Archive for the 'Financial Responsibility' Category

FHFA House Price Index — Prices Still Falling in Miami and New York

posted on September 23rd, 2011 filed under: Financial Responsibility, Real Estate Market Data

According to the FHFA House Price Index, real estate prices are still falling in Miami and New York.

Keep your eye on the long-term trend line, which we warned long ago was our destiny.  At the time, that implied a potential 50% price decline for home values in Miami.  (Did any other real estate broker warn you about that?)

FHFA House Price Index -- Miami MSA -- 1Q1976 to 2Q2011 (NSA) -- with trend line

Home prices in New York have even further to go.  The New York real estate market remains one of the most overpriced in the country relative to income.

FHFA House Price Index -- New York MSA -- 1Q1976 to 2Q2011 (NSA) -- with trend line

At some point, property prices in Miami and New York could start moving sideways rather than down, and work off the remaining overvaluation as a function of time rather than price.  On the other hand, it’s also possible that prices overshoot to the downside — i.e., go below the long-term trend line before floating back up to it.  In any event, you should assume that the long-term trend is our ultimate destination.

Note: FHFA stands for the Federal Housing Finance Agency, which oversees Fannie Mae and Freddie Mac, the government-sponsored entities that buy up most of the mortgages issued in the United States.  The FHFA House Price Index tracks repeat sales or refinancings of the same properties over time.

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Mortgage Rates Testing 2010 Low

posted on September 4th, 2011 filed under: Financial Responsibility, Real Estate Market Data, Real Estate News

The rate on the 30-year fixed mortgage averaged 4.27% last month (August 2011), according to Freddie Mac.  That’s just 4 basis points above the low of 4.23% set in October 2010.

Mortgage Rates -- 30-Year Fixed -- August 2005 to August 2011

Whether you’re getting a good deal on a home in Coral Gables, Miami or Miami Beach depends on a lot of other factors (including the quality of advice you get from a real estate agent).  But one thing you can’t complain about is the rate you’re going to pay on your mortgage.

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FHFA House Price Index Suggests Risk of Further Price Declines in Miami and New York

posted on June 28th, 2011 filed under: Financial Responsibility, Real Estate Market Data, Real Estate News

Mean Reversion

A theory suggesting that prices and returns eventually move back towards the mean or average.

www.investopedia.com

Today’s release of the S&P Case-Shiller Home Price Index was a mixed bag.  A modest rise nationally, but a modest decline locally here in Miami.  With no big news, let’s pull the camera back and look at another data set from a long-term perspective.

The FHFA House Price Index reflects transactions involving Fannie Mae and Freddie Mac.  This is not the luxury market, but it’s a reliable indicator of overall market conditions.  It went up during the boom, and it’s been coming down during the bust.

The FHFA index suggests risk that prices will fall further here in Miami.

FHFA House Price Index -- Miami MSA -- 1Q1976 to 1Q2011 (NSA) -- with trend line

If prices are to revert to their long-term trend line (in red) — and don’t bet they won’t — then Miami real estate remains about 25% overvalued.  The overvaluation needs to be worked off as a function of price and time.  Prices can get back to the long-term trend line by falling fast, going sideways while the long-term trend line catches up, or more likely, some combination of falling prices and passage of time.

Same story in New York, except the overvaluation there may be even greater than in Miami at this point.  (Remember the NAHB-Wells Fargo data that peg New York as the most overpriced market in the nation, based on the ratio of median home price to median income.)

FHFA House Price Index -- New York MSA -- 1Q1976 to 1Q2011 (NSA) -- with trend line

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S&P Case-Shiller Index Shows Prices Continue Falling in Miami

posted on May 31st, 2011 filed under: Financial Responsibility, Real Estate Market Data

We’ve never had a decline in house prices on a nationwide basis.  So, what I think what is more likely is that house prices will slow, maybe stabilize . . . .

Ben Bernanke (July 2005)

A few years ago, the very idea of falling home prices appeared to be incomprehensible to the elite coterie of policymakers who created the housing boom and bust.  The reality, when it hit, caused financial panic and drove the banking system and millions of households into insolvency.  Yet now, monthly reports of a renewed decline in real estate values are met with what-me-worry carelessness.

So there will probably be no panic over the latest S&P Case-Shiller Home Price Index, which showed that (yawn) home prices fell again in Miami for the three-month period ending March 2011.

S&P Case-Shiller Home Price Index -- Miami -- Mar. 2011 (NSA) (from Jan. 2008)Source: Standard & Poor’s

The good news is that the rate of decline in Miami home values moderated from last month’s reading, and the current dip is not the sort of steep decline exhibited during the crash phase of the real estate collapse.

On the other hand, the long view does not give any clear indication of where the bottom will be, now that we have broken the previous low from spring 2009.

S&P Case-Shiller Home Price Index -- Miami -- Mar. 2011 (NSA)Source: Standard & Poor’s

Continued price declines will eventually combine with wage gains to put in a bottom for real estate prices in the Miami metro area (including Coral Gables).  For now, the data show that Mr. Market is still working his way to the downside.

