2011: The end of the housing crash?
Houses are a good deal, and investors are buying -- signs many market watchers point to when they say the worst may be over.
By Simon Constable for The Wall Street Journal
There might finally be some good news this year about the nation's dismal housing market. Or, at least, the bad news could stop.
Either way, it will be welcome relief for current homeowners as well as for potential real-estate investors. Reasons to be optimistic have been sadly lacking since the housing bubble burst in 2006.
For sure, last week we learned the widely watched S&P/Case-Shiller home-price index fell 1% in December, its fifth straight decline. The index tracks 20 major markets. But that figure belies real reasons to be optimistic, according to some experts. If they are right, it might make sense to jump into real estate. The trick is avoiding getting burned again, and it doesn't necessarily mean owning a home.
First, let's recap the economic signs a bottom is close.
Houses are a good deal
Housing is the most affordable it has been in decades, according to analysts at Moody's Analytics. They don't just look at house prices. They also look at incomes.
Nationally, the cost of a house is the equivalent of about 19 months of total pay for an average family, the lowest level in 35 years. Prices usually average close to two years' pay, although that varies nationally. Post continues after video.
At the peak, midway through the last decade, a home in Los Angeles cost the equivalent of 4.5 years' pay. The average price has since fallen to just over two years' income now. That's well below its pre-bubble average of 2.6 years. This means average Los Angeles homes are cheaper in "real terms" than they were typically during the period 1989 through 2003.
The opposite is true around the Washington beltway, where it will take 26 months of pay to buy a home, versus the historical norm of 22 months.
In the end, it will be affordability that will drive people to buy homes.
"Pricing is down so much in some markets that when you analyze renting versus owning it makes much more sense to own," says Michael Larson, a real-estate analyst at Weiss Research in Jupiter, Fla.
It is definitely bullish. But what about timing?
"Housing prices will probably bottom in 2011," says Scott Simon, a managing director at money-management firm Pimco in Newport Beach, Calif. He foresaw the housing crash, helping his firm dodge losses that plagued Wall Street.
Mr. Simon says prices might dip another 5%. Still, in the scheme of things, that's small. Consider this: In some markets, home prices have fallen by half or more since 2006.
For instance, in once-hot Miami you can snap up an average house for under $166,000, according to recent data from the National Association of Realtors. That's down from $371,000 in 2006. Another 5% drop would take it to $158,000.
Investors are stepping up
Here's another sign the market is nearing a bottom: Investors have started to buy up houses and condos, in some instances paying entirely in cash. That's a far cry from the heady bubble days when borrowed money seemed the key to riches. The bubble-era speculators who got burned tended to buy at the peak and borrowed heavily to do so. When the crash came, they quickly saw their wealth erased.
Take Miami again. Last year, more than half of all transactions were made entirely in cash, according to a recent report in The Wall Street Journal. That compares with 13% of deals in the last quarter of 2006, the height of the bubble. Similarly, in Phoenix 42% of sales in 2010 went to all-cash buyers, up threefold since 2008.
It's a sign that these investors are betting on a rebound. Investors buying at current prices are looking for deals, or so-called bottom fishing. They typically like to pay entirely in cash (or with a relatively small loan) to speed up transactions. That can be vital for an investor wishing to lock in a deal fast.
If this is a turn in the market, then it might make sense to go out and buy a home. But, warns Pimco's Mr. Simon, "buy in areas you really know."
Plan to stay put
Buy and hold. While the good news is that the worst of the housing crash might be over, the bad news is that the fast gains of the glory days of 2005 and 2006 won't be back any time soon. So to cover the costs of buying and selling, and what could be a prolonged recovery, plan to own for more than 10 years, explains Jack Ablin, chief investment officer at Chicago-based Harris Bank.
Also remember that borrowing money to buy a house can still be risky. If you pay for a $100,000 property with $20,000 cash and borrow the rest, a dip in the value of $20,000 would leave you with zero equity. On top of that, you'd have to pay to maintain and repair the property, something not necessary when renting.
Homebuying without a house
There are other ways to benefit from a real-estate rebound than directly buying a house. Such investments include stocks, mutual funds or exchange-traded funds. Unlike homes, which typically cost tens of thousands of dollars, these financial investments can be made in smaller amounts and typically are easy to sell.
Weiss Research's Mr. Larson says although new homes are oversupplied, home builders might benefit from a rebound as the situation rights itself.
Rather than pick individual stocks, he says, it probably makes sense for small investors to pick broader investments that hold many different stocks. In particular, he points to the SPDR S&P Homebuilders ETF, which tracks a basket of home-builder stocks.
