The Real Estate Fountain

Contrary to expectations for an increase in home sales from the homebuyer tax credit, the number of closings in May fell a modest 2.2% from April.  That’s a disappointment for those expecting a big finish to the tax-credit incentive.

Sales in Miami, however, rose  strongly, from 592 in April to 727 in May — an increase of 23%.

Sales are not the same thing as prices.  Nationally, prices fared significantly better than sales, rising about 4.2% compared to April.  Notably, prices have risen for three consecutive months since February, even as the homebuyer tax credit continued to stimulate low-end demand.  During the months leading up to the initially scheduled expiration of the tax credit in November 2009, prices fell month after month.  It is possible that the second-round extension of the tax credit, which expanded the eligibility limits, might have stimulated transactions at higher price points.  But housing bears who predict another leg down for prices need to keep an open mind.

In Miami, the median price rose from $192,000 in April to $196,700 in May, an increase of 2.4%.  This is within the Miami market’s range over recent months.

Data are from the National Association of Realtors and Florida Association of Realtors, and reflect sales from Realtor MLS data.  Transactions are not limited to repeat sales of the same houses, and the price data are therefore subject to distortion from shifts in the mix of homes sold (more expensive versus less expensive).

The Housing Market Index maintained by the National Association of Home Builders and Wells Fargo posted a sharp decline in June.  The index fell 5 points from 22 in May to 17 in June, one of the bigger drops on record, and the biggest since a decline from 14 to 9 in October-November 2008.

But don’t read too much into the decline — yet.  The index had surged through May, as the artificial boost from the expiring homebuyer tax credit worked its way through the system.  So the current level merely reflects a retreat to the poor sentiment that prevailed before the government-induced surge.  The index remains up sharply from the single-digit, Armageddon levels of November 2008 to March 2009.

Keep an eye on the next few months.  A level of 17 reflects despair.  If the index breaks below 15, that would reflect a renewed sense of crisis.

According to the Case-Shiller Home Price Index for the three months ending March 2010, home prices in Miami were essentially flat compared to the prior month’s reading.

On a seasonally adjusted basis, the index rose from 147.23 to 147.27, a statistically meaningless change.  Without seasonal adjustments, the index fell from 147.52 to 146.15.

Another reference point, the New York market, fared about the same.  The seasonally adjusted index fell slightly from 170.98 to 170.73, and the non-adjusted index fell a bit more, from 170.57 to 169.42.

The big picture is consistent with the dire views expressed here in 2008:

“[P]rices in Miami will fall 30% to 50% over a period of three to four years, and not return to their old highs until more than a decade has passed”

“[P]rices in New York will be roughly flat at best for about five to seven years beginning in 2005, with greater risk to the downside than to the upside.”

House Price Index Update — New York and Miami, The Real Estate Fountain, Sept. 4, 2008.

And in early 2009:

“[S]ignificant downturns in real estate prices have taken three to four years from the time prices start falling to the point that they reverse up from their ultimate trough.”

House Price Index Update — Miami and New York, The Real Estate Fountain, Feb. 10, 2009.

Another characteristic of real estate busts is that prices typically bounce from an initial low before sinking to the final low.  This cycle is shaping up true to form.

The Wall Street Journal recently reported that inflation in the United States has declined to its lowest level in 44 years, as measured by the core consumer price index (i.e., excluding food and energy).  A prior post here at The REF made a similar observation several months ago.

Why does it matter?  CPI data provide a backdrop for making informed decisions about whether to buy or sell real estate.  In times of inflation, people flee their devaluing cash for hard assets like real estate and commodities.  There are other ways for real estate prices to rise — like when interest rates are slashed and lending standards are abandoned.  (Sound familiar?)  But we will not return to the days of NINJA (no income, job or assets) loans again.  So the next real estate boom is far more likely to be fueled by inflation than easy credit.

The 1970s are a classic example of inflation-based gains in home prices.  Throughout that inflationary decade, real estate values rose in tandem with wages and general CPI inflation.

But this is not the 1970s, and the current lack of general CPI and wage inflation takes the pressure off your decision whether to buy a home.

Recognize, however, that inflation is not gone.  Rather, inflation in some items is being offset by deflation in other items — principally shelter.  In fact, the shelter component has gone negative for the first time in the history of the data series.

The declining shelter component is keeping the overall CPI much lower than it otherwise would be.

The shelter component is based on the cost of renting, not buying.  But you won’t have sustainable gains in real estate prices as long as rents are falling.  As noted here time and again, one of the pathologies of real estate values in Miami and Coral Gables is that the cost of owning far exceeds the cost of renting — well beyond historical norms.

Articles like the one in the Wall Street Journal indicate that the fear of deflation has not disappeared, and that the risk of inflation is thought to be muted.  As long as that remains true, there will be little pressure to buy real estate.

Recognize, however, that others believe the government deliberately understates inflation, and that easy money and government spending will cause inflation to surge in the not-too-distant future.  (See., e.g., www.shadowstats.com).

See both sides.  When the shelter component flips positive, the evidence of deflation could vanish and lead quickly to general inflation.  So it will be wise to keep an eye on this canary in the coal mine.

The Federal Housing Finance Agency (FHFA) recently reported its house price index for the first quarter of 2010.  Nationally, the index shows price declines re-accelerating after moderating in 2009.

