A Robust Housing Market – 2010’s Biggest Surprise?

Thursday, January 7, 2010

1013170_new_homes_constructionMention “housing market” and people’s shoulders sag. Thoughts turn to foreclosures and shrunken equity. Nothing good is foreseen, just expectations of more foreclosures, adding to the already over-saturated market. And now the Federal Reserve is stepping away from buying mortgage securities, even as the media reports banks are unwilling to lend.

However, in spite of these low expectations, the housing market could not only regain its footing in 2010, it could become robust. Here’s why and how we can take advantage of it…

Instead of being perpetually mired down, I believe the housing market is recovering. The following important factors are improving:

Consumer confidence – important for people to make long-term commitments, like buying a home. As described in earlier postings, the various factors that produce confidence (e.g., jobs) are already improving. We are likely on the cusp of having confidence follow suit.

Demand – as always happens in the housing market, a slow sales period creates a growing pool of potential (pent-up) buyers. People are prolonging their stay in rentals, and family formations continue to add to the number of would-be buyers.

Interest rates – still attractive, and houses continue to be more affordable than in previous years

Banks/lenders – they are regaining confidence that the housing market is returning to normal at its current price level and that their improved lending requirements are producing sound loans.

Now, let’s look at the housing market’s segments:

Foreclosed homes: Although foreclosed houses are still coming to market, people now are aware that buying a cheap, foreclosed house can have hidden costs and risks. They come as-is with no guarantees – only the knowledge that the last owners couldn’t afford mortgage payments, much less maintenance. Also, foreclosures are often clustered, meaning the neighborhoods can be less desirable.

Buying will continue, but not necessarily by mainstream buyers. It’s a good market for a specialized purchaser: someone with the willingness, time and energy to take on the risk and fix whatever is wrong. The “flipping” we read about isn’t a return of speculative activities – rather, it is a sensible step of moving a home from a questionable/undesirable state to a desirable one.

Owner-occupied homes: As in all normal markets, the buying will be best in sought-after locations. Everyone wants a low price, but when it comes to buying a long-term asset, particularly a home, people are willing to pay up for desirable characteristics.

New homes: Slow to recover, so far. But don’t think of new houses as higher-priced versions of owner-occupied homes. They come with bells and whistles (e.g., green technology), requiring no added expense and turmoil from remodeling and updating. Just like with autos, buying new means minimal repairs for some time. And a shiny, new purchase is attractive to many people.

Second homes: Why not? With prices down and financing good, all it takes is a down payment, an adequate income and the desire – the same as always.

Finally, here are my thoughts on taking action:

A note on price level: Do not expect a quick jump in prices. Rather, think of the current price level as the foundation that will first be affirmed, then slowly built upon depending on how fast buyers reenter the market.

Own and want to sell?

My guess is that waiting until the market gets going (late spring/early summer) is the best route. People are still wary, so an early listing might not get the best price for the year.

Want to buy?

Early shopping could pay off. But, with prices likely not rising much this year, you probably can make a good purchase later on as well. Increased activity will encourage new listings, so you could find exactly what you’re looking for by waiting.

Want to invest in the trend?

Consider homebuilders. With sales well below previous highs, companies have made adjustments to reestablish their operations and finances at lower levels. (They have also reworked their home designs to match buyers’ changed desires.) A moderate increase in sales could produce good earnings growth.

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John Tobey on Seeking Alpha

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January 2010