Signs of life in the hardest-hit housing markets

Over the last year, it's been so hard to find the kernels of good news regarding the housing market and economics, but recently more positive stories have been emerging, including a cover story entitled "Signs of Life" for the 4/13/09 edition of BusinessWeek. Even the bear-est of the housing bears, Christopher Thornberg, is sounding encouraging. So is this simply an alternative universe or the start of an actual rebound? From the story:

Frenetic buying in a few depressed areas doesn't mean the national bust is over—far from it. But it does herald the start of a new phase in the boom-and-bust recovery cycle. Economists might call it equilibrium: Prices have fallen so much in some areas that shoppers are getting interested again, improving the balance between buyers and sellers. That doesn't mean prices will surge anytime soon. But heavy buying should at least begin to put a floor under prices. "Are we at the bottom?" asks Christopher Thornberg, an economist with Beacon Economics. "We are getting close."

If Thornberg is right, one might expect other markets to begin the bottoming out process in the coming months. Just as California, Florida, and Las Vegas led the nation into the housing bust, those areas could provide the template for a national recovery. "One of the big problems we have across the nation is a lack of confidence," says Adam York, an economist with Wachovia (WFC) in Charlotte, N.C. "As these former bubble markets bounce off the bottom in terms of sales, it could give some hope to [other markets] that the declines are going to end."

Plenty of caveats are in order, because there are peculiar bear-market factors at work. The fact that inventories are falling precipitously in California—to just 6.5 months' supply from 15.3 months a year earlier—would seem to augur well. Historically, "prices respond very dramatically to inventory," says William C. Wheaton, director of research at the Massachusetts Institute of Technology's Center for Real Estate.

But inventories are falling fastest in markets where speculators and first-time buyers are driving the action. Those parties don't have to put their own homes on the market to make a deal. It remains vexingly difficult for home-owners who have bought in the past five or so years to sell one property and buy another.

On top of that, government incentives of up to $8,000 in tax credits for first-time buyers and low mortgage rates engineered by the Federal Reserve are luring shoppers who otherwise would be sitting out. If the government were to take away the punch bowl, markets that seem to be bottoming could well turn down again..

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Why a new home market rebound may be delayed

A funny thing happened on the way to the housing bust: rising foreclosures of newer homes, which are increasingly competing with homes offered by builders in both price and quality. In the past, the new home market often rebounded faster than existing resales, but this time might be different. I pulled some stats from the early 1990s and compared this downturn with the last one and summarized it in my latest column for Builder & Developer magazine:

Whereas in the past homes being auctioned on the courthouse steps or offered by the REO departments of lenders were often old and in need of updating, many of today’s foreclosures are newer homes that increasingly compete with unsold new home inventory. The trend is startling: with buyers enjoying rising home equity during the first half of this decade and low teaser rates offered on sub-prime and Option ARM loans from 2004 through 2007, mortgage delinquencies either fell or rose very slightly, generally less than 2%. But as these loans began to re-set and borrowers found themselves unable to finance due to negative equity, by the first quarter of 2008 delinquencies spiked up by 30% and the first stages of foreclosures skyrocketed by 71% on the heels of a 40% jump a year earlier.

It seems reasonable to assume that such record jumps in housing inventory – homes that will have to be discounted in price to sell – will impact both the timing and trajectory for a new home market recovery.