San Francisco Real Estate Prices Rise as Inventory Falls

Recent reports show San Francisco real estate prices rising, partly due to a reduction in housing inventory. It’s a blip on the EKG of an otherwise flat-lining housing market.

Alamo Square in San Francisco
The Alamo Square neighborhood of San Francisco

On Monday, real estate analytics firm Altos Research released its latest market report. The company’s “Real-Time Housing Market Update” focuses on the same 20 metro areas featured in the S&P/Case-Shiller Home Price Index. Their latest data shows that home prices in San Francisco rose 2.34 percent in June, compared to the previous month.

That’s not a big leap by any means. But it was the second largest increase of all 20 metro areas included in the report.

San Francisco took the lead in the three-month category. Based on data for April, May and June, San Francisco home prices rose by 5.75 percent. This was the largest three-month increase of all 20 cities contained in the report.

Inventory Reduction Supports Prices

San Francisco stood out in other ways, as well. The city had the second largest inventory reduction of all 20 metro areas tracked by Altos Research. If this trend continues, it could put continued upward pressure on San Francisco real estate prices. This is good news for homeowners who have lost significant equity since the housing market crashed.

In most real estate markets across the country, excessive inventory is the biggest drag on home prices. Mortgage rates are low, and homes are more affordable than they’ve been in years. But high inventories have been pushing prices south, making potential buyers wary about taking the plunge.

If you take the falling prices out of this equation, you have a perfect scenario for buyers and investors — low mortgage rates, and low (but rising) home prices. This is how things are shaping up in the San Francisco real estate market.

Granted, most housing analysts are predicting a long and flat bottom for housing markets — San Francisco included. But when the patient has been in a coma for years, any sign of life is worth noting.

San Francisco Home Prices in Second Half of 2011

On July 8, 2011, real estate valuation firm Clear Capital released a report showing home-price trends and forecasts for 50 U.S. cities. Their predictions were mostly gloomy for the second half of 2011, with a few exceptions. San Francisco was one of the exceptions. It was one of only five metro areas where home prices were predicted to rise in the second half of 2011 (New York, Dallas, Orlando, and Washington, D.C. were the other four).

Stated differently, San Francisco was in the ten-percent club. The other ninety percent of the metro housing markets tracked by Clear Capital were predicted to see flat or declining home prices for the rest of this year.

The Truckee, California-based company expects San Francisco home prices to rise by 0.2 percent between July and December of this year. It’s a small number by any yardstick. But given the price erosion predicted for the rest of the country, it’s a noteworthy number.

Jump in Home Sales – May to June 2011

We also witnessed an unexpected jump in home sales in San Francisco, from May to June. Bay Area home sales rose by 14.5 percent during that month-over-month period. This marked the highest level of home sales since June 2010 (when the home-buyer tax credits were expiring).

DataQuick president John Walsh pointed to a number of factors that could have caused the spike: “June likely benefited from a combination of factors, such as price reductions, low mortgage rates and perhaps a batch of short sale transactions from spring that took months to close.”

Behold, a Positive Housing Market Forecast (More or Less)

Shadow inventory. Foreclosures. Falling prices. Tighter lending standards. For months, you’ve been hearing about all the things that are wrong with the U.S. housing market. I thought you might like a refreshing change of pace. Here is some positive housing market analysis for a change.

Home Prices Ready to Climb, Says HUD Boss

Across the U.S., home prices may start rising by the end of 2011. This would mark an end to the steady price declines we’ve seen in most areas over the last few months. This housing market forecast was offered by HUD Secretary Shaun Donovan in July 2011.

Mr. Donovan said that continued price erosion in the housing sector was “very unlikely.” He then posed a question about when we will see a steady rise in home prices. Some analysts are predicting this could happen by the fall of 2011, according to Donovan.

As to whether or not this forecast will bear fruit, much of it depends on foreclosure inventories. This is the number-one factor holding prices down in most areas. Mr. Donovan pointed out that home sales have mostly risen over the last few months, while mortgage-default rates have gone down.

Data reported by CoreLogic in June showed an 18-percent decline in the shadow inventory of distressed homes (compared to the January 2010 peak). This bodes well for the broader housing market. As these trends reduce the number of foreclosure homes on the market, prices will likely start to rise. It makes sense on paper, anyway.

“In the long run, it’s a good time to buy,” Donovan said.

Barclays Analyst Sees Ray of Light in Housing Data

Here we have another housing market analyst pulling a sunbeam from an otherwise gloomy sector. Ajay Rajadhyaksha, a managing director at investment-banking firm Barclays Capital, explained that foreclosure-heavy home sales were responsible for previous price declines. As the percentage of homes sold moves back toward the non-distressed side of the fence, prices should stabilize.

