Opinion: The Housing Crisis Is Over

May 6, 2008; Page A23
By CYRIL MOULLE-BERTEAUX

The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.

How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won't happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.

Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.

Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what's going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.

The boom made housing unaffordable for many American families, especially first-time home buyers. During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much.

Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the bubble to burst.

Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in.

The next question is: Even if home sales pick up, how can home prices stop falling with so many houses vacant and unsold? The flip but true answer: because they always do.

In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.

The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in "months of supply" terms. That's the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high – but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.

Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually. Inventories will drop even faster to 400,000 - or seven months of supply - by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won't stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.

Many pundits claim that house prices need to fall another 30% to bring them back in line with where they've been historically. This is usually based on an analysis of house prices adjusted for inflation: Real house prices are 30% above their 40-year, inflation-adjusted average, so they must fall 30%. This simplistic analysis is appealing on the surface, but is flawed for a variety of reasons.

Most importantly, it neglects the fact that a great majority of Americans buy their houses with mortgages. And if one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one's income is required to be able to make the mortgage payments on the house. Today the rate on a 30-year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today's house prices to the 1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading.

This is all good news for the broader economy. The housing bust has been subtracting a full percentage point from GDP for almost two years now, which is very large for a sector that represents less than 5% of economic activity.

When the rate of house-price declines halves, there will be a wholesale shift in markets' perceptions. All of a sudden, the expected value of the collateral (i.e. houses) for much of the lending that went on for the past decade will change. Right now, when valuing the collateral, market participants including banks are extrapolating the current pace of house price declines for another two to three years; this has a significant impact on the amount of delinquencies, foreclosures and credit losses that lenders are expected to face.

More home sales and smaller price declines means fewer homeowners will be underwater on their mortgages. They will thus have less incentive to walk away and opt for foreclosure.

A milder house-price decline scenario could lead to increases in the market value of a lot of the securitized mortgages that have been responsible for $300 billion of write-downs in the past year. Even if write-backs do not occur, stabilizing collateral values will have a huge impact on the markets' perception of risk related to housing, the financial system, and the economy.

We are of course experiencing a serious housing bust, with serious economic consequences that are still unfolding. The odds are that the reverberations will lead to subtrend growth for a couple of years. Nonetheless, housing led us into this credit crisis and this recession. It is likely to lead us out. And that process is underway, right now.

Mr. Moulle-Berteaux is managing partner of Traxis Partners LP, a hedge fund firm based in New York.

Atlanta's Hot Housing Market

Why Now is the Time to Buy a Home

Newcomer Magazine April/May 2008

by Whitney Brennan


Hillside at Chastain’s traditional brick homes are situated near historic Chastain Park.

You’ve picked a great time to relocate to Atlanta. If there were ever a time to move to the ATL and buy a home, now is it. The area is experiencing phenomenal growth, and Metro Atlanta has become one of the top job producers in the nation—by 2020, another 2 million people are expected to move to Atlanta, which is the largest population increase expected in the nation. Because of the current home buying market, some of these 2 million people may want to consider moving now. With builder incentives and great prices, interest rates at historic lows, a healthy supply of homes, and the fact that buyers get more for their money in Metro Atlanta, the home buying market in Atlanta is as good as it gets. Right now is truly the time to buy.

“The number of homes available in Metro Atlanta was at an all-time high in the last quarter of 2007,” says Steve Palm, president of SmartNumbers, a service providing analysis and forecasting for the real estate business. As a result of these high inventories of homes, builders and developers are offering some of the best deals the area has ever seen to eliminate some of this inventory. From Jan. 25 through Feb. 17 this year, in what was aptly called the Sale of a Lifetime, John Wieland Homes and Neighborhoods offered a life-time structural warranty on new homes, as well as between $10,000 and $100,000 in bonus dollars on every home. Buyers could spend their bonus dollars in three ways: on price reduction, upgrades or financing. For example, a buyer could use some of the money to reduce the total price of the home, another part to have the basement finished and the remainder to buy down the mortgage for the first two years.

Founder John Wieland says, “I started the Sale of a Lifetime, because I realized that a lot of people were sitting on the sidelines, not buying. We had every home marked down. The sale was to accommodate those who were on the fence, still in the decision-making stage.”


A luxurious kitchen at the eco-friendly condo development eon at Lindbergh.

