Places for Home Builders to Dig In

Where are the best markets to build and sell new homes these days?

Amid a flurry of housing news this week, including President Barack Obama’s latest mortgage-refinance proposal, comes an interesting piece of real-estate analysis in the building sector. Houston-based Metrostudy has analyzed the strongest markets for home builders. They include: San Diego; Southern California; Texas’s Rio Grande Valley; St. George, Utah; and Orlando.

The research is by Brad Hunter, chief economist at Metrostudy, a company that, among other things, sends observers out each month to hundreds of new-home communities to count how many single-family homes are under construction, occupied and vacant. Metrostudy’s work is a complement to the U.S. Census’s monthly housing starts numbers and vacancy survey.

Mr. Hunter’s analysis of about 80 markets found that most areas saw housing starts fall in the fourth quarter. (Housing starts in November reached a 19-month high, but they were flat the following month.)

There were a few other key points in Metrostudy’s analysis:

1. San Diego, which showed some signs of recovery in home prices earlier this year, showed “significant strength” towards the end of the year. Construction began on 440 new homes there in the fourth quarter of 2011, a 46.7% increase over the previous quarter. Part of this increase comes because the third quarter numbers were abysmal. But San Diego also showed a 72.8% increase in absorption of new homes, meaning more houses are selling and supply is shrinking, making it a good market for builders.

2. A few of the usual suspects are some of the worst new-home markets in the country, including exurban Central California (starts down 8.2% in the fourth quarter compared with the prior quarter) and Las Vegas (32.9% decrease) as demand continues to lag there and inventory remains roughly flat.

3. Northern Virginia, which has stayed relatively strong during the housing downturn because of its proximity to job centers related to the federal government, is starting to falter. Metrostudy found that starts of single-family detached homes there fell 22.1% in the fourth quarter, and at year end, home construction was down 14.7% annually. Fewer people are moving in as well, as absorption fell 10.9% in the quarter, and inventory rose 17.7%, the highest level of any market observed.

Pending Home Sales Decline in December, Remain Above a Year Ago

Pending home sales fell off of the
19-month high reached in November according to figures released on Wednesday by
the National Association of Realtors® (NAR), but were still higher than one
year ago.  NAR’s Pending Home Sales Index
(PHSI) dropped from 100.1 in November to 96.6 in December, a decline of 3.5 percent.  December pending home sales were still 5.6
percent above the December 2010 index of 91.5.

The PHSI is a measure of signed
sales contracts for home purchases where the transaction has not closed.  It is considered a forward indicator as the
sale is usually finalized within one or two months of contract signing.  An index
of 100 is equal to the average level of contract activity during 2001.

Lawrence Yun, NAR chief economist, said the trend line remains
positive.  “Even with a modest decline, the preceding two months of
contract activity are the highest in the past four years outside of the
homebuyer tax credit period,” he said.  “Contract failures remain an
issue, reported by one-third of Realtors® over the past few months,
but home buyers are not giving up.”

Yun said some
buyers successfully complete the sale after a contract delay, while others stay
in the market after a contract failure and make another offer.  “Housing
affordability conditions are too good to pass up,” he said.  “Our hope is
lending conditions will gradually improve with sustained increases in closed
existing-home sales.”

On a regional
basis results were mixed with three regions showing increases on a year to year
basis but only one increasing during the December.

Pending Home Sales by Region

Region

Index in

December

Chg Nov to
Dec.

(%)

Chg Dec.
2010 to

Dec. 2011
(%)

Northeast

74.7

-3.1

-0.8

Midwest

95.3

+4.0

+13.3

South

101.1

-2.6

+4.9

West

107.9

-11.0

+3.7

U.S.

96.6

-3.5

+5.6

NAR also issued an economic forecast which predicts a healthy growth in
both real and nominal GPD over the next two years with real GDP growing in a historically
normal range of around 3 percent and the unemployment rate falling under 8
percent by 2013. 

Housing starts are expected to improve to around 750,000 in 2012 and
reach a million the next year – both figures well below the historically
typical 1.5 million.  Housing sales, both
new and existing, will remain relatively flat with new home sales reaching a
half million by the end of 2013.  
Existing home sales are estimated to have totaled 4.26 million in 2011
and will rise gradually to 4.45 million and 4.62 million in 2012 and 2013
respectively. 

Inventories are not projected into the future, but the supply of existing
homes is trending down and is now around 2.25 million.  The inventory of new homes has declined to a
nearly negligible level, however given the pace of sales, both inventories
represent about a six month supply.

NAR expects
median prices of both new and existing homes to rise only slightly from current
levels of$223,400 and $166,100 during 2012 but will rise more rapidly during
2013 to a median level of $235,800 and $172,600 by year end.

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Consumer Advocacy Group Weighs in on AG Settlement

Rumors have been circulating for some
time that the Obama Administration is pressuring the 50 state attorneys general,
the Justice Department and the Department of Housing and Urban Development to
settle with major banks over issues relating to errors in servicing and
foreclosure abuses including the robo-signing uproar.  The settlement has been controversial and several
attorneys general including those in California, Delaware, and New York have opted
out of the settlement and/or launched independent lawsuits of their own,
claiming the settlement is not sufficient to the offense.  The rumors have intensified over the last few
days based on a theory that the President hopes to announce the settlement
during his State of the Union Address tonight.

