It’s been almost five years since the housing bubble popped. And, with a glut of homes still on the market, housing prices could fall further. Why is it taking so long for the housing market to sort itself out?

The answer may have something to do with a coin toss.

 I recently visited Eric Johnson, a professor at Columbia’s Business School. He offered me a sweet bet on the flip of a coin. If the coin came up heads, I would win $6. If it came up tails, I would lose $1.

I told him I’d take the bet.

But then he changed the terms — if the coin came up heads, I would win $6. If it came up tails, I would lose $4. That bet I didn’t like.

Of course, this is irrational. The bet is still very much in my favor. If I took the bet 1,000 times, I’d almost certainly make a nice profit.

Still, Johnson said a lot of people are like me: They won’t take that bet. So I went out on the street to test this out on random people.

I introduced myself to Frank Blake, a guy who makes his living as a stuntman, jumping through windows and crashing cars. I offered him the bet — told him I’d pay him $15 if he won, and he’d only have to pay me $10 if he lost.

No deal.

“The $15 makes no difference in terms of gaining it,” he told me. “But losing the $10 in my pocket does.”

Lots of other people turned down the bet, too.

As it turns out, our brains feel losses and gains unevenly: Losing feels worse than winning feels good.

So now — as promised — back to housing.

In a down market, people really don’t want to sell, because selling feels like losing.

Chris Mayer, professor of real estate at Columbia Business School, found evidence for this fear of losses when he studied the Boston condominium bubble in the ’80s.

He would compare two basically identical condos. The owners of both had paid off their mortgages. But one had bought at the peak of the market. That person, he found, would stubbornly ask for a higher price, and keep his condo on the market longer than the other person, who had bought at a lower price. (Here’s the study.)

“The overall magnitude of this effect is very big,” Mayer told me. “This is an important factor in how housing markets operate.”

There are certainly other reasons the housing market is taking so long to sort out. Some people are stuck financially with their mortgages, for example.

But this psychological quirk is also slowing the healing process. It makes people reluctant to lower the asking price on their homes, which in turn contributes to the glut of houses on the market.

“It’s sort of like having a Band-Aid, where you know you would be better off if you just pulled it off at once,” Johnson said. “But instead what you do is you tend to pull it off very slowly, if at all.”

It’s unclear why our brains are wired this way — why we overemphasize losses. Johnson says it could go back millions of years, to when a losing bet was way more serious.

Millions of years ago, we were avoiding animals that wanted to eat us. Today, we’re selling houses.

But some part of our brains may be still be thinking about leopards in the trees.

Source article NPR

Funny I just went through this myself in trying to sell a senior housing unit I had bought for one of my parents, I knew the market had corrected but could not get myself to sell it until it was too late.  I wonder how many of you ar with me?-Sean

Home prices continued to decline across the nation as sales of heavily discounted foreclosed properties weighed down the market.

Median prices of existing homes fell in 123 of 153 metropolitan areas during the third quarter compared with a year earlier, according to the National Association of Realtors. The national median price was $177,900, down 11.2% from the third quarter of 2008.

Distressed sales — mainly foreclosures and short sales — accounted for 30% of transactions in the third quarter, according to the NAR, which pulled down average prices because foreclosed homes sell at steep discounts. Short sales are transactions in which at-risk borrowers sell their homes for less than the loan amount, with the lender’s approval.

Metropolitan areas in Florida and Nevada continued to see the most severe price declines. In the Cape Coral-Fort Myers area, median prices were down 40% during the third quarter from a year earlier, to $98,000. In Las Vegas, median prices were down 34.5% in the third quarter to $138,500. In 2006, median prices were $268,200 in the Cape Coral-Fort Myers area and $317,400 in the Las Vegas area.

Still, home sales rose 11.4% nationwide to a seasonally adjusted annual rate of 5.3 million units during the third quarter, up from 4.76 million units in the second quarter.

See List of Home Prices

• See full chart of home prices in 153 metro areas.

