Realty Bites

Q. Have home prices hit rock bottom?

A. Yes. And no.

As most of you know, I’ve been bearish on home prices since 2002, when I first began warning my clients to stay out of real estate investments if at all possible. Sell your home now and rent, I told them. The economic news has continued to be dire since then, and there are few signs of a lasting recovery in sight. And yet, somehow, the stock market has been rising steadily, which bodes well for the real estate market as well. What’s going on?

Certainly there is plenty of reason to fear another downward spiral in prices. The lending environment is, shall we say, challenging. A large proportion of recent sales have been foreclosures and their close cousin, short sales. (A short sale is simply a sale in which the purchase price is not sufficient to pay off the mortgage.) And we can expect wave after wave of foreclosures in the future as people struggle to pay their mortgages while out of work and unable to find jobs. Things look pretty grim. And yet.

And yet, stocks have bounced back strongly from their lows last year. What gives? The Yale economist Robert J. Shiller may have an answer. He suggested recently that home prices aren’t tied so much to economic data as they are to homebuyer sentiment. Indeed, if you ask around, many people are enthusiastic about the prospects for improvement in real estate prices. There seems to be a general sentiment of optimism among people who have been sidelined by falling prices. If enough momentum develops, recovery could become a self-fulfilling prophecy.

In my opinion, it all hinges on whether there are enough buyers who can still afford to get into the market for real estate.

That was the lead headline that came across my desk today in National Realty News. Here’s an excerpt:

Data through February 2008, released by Standard & Poor’s for its Shiller Home Price Indices, the leading measure of U.S. home prices, show declines in the prices of existing single family homes across the United States worsened in the second month of the new year, with 17 of the 20 now reporting MSAs [Metropolitan Statistical Areas] posting record low annual declines, 10 of which are in double-digits. MORE →

Which way are home prices headed? The answer is: nobody knows. Really. Nobody knows. Not even the experts. For one thing, prices aren’t an amorphous blob that all move in one direction, like an electorate. (Wait, no!) Just because a co-op on Central Park in Manhattan fetched a record price doesn’t mean a coop in Wheeling, West Virginia will sell for $10MM. And vice versa. The fact is, prices are very specific, right down to the precise location of your home.

So get an appraiser. In the meantime, the best we can do is look at large trends to get a general sense of where things are going. MORE →