WASHINGTON (MarketWatch) -- The housing market is just getting worse. Home resales tumbled 8% in September to the lowest levels in this decade, prompting the obvious question: When will it all end?
The honest answer is no one knows. Optimists have been saying for more than a year that the worst is behind us, while the pessimists have been saying recovery is still a year, or years, away.
So far, the pessimists have been right about the weakness in the housing market, but their forecast that the collapse in housing would lead to a general economic malaise has, at least so far, failed to pan out. The economy has slowed, but has not fallen into recession, as consumers and investors adjust to a world in which home prices don't automatically rise 5% or 10% a year.
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The only thing that's clear now is that the housing market has gotten worse since the spring. The market was in a free fall in September. Sales of existing home fell 8%, while inventories of unsold homes rose to a 10.5-month supply. It could take 320 days for a home to sell. See full story.
Sales of existing single-family homes are down 20% in the past year, the fastest decline in 16 years.
Median prices have dropped 4% in the past year, in part because fewer expensive homes are being sold, but also because the typical home is worth less than it was a year ago.
Homes are only worth what someone is willing to pay for them, and right now, most homes on the market have no buyer in sight. Prices may have to fall much more to bring supply and demand back into balance, economists say.
Builders have almost no confidence. The home builders' index fell to a record low in October (the index dates back to 1985). New construction on single-family homes has plunged 31% in the past year, but still the inventory of new homes on the market, after adjusting for cancellations, is at the highest level since the early 1990s.
As if the fundamental sickness in the housing market weren't enough, a secondary infection has developed. The credit crisis in the mortgage market that erupted in the summer has left huge numbers of potential buyers without any access to mortgages.
The subprime sector has essentially died, with the newly reinvigorated Federal Housing Administration able to replace only a tiny segment of what was once a huge market of home buyers.
The top end of the market was also frozen out, as jumbo loans (those with mortgages above the conforming level of $417,000) became more expensive or completely unavailable.
The jumbo freeze-out devastated sales in pricey areas such as the San Francisco Bay area, where jumbo loans had accounted for about 52% of purchases in August, but just 39% in September.
There's some evidence that the jumbo market is slowly returning, but it's not functioning normally yet.
So where does the market stand now?
"We are seeing the first buds of spring" in the recovery of the jumbo market, said Stephen Stanley, chief economist for RBS Greenwich Capital. "It's a slow, glacial recovery."
Stanley believes home sales will be "really bad" for two or three more months, before the credit markets begin to function more normally. "It won't return to where we were six or 12 months ago."
At that point, the secondary infection would be gone, but the underlying illness would still be there. The market will really begin to recover only after sellers capitulate on prices.
And then home sales might level out, Stanley said, acknowledging that he's one of the more optimistic analysts.
Historically, housing corrections take a long time. After the market softened in the late 1980s, sales fell for five years, then took three more years to return to the peak level. Prices took just as long to recover.
Some analysts say the fundamentals will worsen in coming months. The main problem is that so many adjustable-rate mortgages will reset to a higher interest rate. The typical family with an ARM will see mortgage payments rise by $10,000 a year, according to Andrew Jakabovics of the Center for American Progress, a progressive Washington think tank.
Millions of these home owners will be unable to refinance their current loan and will either have to scrounge to make the payments, or lose their home through a fire sale or foreclosure. That would throw even more supply onto a saturated market.
"The mortgage crisis is neither wholly contained nor likely to abate in the near future," said Jakabovics. "Default and foreclosure loom ever more menacingly as borrowers are unable to find a reasonable payment option and unable to sell their homes
I read a great article in the Wall Street Journal today and here it is:
By Jonathan Clements From The Wall Street Journal Online
It could be the kindest cut of all.
Look at the prices of homes getting sold, and the property market's decline seems no worse than a rough day in the stock market. Look at the number of unsold homes, and you realize there's a world of financial pain out there.
True, these unsold homes may eventually get bought at decent prices. But in the meantime, the owners are often bleeding money -- and many of them would be smart to slash their asking price and go for the quick sale.
• Taking time. As you can see from the accompanying chart, home prices are down just 4.5% from their July 2006 peak.
Yet even as prices appear pretty much unchanged, the number of unsold homes has soared. At the current pace of sales, it would take more than 10 months to clear this backlog, according to the National Association of Realtors.
Maybe, however, you have an adjustable-rate loan that's now unaffordable. Maybe you're trying to unload a vacation home. Maybe you moved cross-country for a new job, but your old house still hasn't sold.
The monthly cost of carrying a vacant home could equal 1% of a home's value, figures Charles Farrell, an adviser with Denver's Northstar Investment Advisors. After all, you still have to pay utilities, insurance, property taxes, maintenance and, of course, the mortgage.
What if the mortgage is paid off? There's still an opportunity cost. The equity in your home could instead be invested in, say, bonds yielding 5%.
To make matters worse, "prices could be lower a year from now," Mr. Farrell warns. "There's also the risk of owning a physical asset. I'm thinking about things like fire, broken pipes, theft."
• Cutting deeply. Despite all this, sellers are loath to cut their asking price, which is the reason prices have barely budged -- so far.
"People focus on what their home was worth two years ago, or how much they've sunk into it, or on their desire not to bring a check to the closing," notes financial adviser Bert Whitehead, author of "Why Smart People Do Stupid Things With Money."
His advice: Ditch these emotional hangups -- and unload your property now. "If you really want to sell your house, you have to cut deep," Mr. Whitehead says.
Good advice? Here's how to decide for yourself:
• Ask your real-estate agent how many properties are on the market in your town today and how many sold in each of the past six months, advises Chris Mayer, director of Columbia Business School's Milstein Center for Real Estate.
"If there are 2,000 houses on the market and 200 houses sold last month, that means it's taking 10 months to sell a house," Prof. Mayer says. "That's pretty simple math, but nobody ever does it. If you price your house like everybody else, it might take 10 months to sell it."
• Suppose you price your home like everybody else and it does indeed take 10 months to sell. Figure out how much you would be out of pocket over that stretch, either because your home is vacant or because the mortgage has become unaffordably large.
• Spend your Sunday going to open houses in the neighborhood. That should give you an indication of what you need to ask if you want to get your home sold now. Given the cost of carrying your home and the risk prices will fall further, would it be cheaper to slash your asking price?
If you're going to lower your price, Prof. Mayer advises doing it right away -- or waiting until early next year. He notes that very few houses sell between Thanksgiving and mid-January.
"The best scenario is that prices fall through the spring and then stabilize," Prof. Mayer says. "But I'm more pessimistic than that. I would sell now.
Well folks, the annual Alhambra Summer Jubilee is now in full swing down on 2nd and Main Street every Saturday evening. So grab the kids and come on down to enjoy some of the local restaurant fare and to hear the sounds of some great bands from yester year.
See this link for details.
http://www.cityofalhambra.org/government/parks_recreation/Jubilee07.html
I have a new listing that you might like. It's in the Devonshire neighborhood of Alhambra. The property is located at 2825 W. Ross Ave., 91803. The home is Spanish in design and has 1,739 sq. ft of gross living area on a 7,800 sq. ft. lot. It has 4 bedrooms, 1.5 baths, a living room, formal dining room, breakfast nook, courtyard patio, fireplace, central air and a 2 car garage. Please take a look at this link, you might like it.
