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Charleston Trends and Forecast
Welcome to my presentation. I was unable to make this entire presentation on April 14th at the Friends of the Carter Center networking event at the College of Charleston due to time constraints. So I will do my best to talk you through each slide and help you understand what I trends I am seeing in the Charleston and U.S. economy.
I actually told this joke before I started the presentation. ☺
Young Chuck, moved to Texas and bought a donkey from a farmer for $100. The farmer agreed to deliver the donkey the next day. The next day he drove up and said, "Sorry son, but I have some bad news. The donkey died." Chuck replied, "Well, then just give me my money back." The farmer said, "Can't do that. I went and spent it already." Chuck said, "Ok, then, just bring me the dead donkey." The farmer asked, "What ya gonna do with him?" Chuck said, "I'm going to raffle him off." The farmer said, "You can't raffle off a dead donkey!" Chuck said, "Sure I can. Watch me. I just won't tell anybody he's dead." A month later, the farmer met up with Chuck and asked, "What happened with that dead donkey?" Chuck said, "I raffled him off. I sold 500 tickets at two dollars a piece and made a profit of $898.00." The farmer said, "Didn't anyone complain?“ Chuck said, "Just the guy who won. So I gave him his two dollars back." Chuck now works for Goldman Sachs in their OTC Default Derivative Department. Ironically, the “Goldman Gangstas” just declared a $1.5 billion profit this week after receiving TARP money just a few months ago. Amazing!
SFD = Single Family Detached (House) SFA = Single Family Attached (Condo/Townhouse) Months Inventory = "Current Inventory" divided by "Monthly Sales.“ This reflects how many months it would take to sell out of inventory at the current month's rate of sale. “Big Mama” = The Government “Go Go Days” = 2004-06
I am sure many of you already know these definitions but I included them just in case you don’t.
The Economy and Real Estate
The economy, real estate and stock market are all complicated just like my girl Denise Richards. There are thousand of variables that effect each industry everyday and the media and internet can spit out info at a lightening fast pace that is enough to confuse anybody. All this information overload makes it difficult to stay focused on the real fundamentals that matter to each segment of the economy. This is why the CMR has a disciplined and focused approach to evaluating and measuring the risk in the market.
Paradigm Shift in Finance
Everything happens for a reason! Credit is the engine for real estate since most transactions are leveraged. We just had a major transmission failure of the the U.S. credit engine that takes time to repair. This engine will never run in the same manner it did from 2004-07 so we will have to deal with the ramifications of the shift in financing. This shift was force consumers to save more and live within their means in the future.
Paradigm Shift in Finance
U.S. consumer spending was out of control. U.S. consumer living beyond means. U.S. consumer is addicted to credit. Wall Street profited from providing the “fix.” Enormous opportunities if have cash! Opportunities difficult because of credit contraction and tighter lending. Back to fundamentals.
I believe there are major opportunities in this market but they will be more difficult to achieve because credit is now very tight. We have a consumer who has been addicted to credit for many years and “Big Mama” and Wall Street acted like drug dealers straight out of Columbia. Due to this major contraction of credit there are many real estate players who are boxed in with projects and have run out of cash. Those with access to cash and credit will be able to pick up distressed and performing assets at discounted prices. There are also many real estate deals that are worthless and have no bids that will cause major problems for the banks that made the loans. In order to stay ahead of the pack investors will need to be very careful at measuring risk, stay disciplined and stick to the fundamentals.
“The trend is your friend.” The entire finance and real estate industry lost focus of risk management. Banks, Appraisers, Federal Reserve, Realtors, “Big Mama”, Credit Rating Agencies, Builders, Developers. This is now “Water under the bridge.” No point in dwelling on the past and playing the blame game.
After spending 10 years in the stock and real estate market I can not tell you how important it is to keep the trend as your friend. Those who fight the trend usually lose. Since 2000 when “Lending Gone Wild” got started up the entire financial industry lost focus of risk management and it is now biting us (the taxpayer) in the rear. Once “Lending Gone Wild” was shut down there has been plenty of blame to go around on who was at fault. There were many parties involved and knew what was going and others unknowingly were just busy making money. Regardless, it is now “water under the bridge” and in the past and we all must focus on the present and future. At the end of the day our clients want just one thing……THE TRUTH. So why not give it to them? Quit dwelling on how bad the media coverage is on the economy and communicate the truth with your clients. This is the entire purpose of the CMR. Take the noise out of the daily information overload and help piece together what is a very complicated economic puzzle so our clients can make better investment decisions.
