‘It’s the economy’
The housing market is so important to the U.S. economy that it is hard to talk about real estate without thinking about the economy as a whole. Here, we try to make sense of the latest housing numbers.
This is the fifth and final part in our year-long series tracking luxury real estate’s road to recovery.
By Camilla McLaughlin
Not quite 12 months ago, when Unique Homes began a year-long chronicle of the road to the new normal, 2009 seemed to be the turning point, for both real estate and the economy. Yet, after more than a year of slow but steady gains, we find ourselves once again at a crossroads, an interval of waiting, watching and wondering, “Are we still on the road to recovery or on the cusp of a double dip?”
Concerns about the economy and the unemployment rate already had put the recovery in jeopardy when an added wallop came from a 27-percent decline in home sales in July. “There are serious headwinds to demand that are overwhelming the effect of the tax credit,” says Quinn Eddins, director of research for Radar Logic, a real estate data analytics company, referring to a soft labor market, the tenuous recovery as a whole and uncertainty about future home prices.
Among the more than 100 economists and real estate experts surveyed in August by MacroMarkets, only 21 percent, down from 60 percent in May’s survey, expected 2010 to end with a cumulative gain in home prices. Estimates of cumulative price appreciation through 2014 fell by almost a third, according to the economist Robert Shiller, who co-founded MacroMarkets, a developer of investment product and strategies. Even though the slope of the recovery path is flattening and a majority of those surveyed see little or no price improvement over 2009 until 2012, the forecast still calls for a $1.4 trillion gain in aggregate U.S. homeowner equity by 2014.
Putting the Numbers in Context
Weak home sales numbers don’t tell the whole story, cautions Mark Dotzour, chief economist for the Real Estate Center at Texas A&M University, noting the boost sales in 2009 received from the first-time-buyer tax credit that was effective January 2009. Without another tax credit, Dotzour said, monthly sales for 2010 will likely exhibit significant variance from 2009, and a true reading of housing market conditions may not be possible until June or July 2011.
“We were expecting to see some pull back in home sales after the tax credit expired,” said RE/MAX CEO Margaret Kelly. “It’s hard to know what will come next in this market, but we’re looking for a return to slow, steady growth by the end of the year.” Prices in the RE/MAX National Housing Report based on closed transactions in July in 54 metropolitan areas were off about a half of a percentage point from June, but inched upward over July 2010.
Another positive is the rebound of pending sales in July. Some observers, including Freddie Mac, see this as a good indication that perhaps the recovery from the tax credit would be faster than some anticipate.
“Nationally, we are still looking at 5 million plus homes sold this year and historically that’s very good,” says Jon Cook, president of Prudential California Realty.
National or even statewide data doesn’t always tell the local story. “Recent national reports just don’t apply, especially in supply constrained markets,” observes Mark McLaughlin, CEO of Pacific Union Real Estate, regarding the Bay Area. California sales in July were off by 20.8 percent compared to the prior year, but McLaughlin describes the San Francisco market as robust, especially compared to 2008.
California median home prices are up 10.4 percent compared to July 2009, a gain of 28.4 percent from the low of February 2009. Specifically, from early 2009, San Diego experienced a 19 percent increase, Orange County 21.5 percent and the Palm Springs area 29.4 percent. San Francisco has had the greatest gain — up 52 percent. There is a 5.8-month supply of homes on the market in the Golden State, an increase from a four-month supply in July 2009 but still less than six months, which is typically considered a balanced market.
In Florida, although July sales were almost 14 percent lower than July 2009, the number of sales year-to-date is up 15 percent. Miami, posting a 33.7-percent year-over-year increase in pending sales in August 2010, could be well on the way to recovery, according to Jack Levine, chairman of the Miami Association of Realtors, who expects his area “to outperform other markets throughout the U.S., due to its international appeal.”
Luxury Leads the Way
A year ago, the upscale market was virtually immobilized with affluent consumers in a watch and wait mode. Scarcely 12 months later, luxury real estate is the comeback story of the recovery. By June, $1 million-plus sales were up by 35 percent nationally from June 2009. While overall home sales plummeted in July, sales for homes priced at $1 million and up nationally increased 6 percent year-over-year.
“Our activity is up over last year” especially for $1 million-plus properties, says Linda Lafferty, regional senior vice president of Coldwell Banker in Palm Beach, Fla.
In Massachusetts, the overall number of $1 million-plus homes selling statewide in the first six months is up 61 percent over 2009. Nantucket had the largest gain, a 186-percent increase, followed by Hingham with 90 percent and Westin with 86 percent. Wellesley, Newton and Lexington had the greatest number of sales.
In his company, Cook says, “second quarter closed sales in the $2 million-plus range were up in almost every region,” with the most closed transactions since the second quarter of 2008.
Changes in lending, newly realistic sellers and a renewed interest in home are motivating consumers.
A year ago, jumbo loans were expensive and difficult to get. Today, jumbo rates hover near historic lows and major lenders have eased accessibility. Most importantly, according to real estate professionals, more affluent sellers understand the current market and are adjusting prices accordingly. “Affluent buyers are absolutely seeking value. There is plenty of wealth with the discretion to spend but they are insisting they get the best deal possible,” explains McLaughlin.
“When we look at the attitudes of affluent consumers toward building or buying a home, we see a statistically significant increase in the expectation to do so during the next 12 months as compared to attitudes during 2008,” says Pam Danziger, president of consumer research firm Unity Marketing. Approximately 11 percent of those recently surveyed by Unity Marketing plan to build a new home in the coming year compared to only 3 percent in 2008.
Sales, Not Prices
Looking ahead, the road to recovery for luxury is not without a few bumps in the road. More upscale homes will be subject to foreclosure, a trend that is already evident in a number of areas. Getting distressed properties sold will be important to any recovery, Cook emphasizes.
In the end, the real estate market is all about supply and demand. Going forward, the emphasis should be on the number of sales rather than prices. Real price appreciation won’t occur until inventories are in balance.