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Real Estate Markets in a Recovering(?) Economy

Wichita Area Economic Outlook Conference October 1, 2009 Dr. Stanley D. Longhofer Director, WSU Center for Real Estate. Real Estate Markets in a Recovering(?) Economy. The Housing Crisis that Was. The recent housing market downturn has been unprecedented in the post-WWII era

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Real Estate Markets in a Recovering(?) Economy

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  1. Wichita Area Economic Outlook Conference October 1, 2009 Dr. Stanley D. Longhofer Director, WSU Center for Real Estate Real Estate Markets in a Recovering(?) Economy

  2. The Housing Crisis that Was • The recent housing market downturn has been unprecedented in the post-WWII era • Deep declines in: • Existing home sales (-35% from peak) • New home sales (-75% from peak) • Construction (-80% from peak) • Nationwide in scope • Past downturns have been regional

  3. Existing Home Sales Source: National Association of Realtors

  4. U.S. New Home Activity Source: U.S. Bureau of the Census

  5. Why Was it a National Crisis? • In some ways, it wasn’t • While sales and construction have declined nationwide, price movements have varied across the country • Local market conditions drive local market outcomes • In this downturn, however, most local markets were heavily impacted by a “national” factor: • The relaxation and subsequent tightening of mortgage credit standards

  6. Tightening Mortgage Credit Underwriting Standards Source: Board of Governors of the Federal Reserve System

  7. What about Home Values? • The average decline nationwide has been much smaller than most believe • Many markets (including most in Kansas) have continued to appreciate during the downturn • In the worst markets, existing home price measures probably overstate the true magnitude of value declines

  8. Home Values Haven’t Fallen as Much as You Think -6% from peak -30% from peak Sources: FHFA and Standard & Poors

  9. Why Such a Big Difference? • Both indexes are designed to provide a “constant quality” measure of house price changes • Differences in the indexes: • Case-Shiller index is “value weighted” • FHFA index includes both home sales and mortgage refinancings • Case-Shiller index is heavily influenced by distressed sales • Case-Shiller index is biased toward large, coastal markets

  10. FHFA HPI by Case-Shiller Coverage –9% from peak –8% from peak –2% from peak Sources: WSU Center for Real Estate using data from FHFA and NAR

  11. Home Values Haven’t Fallen as Much as You Think • 43% of markets (166 out of 383) have seen prices increase over the past two years • Both Wichita and Kansas as a whole have seen modest appreciation over this time frame • Only 22 markets have seen price declines in excess of 30% over the past two years • Other than Las Vegas (41% cumulative decline), all of these markets are in California or Florida

  12. Bad Markets May Not Be So Bad • The markets with the largest measured price declines are markets with a large number of distressed sales • Poorly maintained properties • Lenders pressured to get REO off their books • Does a distressed sale really reflect the market value of non-distressed properties?

  13. Distressed Sales Are Making Bad Markets Look Worse than They Are Homes in Central California that were purchased by high-risk borrowers have seen greater price declines than homes purchased by low-risk borrowers, holding all else constant. Source: “Recent Trends in Home Prices: Differences across Mortgage and Borrower Characteristics,” OFHEO Research Paper, August 2008

  14. When Will the Markets Recover? • Measured by sales and construction activity, this real estate downturn is unprecedented in the modern era • Price declines, while widespread, have not been as deep as is popularly believed • With home sales and construction having fallen so far, should we expect a strong rebound when the markets recover?

  15. Are Home Sales too “Low”? Historical Averages: KS = 46 US = 39 Source: WSU Center for Real Estate using data from NAR and U.S. Bureau of the Census

  16. Is Construction Activity too “Low”? Historical Averages: KS = 7 US = 10 Source: WSU Center for Real Estate using data from U.S. Bureau of the Census

  17. U.S. Housing Inventories Are Improving, but Have Further to Go Sources: National Association of Realtors and U.S. Bureau of the Census

  18. When Will Housing Markets Rebound? • There is no reason to expect that sales activity will make a dramatic rebound • Sales are not abnormally “low” • Employment growth may be slow • Financial markets have not fully normalized • A new era of thrift?

  19. When Will Housing Markets Rebound? • There is still excess inventory in many markets • There was clearly overbuilding in “boom” markets • Distressed properties are still supply on the market and compete with non-distressed homes • Construction activity will be especially slow • Irrelevant inventory doesn’t matter

  20. When Will Housing Markets Rebound? • Prices have likely bottomed • Most markets never saw steep declines • The “worst” markets may rebound as distressed sales become less common • Remember: All real estate markets are local

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