Decline in Mortgage Lending Standards from 2001-2006
Source: Loan Performance
In 1989 the average down payment on a home was 10% vs. 2% in 2007. It is clear from the charts above that risk management from the financing side of the transaction was completely abandoned. It was “Lendapalooza” on a grand scale which helped brink this economy to its knees. The banks and Wall Street firms made a ton of money on the front end through commissions and fees. Let’s not forget that this engine was fueled by the securitization of mortgages. The problem that is displayed above is that they allowed practically anyone the ability to obtain a loan with no equity or documentation. These banks and lenders completely abandoned risk management. These slack lending standards are the prime reason that foreclosures and short sales are exploding across the nation.
U.S. Housing Price Trend….Boring!
As you can see from the chart above is that U.S. housing prices were consistently boring from 1950 until 2000. They averaged approximately 1.5-2% and stayed really close to the trend line. Then something amazing happened. Wall Street needed a new gig to generate billions of dollars in fees and Congress repealed the Glass-Stegall Act of 1933. The internet industry had blown up and we were heading for a recession so what was going to be Wall Street’s next big idea.
Thus the Perfect Storm was created. Viva La Lending! You can see the incredible spike in home prices that had not been seen in over 50 years.
Current Bailout Tab
$7,244,000,000,000 $7.244 TRILLION
Since December 12, 2007
Source: Congressional Budget Office, Federal Reserve, U.S. Dept. of Treasury
The current tab includes: Swaps, TAF, Stimupork, TALF, Bear Stearns bailout, Fannie and Freddie bailout, AIG bailout, Money market fund bailout, TARP, Citigroup bailout, Bank of America bailout, Foreclosure Relief, Purchase of Treasuries, and Toxic Asset Plan. More to come? Bet your future taxes on it.
Stages of Real Estate
e ag St 4
We are here.
Currently the Charleston real estate market is in the worst stage which is stage 4. Real estate is no different than the stock market or the weather because it runs in cycles. Each of these stages may run longer than the other but at the end of the day prices do not go up forever as so many believed during the “Go Go” days. The stages of real estate are explained below: Stage 1 – Market hits bottom. Stage 2 – Uptrend. The “Go Go” days from 2001-2007. Stage 3 – The market hits a peak….2006 Stage 4 – The downturn. 2007 – Until ?
Fundamental Analysis vs. Technical Analysis
What is Fundamental Analysis? What is Technical Analysis?
1. What to Buy 2. Segmentation of demographics and economic data. 3. Price/Rent Ratio 4. Sales comparison, cost and income approach.
1. 2. 3. 4. 5.
When to Buy Trend Analysis Moving Average Market Momentum When to Sell
Basically, there are two types of securities analysis – fundamental analysis and technical analysis. Fundamental analysis is what most of us are familiar with. When you see an analyst on television or read comments from an analyst in a magazine or news story, most often these comments come from fundamental analysts. A fundamental analyst tries to answer the question “What” to buy. They will study the company’s balance sheet, evaluate the management team, try to understand the quality of the company’s earnings. A technical analyst tries to answer the question “When” to buy and just as importantly, “When” to sell. A technical analyst wants to find the trend of a chart – is it trending up or trending down. Is the stock outperforming the broad market? How high, or in some cases, how low can the stock go? Unfortunately, there are very few on Wall Street who effectively combine the fundamentals with the technicals. In a sense, they’re playing the piano with only one hand. While that may be a way to play a simple melody, you can play much better music if you play the piano with both hands. In fact, our game plan is grounded in this philosophy of combining the fundamentals with the technicals, or playing the piano with both hands.
Supply and Demand
We all understand the basic forces of supply and demand. The same forces that affect prices in the supermarket also affect prices in the stock and real estate market. Stocks, sectors, and asset classes move in and out of favor just like produce in the supermarket.
We all understand the basic law of supply and demand; we have all experienced these forces at the supermarket. We inherently understand why there are lemonade stands in the summer and hot chocolate stands in the winter. Stocks and real estate move in and out of favor just like produce in the supermarket. In economics and real estate the first thing they teach you is that supply and demand dictates action on price. However most economists or real estate analysts do not even utilize the proper analysis of supply and demand. Why? The reason is that it is not taught.
5 Main Indicators
1. 2. 3. 4. 5. Existing Home Sales Inventory Building Permits Interest Rates Foreclosures
All 5 Indicators can have an impact on price. Key measurements of Supply and Demand.
The five main indicators that the CMR uses to analyze the market are shown above. These indicators are placed in an order of importance where the first three are the most important and the last two are lagging indicators. All five of these indicators have an impact on price which is why we monitor them on a consistent basis. I am merely monitoring these indicators in order to spot a major change in trend that will notify me of major buying or selling opportunities before everyone else.