There may be specific neighborhoods, price ranges, and most important, individual transactions (houses or condos) for which the risk is low enough to justify buying real estate despite falling values in the broader market.  Otherwise, it remains a dubious financial undertaking to buy a depreciating asset with borrowed money.

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Real Estate Still Overvalued in Miami and Coral Gables

posted on April 1st, 2011 filed under: Financial Responsibility, Real Estate Market Data, Real Estate News

There’s something evil about pushing people into committing more and more of their income to house payments, as the the financial-realty complex managed to do over time.  If it were a modest consumer good, people could retreat at will from overspending.  But housing is different.  It’s the mother of all purchases, demanding that the buyer leverage the next 30 years of income.

The amount of misery this has produced in the Miami metro area is staggering.  The Center for Housing Policy recently released its annual housing affordability analysis and found that 42% of working households in the Miami metro area had a severe housing cost burden (too much income devoted to housing) during 2009, the last period for which the relevant data are available.  That’s the highest percentage of households in any metro area in the nation.  Remember to say thanks to your bankers and brokers, everyone.

Homes are assets that produce no income (although they replace the expense of renting).  So it’s hard to value a home like a business.  But we can analogize.  A basic measure of stock valuation is the price-earnings ratio.  Stocks were historically cheap in 1974 when they were trading for about 7 times earnings, and overvalued in 1999 when they were trading for about 40 times earnings.  Similarly, we can compare homes prices to family incomes.

The chart below compares the median price of single-family houses in Coral Gables, Florida to the median family income there.  (Note: family is defined as more than one person related by blood or marriage; household is one or more people.)  In 1999, this price-to-income ratio was about 3.19.  By 2007, it had risen to 6.58.  Now, it’s down to about 4.39.

Coral Gables Real Estate -- Single-Family Homes -- Price to Income Ratio -- April 2010

A few noteworthy observations:

  • Overvalued conditions always revert to normal.  Bubbles always burst.
  • Property values in Miami and Coral Gables are not back to normal yet.
  • Most of the progress in normalizing property values in Miami and Coral Gables real estate has been through falling prices.  Incomes have risen, but the boom and bust is mainly about prices.
  • Prices are still falling.

The rest of the normalization process will be a combination of falling prices and rising incomes.  Comparing the current price-to-income ratio to the pre-boom 1999 price-to-income ratio, real estate remains about 30% overvalued.  That can be worked off through any combination of rising incomes and falling prices, over any time frame.

  • If prices fall 10% per year and incomes rise 5% per year, all of the overvaluation will be mopped up in 2 years.
  • If prices fall 5% per year and incomes rise 2.5% per year, the overvaluation will be mopped up in 4 years.
  • If prices stabilize, valuations would not be back to normal for 6 years at 5% income growth, or 12 years at 2.5% income growth.

If you find a good deal, you can grab it without worrying too much about the residual overvaluation.  Otherwise, caveat emptor.  Be careful out there.

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Mortgage Debt Destruction Continues

posted on March 19th, 2011 filed under: Financial Responsibility, Real Estate Market Data

The value of residential real estate is a function of the amount of money private households are willing to borrow from the future to pay for it.  Generally speaking, you want to own a home when the appetite for mortgage debt is expanding, and you want to be fearful when the appetite for mortgage debt is receding.

A fair measure of the appetite for mortgage debt is the total amount of home mortgage debt outstanding.  True to form, this metric has told — indeed foretold — the story of the current real estate implosion.  When the wild expansion of home mortgage debt crested, it was time to sell, especially in the areas where lending had become the most detached from reality.  Real estate in Miami and Coral Gables fit that description, and prices followed the numbers for total debt, heading down.

Federal Reserve Flow of Funds Data -- Home Mortgage Borrowing (to 4Q2010) -- Table(Data reflect percentage change)

Unlike other real estate downturns, the present implosion has seen the appetite for debt not just recede to a lower level but turn negative.  This reflects both a drawdown in new borrowing as interest in home ownership wanes, and the destruction of existing debt as bad loans are written off.  Quite a deadly combination.

Notably, 2010 saw a bigger decline than 2009 overall, with the first half being worse than in 2009, and the second half matching 2009.

Do not expect real estate values to resume their long-term upward trajectory as long as home mortgage debt is being destroyed.

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Cost of Living Comparison: New York Versus Miami

posted on March 8th, 2011 filed under: Financial Responsibility, Real Estate News

With oil above $100 per barrel again, it’s worth comparing the key factors in the cost of living in New York versus Miami.  It ain’t cheap to fill up the tank of a house.  How ’bout burning through a couple thousand bucks every month or so in the winter?

Coral Gables Real Estate Photos -- House DrawingMiami Real Estate -- Insurance Versus Winter Heating OilNow that’s money up in smoke.  As noted here in 2008 when oil was at $135 per barrel, you could easily spend five or six thousand a year on heating oil and another thousand or two on electricity in a medium-size home up north.

But what New Yorkers lose up the chimney, homeowners in Miami are forced to spend on the ever-soaring cost of property insurance.  The home that costs five thousand dollars to heat in New York could easily cost eight thousand dollars to insure in Miami or Coral Gables.