He said we must consider pricing data for non-distressed sales to see where the housing market is headed. “Non-distressed borrowers will increasingly determine the true health of the housing market,” he added.

According to real-estate data and analytics firm CoreLogic, national home prices fell 7.5 percent in April (over the same period in 2010). But, as Mr. Rajadhyaksha pointed out, much of this price erosion is the result of distressed sales. If you removed distressed sales from the equation, the price drop would only be around half a percent. As the inventory of distressed (foreclosure) homes shrinks, the housing market will normalize again.

“The regular marketplace is hanging tough,” says CoreLogic chief economist Mark Fleming.

Shrinking Inventory: The Real Key to Recovery

The million-dollar question is: When will the inventory of distressed homes begin to shrink significantly? You can’t make a reasonable housing market forecast without answering this question. Opinions are divided on the subject, though most believe it’s not that far off.

Housing economist Thomas Lawler thinks it’s happening right now. “Whatever the excess supply of housing is, it is shrinking pretty fast,” he said.

The folks at Moody’s Analytics have put a future date on it: 2013. That’s when they feel the number of distressed homes for sale will decline significantly.

Warren Buffet, the Oracle of Omaha, also feels that housing inventory could balance out within the next couple of years. “We’re sopping up housing inventory,” he said recently, “and I don’t know exactly when that hits equilibrium, but it isn’t five years from now … it actually could be reasonably soon.”

Mark Fleming, chief economist with CoreLogic, also sees inventory reduction on the not-too-distant horizon. “That’s going to take a number of years to happen,” he said, referring to a reduction in the so-called shadow inventory of homes. “The good news is it’s not getting any worse and it’s slowly beginning to get better.”

As foreclosure inventories shrink, it will help the housing market in two ways. First, and most obviously, it will help balance the scales of supply and demand. Over the past few years, supply has outgrown demand and pushed prices down. Inventory reduction, particularly in the distressed homes department, would eventually allow prices to rise.

Bank-owned foreclosures and short sales are often sold at a discount. This depresses the comparable sales data (or “comps”) used by real estate appraisers to determine home values. Thus, a decline in foreclosure sales will allow a return to normalcy, in terms of home prices.

Every housing market forecast you read over the next few month will come down to foreclosures. It is the core problem that is delaying home-price stabilization. The two things are inseparable.

It’s 1993 in Detroit, for Home Values Anyway

The year was 1993. Jurassic Park was #1 at the box office. The New Kids On the Block were breaking up. And home prices in Detroit were … basically the same as they are right now.

Many cities across America saw a drop in home values after the housing crash of 2008. In most areas, home prices were “rolled back” to pre-bubble levels, circa 2002 – 2003. But home values in Detroit have fallen to levels last seen in 1993. It’s a homeowner’s nightmare, and it doesn’t bode well for the broader economy either.

Looking at the 20 metro areas tracked by the S&P / Case-Shiller Home Price Index, the average decline from peak home prices was 33 percent. But in Detroit, home prices have fallen 51 percent from their housing-bubble peak. Call it a half-price sale. If a Motor City home was worth $300,000 in 2006 or 2007, it would be worth closer to $147,000 in the current market.

Foreclosure Inventories: The Real Home-Price Killer

You could cite a dozen causes for the home-value declines in Detroit. The unemployment rate is higher than most cities. The city isn’t doing enough to attract businesses and create jobs. Demand is soft. Mortgage lenders are too tight with credit. These are all valid points. But the biggest challenge of all, from a pricing perspective, is the inventory situation.

Detroit was one of the cities hit hardest by the housing crash. At that time, the city’s foreclosure rate rivaled any of the so-called sand states (Arizona, Nevada, California and Florida). Today, the Detroit housing market is still being weighed down by unusually high foreclosure inventories.

According to data from RealtyTrac, foreclosure activity in the Detroit metro area rose in May. This bucked the national trend, which saw a decline in foreclosure activity during the same month.

In Detroit, the “REO saturation” is one of the highest in the country. This is a measurement that shows the percentage of bank-owned (REO) homes sold in relation to the total number of sales. According to real estate valuation firm Clear Capital, Detroit’s REO saturation was 58 percent in May. That means that more than half of all home sales were bank-owned homes.

As far as home prices go, Detroit was the worst-performing market in Clear Capital’s latest report. It has held that “title” for the last five months. Data collected by Clear Capital showed a 13.2-percent decline in prices, quarter-over-quarter.