Collect monthly data. Determine a Moving Average. (Sum of months 1 through 12 divided by 12) Calculate the Market Momentum. (Current 12 month MA – Previous Year MA) divided by Previous Year MA MM=Speed of Trend Trend = Change in Direction
The important aspect about the market momentum formula to understand is that trends DO NOT change in one month. You will notice that the market momentum calculation includes current 12 month moving averages and previous year moving averages. The National Association of Realtors and many other real estate groups are famous for releasing data and bragging about how sales improved X% from the previous month. These are very misleading statements to the public because trend changes do not occur that quickly. It takes two years worth of data just to create a market momentum chart. What the market momentum charts do is take the noise out of the data. Real estate moves in slow motion compared to the stock market so spotting trend changes is very predictable.
Existing Home Sales
Here is the most important indicator the CMR follows dating back to 1990. You will notice that over the past 19 years the Market Momentum has never really ventured to far below the trend line into unfavorable status. The Charleston real estate market has been very consistent for a long time and prices never appreciated at a severe level like certain markets in California have experienced in the past. This trend changed in 2005 when the market momentum began declining and switched to unfavorable status in September of 2006. I knew we had major issues at this point in time with the other variables in play in the market that was the equivalent of a red flag going up regarding the real estate market in Charleston. Now that prices are beginning to decline I believe there is a strong possibility that we could see the bottoming of sales volume. The Feb. 2009 sales volume of 333 transactions was the lowest number number of sales in the MLS since Feb. 1992.
Single - $32,111 per year Married - $64,222 per year 15% Income Tax Rate Single 28% DTI (After Taxes) - $637 Married 28% DTI (After Taxes) - $1274 Most buyers qualify for homes ranging from $100,000-$180,000 2926 out of 10,083 homes…..29% of inventory! Inventory in Charleston County out of whack.
I took this data from the Bureau of Labor Statistics. What I did is factor a 15% income tax rate into these average Charleston salaries and then estimate what an lending underwriter would determine these qualified buyers Debt to Income (DTI) would be per month. The conclusion is that most homebuyers in the Tri-County area can really only afford a home priced between $100,000-180,000. Taking this stat into account we can see how completely out of whack our inventory is when only 29% of the 10,083 SFD and SFA homes listed for sale in the MLS fall into this price range.
Tri-County (Detached & Attached) Supply and Demand Trends
Monthly Sales 2000 1800 Supply Units of Inventory (MLS) Demand Sales per Month (MLS) 1600 1400 1200 1000 800 600 400 200 0 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 0 4000 2000 6000 10000 8000 Current Inv 12000
The chart above is a supply and demand chart of all homes in the Tri-County area. What you will see is the inverse relationship that sales versus inventory has in the market. This is why these are two of my most important main indicators. You will notice how high demand (blue bars) was from 2004-06 which kept inventory at lower levels. Then the trend began to slowly change and an opposite effect on these two variables began to take place. If you were not monitoring thousands of transactions you could not have seen this coming. The March 2009 sales volume was lowest number hit since 1999 according to the MLS. There has been a major deterioration of demand in this chart which explains the build up of inventory in our market. As the price decline stage takes effect and homes become more affordable demand will increase and supply will decrease. Unfortunately this transition takes time in the real estate market compared to the stock market.
Counted Inventory – New Homes Berkeley County
I would like to thank William and Mary Lattimore of Coastal MarketGraphics for giving me the next three charts on the new homes market in Charleston. This is a very busy chart so let me help point out what is most important in these charts. In the top right corner of the slide you will notice how the total supply column of Non Finished Unoccupied (NFU) homes has been decreasing from 12 months back until the present time. This is good news since our market is currently overbuilt. There is no need for developers to add more inventory into a saturated market when we have over 10,000 homes for sale. This slide represents a great picture of the market correcting itself due to existing conditions. Another important piece of data on this slide to focus on is in the bottom right corner. At the present time, the Berkeley County # of Months Supply stands at 4.6 months, which is roughly two times higher than the ideal supply figure of 2 to 2.4 months supply. In my opinion, this is very encouraging news for Berkeley County that I will discuss in more detail later.
Counted Inventory – New Homes Charleston County
Charleston County has the most disturbing new homes inventory situation out of the three counties in the low-country. Charleston county still has 1391 NFU homes sitting on the market for sale, which is approximately 3 times higher than the ideal supply according to MarketGraphics. The other problem with this new home inventory in Charleston county is that it is generally priced higher than Berkeley and Dorchester counties because Charleston county includes areas such as Mount Pleasant, Isle of Palms, Folly Beach, Sullivans Island, and Dunes West. The new home inventory in Charleston county will feel the most pain because of the pricing aspect and lack of demand.
Counted Inventory – New Homes Dorchester County
Dorchester, which is smaller than Berkeley county, looks very similar to Berkeley county in terms of supply. Again, this is good news and as demand picks up since we are now in the spring and summer season of real estate I expect the new home inventory picture to improve.