The sale was certainly a success—during the first six days, John Wieland Homes experienced a 100 percent increase in sales. Other builders and developers are seeking the same success. The Providence Group is offering no payments for six months—the company will pay new buyers’ principal and interest payments for the first six months of ownership. All Season Homes recently offered an incredible incentive to buyers in its Brickell community. The company would either pay the principal, interest, tax and insurance on a buyer’s new home in the community, or buyers could choose a free two-year lease on a BMW Z4. Monte Hewett Homes promises significantly discounted homes in all its neighborhoods, and Centex Homes also offers discounted homes, as well as its ongoing Hometown Heroes program, which provides a 2 percent discount on new homes to teachers, firefighters and police officers.

In addition, buyers at The Gramercy Townhomes, a “walking neighborhood,” receive 7 percent of the home price to spend as they want, such as on upgrades, price reduction, closing costs and more. New buyers at Paces 325, a community of luxury condos in Buckhead, receive 2 percent toward closing costs and one year of paid homeowners’ association fees. The Marketing Directors, known for its tremendous success in the sales and marketing of residential real estate, is selling the condos. David Tufts, president and founder of the Southeast division of the company, says, “Right now, there’s a healthy selection of homes available, and interest rates are very compelling. Rates continue to decline, and there is a broad range of programs available for financing. Prices and incentives in the marketplace are great.”

Although overall price is certainly important to home buyers, many have a greater concern. David Ellis, executive vice president of the Greater Atlanta Home Builders Association, explains, “Price is important, but what many buyers worry about is the monthly payment. How much is this going to cost me? This is a big deciding factor, and of course, this relates to interest rates, which are near record lows.” The GAHBA has launched its own campaign, Get Home Atlanta, to inform buyers about the incredible opportunities available in the housing market, including the low interest rates, great prices and builder promotions. Three other builders’ associations, Barrow County, Midwest Georgia and Westside, have joined the GAHBA for the 2008 Spring Parade of Homes Apr. 19-20 and Apr. 26-27. The event is free and open to the public—prospective home buyers will be able to view hundreds of new homes throughout the Atlanta region and choose the neighborhood that is right for them. This year’s event comes at a good time—because with the deals being offered in the marketplace, now is certainly the time to buy.

The wellness-inspired condo development Mezzo features luxurious master baths

Many of these incentives and great prices may be short-lived, but buyers should certainly keep their eyes open—while builders’ inventories are high, buyers’ incentives will remain a constant. “The amount of product available in the market is very high, so builders are willing to negotiate prices—John Wieland Homes is certainly willing to negotiate,” says Wieland.

In addition to the builder incentives and great prices, the housing market in Metro Atlanta offers plenty of choices. Indeed, the supply of homes is high, but the types of living options in the area are nearly limitless. Whether a buyer wants a single-family home, townhome, condo or loft in a petfriendly, eco-friendly, recreational, active adult, mixed-use or masterplanned community, Metro Atlanta has it. There’s even a wellnessinspired condo development. Mezzo, a boutique condo with only 94 unique residences, features spainspired elements and organic features designed to soothe, including Zen-style gardens, a eucalyptus steam room and a massage room. A climate-controlled pet respite, complete with a private bathing area, will certainly appeal to pet lovers.

Another noteworthy condo development is 1010 Midtown. The 35-story mixed-use tower features 443 one-, two- and three-bedroom signature residences and up to 50,000 square feet of retail space. Home owners will enjoy state-of-the-art amenities and features, such as stainless steel appliances, stone baths, expansive balconies, fitness center and multi-level clubroom with private deck overlooking Peachtree Street. A “Park in the Sky,” with swimming pool, cabanas and manicured gardens, completes the package. Jason Winburn, vice president of residential sales and marketing at Daniel Corporation, one of the property’s developers, says, “In addition to its prime location, buyers will appreciate the attention to detail. We took great care in making sure that the community offers incredible floor plans—what are upgrades at other developments are standard at 1010.”