REO properties are often sold at a discount. The banks want to offload them as quickly as possible, so they are generally more willing to entertain low offers than a homeowner might be. With such a large number of homes being sold below market value, it’s likely that Detroit home prices will fall even further in the months ahead.

Granted, all of these things are connected. Price declines make would-be home buyers more reluctant to buy. This decreases the “absorption rate” and keeps homes on the market longer. But housing inventory in general, and foreclosures in particular, is the core issue affecting home values in Detroit.

Major Population Decline in Detroit

Population trends aren’t helping much, either. According to Census Bureau data, Detroit’s population has declined 25 percent over the last ten years. In fact, Michigan is the only state that has registered a net population loss in the last decade. So the number of homes for sale has increased, while the pool of potential buyers has shrunk. You don’t need to be an economist to understand how this affects the Detroit housing market.

Home Prices Rise for the First Time in 8 Months

The S&P/Case-Shiller Home Price Index for April 2011 was released earlier today. It brought some good news, as well as some bad news. Can you guess which one the media will run with?

The Good News – Home Prices Up at the Monthly Level

Surprisingly, home prices rose in all 20 of the metro areas that are tracked by the report. In April, the 20-city composite rose 0.7 percent over March 2011. This is the first time in eight months that prices have risen across the board.

David Blitzer, chairman of the committee that produced the pricing index, explained that the uptick may only be seasonal. “[M]uch of the improvement reflects the beginning of the Spring-Summer home buying season. It is much too early to tell if this is a turning point or simply due to some warmer weather.”

Still, this news may come as a surprise to the economists and housing experts who have already darkened their predictions for a housing recovery. In March 2011, MacroMarkets sent a home-price survey to 111 economists and housing-market experts. The results did not inspire confidence. Most of the respondents did not expect any significant recovery in the housing market until 2013.

According to Robert Shiller, co-founder of the Case-Shiller Home Price Index: “The U.S. housing market outlook continues to deteriorate. Now [the survey respondents] are expecting only a weak recovery, and even that is not until 2013.”

Related story: 4 Reasons the Housing Market Still Stinks

At the monthly level, this latest report would seem to contradict their pessimism. Granted, a one-month increase in home prices does not indicate a full recovery. But it’s still a good sign, right? In some ways, yes. But not when you consider the annual trends…

The Bad News – 4% Decline Over Last Year

The bad news is that home prices dropped significantly in the annual category. Prices were down 4 percent in April of this year, when compared to April 2010. This marks the biggest year-over-year decline since November 2009. So when you look at the data from a wider lens, it certainly does not speak of recovery.

Despite the one-month rise in home prices reported today, the biggest questions remain: When will prices hit bottom in most areas? How long until we experience some sustained appreciation in the housing sector?

Related survey: Consumers don’t expect a housing bottom in 2011

Breaking the Vicious Cycle

Excessive inventories put downward pressure on home prices. Falling prices make would-be home buyers more reluctant to make a purchase. The lack of demand pulls prices down even further. It’s a textbook “vicious cycle,” and it probably won’t end for some time.

As long as we have a high rate of foreclosures, the cycle will continue. The glut of foreclosure homes has been the talk of the town for months. It’s not the only factor depressing the housing market (unemployment is also taking a toll). But it is one of the most significant factors.

But any signs of price stability, however dim, will bring more buyers into the market. This will make the supply-and-demand picture more balanced than it has been in the past.

High Inventory and Price Declines: Housing Market Roundup

Housing Roundup, June 20, 2011: The roundup is when we take a look back at the week’s housing market trends and analysis. Here are some stories of interest for mid-June, 2011.

Housing Starts Rose 3.3 Percent

In May 2011, housing starts in the United States rose by 3.3 percent over the month prior. Work began on approximately 560,000 new homes in May. This does not make up for the huge decline in building activity we saw in April. But it’s still a positive blip on the market’s EKG.

Definition: A housing start is the point when construction begins on a new home. It’s a key piece of data that gives us insight into the home-building sector of the economy. Housing starts are different from permit filings (another economic indicator from the building industry). A permit filing is a paper shuffle that indicates the intent to build a new house. A housing start is when construction has actually begun, so it’s a better indicator of activity in the building industry.

30-Year Mortgage Rates Inch Upward

Mortgage rates had been on a downward slide since mid-April. Over the last couple of months, the average rate for a 30-year fixed mortgage fell steadily from 4.91 – 4.49 percent. Last Thursday, the two-month decline came to an end. The average rate for the benchmark 30-year FRM inched upward to 4.5 percent. At the same time, the 15-year FRM and the 5/1 ARM loan dropped slightly.