Tri-County SFD Snapshot
Median Sold Tri-County Berkeley Charleston Dorchester North Charleston Summerville Goose Creek West Ashley Johns Island James Island Mt. Pleasant Daniel Island $ $ $ $ $ $ $ $ $ $ $ $ 197,000 172,500 236,500 165,000 149,990 170,000 165,500 215,000 185,250 235,000 384,000 639,900 $ $ $ $ $ $ $ $ $ $ $ $ PSF 124 103 152 86 81 88 91 124 127 150 158 249 MI 16.5 12.7 19.3 14.8 12.3 15.0 9.5 13.4 24.5 21.7 16.3 17.4
I highlighted in green the areas that are affordable according to my Tri-County income slide where I mentioned most people can only afford a $100,000-180,000 home. You will notice a consistent theme where Berkeley and Dorchester counties are much more affordable than Charleston county for obvious reasons. An important part of this slide to watch is the Months Inventory (MI) on the right. I expect these numbers will decline because we are now in the buying season for real estate. Unfortunately, due to the severe recession the Tri-County inventory has been building for the last few years and is at extremely high levels in many areas. These high level areas will experience larger price declines in the future.
Tri-County SFD $100,000-$200,000 Price Range
Supply & Demand $100,000-$200,000 Price Range
Months Inventory $115 Avg $/Sqft Poly. (Avg $/Sqft)
$8000 1st time homebuyer tax credit!
12 $105 Months of Inventory (MLS)
$ per Sq. Ft (MLS) $100
8 $95 6
$80 Jan-04 Apr-04 Jul-04 Oct-04 Jan-05 Apr-05 Jul-05 Oct-05 Jan-06 Apr-06 Jul-06 Oct-06 Jan-07 Apr-07 Jul-07 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09
This is a chart of the “sweet spot” of the SFD Tri-County market based on simple calculation of income. What you will notice is months inventory on the right side is standing at approximately 11 months right now. I fully expect this to decrease since we are now into the spring and summer seasonal period along with low interest rates and the $8k homebuyer tax credit. Yes, it is an excellent time to buy an affordable home in Charleston if you have a secure job with decent income and a down payment. You will also notice that the Price per Square.Foot on the left side of the chart peaked in 2007 and has declined approximately 14% since that time. This is a major decline for the low end of the market! However, we are seeing a slight adjustment to the upside in this segment of the market due to low rates and the tax credit.
Tri-County SFD Supply & Demand by Price Range
Current Inventory % 45.0% 40.0% 35.0% 30.0% Percentage 25.0% 20.0% 15.0% 10.0% 5.0% 0.0%
k 00 -1 $0 il+ m $1 k 99 -1 00 $1 k 99 -2 00 $2 k 99 -3 00 $3 k 99 -4 00 $4 k 99 -5 00 $5 k 99 -6 00 $6 k 99 -7 00 $7 k 99 -8 00 $8 k 99 -9 00 $9
YTD Sales %
SFD Price Range Source: MLS
This slide represents a basic supply and demand chart by price range for the TriCounty SFD market. When you see the maroon bar (YTD Sales) exceed the blue bar (Current Inventory) that is a good sign because demand is higher than supply. Again you are seeing the lower end of the market ($0-400k) gradually being worked off. The real action is in the $100-300K market because it is affordable. This is not rocket science everyone. The consumer is back to basics and most in the Tri-County can not afford anything less than $400k. Even the individuals and couples who can afford a more expensive home are moving down in price because everyone has lost so much money in real estate and the stock market over the past few years. We have now entered the “frugal economy” and the inventory sitting in upper end of the price range is at the highest risk of more severe price declines in the future.
Tri-County SFD Inventory Snapshot
Inventory 2500 Months Inventory 100.0
Inventory (# of Homes)
k 99 -1 00 $1 k 99 -2 00 $2 k 99 -3 00 $3 k 99 -4 00 $4 k 99 -5 00 $5 k 99 -6 00 $6 k 99 -7 00 $7 k 99 -8 00 $8 k 99 -9 00 $9 k 00 -1 $0 i l+ m $1
Price Range Source:MLS
We would prefer to have months inventory below 6 months but this is not a normal real estate market. It is obvious from this SFD inventory snapshot that the lower inventory levels are at the lower end of the price range, where real estate is affordable for most buyers. This is not a coincidence.
Months of Inventory
Mount Pleasant SFD Market Share of Tri-County by Price Range
k 00 $1 0k 99 -1 00 $1 k 99 -2 00 $2 k 99 -3 00 $3 k 99 -4 00 $4 k 99 -5 00 $5 k 99 -6 00 $6 k 99 -7 00 $7 k 99 -8 00 $8 k 99 -9 00 $9 il+ m $1
Price Range Source:MLS
A scary chart for the Mount Pleasant crowd. Notice the percentage of inventory in the unaffordable range of the market for each price range in the Tri-County. Once these more expensive homes sell that are sitting on the market you will see major price declines show up in our indexes.
