Residential New Construction Prognosis

U.S. home building likely won't return to normal levels until 2014, and then only if housing prices rebound and foreclosures drop sharply, research from the San Francisco Federal Reserve Bank showed.
Continued weakness in the housing market is dragging on the U.S. economy, which is losing ground under the weight of 9.2 percent unemployment and declining consumer confidence.

Research released by William Hedberg, a San Francisco Fed research associate, and John Krainer, a senior economist there, indicate the drag from housing is likely to continue for years.
"Our analysis suggests that even an unusually strong period of real house price appreciation would not, on its own, lift starts to long-run average levels," the researchers wrote in the regional Fed bank's latest Economic Letter. "A significant easing of the drag on housing stemming from the inventory of foreclosed homes is also needed."
Foreclosures would need to drop by 50,000 homes per quarter starting in 2012, the researchers found, and home prices would need to stop falling by 2013 and then begin to rise, for housing starts to return to pre-2004 levels by 2014.
Such a scenario is optimistic, they said, because the inventory of foreclosed homes is still rising, and the 50,000 unit-per-quarter decrease would match the sharp pace of increase in foreclosures when they began in 2006.
Article from Reuters.com

Residential Real Estate Priced in Gold

Here is a chart, from Chart of the Day, illustrating the long-term historical performance of real estate converted to gold. Yes, things have changed. It might appear that gold is nearing a peak in value and/or that real estate is near the bottom in its swoon. It could turn out to be that way, though there is a higher probability that the issues surrounding the US $ and other major currencies will dictate the rise and fall in gold. I share the opinion of others, gold goes higher. A lot higher.

Declining real estate prices continue to be a concern for investors. For some perspective on the magnitude of the decline in home prices, today's chart presents the median single-family home price divided by the price of one ounce of gold. This results in the home / gold ratio or the cost of the median single-family home in ounces of gold. For example, it currently takes a relatively low 106 ounces of gold to buy the median single-family home. This is dramatically less than the 601 ounces it took back in 2001. When priced in gold, the median single-family home is down over 80% from its 2001 peak (to a level last seen in 1980) and remains well within the confines of a six-year accelerated downtrend and continues to close in on its 1980 trough.

Scanning Real Estate

Activity in the real estate (RE) market is a good reflection of consumer sentiment. RE is the most sought after, and government encouraged, purchase American's can make. As a homeowner, people become consumers of big ticket sales and the country's GDP perk's up and stays there. For me to believe the signals of economic recovery are getting solid, there will have to be several indications of consumer confidence surging. That is because consumer spending makes up nearly 70% of US GDP. This week there are a couple of encouraging reports on December starts of new housing (the start of construction of a new building intended primarily as a residential building) and existing home sales (the number of previously constructed homes, condominium and co-ops in which a sale closed during the month). These reports seem to signal still weak but improving single family sales in December. Low interest rates together with prices reflecting the weak market combined to close sales at a rate large enough to shrink the excess inventory balloon. Multi-family buildings were the driver for most of the increased building activity.

From Bloomberg regarding sales: Higher mortgage rates appear to have motivated buyers during December as existing home sales surged 12.3 percent to a higher-than-expected annual rate of 5.280 million (November revised 20,000 higher to 4.700 million). Details show even strength across regions and a big draw down in supply to 8.1 months from November's 9.5 months. Supply is the lowest its been since March. Home prices slipped in the month, down nearly one percent to a median $168,800.

From Bloomberg regarding building: Housing starts in December slipped back 4.3 percent, following a 3.8 percent rebound in November. The December annualized pace of 0.529 million units fell short of the median forecast for 0.550 million units and is down 8.2 percent on a year-ago basis. The reversal in December was led by a 9.0 percent drop in single-family starts, following a 5.8 percent gain the month before. The multifamily component rebounded 17.9 percent after declining 5.0 percent in November.
Housing permits, in contrast, made a 16.7 percent comeback in December after declining 1.4 percent in November. Overall permits posted at an annualized rate of 0.635 million units and are down 6.8 percent on a year-ago basis. The latest boost was led by the multifamily component which was up a sharp 53.5 percent while single-family permits improved 5.5 percent. However, the Commerce Department noted that building code changes took effect on January 1 in California, Pennsylvania and New York. In turn, some of the multifamily strength likely is due to construction companies getting approval before the tighter regulations.

Median Home Cost in Terms of Gold as Money

Today's chart presents the median single-family home price divided by the price of one ounce of gold. This results in the home / gold ratio or the cost of the median single-family home in ounces of gold. For example, it currently takes 144 ounces of gold to buy the median single-family home. This is considerably less that the 601 ounces it took back in 2001. When priced in gold, the median single-family home is down 76% from its 2001 peak (to a level last seen in January 1983) and remains well within the confines of its six-year accelerated downtrend.