Lawrence Yun, the NAR’s chief economist, attributed rising sales to the federal tax credit of up to $8,000 for first-time home buyers. “We can’t underestimate just how powerful a catalyst the first-time home buyer tax credit has been for the housing sector,” he said in statement.

President Barack Obama signed a bill last week extending and expanding the federal tax credit to include buyers with higher incomes and those who are existing homeowners.

Mr. Yun said that while foreclosures will continue to depress the market, “rising sales from the expanded tax credit should buy drugs on line stabilize home prices by next spring.”

Source article http://online.wsj.com/article/SB125790574094242915.html?mod=WSJ_hps_sections_realestate

LOS ANGELES-New accounting standards requiring property to be marked to market and proposed changes in lease accounting rules could have an immense impact on the balance sheets, income statements and overall financial outlook of US corporations, many of whom are unprepared for the changes, according to a new report from CB Richard Ellis.

The white paper by CBRE, titled “FAS Talking–Unpacking Real Estate’s Impact on Financial Statements,” says that the estimated balance sheet impact of the proposed lease accounting changes alone could be well in excess of $1 trillion for US companies. The report says that the combined effects of mark-to-market and the lease accounting changes hold the potential to negatively impact earnings, capital requirements, debt covenant ratios, credit ratings and other measurements of corporate financial health.

Todd P. Anderson, CBRE senior managing director of global corporate services who co-authored the report along with CFO Michael M. Omiya of Boeing Realty Corp., explains to GlobeSt.com that the changes in accounting standards are “a continuation of the effort to have generic drugs without prescription greater financial transparency, in particular in the financial statements for publicly traded corporations.”

The white paper analyzes the potential impacts of both the mark-to-market requirement and the proposed lease accounting changes–which could go into effect as early as 2011 or 2012–and discusses courses that corporations can purse in order to mitigate the effects of the changes. The mark-to-market requirement, known as FAS 157, went into effect for financial assets as of Nov. 15, 2007 and for non-financial assets including real estate as of Nov. 15, 2008…..

To read the whole story go to Globe Street.

Southern California Apartment Association Trade Show on 09/30/2009

Sept. 21 (Bloomberg) — The recovering housing market may be heading for a relapse as President Barack Obama and Federal Reserve Chairman Ben S. Bernanke consider ending support for the source of the global financial crisis.

The Obama administration is studying whether to let a first-time home buyers’ tax credit expire as scheduled at the end of November. Bernanke and his Fed colleagues may continue talking this week about how to wind down purchases of mortgage- backed securities, according to Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York. The two programs have helped stabilize real-estate demand, with new-house sales rising 9.6 percent in July from the prior month, the most since 2005.

Ending these efforts may stifle the housing rebound by depressing sales and pushing up both mortgage-backed bond yields and interest rates on home loans, even in the face of the record-low zero to 0.25 percent short-term rates the Fed has engineered, said economist Thomas Lawler. A weaker housing market would likely dampen the economic recovery and undercut shares of builders including Fort Worth, Texas-based D.R. Horton Inc. and Miami-based Lennar Corp., that have risen 40 percent this year, based on the Standard and Poor’s Supercomposite Homebuilding Index of 12 companies.

“Things could get ugly,” said Lawler, an independent consultant in Leesburg, Virginia, who spent 22 years at Fannie Mae, a Washington, D.C.-based government-controlled mortgage- finance company. “We could be facing a triple whammy at the end of the year: the expiration of the tax credit, the end of the Fed mortgage-buying program and rising foreclosures.”

Major Test

This is the first major test of policy makers’ ability to coordinate exit strategies as they seek to wean the economy off government support, said Brian Bethune, chief financial economist of IHS Global Insight, a forecasting company in Lexington, Massachusetts.

They have already acted separately, with the administration ending its $3 billion “cash-for-clunkers” automobile trade-in program on Aug. 24 and the Fed starting to wind down its purchases of Treasury debt, which totaled $285.2 billion between March 25, when the initiative began, and Sept. 16.

The 55-year-old Bernanke and his colleagues, who meet tomorrow and Wednesday to map monetary strategy, discussed “tapering” off the Fed’s purchases of mortgage-backed securities and housing-agency debt at their last gathering in August, according to the minutes of that meeting. No decision was made by the central bank’s policy-making Federal Open Market Committee.

