Investing Specialists

Has the Residential Real Estate Market Bottomed Out?

Christine Benz

Whether you consider your home an investment, real estate is still a big part of many individuals' financial lives. Although home equity levels have dropped substantially amid the housing bust, home ownership remains a substantial component of net worth in many households. And even for those who no longer have mortgages, property taxes and housing-related upkeep are often some of the largest line items in household budgets.

To get a sense of whether property prices in various parts of the country were trending up, down, or sideways, I recently turned to Morningstar.com users for their take, posting a query on the Personal Finance forum of Morningstar.com's Discuss boards. I also asked them to share thoughts on whether the housing market had affected their personal real estate strategies. Were they waiting for prices to rebound before selling? Had they found attractive bargains amid the wreckage? To read the complete thread featuring views from across the country, click here.

"No Good News"
Judging from the downbeat sentiment of many posts in the thread, those who have been anxiously awaiting a recovery will have to keep on waiting.

Poster pquilici summed up the case for staying depressed with this post: "I live in Skokie, Ill., and nothing but uncertainty rules the residential market. Short sales and foreclosures dominate the sales. Prices seem to have a continued downward bias. A potential market killer is increased property taxes to fund teachers' pensions. Lousy weather. Irresponsible government. No good jobs. No good news."

Grasshopper joined the doom squad with this post. "My opinion: Homes will lose value every year for at least the next 10 years. You do not live in a bank or stock portfolio in a bull market. You live in a depreciating asset that costs more and more money to upkeep. Burdensome taxes, jobs that do not pay a living wage, and so on. Oh, the weather is lousy too!"

Kayaker astutely noted that ongoing housing-market weakness has exacted an emotional toll as well as a financial one: "I live in a gated golf community in coastal South Carolina. Like everywhere else, housing prices have gone down at least 25% to 30%. Some homes here that are 15 to 20 years old have sold for incredibly low prices (40% less than original asking) because elderly owners did not keep them up to date and would not lower their price to compensate; grown kids inherited them and dumped them quickly. New owners have gotten very good bargains and these homes have gone quickly. Fallout has been a small group of people who are angry at everything and everyone in this close-knit community. Whether housing, their investments, familywide financial issues, or a combination, the financial crisis has taken a big emotional toll on a number of retired people in this community."

Edit, like pquilici, groused about the combination of diminished property values and higher taxes. "I view the housing market in our area as being depressed, but at the same time our assessors are increasing the property values to pay the ever increasing burden of government funding."

Jpluther, whose home market of Silicon Valley has been relatively unaffected by the housing bust, thinks a bubble could yet burst there: "Housing prices [in Silicon Valley] are still completely insane when viewed in terms of rental potential or in terms of median price versus median income. Although we have seen smallish declines, I believe we are still midbubble unless the economy and wages take off in an unexpected manner. A 30% fall from current values would not surprise me at all."

The Best-Laid Plans
Several users noted that the ongoing housing bust had affected their own plans to relocate. Latitudes wrote, "About 16 months ago, I thought I was being very smart in buying a new condo in Orlando, Fla., at what I felt was a significantly reduced price, more than 40% below the asking price and about 10% less than the original buyer had paid two years prior. My thinking was with such a good deal on the 'buy side,' I could then market my current (and much larger) single-family house for up to two years and still come out ahead.

"Well, those 24 months are quickly ticking by and despite the fact that I have priced my house competitively in relative terms (and reduced the price three times), I have only had one ridiculous lowball offer in the last year and half. Lots of showings, lots of positive feedback, but everyone still seems to be looking for a deal (that is, a steal). I don't think the Orlando real estate market (much less the rest of Florida) is seeing much recovery yet. With an overabundance of foreclosures and short sales still in inventory, I just may be watching a well-thought-out plan turn sour."

DebbieTrice is also downbeat about the Florida market, noting that Sarasota, Fla., remains hard-hit and could well stay that way, in her view: "Due to a combination of fraud and rampant speculation, more housing units were built at ever-increasing prices in Sarasota during the boom than could have been absorbed in a reasonable time frame. The bust has further increased the unsold inventory because now-unemployed construction workers have moved away. And, of course, foreclosures and short sales on the market have depressed prices even more. This is one of the worst housing markets in the United States, and I suspect it will get worse before it gets better. My guess is the local market will return to normal about two years after baby boomer retirees feel flush enough to buy second homes in Florida. I am one of those boomer retirees who had planned to downsize, but I won't put my house on the market while it has to compete with foreclosures."

Other users echoed Debbie's sentiment, noting that they'll hold off on listing their homes until they see a rebound. Poster Chamois wrote, "I am delaying a move to a retirement community until values recover, but I am in no hurry anyway."

Ditto for wwgman, who notes that the Phoenix market remains in bad shape. "I am holding off selling and buying another home until the market bottoms."

