Sunday, March 11, 2012

Keith Gilabert Interviewed: How To Spot the Bottom in Housing

A major concern for government offices which depend on tax revenue to continue vital operations is the health of the housing market.  Executive Director Keith Gilabert of public policy firm BentleyForbes Analytics, says “housing is a major concern because 55% of the net worth of U.S. households was in the equity of their homes.”  This calculation was supported by Alan Greenspan in 2001 during the first financial crisis.
Gilabert says, “you still need to be cautious when looking at the unemployment figures.  There are 23 million Americans on unemployment benefits but if you factor in the people that have stopped looking for jobs and the people that are underemployed that number can easily be over 40 million Americans out of work.” 
According to a statistical analysis performed for The Wall Street Journal by the online real-estate information and search firm Zillow, home values in a handful of communities are where they were just before the most frenzied days of the real-estate bubble. Focusing on communities with sufficient sales activity to produce statistically valid value estimates, Zillow spotted 25 places that are within single-digit percentage points of their home-value peaks. (Zillow found no communities where values have surpassed their high-water marks.)
What are the factors that have helped those communities get by may help homeowners to better gauge what's going on where they live and for future homeowners properly gauge a fair price.
I would like to emphasize that housing isn't an investment like stocks or bonds and shouldn't be approached that way.  If you need to liquidate a stock or bond you can easily sell these investments in one day for fair market value.  If you take the same approach with a house, you may end up selling at a substantial discount to the market thus causing you a major loss.
The key factor why people buy a home is most are just nice places to live, places where anyone might want to work and raise a family.  Typically the nicer the area the more of a premium it will command.
So what does a healthy real-estate market look like today?
Here are three key factors to look for employment, rents and foreclosures.  If these traits are present you may already be on the rebound.
The No.1 factor to look for is not location, location, location.  It is JOBS.  Does your area support gainful employment?
Clearly, the factor in determining whether a community has passed through the worst of the housing debacle is its current state of employment. There has always been a connection between the local jobs picture and the local real-estate market, but it's even greater today.
The official U.S. unemployment rate was still a very high 8.3% as the prime home-shopping season began in March.
Look at North Carolina, where three communities appear on the Zillow list of real estate bottoming out. Although North Carolina's unemployment rate is higher than the national average, all three communities are lower than the state rate. Jacksonville, where values are just 0.1% below their peak, is the home of the Marine Corps' Camp Lejeune and New River Air Station. Fayetteville has the Army's Fort Bragg and Pope Air Force Base. And Durham is one of the vertices of the Research Triangle conglomeration of universities, state and federal government offices, and government, nonprofit and corporate research facilities.
Gilabert says, “you still need to be cautious when looking at the unemployment figures.  There are 23 million Americans on unemployment benefits but if you factor in the people that have stopped looking for jobs and the people that are underemployed that number can easily be over 40 million Americans out of work.”
The No. 2 factor is local rents.   Local rents are a real time indicator of real-estate values. Home prices in most communities that have best weathered the downturn, have been area with at the low-rent end. That is, they have lower price-to-rent multiples, and house hunters will often find it cheaper to buy properties than to rent them.
According to Gilabert, “when it comes to "rent vs. buy" the figure I rely on is if prices are more than 15 times annual rents, then a market favors renters; under 15 times, buyers. To do the calculation on your own find a comparable home and take the monthly asking rent and multiply the annualized rent by 15, this will give you an estimated real-time value of your home.”
But you also need to be careful of extremely low price-to-rent multiples can be warning flags for seriously depressed markets that are glutted with unsold properties. Trulia, another real-estate information site, regularly publishes a rent-to-buy analysis of large metropolitan areas, and the most "affordable" markets are a Where's Where of the real-estate bust: Las Vegas (prices 6 times rents), Phoenix (7), Miami (8). At the opposite end, Trulia's survey says the "least affordable" market is New York City (39), where home values are down just 9.1% from their peak.
Foreclosures are a cancer to a communities housing prices.  Healthier communities have fewer foreclosed properties pulling down values of other homes.
Even in good times, one foreclosed property in a neighborhood can bring down the values of every other house around it. And, in bad times, entire metropolitan areas can be swamped by abandoned, foreclosed houses.
In 2010, the worst year so far, about 2.23% of all the homes received a foreclosure filing, according toRealtyTrac, an Irvine, Calif., firm that monitors foreclosed properties. In Las Vegas, the poster child of the Sun Belt's real-estate bust, the foreclosure rate was 12%, more than 80% of homes are worth less than their mortgages and values are down more than 50% from their peak.
Are we there yet? Gilabert suggests, there is some evidence available right now that the housing market is at or very close to bottoming out. 

The prudent homebuyer should look at the economy first, and then at prices.

Evidence of a HousingBottom

The National Association of Homebuilders' Housing Market Index rose five points to 29 in February marking its fifth consecutive monthly increase. 

The ideal number is 50, it represents the neutral level for the index. Even still, the current level of 29 is up 20 points off of the low, and is the highest it has been since 2007.

More positive is news is coming from housing starts, which rose in January to an annualized 699,000 units.

Now these numbers do not represent a comeback compared to 2005's total of 2,068,000. But it shows the market is stabilizing and it is much better than 2009's average of 554,000 and 2010's 586,000.

The most important data in here because it shows there is demand and a trend in housing. Multi-family starts were 175,000, up more than 70% over 2009, while single-family starts of 508,000 were only modestly above the 2009 average.

Lastly, foreclosures in January 2012 were down 19% from a year earlier.

There is strong evidence that housing is forming a bottom but it’s values could stay depressed for many years before it begins to trend back-up.  The only way a home owner will build equity is by paying down their mortgage.

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