Buyers looking for eco-friendly communities also will be pleased with the options in Metro Atlanta. Many of the area’s builders and developers are going green, producing homes designed to reduce energy costs and promote conservation. For example, both Monte Hewett Homes and Haven Properties ensure that every home they build is EarthCraft House and Energy Star certified. Monte Hewett’s West Village, a pedestrian-friendly community of townhomes and single-family homes, was recognized by the Atlanta Regional Commission as the 2007 Development of Excellence, and Monte Hewett’s Hillside at Chastain, a community of 11 luxury estate homes, features an underground storm water detention pond with a community park above. Haven Properties’ homes, such as those at recreational community Chapel Hills Golf & Country Club, are 30 percent more energy efficient than homes built using standard construction. (For more information about recreational communities, turn to page 20.) Another green community of note is eon at Lindbergh, a Dawson Company and Lane Company development featuring 352 one- and two-bedroom EarthCraft-certified condos—free recycling is offered to all residents. For those seeking environmentally-friendly loft living, Chamblee’s Eco Lofts is Atlanta’s first-ever eco-friendly condominium development powered by 100 percent clean, renewable wind energy.

Home buyers seeking communities with a master plan will certainly not be disappointed by the options in Metro Atlanta. Indeed, master-planned communities are a growing trend in Metro Atlanta real estate. These types of communities generally encompass a large amount of land and include a tremendous amount of recreational amenities such as lakes, golf courses, bike paths, jogging trails and parks. Builders and developers of master-planned communities anticipate the future needs of residents and include these amenities in the original plans. Laurel Canyon, a master-planned mountain-golf community in Canton, features amenities such as a fitness center, children’s play park, water park, a party deck overlooking the Blue Ridge Mountains and an all-sports court. Laurel Canyon comprises four neighborhoods—Longleaf, High Point, Horizons and Seasons, an active adult community—and many of the homes offer breathtaking golf course or mountain views. A truly unique master-planned community is Le Jardin in Fairburn. Inspired by nature and the arts, the community will feature spa services, sculpture gardens, internationally commissioned art and the first-ever American replica of Monet’s Water Garden.

In addition to great deals and prices, low interest rates and a healthy selection of living options, Metro Atlanta—when compared to other metro areas—offers home buyers more for their money. David Tufts of The Marketing Directors explains, “Home buyers need to know how reasonably priced homes in Metro Atlanta are, as compared to the global marketplace. In New York City, homes are roughly $1,500 a square foot, while homes in Metro Atlanta are about $300 a square foot. So, in the grand scheme of the marketplace, Metro Atlanta is very affordable.” John Wieland agrees. “John Wieland Homes builds in four other major cities, and what buyers get right now in Atlanta is really terrific. They get a lot of house, a lot of features and a lot of quality for their money.”

1010 Midtown, a 35-story mixed-use condo development, will feature up to 50,000 square feet of retail space.

Clearer skies on horizon

Housing market: With its robust growth rate, Atlanta is set to bounce back sooner, stronger than many areas.

By Seth Weissman, Dan Forsman
For the Journal-Constitution
Published on: 04/14/08

The reports of the demise of Atlanta's housing market have been greatly exaggerated.

The much publicized housing bubble was never more than a small bump here in Atlanta. In parts of Florida, California and Nevada, housing prices doubled and tripled between 2001 and 2006. During the same period, home prices in Atlanta increased a slightly higher than normal 4 percent to 5 percent per year. Price increases in other parts of the country were unsustainable, and what went up eventually came down. Not surprisingly, where prices went up the most, they also came down the most. For all the bad press about housing, home prices in the Atlanta region fell less than 5 percent over the last year.

While fear and uncertainty have caused the number of overall home sales to fall sharply in Atlanta and around the country, home prices here have not fallen anywhere near as much. This is because while housing is a commodity, it is also a place where people live. The majority of home moves are discretionary. If the market is unfavorable, discretionary buyers and sellers sit on the sidelines. This can cause a decline in the number of homes sold without having much of an effect on prices.

Home prices in the Atlanta region are somewhat immune to a large price drop because we benefit from a wonderful safety net. Our metro region adds about 150,000 people per year. Between 2000 and 2006, our region added 856,266 people, a growth rate that was the highest in the nation. Almost 2 million additional people are expected to move here over the next 12 years. With so many new families moving to Atlanta, the demand for housing will remain strong.

While there are more than 100,000 homes on the market today, it will not take long to absorb them based on our current rate of growth. This is particularly the case since homebuilders started cutting back on new construction three years ago and permits for new homes have now fallen dramatically.

Home buyers are confused about getting a mortgage and the large number of homeowners at risk of being foreclosed. Despite all the hoopla about a credit crunch, it is surprisingly easy to get a mortgage if you have decent credit. While the same cannot be said for buyers with bad credit, this represents less than 10 percent of the market.

