The Real Estate Roller Coaster: What’s Up, What’s Down

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RISMEDIA, Jan. 31, 2008-Another batch of dismal housing data hit the economy Tuesday, including worsening foreclosure rates, piling more pressure on the government to take action that could help pull real estate out of its tailspin.

“We’re still in the middle of all this,” said Bob Walters, chief economist for Quicken Home Loans in Livonia, Mich., “I would expect the data to get worse before it gets better.”

The numbers, in three reports released Tuesday, showed that:

- More than 1% of all U.S. households were in some stage of foreclosure last year, a significant increase, according to RealtyTrac, a housing data firm;
- Home values took a major swoon, with prices in a 20-city index tracked by Standard & Poor’s declining by a record 7.7% in November. The study said Chicago-area prices that month were 3.9% lower than the year before;
- The rate of homeownership saw its biggest one-year drop on record, and the number of vacant homes climbed to 2.18 million from 2.07 million, the Census Bureau reported.

The numbers likely mean that the decline has further to go, observers said.

“Six months ago, people were saying we will see prices hit rock-bottom, and now I don’t think we’re seeing even the most optimistic people saying that,” said Geoff Smith, vice president of the Woodstock Institute in Chicago, which has studied foreclosure trends.

On top of that, many observers say any aid from the government, including a widely expected interest rate cut from the Federal Reserve, will be too little, too late.

Miami continued to be the weakest U.S. market in the S&P data, with an annual price decline of 15.1%. San Diego followed with a 13.4% drop, Las Vegas with 13.2% and Detroit with 13%.

The Woodstock Institute’s Smith said that if there’s any room for encouragement in the dreary data, it is that the ongoing decline in property values will make homes more affordable and pull buyers back into the market.

“If you see property values coming back down to earth, that’s where you’re going to see a recovery, in affordability,” he said.

Walters of Quicken agreed.

“As painful as it is-it’s terrible and there are real human costs and financial costs and it’s extraordinarily difficult -we’re seeing that the economics are working,” he said. “As prices fall, more and more people will be able to afford to purchase that house. It’s painful but it begins the process of renewal.”

Some are pinning their hopes on congressional action and interest-rate cuts by the Fed to stimulate the economy and lift housing out of the doldrums with it.

The Fed’s cuts, however, don’t have a direct relation to mortgage-interest rates, which are determined by the bond market. But Rick Sharga, a RealtyTrac spokesman, said last week’s three-quarter point Fed cut and any similar action this week may provide some momentum.

“(Fed rate cuts) seem to have a psychological effect” to help restore home buyer confidence, he said. “At some point, people will get off the sidelines, and that’s the real solution to the foreclosure situation.”

But J. Edward Katz, a business professor at Penn State University, said he doubted that government interventions could have broad effect.

“I think we’re just going to have to let the market play out,” Katz said. “The proposals may be in the right direction, in part. But they’re too little and I think the situation has deteriorated too far.”

Sharga said much of the pain borrowers such as Shaw are feeling from adjustable-rate loans may be about to crest.

“I expect 2008 will be the final year of the big resets for the most vexing of these loans, the subprime adjustable-rate loans,” he said. “We’re going to see a huge wave of those resetting in late May and June.

“Once those have reset, we will have virtually all of those loans out of the system, and that, theoretically, should take some of the pressure off,” he said. “There will be still other loans adjusting out there, but of a more traditional variety _ none that have a history of defaulting.

“If nothing else bad happens economically, we could start seeing things coming back by 2009,” he said.

But that leaves 2008, he said.

“Short-term, we’re going to see half a million to three-quarters of a million bank-held properties put on the market this year, and that will do nothing to help with the inventory (of homes for sale) imbalance we have,” Sharga said.

Those bank-held properties, the product of the foreclosure mess, are doubtless contributing to the home-vacancy rate reported by the Census Bureau Tuesday and to the downturn in homeownership rates.

The Census said homeowners accounted for 67.8% of occupied homes in the fourth quarter, down 1.1% from a year earlier-the biggest year-over-year drop since recordkeeping began in 1965. Homeownership hit a record high of 69.2% in 2004.

© 2008, Chicago Tribune.
Distributed by McClatchy-Tribune Information Services.

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