Home sales were up in February

More data is rolling in that potentially suggests recovery in the real estate markets.  However, once again, I remain skeptical that this data points are anything but random variations driven by such factors as massive foreclosure and not anything that suggests recovery.

The median home prices was fairly stable at $165,000 relative to $164,800 in January (this are national figures).  On a year to year basis, prices were down 15.5% from $195,800 a year ago.

The price drops may be slowing for the moment, but I fear that with layoffs and income reductions (through salary cuts, reduced benefits, reduced hours, etc) home buying is not on the minds of too many people right now.

I’ve seen through a variety of sources that another 20% drop in prices is forecast before we find the bottom.

Housing starts somewhat surprisingly jumped 22.2% in February.  Does this mean that the real estate market is on the road to recovery?

Total housing starts increased to a seasonally adjusted rate of 583,000, up from 477,000 in January.  With economists projecting only 450,000 starts in February, the results were quite startling.

I think in this case percentage change is a deceptive indicator.  Housing starts are so low right now that even after a huge jump as seen in February the value is still very low.

Even with housing starts rising, there is still a major problem: where are the buyers?  Sales dropped to an annual rate of only 309,000 in January, representing the lowest level spanning the entire 46 years that the statistics have been recorded.

Prices are still under great pressure.

It will take several consecutive months of improving trends to even suggest that the housing market is recovering.  And personally, even if things do get a little better in the spring and summer seasons, I won’t believe it’s a true recovery.

Interest rates are being pushed as low as possible to spur demand and prices still are falling.  Soon, some people on the sidelines will jump in thinking they are getting rock bottom prices.

While it’s nice to get interest rates under 5%, I think the best strategy right now is patience.

As part of my exercise program, I want through many Long Beach, California neighborhoods close to where I live.  In my walks, I’m always observant of signs, real estate related signs that is.  And recently, I’ve been seeing more and more.

Before you jump ahead and assume I mean that more homes are for sale, let me tell you that I’m seeing a different kind of sign - for rent.  That’s right, many people are moving, and that can only mean one thing - they are downsizing their rents.

I talked with a friend who owns many rental properties in the area and she confirmed that there’s a lot of downward pressure on rents.  People are moving out of 3 bedroom apartments into 2 bedroom apartments, or even doubling up with multiple families in one apartment.

In these economic times, it is necessary to get creative in order to survive.  What this means for the real estate market is that there is another element of pressure on prices.

Obviously, for rental property if the rent goes down the price goes down, but the trend extends beyond that.  It gets down to the cost of housing.  If rents are dropping, and that is what happens when there are a lot of rentals available, the law of supply and demand assures that result, then the cost of housing is dropping and the relative cost of home ownership is rising.  And that creates yet another downward pressure on home prices.

Real estate prices have been in decline for years.  And we’ve been in an economic recession since December 2007.  Now that the economy has gotten really bad and real estate prices have tumbled to levels unthinkable  a few years ago, the  talk turns to recovery, and housing bargains.

Let me use the stock market as an example that can be applied to real estate prices.  If you remember back in November 2008, the Dow Jones had dropped to around 7500.  And then it staged a recovery, all the way back up to 9000 in January 2009.  But that was not the end of the story.  As you are aware if you watch the news, the Dow Jones has tumbled once again and is now around 6500.

Can a similar thing happen to real estate prices?

Real estate prices have dropped on a nationwide basis by about 19% last year.  Regionally, the damage was much worse.  In bubble states like California and Flordia, some areas are suffering through declines of over 50%.  With prices having fallen so far, and foreclosures becoming a large component of housing sales, many people look at today’s prices as bargains.

Throw in low interest rates and it looks even better.  But wait a minute…

The government is trying to force interest rates to artifically low levels.  Why?  They need people to buy houses to prevent further price drops.

When the spring and summer buying season arrives, many prospective buyers will step up and start looking for homes, assuming that the prices represent bargains.  Combined with historically low rates, these deals will be tempting and could spur demand and cause a bump in prices.  This is where I want to compare to the stock market.

Just because prices bump up (if they do at all) does not mean the price bottom has been reached.  Many analysis feel that prices must still drop another 20%.  There is a potential avalanche of foreclosures still looming as property values decline and homeowners come under pressure from cut-backs in their work hours or salaries, job loss, and resets on their mortgages.

In Long Beach California and all across the South Bay area, there are pockets where home prices have been slashed and other areas where the decline has been much less severe.  I foresee more trouble ahead for the economy and think that housing prices are still on the verge of another step down.

I saw a news piece today about a lady who has lost her entire $100,000 downpayment due to the decline in home prices.  She has continuted to make her payments, and has talked to the bank about getting some help with her loan.  Her income has dropped and it has become more difficult to make payments.  Do you think the bank was willing to help?

For the good person who is paying the bills, the banks are not interested in helping.  They are in business to make money and they don’t like cutting deals unless they see an upside.  For a person who is not paying, they may be willing to cut a deal.  Something is better than nothing to the bank.

What is so frustrating about this situation, to the lady in question, to me personally, and to many others who are in the same situation, is that as long as you do the right thing and pay your bills you get no help.  If you stop paying, then maybe you get a break.

I see the mortgage bailout plans as a necessary evil right now.  Foreclosures are inevitable, but maybe the rate of foreclosure can be slowed by helping a few people.  But hopefully the help will go to good people who got in over their heads and not to investors who happended to get stuck holding a property.

Real estate investment involves risk and there should not be a bailout for taking risk.  That eliminates the consequence and encourages irresponsible behavior.