By: Dennis Norman
- Dennis Norman
As anxious as I am to finally see something positive come out about the housing market I am still very skeptical when I hear about reports like I referred to in the headline for this post.
Therefore,like an investigative reporter,I went searching for this report,find out who was behind it and what it was based upon. What I found was quite interesting. For starters,the person behind it is University of Virginia School of Architecture professor William Lucy along with a graduate student Jeff Herlitz. Hmm…no smoking gun,Lucy is not employed by the National Association of REALTORS(R),the National Association of Home Builders nor any other group that may be a little slanted in their opinion. So far so good.
I then dug into his report titled “Foreclosures in States and Metropolitan Areas:Patterns,Forecasts,and Pricing Toxic Assets”. Wow,and I thought I could get wordy. Anyway the report is quite informative and somewhat encouraging. It is very comprehensive and,as you would expect from something produced by a University Professor,goes into great detail and depth,so I’m just covering the highlights here.
The jest of the report is that the problems in the real estate market,particularly with regard to foreclosures and price declines as a result,is not as wide-spread as one may think or as the media has portrayed. In fact the report indicates that “66% of potential housing losses in 2008 and subsequent years may be in California with another 21 percent in Florida,Nevada and Arizona,for a total of 87 percent of national declines in these four states.” Great news if you own property in one of the other 46 states but not so encouraging if you own anything in those four.
Lucy looks at the top 10 states in terms of numbers of foreclosures (based upon ratio of 2008 foreclosures to total housing units) and then does an analysis of the relationship between the median income and median home prices in those areas.
He goes on to compare 2007 levels to “pre boom” levels in 2000: For example,in California in 2007 the median home price was 8.3 times greater than than the median income and 159% higher than the national average of 3.2. In 2000 California’s ratio was less than half the 07 level at 4.0 and only 66% higher than the national average of 2.4 Clearly this is one market where prices just ran away and at a rate far exceeding the increase in income of the residents.
Lucy then does an analysis of what the total cost would be to absorb all the foreclosures back into the market at prices equal to the income to price ratios of back when things were “normal”in 2000. Lucy says that “potential housing value losses from 2008 foreclosures,in 50 states,if values decline to year 2000 levels,were less than one-third of the $350 billion that has been provided to banks and insurance companies to cope with losses in mortgage backed securities.”(clearly he wrote this before the more recent checks to banks were written).
I think Lucy is on to something….the impact of foreclosures on the overall market has been huge and no doubt has skewed prices but it really is only producing,as Lucy says in his report,“pockets of substantial declines”and these pockets may really be affecting the overall numbers not to mention the perception.
This report is good reading and packed with data that could be very useful to the investor. I’m going to be reading it more thoroughly in the days to come and may have more to say about it afterward.
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