Mr. Larson also highlights specialized mutual funds such as the Fidelity Select Construction & Housing fund, which tracks home builders as well as home-improvement retailers like Home Depot and Lowes that would also likely benefit from a housing recovery.
Read more from The Wall Street Journal and MSN Money:
MORE ON MSN MONEY
VIDEO ON MSN MONEY
Its all good for the banks and investors....
But not so good for the people down on Main St....
They are still losing their homes at record rates due to foreclosure, No Jobs
But the banks got bailed out, using OUR money! Only
to have the banks hoard the money and not loan it back to the
taxpayers..Something NOT right with this charade..
How do I say it so that people understand? ****!!!!! There are already enough homes built. Building more will only add to the huge stock pile. But if investors want to throw their money away, go ahead. What do I care about how people with money to waste, waste it?
This kind of article is adding to the false propaganda regarding the true state of the economy and employment. Stock markets are manipulating one another so that stock brokers can earn money. But the truth is, there are no real products or needed services being created in any appreciable degree and added to the economy. Jobs worth a livable income are rare. And people are getting further into debt using their credit cards.
So to all of the authors writing this crap, many of us know the truth. And you are accumulating negative karma by adding to the problem with your lies rather than writing stories that may help the average american. I know you need to justify your job and pander to a weary audience. But really, enough is enough.
These articles are so full of crap! Unemployment is still at an all time high w/no end in sight. Previous homebuyers who got rammed up the *** by their banks can no longer get a loan due to their credit & there are millions & millions of them. Bail them out Obama hand each of American a million $$ w/a condition they buy a house or car. The banks got billions & smell like roses now but screw us right?!
People keep building houses when there are so many on the market now! We do not need more houses! Real estate & investors need to stop snatching the "good deals" out from serious homebuyers to try to turn it around to make more $$! These houses go back on the market & sit. I know of 5 w/in 3 blocks of here. Real estate agents/companies bought it & thought they could turn profits & there they sit & sit.
The problem is simple to figure out. Housing is dependent on jobs. If unemployment continues to be high in an area, housing will remain depressed. If the employment situation improves, so will housing prices.
I already have a home and the folks I know that got foreclosed on aren't interested in getting back in the game (no matter the cost/savings).
Wouldn't it just serve this article better if I were to pledge to take out as much of the equity of my house and buy stuff I don't need with the money I don't really have? Sorry for that last bit, but isn't that what it would take to get the housing crazy train back on it's tracks? Are you seriously advocating that investors/speculators start buying up homes (that they aren't going to live in) and turning them into rental property?
There are literally hundreds of thousands of empty NEW homes in FL right now rotting in the sub-tropical weather. WHY would you goad people (investors/speculators) into buying homes in an incredibly saturated market?
Also, "...the crash MIGHT be over."? Are Fanny and Freddy looking pretty healthy to you? Are all the current or backlogged foreclosures processed? Are folks NOT being foreclosed on any more? Are folks not losing their jobs to the tune of 370,000 a month?
Isn't it always the "Best time to buy a home", no matter if it really isn't?
What a joke!!! To the masses that work in the housing industry or own a home, the end of the housing crash means we have all our equity back that we lost, they are building homes at a rate where the millions of people unemployed in the construction industry are back to work and making a decent wage again, the price concessions that have been forced on the subcontractors have been reversed and you can actually make a profit again, and it doesn't take years to sell your home at a price you could have gotten for it 15 years ago.
The indicators that are used to support an article like this mean absolutely nothing !!!
It's full of BS. This sounds like an add for the Lenders and the people who caused this mess in the first place !!!
You mean to tell me that we now know how many poverished Americans there are?
Maybe the Chinese, Muslims and Mexicans can buy them up now.
Hell you know how long those foreclosed houses been on the market? I wouldn't buy one of them unless i had someone come in and check it out and tell you how much your going to have to pay to fix it up. for pete sakes dont get anyone the bank will recommend the banks pay people to come in and they just paint over the mold and do small fixes and when you buy it then the troubles start.
pay $100,000 for it with $20,000 down and have to put $60 to $80,000 into it loose your equity and your in financial trouble real quick.
My advice just go buy a new house that was just recently built and don't mess with anything the bank foreclosed on haven't we been screwed over by the banks again. The old saying if you can't trust your banker who can you trust. Take if from me you can't ever trust your banker anymore.
Check out the article about Southwest Florida's market perception versus reality. http://www.news-press.com/article/20110220/RE/102200329/Commercial-connection-Signs-point-rebound-SW-Fla-housing-market
Copyright © 2013 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
MSN REAL ESTATE
Even those who don't like to shop are probably hitting the stores this month. Here's what to be on the lookout for and here's what to avoid.