WEEKEND INVESTOR FEBRUARY 26, 2011 Housing: Is It Time to Buy?
The Relationship Between the National Housing Market and Local Markets Is Breaking
Down—and Opportunities Are Cropping Up for Well-Heeled Buyers. Here's What
You Need to Know
The Rybski family recently sold their home in Mendham, N.J., and bought a much
larger one across town for $1.025 million. The upgrade is costing them just
$800 more a month.
Is housing headed for a dreaded double-dip? Or are signs finally pointing to
a long-awaited rally?
Despite the glum statistics recently, well-heeled buyers in many markets should
feel comfortable betting on the latter.
Home prices nationwide in December were down more than 31% from their 2006
peak, according to the latest Standard & Poor's/Case-Shiller index, including
a 4.1% fall in 2010. And some economists see more weakness ahead, based on the
so-called shadow inventory of foreclosures that haven't yet been put up for
sale.
But the national housing market is merely a collection of local markets. And
while those markets have moved together to an unusual degree during the past
15 years or so, new data show that the pattern is changing—and that many
markets are safer now than they have been in years.
Before the recent housing boom, local and national prices in the 14 biggest
markets had a slight negative correlation, meaning some markets tended to zig
as others zagged, says Robert Shiller, an economist at Yale University and co-creator
of the Case-Shiller index. From 1997 to 2006, however, "correlations became
very close for nearly all [14] cities," he says, as a rising tide lifted
most boats.
Correlations are still quite high by pre-1997 standards, but they are weakening.
In the first quarter of 2009, for example, median prices for existing-home sales
declined from the previous year in 134 of 152 metropolitan statistical areas,
according to the National Association of Realtors. By contrast, in the fourth
quarter of 2010, median prices rose in 78 markets, fell in 71, and were unchanged
in three.
David Blitzer, chairman of the index committee at S&P Indices, says the
breakdown in correlations "is a positive sign we are moving out of the
boom-bust cycle."
Even within metro areas, there are growing divides. In some markets, such as
upscale Greenwich, Conn., sales and prices are picking up closer to the downtown
area even as more moderately priced homes in adjoining neighborhoods languish
on the market, says Jeffrey Jackson, chairman of Mitchell, Maxwell and Jackson
Inc. , an appraisal company in New York. In other regions, such as the Midwest,
the situation is reversed, with starter homes and "distressed sales"
such as foreclosures in demand but trade-ups and retirement townhouse sales
stalling.
"There is no consistency," says Lawrence Yun, chief economist of
the National Association of Realtors. "In one quarter, a market may see
a price increase and the next quarter a price decrease."
There's good reason to be skeptical of the national statistics. The NAR's quarterly
price data are based on median sale prices and can be skewed by sales of higher-
or lower-priced homes when there are few transactions, experts say. The Case-Shiller
index is based on repeat sales of specific homes, which some argue is a more
accurate measure—but it is limited to only the 20 biggest markets.
Local Market Monitor Inc., a real-estate research company based in Cary, N.C.,
that ranks local housing markets for banks, investors and builders, combines
the best of both. It takes repeat-sales prices compiled by the Federal Housing
Finance Agency across 315 housing markets and compares them with the "equilibrium
prices" that can be sustained by local economic conditions. Then it ranks
markets accordingly.
LMM's latest data, released Thursday, suggest the worst of the housing bust
is over in most areas. The firm rated just 21 markets as "frankly dangerous"
in February, down from 31 in August. It ranked 20 markets as speculative, 259
markets as posing "typical" risks and 15 as suitable for conservative
investors, from 37, 222 and 25, respectively, in August.
"For the vast majority, we are seeing a much more normal situation,"
says Carolyn Beggs, chief operating officer at LMM. "Home buyers shouldn't
have the fear they would have had three years ago."
Despite the broadly positive signs, however, buyers still need to exercise
caution, for there are vast differences across various metro areas—and
sometimes from one part of town to another.
Is the Worst Over?
In the Northeast, prices in financial centers such as New York and Boston are
benefiting from the Wall Street rebound, and in many neighborhoods prices are
either bottoming or gaining modestly, according to LMM. Washington is seeing
a slow recovery in home prices thanks to relatively stable government employment.
The metro Philadelphia area saw prices decline just 0.5% the fourth quarter
of 2010 over the previous year, far better than the national average. Optimism
is spreading: Building permits for single-family homes rose 8% in 2010, far
better than the 3% rise nationwide. But the dividing line is stark: In nearby
Allentown, Pa., which has suffered high foreclosure rates during the bust, permits
plunged 22% in 2010.