Unfortunately, mortgage rates alone are not enough to kick-start the sluggish housing market. Many would-be home buyers are still concerned about declining home prices. And rightfully so. According to the Case-Shiller / S&P index, home prices in the U.S. have dropped 33 percent from their 2006 peak. The downward trend continues in most parts of the country. Low mortgage rates are enticing. But they’re being offset by the fear of price erosion.

Phrase of the Month: “Backlog of Foreclosures”

Everyone is talking about the backlog of home foreclosures. There’s a good reason for this. With the current glut of foreclosure homes on the market (and another 2.2 million in the works), housing recovery is a dim light on the distant horizon.

It’s taking a toll on home prices, too. Robert Shiller, the Yale economist and co-creator of the Case-Shiller home price index, said he wouldn’t be surprised if home prices fell another 10 – 25 percent over the next few years.

The backlog is taking longer to work through, as well. In 2007, it took banks an average of 151 days to foreclose on a home and get it back onto the market as a bank-owned (REO) property. Today it takes an average of 400 days. This will perpetuate the glut of distressed homes on the market while delaying recovery in the broader housing market.

Popular Story: Confessions of a Mortgage Reject

We have received emails from many readers in response to a story we published on June 4. The story (Confessions of a Mortgage Reject) struck a chord with a lot of frustrated home buyers who’ve been turned down by lenders. It seems that cash reserves are playing a larger role in the mortgage market today than they have in the past. More lenders are requiring additional cash for closing, and the standard amount has increased as well.

Definition: Within the context of mortgage loans, cash reserves are extra funds the borrower has in the bank. This is additional money that goes above and beyond the amount needed for closing costs and/or down payments. Some lenders require borrowers to have the cash equivalent of one to six months worth of mortgage payments.

The 3 Scariest Numbers for the U.S. Housing Market

I’m normally not a doom-and-gloom person, when it comes to reporting on the housing market. But I’ve come across some numbers recently that shrink whatever hope I had for a timely recovery. So without further ado, I give you the three scariest numbers in the U.S. housing market.

33 Percent

Price ReducedThat’s how far home prices have dropped since their 2006 peak, in the 20 major cities tracked by the Case-Shiller / S&P Home Price Index.

Granted, it’s only 20 cities. But these cities were chosen for a reason. They give a representative view of what’s happening across the country. And what’s happening isn’t good.

This number has a lot of people dragging out the ominous “double dip” phrase. The Case-Shiller report released on May 31 indicates home prices have dropped below the previous post-housing-crash low, which occurred in April 2009.

No matter how you look at the data, it doesn’t inspire confidence. It certainly doesn’t suggest we’ve hit bottom, or that a bottom is even close. (Not that anyone is expecting a bottom this year.)

2.2 Million

That’s the number of mortgage loans that are currently in some stage of the foreclosure process. This is according to Harvard University’s State of the Nation’s Housing report, which was released earlier this week. The report also points out that 11 million homeowners in the U.S. are upside down in their mortgages. Additionally, 2 million homeowners are “severely delinquent” on their mortgage payments.

These numbers are disturbing in how they relate to housing inventory and home prices:

  • 2.2 million loans are in some stage of foreclosure. Most of these homes will come onto the market at reduced prices. They will be sold for less than market value. This is generally the case with distressed real estate. This puts downward pressure on home prices in two ways. It increases the sheer number of homes on the market (sustaining the imbalance of supply-and-demand), and it creates reduced pricing-data for comparable sales or “comps.”
  • 2 million people are falling seriously behind on their payments. Not all of these will be foreclosed on, of course. But a large percentage of them will. This will add to the excessive number of homes already entering the foreclosure “pipeline.” As a result of the robo-signing fiasco, most lenders and loan servicers are processing foreclosures at a much slower pace than they did in the past (see “400 days” below). So the pipeline will be full for a long time.
  • 11 million homeowners are upside down in their mortgages. That’s nearly a quarter of all residential properties. And as we know all too well, many underwater homeowners choose to walk away from their homes — and their debt obligations. Data from Fiserv and the Mortgage Bankers Association (and common sense) show a direct correlation between underwater homeowners and foreclosure rates. When the first number goes up, it takes the second number along with it.

All of this translates into downward pressure on home prices in most parts of the country. There are rays of light here and there, like in Washington, D.C. But for the rest of us, it’s depreciation-ville.