Tri-County SFA Snapshot
Median Sold Tri-County Berkeley Charleston Dorchester Summerville Goose Creek West Ashley Mt. Pleasant James Island $ $ $ $ $ $ $ $ $ 172,250 124,900 187,380 123,000 123,000 120,000 181,850 193,500 161,150 PSF $ $ $ $ $ $ $ $ $ 154 113 175 84 84 88 107 130 148 MI 29.2 22.3 32.3 20.4 20.4 10.6 14.4 21.5 43.2
You have to be careful with SFA property. The median sold and PSF do not include the regime fees. You must factor the monthly regime fees into the equation to get a true sense of the cost to own a townhouse or condo. This snapshot tells the same story as the SFD snapshot.
Tri-County SFA Supply & Demand by Price Range
Current Inventory % YTD Sales % 60.0%
k 00 -1 $0 il+ m $1 k 99 -1 00 $1 k 99 -2 00 $2 k 99 -3 00 $3 k 99 -4 00 $4 k 99 -5 00 $5 k 99 -6 00 $6 k 99 -7 00 $7 k 99 -8 00 $8 k 99 -9 00 $9
SFA Price Range Source: MLS
Same story as the SFD snapshot. The demand is where the maroon bar (YTD Sales %) is higher than the blue bar (Current Inventory). The demand for SFA is in the $0-199k.
Tri-County SFA Inventory Snapshot
Inventory 1200 Months Inventory 160.0 140.0 1000
800 Inventory (# of Hom es) 100.0 Months of Inventory
$0 10 0k $1 00 -1 99 k $2 00 -2 99 k $3 00 -3 9 $4 00 -4 99 k $5 00 -5 99 k $6 00 -6 99 k $7 00 -7 99 k $8 00 -8 99 k $9 00 -9 99 k $1 m i l+
This chart demonstrates the high quantity of homes on the market (Red bar) vs. the Months Inventory (Blue Line).
New Building Permits
The new building chart is in un-chartered territory based on historical data. Although this chart hit -38, which is an all time low record the fact that new building permits has slowed down considerably is a good thing when you have a market that is overbuilt. What is really fascinating about this chart is how the momentum began to decline in January 2005. This sign of weakness was well in front of the time when real estate hit its peak in 2007. I believe we should start to see this chart bottom out soon since credit is so tight and there is a ton of inventory sitting on the market right now.
Tri-County Annual Housing Construction
Tri-County Building Permits
Single Family 12,000 Multi-Family Total Poly. (Total)
8,000 No. of Permits
0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
30 Yr. Conventional Mortgage Rates
11 Created by: Brad Rundbaken www.charlestonmarketreport.com 10
Mortgage Rate %
Source: Federal Reserve
4 Jan-90 Jul-90 Jan-91 Jul-91 Jan-92 Jul-92 Jan-93 Jul-93 Jan-94 Jul-94 Jan-95 Jul-95 Jan-96 Jul-96 Jan-97 Jul-97 Jan-98 Jul-98 Jan-99 Jul-99 Date Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Jul-05 Jan-06 Jul-06 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09
6 per. Mov. Avg. (Series1)
12 per. Mov. Avg. (Series1)
Here is a major bright spot in the real estate world right now thanks to the U.S. government. Yes, the government has artificially kept interest rates low by buying up our own treasuries which has helped the residential real estate market. You will notice how we are at low rates not seen in a long time.
Treasury Yield Story
This chart goes all the way back to 1962 and demonstrates the various interest rate stages we have been in over the years. Currently we are in a deflationary stage for real estate. This is evident in the action on home prices. I expect us to return to an inflationary period sometime in the future. Let us all hope it is not hyperinflation. I expect inflation to return and it will present difficulties for the real estate market as this will place major pressure on home prices to come down further.
Tri-County Distressed Real Estate
800 705 700 675 678 723
600 515 # of Units 500
400 316 300 205 174 158 107 100 315
373 287 251 210 177
0 Oct-08 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 www.charlestonmarketreport.com Berkeley Charleston Dorchester Tri-County
In order to get more detail on how this info is compiled go to: http://www.realtytrac.com/education/foreclosureTerms.html
Where Art Thou Foreclosures?
