An economist, consultant, academic, and fund manager try to locate the bottom of the market:By Peter Carbonara and Lauren Young
Real Estate December 11, 2008
Everyone is worried about the real estate market, whether it's because they want to sell, buy, or want a sense of whether their homes will regain value. As proposals to help the housing market are debated in Washington, BusinessWeek turned to leading real estate experts for their reading of where housing is headed, and whether the proposals will help stabilize the battered residential sector.
JOHN BURNSPresident, John Burns Real Estate Consulting in Irvine, Calif., which advises large builders and investors
The Outlook: No matter what sort of real estate package comes out of D.C., the woes of the broader economy will keep housing prices weak for some time, says Burns: "First we need to stabilize the banking system, and I don't think that has completely happened." He thinks banking problems are "worse than most people do—problems in commercial real estate, credit cards, and auto loans. Those are going to take at least two to three years to work out."
The Good News: For one, Burns says, "the affordability problem is no longer a problem." Also, housing inventory levels have been declining. For those with cash and a long-term horizon, he predicts 2009 will be an excellent year to buy. "The government is going to keep interest rates low, there will be various kinds of government incentives, and very low prices."
Favorite Market: Washington, D.C., "because the job market will remain strong and the affordability issue has essentially disappeared." San Diego and Denver are on his radar screen, though he expects them to have a tough 2009. "In all markets, the best school districts that are close to work will almost certainly recover first," he adds.
Washington Wish List: Burns wants government to encourage "responsible home buying"—buying by people with a down payment of 20% to 30% who intend to own for at least five years. He thinks legislation mandating loan modification is likely, and he's a fan of a proposal to double the mortgage interest deduction.
THOMAS LAWLEREconomist and founder, Lawler Economic & Housing Consulting in Vienna, Va.
The Outlook: Lawler says he's seen prices begin to stabilize in some places—Sacramento, for one, and even some areas outside hard-hit Las Vegas. He believes that if Congress and President-elect Obama launch a big economic stimulus plan on Day One and homebuilders bring no new inventory onto the market for six months or so, the national housing market could find its bottom by the third quarter of 2009.
Washington Wish List: Lawler wants "an $800 billion to $900 billion stimulus package, passed early in the year, that would put about $6,000 into the hands of every taxpayer and let them decide what to do with it—buy houses or cars or reduce debt."
MICHAEL FEDERPresident and CEO, Radar Logic, which tracks residential prices in 25 major U.S. metropolitan markets
The Outlook: Feder doesn't have a crystal ball, but the RPX futures market, based on Radar Logic's residential real estate data, may come close. Increased buying of distressed homes on the West Coast signals some kind of stability, particularly in Southern California. "It doesn't mean we're at the bottom or in recovery—it means buyers have found prices that are attractive," Feder says. But California was one of the first states to declare a moratorium on foreclosures, so if that is lifted and foreclosures snowball, "price firming" could be reversed.
One-year forward pricing contracts—traders bet on the health of housing markets using derivatives contracts based on Radar Logic data—show home values will be 5% to 10% below where they are now, depending on the market. "In some cases residential real estate will be recovering; in some cases we'll be just beginning to stabilize," he says. Residential futures contracts show a recovery first on the West Coast in late 2009 and 2010, followed by stabilization in the Midwest. In New York City, "weakness in the financial sector is so important that the economy there will lag longer than other markets."
Washington Wish List: "I'd love to see our regulators and leaders find ways to give consumers confidence that their homes are worth something, as opposed to making it palatable to carry a mortgage," says Feder. "I don't think [lower mortgage rates] alone are the Holy Grail."
SAM LIEBERCEO of Alpine Woods Capital Investors
The Outlook: Lieber thinks real estate can go one of two ways. The first he calls the "Doomsday Death Spiral," where more and more people get laid off and over a period of time won't be able to make mortgage payments. "They have to put their homes on the market and then drop prices because they have to sell their homes. Once they're renting, they tighten their belts and buy less, so consumption stays low, leading to more layoffs."
Lieber thinks the "Motivational Scenario" is more plausible because it's sparked by a likely drop in rates. Qualified first-time buyers and people who want to refinance put a floor under housing prices. "Everyone on the sidelines jumps in," he says. "The bad loans on the books of banks get cleaned up, and home prices rise. Banking stocks rise, so the Treasury [which has stakes in the banks] makes money. The American people make money, and banks start lending."
Lower-Rate Logic: Lieber says mortgage rates will drop. Traditionally, the gap between the 10-year Treasury bond and 30-year mortgage rates is 1.5 percentage points. Now it's 2.75 percentage points. How low will rates go? "A 30-year fixed rate of 4.5% for a mortgage is likely, and 4.25% is possible," he says.
Carbonara is a senior writer for BusinessWeek. Young is a Personal Business editor for BusinessWeek.
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