400 Days

That how long it takes, on average, for a bank to complete the full foreclosure process. The “clock” starts when the bank files a notice of default. It stops when they complete the foreclosure and list the home for sale as an REO (bank-owned) property. That was the average processing time for the first quarter of 2011. This time last year, it took banks an average of 340 days to complete the process. In the first quarter of 2007, it only took an average of only 151 days to complete the process.

So we have a lot of foreclosures already. On top of that, we have 2.2 million loans in the foreclosure pipeline right now. And on top of that, we have a high percentage of homeowners who are falling behind on their mortgage payments (many of whom will be foreclosed upon in the months to come). As if this were not enough, it takes the banks longer to complete the process and get these homes back onto the market as REOs.

Maybe this is why economists are revising their predictions for a housing recovery.

Bonus Number – 5 Years

Housing recovery relies heavily on the absorption rate of our current inventory. How soon can buyers and investors absorb (purchase) all of those homes for sale — and the homes that will be for sale once they clear the foreclosure pipeline?

Michael Feder, the CEO of housing research firm Radar Logic, thinks it could be a long wait. During a March 2011 interview with Bloomberg radio, Feder said:

“The reality which you add up all the houses for sale, houses vacant not yet on the market, houses underwater, seriously delinquent, in foreclosure, almost in foreclosure, the number is closer to 60 months, 5 years.”

According to the aforementioned report by Harvard University, the excess housing inventory at present could be as high as 2.6 million units. We will need to see a lot more demand before these numbers start to come down.

Uncharted Waters?

Perhaps the most disturbing concept of the current housing market isn’t a number at all, but a notion. In previous boom-to-bust cycles, housing and home-building have always led the charge to recovery. But not this time.

Currently, the U.S. economy is dragging the housing market along like so much dead weight. Home building, in particular, has hampered GDP growth. The drop in residential fixed investment (RFI) in Q3 2010 put a tremendous drag on economic growth. This is something of a rarity. It challenges our understanding of how these cycles are supposed to work.

When economists make predictions, they do so using historical data. But in some ways, the current trends in our housing market lack any historical precedent. We have entered uncharted waters.

Reader Q&A: Negotiating the Price of an FSBO Townhome

Reader Question: “We live in a small town with numerous homes on the market. Many have sat for a year. For this reason, we’ve decided it’s best to look at a no-maintenance townhome, as we don’t know how long we’ll be here and feel that it would be the easiest type of property to sell down the road.

“It’s an FSBO and the owner is asking $162,500. The other townhomes are identical and the most recent sale was 5 months ago for $135,000. It was listed at $154,500. The average sale price over 10 years has been $154,000. This townhome is dated with 14-year-old appliances, furnace and master bath. After extensive research, we offered $142,500. They have countered at $150,000.

“My husband doesn’t feel we should continue to negotiate; however, I feel that we should stick with where we are. The couple is an elderly couple moving into assisted living and owe $80,000 on their mortgage. I feel that my husband’s emotions are getting in the way of a business transaction. I’m more concerned with having to update and trying to at least break even when it comes time to sell. Any advice?”

Brandon’s Response:

If the sellers were smart, they would accept your offer. It sounds reasonable to me, based on the market data you’ve provided. But some homeowners let their emotions get the best of them when selling a home. They’ve spent years in the house, and they have a lot of memories. You and I know that emotional value doesn’t translate into financial value. But try telling that to the homeowner!

If I were you in your spot, I would first want to know if the sellers had other offers. If not, you can safely negotiate with them until you land on a price that is acceptable to both parties. You could even hold your ground at $142,500 to see if they change their minds. But if they’ve had other offers, there’s a chance you will lose the townhome to a higher “bidder.”

The sellers have shown they are serious by dropping their asking price by $12,500. So I’d be willing to bet they’ll negotiate further. Do you know how long their townhome has been on the market? This is a key factor that ties into the seller’s motivations. If they’ve been on the market for a long time, there’s a higher chance they’ll accept whatever counteroffer you make (if you decide to make one). If they are newly listed, they might not realize how much of a buyer’s market they are in.

Are you using a mortgage lender? If so, you have to consider the home appraisal as well. The lender is going to have the townhome appraised to make sure it’s worth the amount you’ve agreed to pay. If the comps support your offer, there’s a good chance the property will meet appraisal. But if you offer well above the comps, you might run into a low appraisal situation.

How much do you want this townhome? That’s the last consideration you need to make. If it’s a dime a dozen, then it probably won’t break your heart to miss out on it. You’ll find another suitable property soon enough, and it might be better priced.

