Elusive Search for the Bottom: Housing Market Update

A lot of people around me, especially those focused on buying real estate as an investment in this historically challenging real estate market, are obsessed with when US home prices will “bottom out”. I believe people sometimes focus on finding the lowest home price at the expense of other equally important economic factors such as the cost of construction/”fixing the place” and financing costs…both of which are at historic lows right now, and thought I’d share some of the latest news/information relevant to this topic:

1. The general consensus of economists (this is available from several media sources) is that home prices, which have already tumbled 20% from their peak three years ago, will probably sink another 10% before stabilizing.

2. Per a Wall Street Journal article on October 29, 2008 (see below for an excerpt, and a link to the article), the consensus at a National Association of Home Builders conference recently was that “home prices will bottom out as early as the middle of next year (2009)”.

3. Finally, there were several articles this past week discussing the troubled mortgage modification plan the FDIC has implemented at Indymac since they took management control in July. The FDIC is proposing implementing this type of plan at a much broader level nationally to reduce the total number of foreclosures in the future. I agree that foreclosures are generally bad for everyone involved (including the homeowner and the lender)….and the more that’s done to avoid them systematically, the better. I also believe addressing this issue will help home prices “find their bottom”. While the White House has not made a decision on the FDIC backed proposal yet (and likely won’t till we have a new President), JP Morgan announced over the weekend that it is launching a similar program which should help prevent foreclosure for about 400,000 homeowners. All this is good news from a housing finding its bottom standpoint.

I won’t take an official position on when the market will bottom as I believe it’s already a great time for folks with a long term investment horizon to invest in real estate. And as a wise person once said: “you only know the market bottomed once it’s too late (i.e., once it’s started rising again). But here’s some thoughts on what the above could mean for you:

Selling: If you’re a current homeowner….this is generally not a good time to sell….so unless you believe you must sell for financial or other life reasons (e.g., job change), hold off on selling the real estate you own currently. The key caveat here is if you think you’re going to need to sell in the next 24 months or so. If this is the case, I would consider selling now as you’ll likely maximize your home value by selling today vs. in the near future.

Buying: If you’re thinking about buying for living or investment purposes, then the key is to have a long time horizon (e.g., 5 years or longer). For folks who fall into this category, I believe it’s a good time to start looking at possible opportunities including foreclosures.

Key Recent Articles:

Economists Predict Home Prices Will Bottom Next Year (WSJ, 10/29/08)
When will housing's sickening slide stop?
According to economists at the semi-annual National Association of Home Builders forecast conference, not soon—though the end is in sight. The consensus: Home prices will bottom out as early as the middle of next year.
I've been attending these conferences for years, and last spring's was the gloomiest I'd ever attended. The latest conference, held last week, was also downbeat, but with a glimmer of hope—many of the economists seemed optimistic that the government's bailout plan, which includes buying toxic mortgage debt, will lead to housing's recovery. More affordable prices, pent-up demand, incentives on new homes, fewer housing starts and expected declines in interest rates for fixed-rate mortgages also should help ease the crisis, said David Seiders, chief economist of the trade group.
For the rest of the article, click here (you may need a WSJ subscription to read the full article): http://online.wsj.com/article/SB122522301876377101.html

Massive Effort to Save Mortgages (WSJ, 11/01/08)
J.P. Morgan Chase & Co. launched an ambitious plan Friday to modify the terms of $70 billion in mortgages for borrowers who are behind on their payments or soon could be.
The move by the New York bank will cover as many as 400,000 borrowers. They'll be moved into loans carrying lower interest rates, smaller principal amounts or other more-affordable terms.
For the rest of the article, click here (you may need a WSJ subscription to read the full article): http://online.wsj.com/article/SB122549543952589677.html

FDIC Plan Tests Limits of Leniency (WSJ, 11/01/08)
When the Federal Deposit Insurance Corp. seized control of IndyMac Bancorp -- the nation's 10th-largest mortgage lender by loan volume -- the agency vowed to ease terms for many of its troubled borrowers. In doing so, the FDIC wanted to show the mortgage industry how it could slash home foreclosures by making decisions both sensible and humane.
For the rest of the article, click here (you may need a WSJ subscription to read the full article): http://online.wsj.com/article/SB122548504641688959.html