Market Report: November 2009

Stability is the New Appreciation

Since Labor Day retail residential real estate is back. In most market segments, prices are stabilizing and inventories dropping as a new group of buyers has entered the marketplace for homes. While the past three fall selling seasons have been serious disappointments, the tide seems to be moving in the other direction. This change should give pause to the small army of fence sitters who have been keeping one wary eye on their job prospects and the other on what appears to be an endless bounty of real estate bargains. Their caution is well advised and appropriate given our collective economic plight and there is no shortage of oracles predicting even lower prices in 2010. Nonetheless, these potential homeowners may be a bit out of step with the reality on the ground and will find themselves buying in the third stage of the recovery cycle. This is not necessarily wrong as one can still jump on the train as it pulls out of the station.

Competition for homes has ramped up for well-priced properties under $1,000,000. The rate of depreciation and the inventory of those homes are falling. I am not suggesting the Great Recession is over or even that there is light ahead in the tunnel. Rather a second wave of buyers has emerged and that fact has altered the landscape, at least temporarily. This group of buyers is decidedly different from those in the first wave, the pack that has been feasting on bank deals and distressed properties for the past two years.

This second wave of home-seekers believes that there is a lessening risk that prices will decline in any meaningful manner during the next few years; price stability breeds market confidence. They have stayed above the rough fray during the early part of the crisis but now have collectively concluded that it is safe to go in the water. They cannot move forward, however, without their lending partners and this relationship is improving. For the past two years banks have avoided the jumbo loan marketplace and have been reluctant partners in the conforming residential lending space.

Banks rarely lead and prefer to follow. Most lenders are recovering financially, their balance sheets fattened by generous bailouts and cheap money available at the Federal discount window. It appears, by actions rather than rhetoric, that banks are beginning to approach the housing crisis in a far different manner than in 2008 and in early 2009. Lenders are slowing down the process of taking back homes, retaining foreclosed properties, and are far more helpful in assisting troubled borrowers. Some of this benign neglect is self-interest and some is the result of new Federal rules and political jawboning. Veteran bankers remember the Resolution Trust Corporation debacle of the early '90s and realize a more measured approach to the disposition of bad loans is more profitable. The fire sales of 2008, starkly reminiscent of the RTC circus, had a whiff of panic about it but now the lending community has gotten a lot smarter. The fire sale is over.

There will be a second wave of foreclosures ahead as lenders will eventually need to remove non-performing loans from their books. Banks know there are massive potential losses coming in their commercial portfolio in 2010 and 2011 and want to minimize future losses in the residential sector. The industry is finally getting the staff in place to play out the final act of this drama in an orderly fashion. Banks and their federal partners are going to need to maximize the value of their non-performing residential assets; the retreat will be orderly and therefore there will be far fewer bargains in 2010.

Just as there is a hidden inventory of properties owned by banks and discouraged sellers, there is a countervailing group of potential buyers that are also part of this recovery. They represent the third wave of buyers. They are now renting even though they have the means and desire to purchase a home. It is an article of faith amongst them that prices will go even lower in the future. The third wave, a cautious group, will enter the marketplace when job losses stop. At that point, prices will begin an upward trajectory. Those who wait too long may be consigned to a new class of permanent renters; people who recently lost homes to foreclosure and those too timid to enter the market in a timely fashion.

In the past, Americans opted for the more costly home ownership model for appreciation, principle reduction and tax advantages as well as other intangible benefits. As the prevailing winds shift and market sentiment moves to the broad middle ground between the negative and positive, the third wave of buyers will enter the marketplace providing price stability during the waning days of The Great Recession. The consumers in the three waves will make purchases that reflect the quality of buys made during the 1992-1998 period; in case you forgot, anyone who bought then came out a winner.

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