So, to recap. You need to consider how long the townhome has been on the market. You need to think about the home appraisal (if you’re using a mortgage), and the problems that can arise when you offer more than comparable sales. You need to think about how badly you want this property, and how many other homes are available in the area.

When you made your offer, did you present the comps to the seller? They might not be in touch with local market conditions. So if you do decide to make a counteroffer (somewhere between $142,500 and $150,000), make sure you support it with comparable sales data. Attach them to your offer. This sends a strong message to the seller. It says, “I am offering this amount, because that’s what the current market supports. See for yourself.”

Like I said, a smart seller will jump on a reasonable offer — especially in a slow market. But these sellers might just have their heads in the sand. There may come a time when you have to walk away.

Keep this in mind. You’ve basically given the sellers two choices:

  1. Take our reasonable offer and walk away with $62,500 in net proceeds.
  2. Reject our offer and wait around for the next buyer, even if it takes six months or more.

It seems like an easy decision to me.

I’ll tell you what I would do. But first, I want to make it clear that I’m not familiar with your local market. So don’t take this as gospel. If I thought the townhome would appraise (and I really wanted to buy it), I would offer $145,000. I would attach some sales data to support my offer. And I would make it clear that this was my final offer. If the sellers have a brain between them, they would jump on it. On the contrary, if I was only lukewarm about this particular property, I would probably hold my ground at $142,500. Again, that’s just me.

I hope this helps you in some way, and I hope it all works out. Good luck.

Survey: Most Consumers Don’t See a Housing Bottom in 2011

With mortgage rates as low as they are, many analysts are wondering why the housing market is still sluggish. I previously shared my view that would-be home buyers are simply waiting for prices to stop falling. But I didn’t have any hard evidence to support that assumption. So we ran a survey and asked our readers this very question: Do you think your housing market will hit bottom in 2011? More than 1,700 of them were nice enough to respond. Here’s what they told us.

Survey: Housing Market 2011

Survey Details

We ran this survey on the Home Buying Institute website from April 1 – May 15, 2011. We offered a free home-buying booklet (PDF download) as an incentive, to increase participation. We asked the following question:

Do you think home prices in your area will hit bottom in 2011?

Survey participants had three responses to choose from:

  1. Yes, they will hit bottom in 2011.
  2. No, they will keep falling through 2011.
  3. Prices will start going up this year.

More than 1,700 people responded to our survey, and 78 percent of them felt that home prices would keep falling. Only 4 percent of respondents felt that prices would rise (or continue rising) in 2011. This was a nationwide survey, with participants from almost every state in the U.S.

Consumers Don’t Expect a Bottom Until 2012, at the Earliest

Interestingly, the views of consumers seem to coincide with the largely pessimistic views held by most economists. In March, housing-research firm MacroMarkets released the results of a home-price survey. The survey was sent to more than 100 housing analysts and economists. The general consensus was that the current housing market is still deteriorating. Most of the experts surveyed did not expect the housing market to hit bottom until 2012 or later.

Consumer sentiment is tracking right along with the experts. Most consumers expect home prices to continue falling through 2011. And who can blame them. A recent report by Zillow showed that home prices nationwide had dropped by 3 percent over the last quarter. Ouch. That kind of news doesn’t inspire confidence in buyers who are already nervous about the market. Their fears are legitimate. Who wants to plop down a small fortune on a house only to see the value drop further?

Housing starts are down, as well. (Housing starts are the number of new homes that started construction during a certain period.) They dropped by 10.6 percent from March to April 2011, which signals a major slowdown in the building industry — not to mention a lack of demand.

Low Mortgage Rates Aren’t Enough

My question is, why do so many in the media talk about mortgage rates as the saving grace of the housing market? Mortgage rates alone are not enough to spur the housing market. We’ve been seeing this for months now.

Rates are very low right now, and they’ve dropped for four weeks in a row. The 30-year fixed-rate mortgage had an average rate of 4.6 percent for the week ending on May 13, 2011. Let’s put this in perspective. The average rate during the Carter administration was nearly 20 percent. Now they’re hovering below 5 percent.

Mortgage rates don’t get much lower than they are right now. Even at the lowest point of the last two years, the average rate for a 30-year fixed mortgage was only half a percent lower than it is right now.

As far as mortgage rates go, this is about as good as it gets.

But home buyers are still hesitant. It’s not the mortgage rates causing this hesitancy — it’s home prices. Specifically, it’s the threat of continued price erosion that is making buyers so reluctant right now. The media has rolled out the “double dip” phrase again, and it scares the bejesus out of would-be home buyers.