Today the Center for Responsible Lending
which has been an early and outspoken critic of mortgage lending came out in
favor of the settlement saying, while it isn’t perfect, it would represent an important
step forward in addressing foreclosure abuses

“The settlement would include key reforms to clean up unfair mortgage
servicing practices,” the statement from the Center said.  “It would also provide an important template
for ways banks can use principal reduction to reduce unnecessary foreclosures
and put the country back on a path to economic recovery.”

While the Center admits that not all
details of the settlement are available as yet, but based on current
information, the key reforms include:

  • The
    elimination of robo-signing as banks would agree to individually review
    foreclosure documents according to the law.
  • Adoption
    of practices that would improve communication with services and end servicer
    abuses including fairer treatment for homeowners who are late on mortgage
    payments.
  • More
    sustainable loan modifications including a requirement that banks “get serious”
    about reducing principal balances.
  • While
    the state AGs would be prohibited by the settlement from pursuing further
    actions against the banks, the Center said that nothing in the settlement would
    prevent homeowners from suing on an individual basis nor would the settlement
    shield the banks from prosecution for criminal activities or from claims based
    on mortgage securities violations, fair lending suits or claims against the
    Mortgage Electronic Registration System.
  • The
    settlement would be enforceable in court by an independent monitor.

The Center said that its research
indicates that the country is only about half-way through the mortgage crisis,
but the proposed settlement would wrap up a year-long investigation into
robo-signing and other abuses and is “crucial to containing the damaging
effects of foreclosures on our economy.” 
It stresses, however, that additional policy actions on multiple fronts
is a necessary addition to the settlement.

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Investor Cash Adding Downward Pressure on Home Prices

Cash buyers, principally investors, may
be putting downward pressure on home prices according to the Campbell/Inside
Mortgage Finance Housing Pulse Tracking Survey released Monday.  The survey found that investors with cash in
hand are able to offer something that homeowners dependent on mortgage
financing cannot, a guaranteed sale with a quick closing timeline.  This seems to offset the desirability of a
higher bid with a mortgage contingency.   

The
Housing Pulse survey found that the trade-off between price and speed is
particularly true with offers on distressed properties because the lenders and
servicers liquidating the properties generally prefer transactions that can
settle within 30 days.  The Campbell
report states, “While investor bids may not be the
first offers accepted, they often end up winning properties after other
homebuyers are eliminated because of mortgage approval or timeline problems.
Appraisals below the contracted price are a common reason for mortgage denials.
Most mortgage financing timelines are now in excess of 30 days.”

The
survey reports that 33.2 percent of home buyers in December were cash buyers,
up from 29.6 percent in December 2010. 
However, 74 percent of investors came to the table with cash.  This is especially striking as the survey
found that investors accounted for 22.8 percent of home purchases in December,
changed only slightly from 22.2 percent in November.  But, Campbell says, “Despite their relatively
small share among homebuyers, investors have an outsize effect on home prices because
their bids bring down market prices.”

Real estate agents responding to the
survey commented on the low bids they are seeing from investors.  Campbell quoted anecdotal information from a
few agents indicating they are seeing investor bids 10-20 percent below list
prices, but with quick closings.

The total share of distressed properties
in the housing market in December continued at a three-month moving average of
47.2 percent, the 24th consecutive month that the HousePulse
Distressed Property Index (DPI) was over 40 percent.

The Campbell/Inside Mortgage Finance
HousingPulse Tracking Survey involves approximately 2,500 real estate agents
nationwide each month and provides up-to-date intelligence on home sales and
mortgage usage patterns.

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Momentum Seen for Home Improvement Spending

Spending
on home improvements and remodeling have shown signs of a rebound and the
Remodeling Futures Program at the Harvard Joint Center for Housing Studies is
projecting that sector of the economy will end 2012 on a positive note.

The
Joint Center produces the Leading Indicator of Remodeling Activity (LIRA) each
quarter.  It is designed to estimate
national homeowner spending on improvements for the current quarter and the
following three quarters.  The indicator, measured as an annual rate-of-change
of its components, provides a short-term outlook of homeowner remodeling
activity and is intended to help identify future turning points in the business
cycle of the home improvement industry.

The
figures from the most recent quarter, the fourth quarter of 2011, showed an
estimated four-quarter moving total of $112.4 billion in home improvement
spending compared to $113.8 billion in the third quarter.  This number is expected to dip further in the
first quarter of 2012, to $108.1 billion before starting to build at mid-year.

 “Sales of existing homes have been increasing
in recent months, offering more opportunities for home improvement projects,”
says Kermit Baker, director of the Remodeling Futures Program at the Joint
Center.  “As lending institutions become less fearful of the real estate
sector, financing will become more readily available to owners looking to
undertake remodeling.”

…(read more)

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