Scanner here: This chart is making the case for gold more clearly than the case of real prices still falling. But it is also saying that there is no question which one should be owned as an investment. Own a home for housing, decorate it with gold.

Seattle's Columbia Center - Debt Modification

The Columbia Center Tower is the tallest building in Seattle. It is called a trophy property. It's location is what is clearly trophy worthy. It sits up the hill from the Seattle waterfront and its height creates office views that are spectacular on a clear day. Today in the Seattle Times Newspaper, an article on the financial condition of the Columbia Center debt references an observer of the commercial mortgage-backed securities market saying this debt is the nation's largest delinquent commercial mortgage-backed securities loan. It also describes how this one potential CMBS foreclosure that is so widely anticipated may become much less formidable, until the extensions and modifications come due for the borrower. There is still a widely held view in the real estate industry that real estate prices will recover and will return to annual growth trends. The Columbia Center modification is betting on a recovery of 45% in the value of the building by 2017, just to cover the reported debt of $480 million. The commercial real estate recovery better be underway if the modification is going to work out.

The local director of leasing for Cushman Wakefield has this to say in their 2Q10 market assessment of the downtown Seattle office building market. "Although momentum is picking up, it will be some time before downtown Seattle reaches a turning point from and tenant’s to a landlord’s market. The overall vacancy is well above the previous record of 16.5% set in 2003, and the market must absorb more than 5.8 msf before it reaches a level of equilibrium. With modest gains in office-using employment forecasted over the next two years, vacancy rates will stay elevated and asking rents will remain flat for the foreseeable future." Chances are this is an optimistic statement.

King County, WA Real Estate Data

By Eric Pryne

Seattle Times business reporter

Related

Was June a good month for King County home sales? That depends on which numbers you pay attention to.
The good: Buyers closed on 1,879 houses last month, according to statistics released Tuesday by the Northwest Multiple Listing Service. It was the largest monthly total since August 2007, and 13.5 percent more closings than the number recorded last June.
The not-so-good: Pending sales — offers accepted by sellers that haven't yet closed — fell 26 percent in June from the same month last year. It was the second month of year-over-year declines after 12 straight monthly gains.
Both sets of numbers were strongly influenced by the expiration of federal tax credits two months ago. Buyers and sellers had to sign contracts by April 30 to qualify for the savings, and many of those deals closed in May and June.

One Eye on China: Fighting Inflation Using the Yuan or Interest Rates?

Some members of the US Congress are publicly creating pressure on the government in China to allow their currency, the Renminbi or yuan, to float. The belief is that it would naturally rise in exchange for the US dollar in particular, making goods and services in China more expensive. The benefit to the US is that a more expensive yuan would increase the incentive for US companies to move production facilities from China to the US. (Of course, they may just move to another favorable currency economy but that will be after the elections. Right now the expedient political move is to pressure China.) In his article, Get the Yuan Right, Prove Pundits Wrong, Andy Xie describes his beliefs about the cause and effect issues surrounding the internal difficulties facing the government of China, price inflation and the mother of all housing bubbles, making their decision for what to do with the pressure from D.C. very difficult.

Andy Xie makes the following observations, "By all measures (stock value to GDP ratios, inventory value to GDP ratios, new property sales to GDP ratios, price to income ratios, rental yields, and vacancy rates) China's property market is one of the biggest bubbles ever. It's probably much bigger than the U.S. property bubble relative to GDP. 

Interview with Prof Robert Shiller on Real Estate Trends

Robert Shiller, Yale professor, author and co-creator of the S&P Case-Shiller Index, has several concerns about the condition of the national real estate markets. Mainly, the size of the shadow inventory of homes that have been taken back by banks through foreclosure but have not yet been marketed to prevent a flood of inventory driving market prices lower. As a result of this action, the Case-Shiller Index has reported home prices increasing for seven months in a row through December. In addition to this so-called shadow inventory, "I think people will become less resistant to defaulting on their mortgage," Shiller says.

To see a five minute video interview, from Yahoo Finance, click on "read more".

Are homes cheap now? Relative to what?

This is an excellent article, and a good reminder, by Calculated Risk that is titled "Are homes now cheap" that describes the trap for buyers today who have a short to mid-term holding time frame. In this article, he shows that the purchase today of a home with a 5%, 30 year mortgage, would allow the buyer to have a mortgage of $186,282 with a monthly p&i of $1,000. The buyer plans to sell this property in seven years and expects mortgage rates to be 7% at that time. The new buyer has the same $1,000 payment in mind and finds that with interest rates now at 7% the maximum mortgage amount is only $150,308. For this property to sell in seven years something will have to change. Unless the employment rate improves a lot from today, it will be the sale price that most likely gets the change, to a lower amount. Be careful out there.