Additional Survey: No Housing Recovery Until 2014?

File it under ‘C’ for coincidence. Shortly after publishing this survey, I noticed that Trulia and RealtyTrac published a similar one. Bloomberg ran the story earlier today. It actually serves as a perfect follow-up to the question we asked in our survey: If you don’t think the housing market is going to recover in 2011, when do you think it will happen?

According to the Trulia / RealtyTrac poll, more than half of U.S. homeowners and renters don’t expect the housing market to recover until 2014, at the earliest.

A Mini-Surge in Refinancing

Given the lack of housing demand, mortgage lenders are thankful for a small surge in refinancing activity. Last week, refinancing applications reached their highest rate since December of 2010. Homeowners are rushing to lock down a low rate, and they’re smart for doing so. Industry analysts don’t expect rates to get much lower than they are now.

Housing Bust Part 2: Home Prices Fall 3 Percent

Over the last quarter, home prices in the United States have dropped 3 percent. That’s the most significant decline since the housing market first started to implode, back in 2008.

I previously reported that many economists were revising their housing outlooks in a negative way, abandoning all hope for a housing recovery in 2011. We won’t see any real recovery until at least 2012, said the experts.

But recent data shows that things could be even worse. As it turns out, a 2012 recovery might be wishful thinking.

Zillow just released its Real Estate Market Report for the first quarter, and it’s ugly. In the first quarter of this year, U.S. home prices dropped faster than they have in any quarter since 2008. You will recall that 2008 is when the housing market came crashing down. Nationwide, prices fell by 3 percent (Q4, 2010 – Q1, 2011). Detroit was one of the hardest-hit cities, with a quarterly price decline of 5.2 percent. Translation: The first quarter of 2011 was the worst for home values since the housing crisis began.

Zillow’s market report is compiled from public data sources in 132 Metropolitan Statistical Areas.

Stan Humphries, chief economist at Zillow, doesn’t expect home prices to hit bottom until 2012, at the earliest. In the meantime, he says prices could fall another 8 percent. He’s not alone in his pessimism (or realism). Last month, the chief economist from Fannie Mae predicted that home prices in the second quarter of 2011 would be at least 5 percent lower than the first quarter. He had originally predicted a price decline of only 2.6 percent.

The Vicious Cycle of Price Decline

We are in a vicious cycle again. The number of homes for sale greatly exceeds the demand. This puts downward pressure on home prices. In order for home values to stabilize, we need to see less inventory and more demand. The problem is that it could take years for the current glut of homes to work through the system. Given the current rate of absorption (homes being purchased), some analysts are predicting a five-year overhang of housing supply.

Of course, if the foreclosure rate continues to rise, any hope for housing recovery moves further down the road. And that’s the real problem here — foreclosures.

At the end of the first quarter, more than 28 percent of single-family homeowners were underwater in their loans. Homeowners with negative equity have three choices: (1) stay in the home and hope to regain some value, (2) sell the home at a loss through a bank-approved short sale, or (3) walk away and let the bank foreclose. Judging by the foreclosure numbers for the last few months, I’d say there’s an increasing number of folks choosing the third option. This will drive inventory up and push stabilization further down the road.

And what about home buyers? They represent the demand side of the equation. Why aren’t they snatching up all of these “discounted” properties? With a handful of exceptions, housing prices are still dropping in most areas. And home buyers know this. That’s why they are reluctant to move forward. I read their emails daily. One of the most common questions we receive from our readers is: “When will it be safe to buy a house in my market?”

Thus, the vicious cycle continues. Inventory rises. Prices fall. And in most cities, would-be home buyers are sitting on the sidelines waiting for the market to hit bottom. At this point, it’s safe to say there is no hope for a national housing recovery in 2011. There’s a glimmer of hope for a nationwide recovery in 2012. My money is on 2013.

4 Reasons Why the Current Housing Market Stinks

Underwater homeowners are hoping for a miraculous turnaround to restore their equity. Home buyers are waiting to see when prices will bottom, so they can make their move. Real estate agents are promising sunnier days ahead. Just don’t expect any of these things to happen in 2011.

If you gathered 100 economists and real estate analysts, and asked them how they felt about the current housing market, you’d have a pretty good idea what the rest of 2011 will be like. But don’t bother. This has already been done.

Toward the end of March, MacroMarkets released the results of its latest home-price survey. The survey collected responses from a variety of economists, real estate experts and market analysts — 111 of them. The general consensus was that the current housing market is still deteriorating.

This survey has been widely reported already. So instead of rehashing old news, let’s examine the four factors that led to the dismal outlook.