In Miami, the index rose a little from the fourth quarter of 2009, but has generally been in a sideways pattern that began abruptly in the second quarter of 2009, breaking the preceding freefall.

The sudden sideways pattern is rather unnatural, and may reflect the onslaught of government intervention that became the fashion in spring 2009:  $8,000 homebuyer tax credits, suspension of mark-to-market accounting rules, Federal Reserve purchases of securitized mortgages and 10-year Treasury bills,  foreclosure prevention programs — the list goes on and on.

But if price declines nationwide are re-accelerating as the government handouts and assistance programs wane, will real estate in Miami and Coral Gables really manage to avoid the same fate?  The world remains tormented by deflationary debt destruction, and the government may be out of bullets.  Potential buyers might be reminded of the old Clint Eastwood line:  “You’ve got to ask yourself a question.  Do I feel lucky?”

Indeed, FHFA maintains two price indices: one based on home purchases only, and another based on home purchases and refinance appraisals.  The latter price index posted a notable decline for Miami real estate values in the recent FHFA data release.

Buying real estate in Miami or Coral Gables remains a risky proposition.  Make sure you work with a broker who will act in your best interests, explain the pros and cons, and preferably rebate you a big chunk of change.  Hmmm, wonder who that might be . . . .

The Florida Association of Realtors reports that existing home sales rose significantly in Florida, up 27% compared to April 2009.  But of course, sales and prices are two very different things.  The median price statewide was up 1% from April 2009.

The Miami metro area registered 594 sales at a median price of $192,000 in April — a little soft compared to the 649 sales at a median price of $197,500 in March.  Compared to April 2009, when there were 555 sales at a median price of $177,000, the numbers look better.

The nationwide picture posted a strong 7.6% gain in sales on a seasonally adjusted basis, and a respectable 4.0% rise in the median price.

According to the National Association of Realtors, six metro areas posted double-digit gains in median price compared to April 2009.  One of those supposedly was Miami/Ft. Lauderdale, where NAR says the median price rose 14.8% to $225,000.  (NAR must define Miami/Ft. Lauderdale differently than just adding FAR’s Miami and Ft. Lauderdale data, because FAR reported median prices of $192,000 for Miami and $207,000 for Ft. Lauderdale.)

Like the batting statistics of baseball players who took steroids, the current data deserve an asterisk signifying the possibility that they may be distorted by the $8,000 homebuyer tax credit.  Although the credit ended on April 30, that was the deadline for signing contracts.  The deadline for closings is June 30.  So expect two more months of possibly puffed-up existing home sales numbers before the effects of that particular elixir wear off.

What then?  Sales and property values could take a hit, but median prices might fare well as the mix of homes shifts upward from the cheaper homes where the credit had the most kick.

Homebuilders in the U.S. continue to become more optimistic.  The Housing Market Index maintained by the National Association of Homebuilders rose to a level of 22 in May from a reading of 19 in April, quite a good improvement in one month.  The index is a gauge of homebuilder sentiment.  The current level is low by historical standards but has been steadily improving.

And those homebuilders continue to increase the pace at which they are breaking ground on new homes.  Housing starts nationwide rose to a seasonally adjusted annual rate (SAAR) of 672,000 in April, up smartly from a revised 635,000 in March.

Evidence of a bottom in housing nationwide continues to mount.  But be careful about forcing the nationwide picture into your local frame of reference.  Here in Miami and Coral Gables, real estate sales have recovered but prices continue to face headwinds from fundamentals (incomes, rents, employment and historical trendline values).

Is there any reason to think that people around the world are about to flock to Miami and Coral Gables to buy real estate?  Not if Google Trends is any indication.

Google Trends shows how popular a search term is — i.e., how many times people are searching for that term on Google.  Here’s the result for the search term “miami real estate”:

The boom has busted.  The dream is over.  And as with most dreams, we almost surely will not experience it again as long as we live.

What a difference a month makes.

The yield on the 10-year Treasury note spiked higher at the beginning of April, raising the prospect of higher fixed mortgage rates, which are generally correlated with the yield on the 10-year.  Now, with fears of Greek and other sovereign debt problems rocking Europe, the flight to safety in U.S. Treasury securities has driven the 10-year yield right back down.  Fixed mortgage rates should decline significantly as well.

The 4% level is proving to be very strong resistance.

The number of houses going under contract rose in March, according to the Pending Home Sales Index maintained by the National Association of Realtors.

Nationally, the number of pending home sales rose 5.3% compared to February on a seasonally adjusted basis.

In the South, pending sales rose12.7%.  In the Northeast, pending sales fell 3.3%.

The index does not track activity on a local level, but real estate sales activity in Miami and Coral Gables has been on quite a tear.  (Remember, sales and prices are two very different things.)

It is generally believed that the April 30 expiration of the $8,000 government benefit for homebuyers is goosing sales.  The index for April, scheduled to be released on June 2, will be the last one reflecting sales spurred by that handout.  The index is then expected to drop sharply because the handout brought future sales forward, as happened late last year with the originally scheduled November 30 expiration of the credit.  Back then, pending sales peaked in October, because deals had to close by November 30.  This time, pending sales should peak in April, because the expiration was structured to require contracts by April 30 and closings by June 30.

An index level of 100 equals the level of pending sales in January 2001 when the data series began.