Keepin’ It Real Estate: Where Have All the Houses Gone?
This post first appeared on Minyanville.
Where have all the flowers gone, long time passing?
Where have all the flowers gone, long time ago?
When will they ever learn, when will they ever learn?
- Peter Seeger
There’s an odd refrain cropping up in some of the nation’s most troubled housing markets — those where real estate professionals can’t help but raise their pom-poms in unison and declare this “the best buying opportunity, maybe ever.”
Here’s how it goes: Where have all the houses gone?
For months, buyers have been told the time to buy is now, what with interest rates at all-time lows, prices down in some markets more than 50%, and generous tax credits for first-time home buyers. These factors — along with aggressive advertising by the National Association of Realtors — have driven up demand, even as prices kept falling. Supply, meanwhile, has been severely limited for the past 6 months by foreclosure moratoria that were enacted at the end of 2008.
And as tends to happen when demand outweighs supply, many homes have been selling above their list prices as multiple-offer scenarios led agents around the country to wax lyrical of the boom days of yesteryear.
This cursory analysis of the nation’s housing market — while sufficient for the financial punditry complex, eager to call a bottom (again) and certain real-estate agents looking to make a quick sale — is woefully inadequate for any buyer interested in buying an actual home rather than a data point.
Take these 2 California markets for example — a pair that couldn’t be more different if one were located on the moon:
Bakersfield, a central-valley farming and oil town best known for jockeying with Fresno for the right to be called “the armpit of California,” was besieged by the housing-market crash early on.
Subprime lending flourished here during the boom as home builders like Lennar (LEN), Centex (CTX), and DR Horton (DHI) showered once-quaint communities with sprawling suburban developments. The town made national press for one of the worst real-estate markets in the country — prices have fallen an astounding 48% since just last year.
In Bakersfield, the above characterization of the housing market isn’t altogether inaccurate. Prices have fallen far and fast, and homes bought by all-cash investors can offer a tidy return as rentals. Three-bedroom homes for $40,000 will do that to a market. And with inventory constricted by foreclosure moratoria, properly priced homes don’t stay on the market for long.
Indeed, supply of unsold homes sits at a mere 2.6 months, according to a local appraiser group — a far cry from the nationwide level of around 10 months. That’s not to say, however, that imminent appreciation is on the horizon: A flood of foreclosures looms, threatening to further depress prices.
Kissed by a gentle sea breeze and the Midas Touch, Laguna Beach, California is a seaside town 164 miles to the southwest and best known for hidden surf breaks and snobby adolescents.
The setting for the once-popular TV show The OC, Laguna was also the locale-du-jour for mortgage brokers and real-estate agents who struck it rich during the boom. Nearby Irvine — once the mortgage-banking capital of the world — made Laguna’s palatial cliff-side homes ideal for brokers eager to solidify themselves in the Orange County mortgage scene.
Prices rose to absurd levels for what were, to be sure, beautiful homes in a pristine location.
Laguna is now crashing back to earth.
Supply of homes above $1 million now stands at an astounding 24 months, as just 49 have sold this year with a whopping 313 currently on the market. List prices are gapping down as buyers struggle to find jumbo loans. Big banks like JPMorgan (JPM), Citigroup (C), and Bank of America (BAC) won’t touch the stuff, since they can’t unload them onto Fannie Mae (FNM) and Freddie Mac (FRE). So desperate sellers are being forced to get creative with their marketing.
One recent sale included a 350 Ferrari Modena, and a short sale less than a mile away is being offered for $8,995,000 — nearly $3 million below its original list price of $11,990,000.
These 2 wildly divergent markets are a microcosm of the country’s current real-estate dilemma: While low-end markets grope for a bottom (hoping the aptly described “pig in the python” of shadow supply doesn’t derail their nascent recoveries), high-end markets careen back to earth.
And as price discovery works its way through well-to-do areas, the mix of homes sold will continue to shift back towards more expensive sales, pushing up median and average-sales-price data. This dynamic will present the misleading conclusion that the country’s housing market is recovering, even as actual prices continue to fall.
Indeed, as many frustrated buyers wonder where all the houses have gone, most would be wise to sit tight for a few months until banks get around to unleashing a mountain of supply back onto the market — they’ll soon find out.