Mortgage-Backed Securities

Under the current program, the Fed is scheduled to buy up to $1.25 trillion of mortgage-backed securities and $200 billion of agency debt by the end of the year. So far, it has purchased $862 billion of the former and $125 billion of the latter.

A trio of Fed presidents — Jeffrey Lacker of Richmond, James Bullard of St. Louis and Dennis Lockhart of Atlanta — has publicly raised the possibility the central bank might not spend all the money authorized for the mortgage-backed securities. Lacker questioned whether the economy needs the additional stimulus in an Aug. 27 speech.

New York Fed President William Dudley, who is vice chairman of the FOMC, has sounded more cautious.

“The market expects us to complete these programs,” he said Aug 31. “To contradict that market expectation is a pretty high hurdle.”

Abrupt Stop

An abrupt stop might push up mortgage rates by a half to one percentage point, said Hooper, a former Fed official. Tapering off — by reducing weekly purchases and stretching them beyond the end of the year — would have a more muted effect, pushing rates up by at least a quarter percentage point, he said, adding that the Fed may announce just such a strategy after its meeting this week.

Mortgage rates for 30-year fixed home loans averaged 5.04 percent in the week ended Sept. 17, down from 5.07 percent the previous week, according to McLean, Virginia-based Freddie Mac, a government-controlled mortgage-finance company.

Borrowing costs for home buyers are relatively high based on the historical relationship with the Fed’s target rate for overnight loans between banks, currently at zero to 0.25 percent.

The yield on the benchmark 10-year Treasury note is 3.22 percentage points more than the federal-funds rate, compared with an average of 1.45 percentage points during the past 20 years, according to data compiled by Bloomberg. Thirty-year mortgage rates average 1.69 percentage points more. While that is down from 3.19 percentage points in December, it is still above the average of 1.4 percentage points for this decade before the credit markets seized up in the second half of 2007.

Fed Purchases

The Fed’s purchases of mortgage-backed debt so far this year have dwarfed net issues of such securities by Fannie Mae, Freddie Mac and government-run mortgage-bond insurer Ginnie Mae, which totaled about $440 billion through the end of August, said Walt Schmidt, a mortgage-bond strategist in Chicago at FTN Financial.

Once the Fed exits the market, the spread between yields on mortgage-backed debt and Treasury securities will have to rise, perhaps by a half percentage point, in order to attract other buyers, he said. The spread now is about 140 to 145 basis points, down from around 215 at the start of the year.

“One of the key linchpins Cialis Without Prescription to the restabilization of our economy is getting housing back,” said Laurence Fink, chairman and chief executive officer of New York-based BlackRock Inc., the largest publicly traded U.S. money manager. “There is a great need” for the Fed to “continue to invest in the mortgage market right now,” added Fink, 56.

Crucial Extension

A number of Washington-based organizations — the National Association of Home Builders, the National Association of Realtors and the Mortgage Bankers Association — say an extension of the buyer’s tax credit is also crucial.

Lawrence Yun, chief economist of the realtors’ group, estimates that about 350,000 home sales through August were directly attributable to the tax credit of up to $8,000 for first-time buyers. People buying their first homes accounted for 43 percent of sales since the credit became law, up from 32 percent in the six weeks prior to its passage, according to Washington-based Campbell Communications Inc.

Treasury Secretary Timothy Geithner, 48, called signs of stabilization in the U.S. housing market “very encouraging” and told reporters on Sept. 17 that the Obama administration will take a “careful look” at extending the credit.

‘Slim’ Chances?

Congress may not pass an extension; the chances “seem slim,” said Mark Calabria, director of financial-regulation studies at the Cato Institute in Washington and a former staffer on the Senate Banking Committee. Public opposition to increasing the federal budget deficit is high, and there’s little appetite on Capitol Hill for finding spending cuts to offset the cost of the tax credit, he said.

The deficit will total $1.6 trillion this year as revenue falls and the government spends at the fastest pace in 57 years, according to the nonpartisan Congressional Budget Office.