A recent Study by RealtyTrac found only 30% of foreclosures were listed for sale in the MLS in foru states including CA. Currently there are 634 Active “distressed” listings on the MLS out of 9696 listings. 13.5% of homes sold in Q1 2009 were distressed. Only 6.5% of homes listed in the MLS are “distressed.” (4/10/09) Based on the RealtyTrac study and my discussions with local REO brokers the Tri-County region could easily have 3000 homes in some stage of a short sale or foreclosure right now. This is a major problem that the real estate community needs to address ASAP. Where are all the foreclosures?? Reasons there is “invisible” distressed inventory: 1. System overwhelmed and takes time to process. 2. Banks do not want to write down losses. 3. Banks holding back inventory so prices do not fall to fast. 4. All mortgages have not reset. (See next slide) 5. Charleston prices are only recently starting to show declines. 6. An increasing unemployment rate in Charleston, declining real estate values and mortgage resets will continue to place pressure on many homes in the Tri-County area. Major problem that must be addressed within the community. Government programs will not fix the problem. There is demand but NO transparency for these properties. Solutions: 1.) A platform designed for the private (and where sensible) public purchase of assets - a market stabilizing process is involved. Essentially an auction process or clearing exchange 2.) A structural (infrastructure) analysis of relative value - product price analysis. 3.) Affordable housing or "market rate" housing with some assistance for governing entities
Next Wave of Defaults….AlARMing
You will notice from the graph above how we are almost done with all the sub-prime resets. However there are other types of loans such as Alt-A and Prime that are defaulting in Charleston and other cities around the country. This vicious cycle does not end until 2012. These defaults will continue to place pressure on homes until the loans are modified or resold. It will take time to work through these loans and reduce “distressed” transactions in the real estate market.
Equifax, a well-respected credit bureau, found that 7% of homeowners with mortgages that were at least 30 days late on their payments in February, that’s up 50% from a year ago. And close to 40% of sub-prime borrowers are late, up from 23.7% a year ago. We really did not experience an increase in short sales and foreclosures here in Charleston until 2008. It will take us a few years to clean up the mess that was created mostly from 2004-07. This will create opportunity for many buyers who have cash in a desirable location of the U.S.
Foreclosure Effect on Price
Obviously an inverse relationship. As foreclosures increase the median home price drops. California has witnessed a 50% decline in the median home price over the past three years once foreclosures exploded from 2007 until the present time.
Scary chart for the Tri-County region. Yes, many people are currently “underwater” (house is worth less than what they owe) and this is a major concern of mine.
Our unemployment rate has practically doubled over the past year. Although this is a lagging indicator these lost jobs will place pressure on the residential and commercial markets in Charleston. I expect this chart to worsen for a little while longer. Hopefully Charleston can gain some in-migration from people up north and the midwest who can eventually sell their homes and move here.
Alternate Unemployment Data
The U.S. government's Bureau of Labor Statistics (BLS) shocked the world Friday with the release of its official, headline unemployment number: A surge from 8.1 percent to 8.5 percent. But it's really a lot worse. This number (called "U-3"), although invariably cited by the press in the headlines, is the narrowest, most sugarcoated measure of U.S. joblessness: It excludes workers seeking full-time jobs, failing to find them, and then accepting part-time work that almost invariably pays far less. It excludes discouraged workers who have given up looking for jobs because they can't find any. And, as if that wasn't enough to color the truth, the BLS has been consistently and grossly understating the current unemployment numbers, not revising them until months later when fewer people are paying attention. Williams points out that: "The pattern of impossible biases being built into the headline monthly payroll employment continued with March 2009 reporting. Instead of the headline jobs loss of 663,000, consistent application of seasonal-adjustment factors would have shown a more-severe monthly jobs loss of about 750,000. This upside reporting bias has been seen in 11 of the last 12 months, with a rolling 12-month total upside headline-number bias of 1,345,000." The proof: In every single one of its six most recent monthly payroll reports, the BLS has announced massive upward revisions in prior months' job loss numbers — with five of those even exceeding its own guidelines for the acceptable margin of error (plus or minus 5 percent). Fact #2. Government Admits Some of the Flaws The government also publishes a broader measure of unemployment ("U-6"), which corrects some — but not all — of the above flaws. This measure includes many discouraged and part-time workers, as it should. And, lo and behold, those adjustments alone add more than seven full percentage points to the unemployment rate! Instead of 8.5 percent unemployment, suddenly we see that we have 15.6 percent unemployment, according the government's own admission. Instead of a recession, suddenly we see that we are already in a depression.