Top 4 Housing Market Killers

According to Robert Shiller (Yale economics professor and co-founder of MacroMarkets), the pessimistic views of the experts were mostly influenced by the following:

  1. High unemployment
  2. Supply overhang
  3. Ongoing foreclosure crisis
  4. “Constrained” mortgage credit

Let’s take a closer look at these four factors.

1. The Unemployment Rate

While there are glimmers of light in the labor market, unemployment is still hovering near 9%. Many analysts expect it to stay in this range for the rest of 2011. But it’s not just the jobless rate that’s suppressing the current housing market. It’s the fear of job loss.

I would wager that 90% of Americans over the age of 21 know someone who has lost a job in the last three years. I know four of these folks, off the top of my head. This strikes fear into the heart’s of would-be home buyers.

Before the recession, many of us took our jobs for granted. The idea of steady employment was viewed as a sure thing, like the rising of the sun each day. Today, we are all painfully aware of our financial vulnerability. We’ve seen how quickly the rug can be yanked out from under us.

This is clearly having an impact on the current housing market. A 2010 survey by the Home Buying Institute showed that fear of job loss was a big concern among home buyers.

2. The Housing Supply

How much housing supply do we have right now? This question has yielded all sorts of debate among real estate analysts. It really depends on how you define the word supply. Michael Feder, CEO of the real-estate research firm Radar Logic, measures the current supply overhang in years — not months.

During an interview with Bloomberg, Feder said:

“The reality which you add up all the houses for sale, houses vacant not yet on the market, houses underwater, seriously delinquent, in foreclosure, almost in foreclosure, the number is closer to 60 months, 5 years.”

Elevated supply puts downward pressure on prices. Economics 101. This is good news for future home buyers, because it could bring even bigger bargains down the road. But it’s bad news for anyone hoping for a recovery in the housing sector. If housing supply continues to outpace the absorption rate (i.e., purchases), we will see continued price erosion. This brings us to one of the major factors driving housing supply right now — foreclosures.

3. The Ongoing Foreclosure Crisis

Some people are talking about the foreclosure crisis in the past tense, as if it’s fading in the rearview mirror. Nothing could be further from the truth. In January, RealtyTrac was predicting a 20% rise in foreclosure filings for 2011.

According to Rick Sharga of RealtyTrac:

“We will peak in foreclosures and probably bottom out in pricing [during 2011], and that’s what we need to do in order to begin the recovery.”

He also mentioned the key factors that will drive the foreclosure rate this year. Sharga pointed to unemployment, weak lending, and the overhang of properties that should have been foreclosed on in 2010 (but weren’t because of the foreclosure freeze). Sound familiar? Those are the other three items on this list.

At the end of 2010, we saw a record number of homes going into foreclosure. This would suggest a spike in foreclosure inventory over the coming months. But that spike hasn’t happened yet. Why? Because we are delaying the inevitable. Mortgage lenders and servicers are facing a new round of scrutiny into their foreclosure practices. This has led to a decrease in foreclosure activity from January to February. But the rate of default does not seem to be slowing.

A pipeline analogy is in order here. Imagine a pipeline representing the foreclosure process.

  • On the “input” side of the pipe, you have the homeowners who are falling behind on their payments. Many of them will soon be foreclosed on.
  • The pipeline itself represents the legal process through which homes are foreclosed on, repossessed and resold.
  • On the “output” side, we have an increase in housing inventory, resulting from new foreclosure homes coming back onto the market.

The ongoing scrutiny of foreclosure practices has narrowed the output side of the pipeline. But homes are still entering the input side at the same rate. It’s a classic bottleneck scenario, and it’s going to delay normalization of the housing market.

4. The Tightening of Credit

When the housing market started tanking in 2008, mortgage lenders restricted their lending guidelines. Gone are the easy-breezy days of subprime mortgages and stated-income loans. If you want to qualify for a conventional mortgage loan in 2011, you better bring your credentials. This includes a credit score of 620 or higher, a down payment of at least 5%, and a manageable level of debt. Steady employment is also a must. Don’t expect a lender to take you word on any of this — they are scrutinizing documents like never before.

Of course, this is simply a return to the days of sensible lending. Remember those days? Once upon a time, homeownership was considered a privilege instead of a right. You had to work hard for it. You had to save money and maintain a clean credit record. Then came the housing boom, when many of these requirements got watered down by lenders. Now we are back where we started.

All of the items on this list are suppressing the current housing market. But only the first three items are truly problems. The tighter lending standards are part of the solution — at least, in the long term.