In a sign of the public’s concern about the deficit, 62 percent of people surveyed in a Sept. 10-14 Bloomberg News poll said they would be willing to risk a longer-lasting recession to avoid more government spending.

The impact of terminating the tax credit will show up first in the new-home market, said David Crowe, chief economist of the home-builders’ association.

“It takes at least four months to build a house, and you need to buy it before Dec. 1 to qualify,” he said. “If you haven’t started building it by now, it’s too late.”

Housing Starts

Single-family housing starts fell 3 percent in August to a 479,000 annual rate — the first decline since January — according to seasonally adjusted figures in a Sept. 17 report from the Commerce Department.

Residential construction and home sales led the way out of the previous seven recessions going back to 1960, according to David Berson, chief economist of PMI Group, a mortgage insurer in Walnut Creek, California. Real-estate sales fuel consumer spending, which historically accounts for about 70 percent of gross domestic product, he said.

“Housing has been the sector of the economy with the largest multiplier effect,” said Berson, former chief economist at Fannie Mae. “Whether buying new homes or existing homes, people tend to fill them up with things: new furniture, new appliances, new window coverings.”

Recovery Signs

To be sure, some economists are betting the housing recovery is here to stay. The market has “clearly bottomed,” said Dean Maki, chief U.S. economist for Barclays Capital in New York.

Even some of the optimists are hedging their bets given how dependent the market has been on government and central bank support.

“I’m right in there with the rest of the cheerleaders, but there are no historical anecdotes, no historical data points to use for this,” said Lewis Ranieri, the 62-year-old mortgage- bond pioneer who is chairman of New York-based Hyperion Partners LP. The U.S. housing market is “still very fragile.”

If you want to figure a good rate look at the unemployment rate in the areas you are interested in, for Portland Oregon area that rate is 13.2%.  It makes sense vacancies should trail and track the unemployment numbers especially for a blue collar working class building.  Well enough of my rant here is an article from the latest issue of Multifamily Executive.-Sean

Rental Owners Report Soaring Vacancies: People Who Lose Homes Move in With Families Instead of Renting Apartments

Aug. 28–Southern Oregon Rental Owners Association reported a 9.4 percent vacancy rate for June, the highest level in the 20 years that the organization has surveyed its members.

“We knew some of our renters couldn’t afford it and moved in with families,” said association manager Roberta Claudson of SOROA, which consists of rental owners with anywhere from a few rentals to hundreds of properties. “We thought it would be balanced out by people who had lost their homes. But apparently, they’ve moved in with families, too.”

She said multiple-family housing has been hit harder than houses.

“Houses are staying good,” Claudson said. “But it’s the apartments that are seeing it; the ex-homeowners still want a house.”

In the report for June — the most recent month for which figures were available — SOROA members said they had 414 vacancies out 4,392 reporting units. One year earlier, the vacancy rate was 5.5 percent. It was 5.9 percent in the summer of 2007 and 2.3 percent in 1999.

The local vacancy report represents only Buy Viagra Online Without Prescription the owners who reported figures for the association’s June meeting.

Nationally, rental owners are finding themselves with even more empty units. The vacancy rate increased to a record 10.6 percent in the second quarter, according to the Census Bureau.

HomeTownRent of Chapel Hill, N.C., anticipates that the rate will spike at 11.5 percent and slowly decline toward 8.5 percent by 2012 as excess housing and apartment inventory is soaked up by additional renters.

The Census Bureau estimates there are more than 80 million people living in nearly 40 million rental units. There are more than 1 million vacant rental properties than in 2000.

SOROA also announced it has moved its office, overseen by association coordinator Sharri Dallas, to Suite 10 of the Estate Building, 10 Crater Lake Ave., Medford.

The association’s new hours are noon to 4 p.m. Monday through Friday. The telephone number remains 842-7676. However, there is a new fax number, 858-3081.

SOROA’s next meeting is 6:30 p.m. Sept. 15 in the conference room of the Housing Authority of Jackson County, 2231 Table Rock Road. Diane Hess of the Fair Housing Council will be the speaker.