NATIONAL OPPORTUNITY/RISK INDEX
Source: Real Estate Economics
TOTAL JOBS-TO-TOTAL HOUSING INDEX
115.0 112.5 S T R O N G E R W E A K E R 110.0 107.5 105.0 102.5 100.0 97.5 95.0 92.5 90.0 87.5 85.0
A pr Jan-1 0 O ct Jul A pr Jan-0 9 O ct Jul A pr Jan-0 8 O ct Jul A pr Jan-0 7 O ct Jul A pr Jan-0 6 O ct Jul A pr Jan-0 5 O ct Jul A pr Jan-0 4 O ct Jul A pr Jan-0 3 O ct Jul A pr Jan-0 2 O ct Jul A pr Jan-0 1 O ct Jul A pr Jan-0 0 O ct Jul A pr Jan-9 9 O ct Jul A pr Jan-9 8 O ct Jul A pr Jan-9 7 O ct Jul A pr Jan-9 6 O ct Jul A pr Jan-9 5 O ct Jul A pr Jan-9 4 O ct Jul A pr Jan-9 3 O ct Jul A pr Jan-9 2 O ct Jul A pr Jan-9 1 O ct Jul A pr Jan-9 0
The total number of jobs relative to the total number of homes in the nation lends insight to the economic foundation that supports net housing demand. The indexed chart below presents historical relationships and a near-term forecast in jobs-tohousing relationships relative to a long-term equilibrium line derived by Real Estate Economics: The jobs-to-housing index is arrayed relative to an equilibrium line set at 100. An index above equilibrium reflects periods of pent-up demand or under supply of housing relative to jobs, while any index below 100 represents over supply. As shown above, since late Year 2002, the nation has been in a state of over supply of housing. This pattern of over supply suggests that the strong housing sales activity and the housing price run-up that occurred after the 2002/2003 recession were largely artificial, being caused by deregulation of the financial industry and the resultant loosened lending practices that allowed non-traditional users (investors and unqualified buyers) to enter the housing market in large numbers. Now, with unprecedented job losses, the index is being driven down further, reflecting a reduced ability for the national economy to support the existing housing supply. The result has contributed to distressed sales, foreclosures and further drops in home prices. Unfortunately, the pattern worsens during the next 12 months – despite the fact that very few homes are now being constructed.
MORTGAGE COST-TO-INCOME RELATIONSHIPS
MORTGAGE COST-TO-HOUSEHOLD INCOME INDEX
150.0 U N D E R V A L U E D 140.0 130.0 120.0 110.0 100.0 V A L U E D 90.0 80.0 70.0 60.0 50.0
A pr Jan-10 O ct Jul A pr Jan-09 O ct Jul A pr Jan-08 O ct Jul A pr Jan-07 O ct Jul A pr Jan-06 O ct Jul A pr Jan-05 O ct Jul A pr Jan-04 O ct Jul A pr Jan-03 O ct Jul A pr Jan-02 O ct Jul A pr Jan-01 O ct Jul A pr Jan-00 O ct Jul A pr Jan-99 O ct Jul A pr Jan-98 O ct Jul A pr Jan-97 O ct Jul A pr Jan-96 O ct Jul A pr Jan-95 O ct Jul A pr Jan-94 O ct Jul A pr Jan-93 O ct Jul A pr Jan-92 O ct Jul A pr Jan-91 O ct Jul A pr Jan-90
O V E R
Mortgage Cost-to-Income Index
The other half of the equation to national market stability deals with housing costs (or more specifically, mortgage costs) relative to household incomes. Long term trends and a near term forecast between mortgage costs and household incomes are shown below: The equilibrium line shown in the chart above represents the long-term relationship between costs and incomes, and as with the jobs-to-housing index, the equilibrium line associated with the mortgage cost-to-income index is set at 100. Any index above the 100.0 equilibrium index reflects under valuation of housing relative to household income support, while an index below equilibrium represents a period of over valuation. The chart reveals that housing values are currently well above equilibrium, reflecting a trend of increasing under valuation that began during the latter part of Year 2007, and is now quite severe. This is a reversal, following four years of over valuation (a price ‘bubble’) that formed from 2004 thru late-2007. Correcting from the past run of artificially overvalued housing, the current drop in home prices indicates a considerable over correction and unprecedented levels of housing affordability. With current and projected job losses, under valuation may need to be even greater in order to offset a very poor jobs-to-housing index.
COMPOSITE INDEX OF LEADING INDICATORS
NATIONAL HOUSING MARKET OPPORTUNITY/RISK INDEX
For the Month of February 2009
Composite O/R Index 135.0
Under Valuation will increasingly offset Economic Losses. Mortgage Cost-to-Income Index Market stabilization by 3Q’10.