The degree to which foreclosures will stress our local market will depend on what actions our federal government takes to solve the problem. However, foreclosures are highly concentrated in certain neighborhoods rather than being evenly distributed throughout the metro region. As a result, housing markets in desirable neighborhoods with low foreclosure rates are already showing signs of strengthening.

Less desirable neighborhoods hard hit by foreclosures may limp along for years in a recurring tale of rich neighborhoods getting richer and poor ones getting poorer.

Smart housing decisions tend to boil down to a focus on location. While there are many factors that make a neighborhood desirable, the more important ones include quality homes, good schools, low tax rates, low crime rates and good access to work centers and shopping. Driven by traffic congestion, an aging population and changes in consumer preferences, what is considered a good location is also changing. There is a reason that all those condominiums and mixed-use developments are being built - they are filling a demand from aging baby boomers and young professionals. While developers may have gotten a bit ahead of themselves in this area, the smart money is on the demand for this type of housing to grow exponentially over the next decade.

Housing prices in Atlanta, not having fallen much, should not have far to go to predictably rebound. In a few years, due to the health of our local economy, housing prices should be higher than at the peak of the previous cycle.

Sellers whose homes are worth less than they were a year ago and who psychologically feel poor should not have to wait too long to feel better about their circumstances. Of course, rather than waiting to sell until prices recover, savvy sellers have figured out that if they can get an equally good deal in purchasing another home, they are still ahead of the game.

A $200,000 home in Atlanta in 2001 was likely worth $260,000 in 2006. With a 5 percent drop in housing prices, that house today would be worth $247,000. While a $47,000 increase may not seem like much, as a rate of return on the typical buyer's cash investment, it is very healthy. Housing is and will continue to be a tremendous builder of wealth for buyers who can ride out the periodic cycles in the market.

A strong buyer's market and low interest rates are allowing buyers to get great deals on housing. As the spring market gains momentum, the best deals are being snapped up. The advice of "buy low, sell high" has never been more apt. Buyers should act accordingly.

> Seth Weissman is senior counsel to the Georgia Association of Realtors. Dan Forsman is president and CEO of Prudential Georgia Realty.

JOHN OVERMYER / NewsArt

Selling in a tough market best left to the pros

INSIDE ADVICE

By John Adams
Contributor
Published on: 03/16/08
In years past, the metro Atlanta real estate market has, on occasion, been so sizzling hot that simply placing a "for sale" sign in the front yard might generate multiple purchase offers in a single weekend. Some areas were so sought-after that potential buyers would bid against each other for the right to own your home. But today is not one of those times.

Buyers seem to be in a hibernation mode, under the mistaken impression that home values are actually falling, waiting nevertheless for an unexpected sign from the oracle.

In this market, if you need to sell your house, you need a real estate agent. In addition to the experience they bring to the table, the selling process involves a lot of work. Here are some of the things an agent can do for you better than you can do for yourself:

• Provide you with current information on what's sold recently in your neighborhood, as well as what the competition is offering. Agents can even find out about homes "under contract" and other homes that may be coming on the market in the near future. This market intelligence is vital today because your home's value is a function of what it takes to buy similar properties.

• Assisting you in the accurate completion of your Seller Property Disclosure Statement. While this form is not mandatory, you are required to disclose any conditions or circumstances surrounding your property that might negatively affect its value and that are not readily discoverable in a thorough inspection.

• Giving you advice and suggestions on what improvements to do (and what not to do) to make the house more attractive to buyers in your target price range. Owners waste millions of dollars yearly having the wrong home improvements made in hopes of commanding a higher selling price.

• Advertising your home in the proper media channels so that the maximum number of potential buyers is exposed to information in a timely manner. Your agent's real strength should be in marketing, and that is the art of gaining an advantage over the competition through the use of information.

• Placing your home in the Multiple Listing Service is a critical element in your marketing plan, because it enables all the agents in metro Atlanta to see that your home is available and that you will cooperate and pay them an appropriate fee for delivering their buyer to your doorstep. Remember that the hottest part of the buying market is corporate transfers into town. They have a real need to buy quickly, and most have cash from the sale of their previous home to the company relocation firm. And they don't sit in their hotel rooms calling "for sale by owner" ads. Instead, they work with successful agents.