The Housing Crash Isn’t Over: Here’s How to Profit
The US housing market has not hit bottom and, depending on which view you take, has quite some room to move down further. The truth is that we are still in the middle of a historic crash. However, as with such market dislocations, there are very attractive opportunities to invest and make profits if one has capital, patience, expertise, and a good plan in place.

I’ve pulled together some very compelling data from a myriad of sources including G7 Capital Management, a private equity firm specializing in distressed real estate. It’s using this data that I’ll lay out exactly why I feel the people that are calling for a bottom are the soon-to-be victims of a massive head fake; why the nightmare has a long way to go; and how you might be able to profit from it.

Why Everyone Is Wrong – This Isn’t a Bottom

There are four items in place that are tricking people into calling a bottom, when in fact three of these items are temporary. The result is an artificial restriction of supply and artificial pumping of demand.

1) It’s the seasonally strongest buying season

2) There’s a foreclosure moratorium about to end

3) Federal tax credits offered for 1st time homebuyers

4) Historically low mortgage rates (this may or may not change soon)

Why More Foreclosures Are Coming – A Lot More

Foreclosures will continue to come as long as the job market does not get better. Also, borrowers who have Alt-A loan products will have those coming due in the next couple of years and many of the loans will not qualify for the current values resulting in their homes being foreclosed on. The result is that the market will be flooded with new supply, and without artificially increased demand, prices will continue to drop. Here’s why:

1) We have rising unemployment and a worsening economy.

Click to enlarge

2) Banks hold massive numbers of future foreclosures due to the moratorium. The moratorium will end and those houses will hit the market. In the California market, where G7 is concentrating its purchases, the numbers are devastating.

Click to enlarge

Source: ForeclosureRadar.com and Field Check Group

3) April was highest month for foreclosure since records were kept by Realtytrac.

4) 12% of all homes in the U.S. are now 30 days past due; 24% are underwater on their mortgage. G7 tells me that they believe this number will reach 35-40% by 2010.

Click to enlargeSources: Zillow.com Q4-2008 Real Estate Market Report. Moody’s Economy.com, First American CoreLogic, T2 Partners Estimates

5) 1/3 of all properties for sale are REOs, or bank-owned real estate.

This last item is key. According to ForeclosureRadar.com and Field Check Group, there are 911,000 Notices of Default [NODs]. These people are living in their houses, for free, waiting for the axe. Of these, 393,000 have been foreclosed. Of the 393,000 foreclosures, 118,000 are unsold REOs. Backing out the 393,000 from the 911,000 total, the remaining 565,000 homes represent potential foreclosures and short sales. That means 683,000 total potential REO and Short Sales coming to market.

What kinds of foreclosures have occurred thus far and will occur going forward? So far, speculators and those with subprime mortgages are the ones who have been taken out. Coming up, G7 expects to see those with Alt A, or Pay Option loans going under, along with Prime and Jumbo loans that are defaulting due to job losses and general price declines. These Jumbo, or non-conforming loans, are a major factor for banks, since they must put that loan on their balance sheet since there is no securitization market. Therefore, banks are being extremely tight in underwriting these loans, making these homes harder to purchase, further increasing supply.

As the more expensive homes begin to default, that will put pricing pressure on that sector, with declines of 20% – 25% expected. As Cialis Viagra buy Online those homes decline in price, the homes in the price tranche just below those will feel the pressure and decline as well. G7 expects declines in the Conforming mortgage pool to decline 7% – 10%, while the median is anticipated to drop 10% – 15% (the median is a tricky statistic though as it may not drop as much if higher priced homes begin to work through the system).

The bottom line here is clear: tons of housing supply coming to market. So how can you profit?

A Generational Low in the Making

The first thing to do is figure out where the worst declines are coming. According to Zillow.com Q4-2008 Real Estate Market Report. Moody’s Economy.com, First American CoreLogic, and T2 Partners Estimates, it’s the boom areas that are in major trouble: The percentage of mortgages that are underwater is staggering. Here are the top four: Miami (65.1%), San Diego (63.9%), Las Vegas (61.4%), and Los Angeles (56.4%).