130.0 125.0 120.0 115.0 110.0 105.0 100.0 150.0 140.0 95.0 130.0 90.0 120.0 85.0 110.0 80.0 100.0 90.0 75.0 80.0 70.0 60.0 50.0
The above indexes tend to be counter-cyclical. More importantly, they tend to preempt actual market changes. When the above indexes for jobs-to-housing and mortgage costs-to-incomes are combined into a composite index (the Housing Opportunity/Risk Index), the resultant Housing O/R Index leads market change by 18 to 24 months – effectively giving a clear warning to market participants when to leave the market… and when to enter. The chart below presents this composite Housing Opportunity/Risk Index: The O/R Index shown for February 2009 is recorded at 110.2 – near a record high. This index, however, won’t be felt in the housing market until the latter half of Year 2010. Indeed, what we’re feeling now is the depressed index of early Year 2007 – near the low point of the cycle. The current index gives a clear indication as to what market conditions will be like during the latter half of Year 2010. And they’ll be healthy - not in terms of price as much as in terms of sales volume. The incredibly strong values reflected by the current index will become increasingly apparent as the economy begins to recover. Even with modest incremental job growth (which is expected to be evident by the latter part of Year 2010), an increasing number of potential buyers will recognize the market’s severe under valuation, and will enter the market. Sales volume will increase dramatically as an increasing number of buyers seek to take advantage of under valuation once economic stability is established. Indeed, even speculators may, once again, become an issue. Though the index has been trending in positive market territory (an over correction), the severity of the financial crisis and extremely poor market psychology will continue to hinder market conditions in Year 2009 and well into Year 2010.
Jan-92 Jul Jan-93 Jul Jan-94 Jul Jan-95 Jul Jan-96 Jul Jan-97 Jul Jan-98 Jul Jan-99 Jul Jan-00 Jul Jan-01 Jul Jan-02 Jul Jan-03 Jul Jan-04 Jul Jan-05 Jul Jan-06 Jul Jan-07 Jul Jan-08 Jul Jan-09 Jul Jan-10 Jul Jan-11 Jul Jan-12
ESTIMATED DATE THE INDEX IS MANIFEST IN THE MARKET
Jan-90 Jul Jan-91 Jul Jan-92 Jul Jan-93 Jul Jan-94 Jul Jan-95 Jul Jan-96 Jul Jan-97 Jul Jan-98 Jul Jan-99 Jul Jan-00 Jul Jan-01 Jul Jan-02 Jul Jan-03 Jul Jan-04 Jul Jan-05 Jul Jan-06 Jul Jan-07 Jul Jan-08 Jul Jan-09 Jul Jan-10
During the 18-24 month lag time between the index and market manifestation, foreclosure inventory will shrink, credit will ease and economic
The Index Leads the Market by 18 to 24 Months – It Effectively Predicted the downturn.
W O R S
growth will resume (3Q’10).
Forecast for Charleston
Forecasting is very difficult. Forecasting is the equivalent of fortune telling. Forecasting is impossible when “Big Mama” (Government) constantly changes the rules. Prefer Risk Management to Forecasting!
Tri-County Median Price Forecast
18000 16000 Sale Volume per Year 14000 12000 10000 8000 6000 4000 2000 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Another 15-20% drop in hom e rrice s is pos sible in next 12-18 m onths. March 2009 $270,000
$350,000 $300,000 $250,000 $200,000 $150,000 $100,000
Aberration in Price and Sales
Avg Sale $
This is probably one of my most busy and confusing charts but it is the one everybody wants…..The Forecast. I am forecasting another 15-20% drop in home prices for all homes above the $400k price range over the next 12-18 months. This would obviously have an impact on the overall median and average Tri-County home prices but the decline in prices would be caused by the upper end of the market. The reason I anticipate a further decline in price is the “Lending Gone Wild” era created excess supply and demand. You can see this by looking at the arrows on the above chart. If the Charleston market had remained on a normal trend with regards to sales volume the average home price would probably be approximately $225,000 and NOT $270,000. The reversion to the mean will occur once the upper end of the market finally sells off at lower prices. I do not anticipate the $100-300k segment of the market to have that bad of a correction but it is impossible to know until we can all see all the distressed real estate in this town. Until that occurs we are all flying blind.
Average Annual Sales Price
Good News About Charleston
Good News About Charleston!
Good News About Charleston!
Charleston is special! Travel + Leisure Magazine 2008 #1 Friendliest City #2 Shopping #2 Home Design 2008 Southern Living #1 Best Southern City Inc.Com #6 Midsize City for Doing Business
Good News continued
Forbes Magazine 25 Strongest Housing Markets Conde Nest 2008 #2 Top U.S. Destination Milken Institute 2008 Top 25 Best Performing Cities Weather, low taxes, beaches, golf, history, etc.
Tri-County median home prices will continue to decline because of upper end of market being overbuilt and overpriced due to current supply and demand conditions. The affordable market is priced competitively. Deterioration of price depends on how we handle foreclosures. Charleston desperately needs affordable housing! Lending/Financial Crisis could benefit Charleston with jobs and inmigration. Excellent opportunities in affordable market because of low rates and tax credit. Great time to buy if home priced correctly! Economic and real estate correction will take time. As long as the credit system does not have any further meltdowns we could be witnessing the low point of sales volume now that prices are beginning to decline. Proper risk management is KEY.
Post & Courier College of Charleston Everyone for Attending PowerPoint available at: www.charlestonmarketreport.com
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