The news out of the housing market is not reassuring: New mortgage delinquencies are on the rise, pending home sales declined 30% in May and the federal government owns 46% of the nation's foreclosed homes (REOs, or "real estate owned" by lenders).
So does this point to lower home prices? That depends on macro issues such as interest and foreclosure rates and on local market conditions such as inventory, household incomes and employment.
The cliché "all real estate is local" is certainly true in a broad-brush way, but it's equally true that some trends cut across local and even regional markets. Though some of the evidence is anecdotal, the national market appears to be divided into three categories of buyers:
Middle-income households which took advantage of the federal tax credits to buy homes at prices under Federal Housing Administration (FHA) ceilings for conventional loans.
"Bottom-fisher" investors snapping up distressed properties for cash.
Overseas investors seeking to put their capital to work in "bargain-priced" U.S. real estate.
The question of whether prices are heading lower in any specific market may well hinge on the activity of one or more of these pools of buyers. Those areas with sustained interest from qualified or cash-heavy buyers may well rise, while areas with little buying activity might continue slipping.
This is supported by the latest S&P Shiller-Case Index, which found that prices in San Francisco have risen 18%, while home values in hard-hit Las Vegas are still declining.
Higher Mansion Foreclosures
Analyses of sales by zip codes and price levels have found that transactions in areas with prices below the FHA conventional loan caps -- $271,050 in many parts of the country and as high as $729,750 in pricey zip codes -- rose sharply between January and May 2010 as buyers took advantage of federal tax credits. (You can find the FHA loan limits for your area at fhainfo.com.)
Homes priced well above the FHA guidelines, requiring hefty down payments and jumbo mortgages, are not doing as well. Indeed, the percentage of seriously delinquent $1 million-plus loans rose to 13.3% in February, 50% higher than the 8.6% overall delinquency rate.
While sales have surged in lower priced homes in desirable areas such as San Diego -- inventory fell to a mere 2.6 months earlier this year -- higher end homes are languishing. It would take 12 months to move the homes above $1 million at current sales rates in San Diego county, and three years to unload the inventory of residences above $2 million.
Bargain Hunting by Cash Buyers
Cash buyers, a code phrase for investors rather than regular home buyers, accounted for fully 30% of all sales in the huge Southern California metropolitan market in February of this year. Cash buyers have driven up prices in beaten-down markets such as San Diego by up to 14%.
Much of this cash buying has centered on foreclosed properties -- REOs in real estate parlance. In the first quarter of 2010, REO transactions accounted for fully 31% of all residential sales. To put that in context, there were 1.2 million foreclosure sales in 2009, more than 25 times the amount logged just four years earlier in 2005 at the top of the housing bubble.
Ironically, as prices rise in response to this investor demand, the number of "bargains" falls. What remains to be seen is if these cash buyers plan on "flipping" their investments for a quick profit -- a plan which depends on prices continuing to rise and inventory staying low -- or hold them as rentals.
According to reports from heavily discounted markets such as Miami, foreign investors are buying condos for cash. Condos that once fetched $190,000 can be had for $75,000 to $100,000. Europe-based buyer Leroy Jean Francois has bought 47 condos this year alone for clients in France and Switzerland.
Going forward, the question about housing prices boils down to this: Will buyers continue to step in and bid up prices with strong demand, or is the tax-credit/bargain-basement buying rush fading? With sales falling off, it's impossible to tell if it's the buying interest decline or the sales rise that's temporary.
Once that's clear, we'll be able to forecast the probable direction of house prices.