"Philadelphia is an established East Coast city that didn't have a lot
of overbuilding during the boom, so its bust was less painful than somewhere
like Allentown, which was one of the growing areas in Pennsylvania," says
Robert Denk, senior economist at the National Association of Home Builders.
In the Southeast, the pain is much more widespread. Florida cities such as
Orlando, Jacksonville and Daytona still are struggling from foreclosures, high
inventories, unemployment and a weak second-home market. In Orlando, ranked
by LMM as a "frankly dangerous" market, prices declined 8.1% in 2010.
Jacksonville declined 7.3%, while Daytona was down 5.6%.
California, meanwhile, is a hodgepodge. In some cities, prices are recovering
faster than in many other parts of the U.S., largely because of population growth.
In San Diego, prices increased by 0.1% in 2010; in Los Angeles, prices were
flat. The San Jose-Sunnyvale-Santa Clara area, near Silicon Valley, saw a 2.2%
rise.
Dianne Hartnett, a Re/Max real-estate agent in downtown San Diego, says sales
have been "surprisingly" brisk for condominiums, which typically start
at about $575,000. "There hasn't been a lot of new construction and there
won't be for a while, and that is healthy for the downtown market," she
says.
The situation is quite different in Central California, a hotbed of foreclosures.
LMM ranks Fresno, for instance, as "frankly dangerous," with prices
having fallen 5.5% in 2010. Rental vacancy rates there surged from 3.8% in the
first quarter to 11% in the fourth, according to the U.S. Census Bureau, thanks
to a spike in foreclosed homes now available for rental. In Los Angeles, by
contrast, vacancy rates fell to 6.2% in the fourth quarter from 8.4% in the
first quarter.
Las Vegas, Reno and Phoenix continue to cast a pall over much of the Southwest.
All three remain on LMM's "frankly dangerous" list, with prices having
fallen by 5.9% in Las Vegas, 10.3% in Reno and 8.9% in Phoenix.
Yet some Texas cities, such as Austin, Dallas and San Antonio, are much healthier.
The region largely escaped the boom and bust—and employment has held up
better thanks to the thriving oil industry. In San Antonio, for example, prices
rose 0.7% in 2010.
The Midwest remains sluggish, with its biggest market, Chicago, down 0.3% in
2010. Paul Wells, a Re/Max broker in nearby Barrington, Ill., says prices and
sales overall in Chicagoland appear to be stabilizing but are better for low-cost
housing than for more expensive homes.
"More people are looking in the upper price ranges than last year at this
time," Mr. Wells says, "but sales above $1 million last year were
still about 10% below what they were in 2009." By contrast, sales of homes
priced under $1 million increased 10%.
The Wild Card
There is, of course, one wild card that could affect most markets: rising interest
rates. A big surge could pose a risk by making homes less affordable. Rates
for a 30-year fixed-rate conforming mortgage spiked to 5.13% on Feb. 14 from
5.04% a week earlier, according to the Mortgage Bankers Association.
Since then, however, rates have fallen back below 5% on jitters over the Libya
situation.
The best-case scenario might be that rates rise in 2011, but very slowly. That
"should encourage people to act soon, before rates get any higher,"
says Guy D. Cecala, CEO and publisher of Inside Mortgage Finance Publications
Inc., a Bethesda, Md.-based provider of residential mortgage data. In San Francisco,
for example, "Rates were going up [in 2010], but it was good because it
pushed people to buy," says Alan Mark, founder of The Mark Co., a residential
real-estate consultant there.
Confusing though the various statistics may be, they do point to one overarching
conclusion: Now is a good time for upper-income buyers in most markets to start
looking.
Consider Gail Rybski, a human-resources executive at a pharmaceutical company,
and her husband, Robert, a remodeler. The couple recently sold their home in
Mendham, N.J., and bought a much larger one on two more acres across town—a
"Norman Rockwell-esque" neighborhood, Mrs. Rybski says.
The couple got a 4.9% 30-year fixed-rate loan for the new house, for which
they paid $1.025 million. The monthly nut is just $800 higher, an amount they
can easily afford.
Mrs. Rybski says she did much research before taking the plunge. When she added
up all of the pros and cons, she says, "We thought this investment was
a risk worth taking."
Write to M.P. McQueen at mp.mcqueen@wsj.com
