010 when tax credits spurred a spike in sales that proved temporary, and last year, when rising unemployment, bickering over the U.S. deficit and falling stock prices spooked consumer confidence.
Buffett ‘Dead Wrong’
“I was dead wrong,” Warren Buffett said in his Feb. 25 letter to Berkshire Hathaway Inc. shareholders about his expectations for a housing recovery last year. He says he’s optimistic again, expecting reinvigorated household formation to spur demand for more residences.
“Housing will come back -- you can be sure of that,” he wrote. “Every day we are creating more households than housing units. People may postpone hitching up during uncertain times, but eventually hormones take over. And while ‘doubling up’ may be the initial reaction of some during a recession, living with in-laws can quickly lose its allure.”
After looking for several years for a larger home, Jessica Moehlman, an auto sales manager, said she and her partner expect to complete the purchase by June of a $439,000 three-bedroom house in Grant Township, Minnesota, about 20 miles east of Minneapolis, so his three children can get into a good school district.
No More Waiting
The improving economy and current price levels have “created an urgency for us to purchase a new home now versus waiting a few years,” said Moehlman, 27. “We feel we are still able to utilize our money more effectively by buying a bigger house for less money.”
PulteGroup, the largest U.S. builder by revenue, and D.R. Horton, the biggest by volume, each have one community in Eastvale, the California city where software developer Kowalyshyn sees improvement. Meritage sold about 30 homes in the town last year and this year opened a new community called River Road, with prices starting at $402,990, said CFO Seay.
KB Home has four communities in Eastvale, with prices starting at $272,990, according to its website. The homes are selling at a profit, Reffner said.
“We think Eastvale is a great market,” he said.
Kowalyshyn said he considered alternatives to keeping up payments on his home, including selling at a loss or walking away from his property to let the bank take it back. To buy a house closer to his Los Angeles office -- a 100-mile round-trip commute from Eastvale that costs four gallons of gas a day and about $50 a month in tolls -- he’d pay more money for less space.
“I’m a numbers guy,” he said. “I’ve done a statistical analysis of all my options. I talked to a lawyer. My conclusion is the best choice, at least short term, is to stay and see what happens.”