If energy and insurance roughly cancel each other out, what other cost-of-living factors weigh in the balance?

The pay scale is generally much higher in New York than in Miami.  But there’s no state income tax in Florida, which is especially nice if your income tends to be from investments rather than from a salary.

Public education is phenomenal in many New York suburbs, with lots of high schools boasting average SAT scores at the 90th percentile or higher.  But to pay for those fabulous education systems, property taxes are stratospheric.

Bronxville High School, Bronxville, NY

Bronxville High School, Bronxville, NY

In South Florida, there are some excellent educational opportunities if you do your homework, and your property-tax assessments can be capped at a three percent annual rate of increase.

Of course, if you want to use private schools, you’re going to pay a hefty price per child no matter where you are, snowshoes or sunshine.

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Miami Home Values: Price to Income Ratio Bounces Off Low

posted on March 3rd, 2011 filed under: Financial Responsibility, Real Estate Market Data, Real Estate News

(As predicted here . . .)

The National Association of Home Builders and Wells Fargo maintain a Housing Opportunity Index (HOI) that compares median home prices to median incomes in a couple hundred metro areas.  Back in early ’09, the HOI showed that the price-to-income ratio for the Miami metro area was between 4 and 5 to 1, based on 4Q08 data showing a median home price of $225,000 and a median income of $49,200.  That was better than the 6-to-1 ratio at the peak, but nowhere near the 2.5-to-1 that prevailed back in the late 1990s, before the real estate mania began.

Accordingly, The Real Estate Fountain observed that home prices in Miami and Coral Gables would have to fall another 30% to 50% to return to their normal historical relationship to incomes.

Coral Gables Real Estate Photos -- Elevated View -- Downtown to Southwest and Biltmore Hotel

And so it came to pass.  According to the HOI, median homes prices in the Miami metro area continued to fall, plunging especially steeply as the artificial effects of the $8,000 government-handout program wore off.

1Q09: $185,000

2Q09: $174,000

3Q09: $160,000

4Q09:  $185,000

1Q10:  $170,000

2Q10:  $134,000

3Q10: $126,000

4Q10:  $142,000

The median income has risen from $49,200 to $52,200 over the same period — a negligible change compared to the change in median price.

Bottom line:  In 2Q10 and 3Q10, we hit the old 2.5-to-1 ratio and bounced off it.

Make no mistake.  The price-to-income ratio is not likely to continue rebounding.  Do not expect another wave of irrational exuberance to goose the valuation of Miami and Coral Gables real estate.  Indeed, valuation measures like the price-to-income ratio often overshoot to the downside during a bust that follows a boom.  We haven’t even seen that yet.

On the other hand, the price-to-income ratio is back near normal, and that takes a lot of the risk out of buying.  You may not get rich buying real estate at merely normal valuation levels, but you’re a lot less likely to be ruined.

Break out the party hats.

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Bank-Owned (REO) Property Sales Receded in Coral Gables in 2010

posted on January 22nd, 2011 filed under: Financial Responsibility, Real Estate Market Data

Sales of bank-owned properties fell in Coral Gables in 2010 compared to 2009, on both an absolute and percentage basis.

REO Bank-Owned Properties -- Sales -- Coral Gables -- 2008 to 2010

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Bankers Held In Contempt Over Bird Grove Condo

posted on January 18th, 2011 filed under: Financial Responsibility, Properties in Focus, Real Estate News

The Daily Business Review reported last week that a Miami trial judge held six banks in contempt of court, and threatened bankers with jail, in connection with the default-besieged Bird Grove Condo at 2734 Bird Road in Coconut Grove.

Miami Real Estate Images -- Bankers Held in Contempt

The Bird Grove exemplifies one of the ways in which the financial industry has socialized the consequences of the bust after privately profiting from the boom.  Two units in the Bird Grove are bank-owned (REO or real estate owned).  Seventeen others are in default, but banks have not followed through on the foreclosure process and taken ownership.  With ownership comes responsibility for condo association dues, taxes, insurance, maintenance and all the other joys of home ownership.  And when repossessed properties are sold, banks must recognize the losses on their balance sheets.

So instead, banks leave the units in limbo, avoiding expenses and deferring loss-recognition.  When half of the unit owners aren’t paying either, the condo association is starved for dues and the building goes downhill fast.

The court appointed a receiver for the Bird Grove, who found a condo building where “garbage hadn’t been collected for weeks, electricity was about to be cut off, the building had no insurance, and an elevator was broken,” according to the DBR.

Bird Grove Condo, 2734 Bird Rd.

Bird Grove Condo, 2734 Bird Rd.

The good news for the banks is that the law is on their side.  Florida law, as interpreted by the appeals court with jurisdiction over the Miami area, simply does not require banks to pay condo dues and expenses until they take ownership.

The banks involved are Bank of America, Flagstar Bank, GMAC, PNC Bank, SunTrust Bank, U.S. Bank and Wells Fargo.  Congenial billionaire Warren Buffet, whose company is Wells Fargo’s largest shareholder, probably doesn’t have to worry about garbage collection and electricity.

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