• Getting your home viewed by as many agents as possible in "caravans" where agents go out in groups and simply see what's on the market. It's funny how many times a house will be sold by an agent who saw it last week on caravan. But if an agent previews a house, it becomes part of their mental inventory, and tends to sell more quickly. In addition, your agent will "talk up" your home to other agents as a good deal. This type of promotion would not be well-received if it came from you.

• Dealing with prospective purchasers who often have questions that they are reluctant to ask the homeowner. And screening out prospects who have no real chance of affording your home but are just window shopping. In addition, your agent will show your house to prospects when you are not available to do so and can hold open houses that allow nosy neighbors to view your home. These neighbors may have friends or relatives that want to live nearby, so it's smart to let them look all they want.

• Analyzing offers and handling negotiations between the parties are other parts of the agent's job. Because the agent has no emotional stake in the property, she can focus on bringing the parties to a "meeting of the minds" rather than having buyer or seller feel resentful. The goal here is to get the house sold, and agents can prevent the parties from killing their own deals.

• Seeing the deal through to closing is a major job. Your agent doesn't get paid until the papers are signed, sealed and delivered.

Uncontrolled decline in prices? Numbers say no

INSIDE ADVICE

By John Adams
Published on: 03/09/08 AJC HomeFinder
I recently heard a report on the national news that home values were in a "free fall." Not being exactly sure what a free fall is, I looked it up. A "rapid, uncontrolled decline" was the meaning I settled on. If, in fact, home values were in a free fall, that would be very bad for those of us who own real estate, especially those who have invested a lot in their own homes. And since the average American family has a large part of their net worth tied up in their house, a "free fall" in home values could spell trouble for many reading this column.

Thus, I was pleasantly surprised when the most widely trusted home price index for the United States was released recently. It showed that, in fact, home prices are not in free fall. Instead, it showed that Georgia home values for the fourth quarter of 2007 were, in fact, slightly higher than they had ever been. The Office of Federal Housing Enterprise Oversight (www.ofheo.gov) is charged with supervising Fannie Mae and Freddie Mac, both government-chartered "market-makers" for home loans. The office has access to data on home sales and refinancings from all over the United States. Here's what the house price index revealed.

Here are the facts:

• The oversight office's all-transaction HPI includes data from home sales and appraisals for refinancings. That index rose 0.1 percent over the latest quarter and 0.8 percent for the year 2007. The "all-transactions" index is the broadest measure of home values available anywhere. I realize that a national average home price increase of less than 1 percent is statistically no increase at all. But after reports of my home's value being in a free fall, an increase of 0.8 percent nationally starts to sound pretty good. Remember, this number includes California, Florida and all the states where recent unsustainable price run-ups are being paid back today.

• The states with the greatest rates of appreciation between the fourth quarter of 2006 and the fourth quarter of 2007 were: Utah (9.3 percent), Wyoming (8.3 percent), North Dakota (7.9 percent), Montana (6.9 percent), and Alaska (6.0 percent). None of these states had participated in the speculative frenzy that set up our current slowdown.

• The states with the lowest rates of appreciation for the same period were: California (-6.6 percent), Nevada (-5.9 percent), Florida (-4.7 percent), Michigan (-4.3 percent), and Rhode Island (-2.6 percent). The first three are suffering from their own popularity, Michigan is in a general decline, and Rhode Island is approximately the size of Fulton, Dekalb and Gwinnett counties added together, so it's hard to say what's really happening there.

• Georgia's price appreciation for 2007 ranked 24th on the list of states, and indicated that the typical home here increased in value by 2.55 percent during the year. It also showed a small increase of 0.76 percent in the fourth quarter alone.

• The Atlanta metro area ended the year with a small, but important increase as well. The all-transaction index showed the average metro area home was up 1.67 percent for the year, with a 0.67 percent increase in the difficult fourth quarter.

Some of you may remember that the widely publicized S&P/Case-Schiller index of home prices came out earlier this year, and it showed home prices in Georgia declining, although only slightly. I chose not to dwell on those numbers, and I want you to know why.

The Case-Schiller national index uses only resale data from county tax records in 37 states, while the office of oversight index uses Fannie Mae and Freddie Mac appraisal data from sales in all 50 states. In addition to having complete national coverage, the oversight office index expands its data by including refinancings, giving it a much broader base of information from which to draw conclusions.

The HPI is based on more than 34 million repeat transaction over 32 years. I guess this means I am still in denial about the broad-based "free fall" in housing values across the nation and here in Georgia.