The numbers could, believe it or not, be even worse. This data does not include the roughly 50% of Alt-A and subprime loans that were cash out refinances that now carry a higher loan balance than original purchase amount. Whoa!

The next issue to look at is timing. Here’s a chart from Moody’s Economy.com that shows not only how bad the bubble got in terms of homes prices relative to the median price index trendline, but how bad the crash is (and is going to be).

Click to enlarge

So now is the time to be gathering capital and as those foreclosures start to hit, you’ll want to judiciously deploy it into those properties.

Now this is all well and good, but given how awful this crash is, how do we know that the market will recover, and when will that happen? I can’t predict the future, but there are some extremely compelling trends that tell us this situation is akin to what savvy investors saw with the old Resolution Trust Corporation.

Here’s a chart of U.S. Housing Starts from 1959 to the present, provided by Moody’s.com (unadjusted for population growth, the highlighted areas are market recessions):

Click to enlarge

Housing starts are at their lowest point in fifty years. It’s been said that the “smart money” gets into housing when new starts drop below one million. Meanwhile, because of these price declines, housing affordability is, believe it or not, at unprecedented highs in California.

Click to enlarge

With so few new starts, once this excess inventory comes online and Americans start snapping up the bargains, it’s reasonable to assume that housing at the bottom end of the market has limited downside.

And finally, the price-to-rent ratio has reached a point where properties can be rented at rates that not only cover principal, interest, and taxes, but can actually generate cash flow above and beyond those requirements and still have room for future price appreciation. This chart, from Moody’s.com, shows MSA fair market value rent for a 3 bedroom unit, divided into the average price for a new home in the market.

Click to enlarge

So How Do You Profit?

There are a few places to fish to take advantage of these trends, depending on how you see things playing out. One school of thought says that all those people being foreclosed on will have to live somewhere, and that may mean that apartment buildings see higher demand. But you’d be barking up the wrong tree. Apartment rental rates are going down. More likely, people who need a house to live in and get foreclosed upon still need a house to live in. So house rental rates will be fine. In this case, apartment REITs in the big housing bubble cities might be one thing to short. Some of these include Avalonbay Communities (AVB), Home Properties (HME), and Equity Residential (EQR).

I think you still want to avoid, or even short, retail REITs. Consumer spending isn’t recovering, and when foreclosures slam neighborhoods, businesses in those neighborhoods will be further harmed. General Growth Properties (GGWPQ.PK) just filed for bankruptcy. I’d stay away from Glimcher Realty Trust (GRT), but Getty Realty Corp (GTY) might be fine, as it deals in gas stations and convenience stores. There will still be demand for these, and their latest financials look okay. It pays a 10% yield.

What to do about the homebuilders? Companies like Pulte (PHM), Toll Brothers (TOL), D.R.Horton (DHI), KB Home (KBH), Lennar (LEN), and NVR (NVR) will see their fortunes rise again one day. Sooner or later, all that excess foreclosed inventory is going to be chewed through. About 300,000 homes get demolished each year. I don’t quite think we’ve hit the bottom here yet, but I would start to keep an eye on these players. Choose the ones with the strongest balance sheets and operating in regions that are the least badly hit by foreclosures.

As for those individual homes that are being foreclosed upon, I think those offer the biggest opportunity for capital appreciation. Of course, you really have to know what you’re doing, and buying into those wacky do-it-yourself infomercials on how to buy a foreclosed home isn’t the best way. You need to know where and when to fish for homes, and it isn’t easy. It goes beyond just grabbing any old foreclosure. You need sophisticated data and analytics. You need plenty of capital to get significant discounts from current values.

The home that needs fixing up is worth more in the long run… and you can’t even get loans for homes that need to be fixed up. The best bet is for accredited investors to seek out private equity funds who have a plan or, for those individuals who want to own a few homes of their own the G-7 Realty has a program where they will help you locate, finance, acquire, rehab and rent the home and later tell you when is the appropriate time to sell.

Full Disclosure: No position in any stocks mentioned