 

Bargain-Shoppers Holding Off, Sellers Unrealistic?
The sentiment among would-be buyers, meanwhile, corroborates that the worst may not be over in some markets. They're looking for bargains that haven't yet materialized.

Poster Edmund_Dantes, for example, would like to purchase a beach vacation home in Southern California but is waiting for even lower prices before making a move. "Lots of inventory out there. I intend to only submit low-ball offers. Sellers can take it or leave my offer. If they leave it, I will just move on to the next property. Frankly, I am hoping for further weakness for my purchase. My biggest concern is if interest rates surge before I can find a property and lock in a rate. In that eventuality, my offer prices will drop accordingly."

He's also concerned about bidding on homes in a market littered with short sales. "Lots of properties on the market are short sales, wherein the bank allows the deadbeat to continue to reside in the property, without paying their mortgage, until the property is sold. My experience with these [is that] sellers have every incentive to delay sales (including not making the property available for viewing), so they can continue to live rent-free. An additional problem with short sales: The seller's bank can take their time in deciding to accept or reject an offer. These properties are thus very inefficient to close/buy. On a macroeconomic level, I suspect this will contribute to property markets taking longer to clear inventory and stabilize prices."

Jadster, meanwhile, is trolling for bargains in the Denver area but hasn't yet found prices low enough for his taste. "Housing is still not cheap overall, but I'd buy now if I saw a good opportunity. We have placed some low-ball offers and been rebuffed, so we just move on to the next one. It's a buyer's market, and as unemployment and foreclosure issues linger, it should remain so for a while. One example: An older fellow overpriced his house at $400,000, dropped it to $380,000 after a few weeks, then dropped it to $365,000 after another month. It's still on the market."

Poster Fitness has also observed unrealistic sellers in the Denver market: "[I] notice that many homes that are selling are decreasing their prices. Some are less than the prices of 2005 and other homeowners are still unrealistic and have not come to terms that this is not the same housing market of just a few years ago. If Fannie Mae (FNMA) and Freddie Mac (FMCC) tighten the lending standards even further, the housing market in my opinion will drop faster and further. People with cash and large down payments may be the beneficiaries, and everyone else may be unable to purchase at this time."

Olddude echoed the view that some would-be sellers are being stubborn about their asking prices, anchoring on bubble-time prices. "My take on the housing market? The place we want to retire to, the Catalina Foothills outside of Tucson, Ariz., is still one of the most expensive places in the U.S. Most of the desirable homes have been pulled from the market and the homeowners are waiting for a hoped-for recovery. They might die waiting to sell and ditto for me waiting to purchase."

TOOOINTENSE is another would-be buyer who's encountering still-high prices where he lives and works, Nashville, Tenn. "I have looked at purchasing several properties that are in need of light to moderate repair as investments (I am in construction), and none has panned out. The banks are trying to hold out for as much recoup as possible, naturally, but won't bite on cash offers. Individuals are still in a housing-bubble daze and are staying put or not considering any price reduction. Foreclosures have moderated, but I feel that prices are still too high."

WesternMass pointed to a similar phenomenon in his home market, noting that stringent lending standards have contributed to the malaise. "I have been flipping select single-family homes in western Massachusetts for some 20 years. Current pricing is flat, and home inventory for sale is low for this time of year. Even distressed homes are not showing up on the market. We have three 'Over 55' communities already approved for construction; however, only one has been built so far and sale of individual units has been slow. The other two projects are on hold until the market starts improving. Seems everyone is sitting on their property until the market improves. The other problem is availability of financing. Local banks and national banks have become very cautious in their lending practices. You need a credit score of 700-plus and have to undertake a tremendous amount of paperwork and close scrutiny to secure financing."

BuyerBeWare in Virginia Beach, Va., notes that sellers who hold out for their price may be pennywise and pound-foolish. "Most people who want to sell are hanging on to houses and refusing to price properties to sell. They do not want to sell at a loss even though three to five years from now they will sell at a greater loss. They will also lose all the taxes, maintenance, interest payments to the banks, and other expenses they spent during that three- to five-year time frame."

Not All Doomsaying
Yet as pessimistic as some posters were about the headwinds facing the housing market, a handful believe that residential real estate in their community is close to bottoming, if not already on an upswing.

Kayaker, in South Carolina, noted that, "This winter and spring, real estate sales activity is up quite a bit here versus in 2010; nice houses at reasonable (not fire-sale) prices are selling here now, which was not the case in 2009 to 2010."

RTO31607, meanwhile, is seeing signs of stabilization in the Highlands Ranch area of Denver. "From high to low here, prices went down about 15%. They have recovered by a couple of percentage points since the low last year. Some houses are moving; this is a desirable area in which to live. There's not a lot of action, but there's some."

MrGolf noted, "Prices here in my Sarasota neighborhood seem to be flattening after two years of steep drops."

Bitsotree observed that the high-end residential market in Boston is just fine, thank you very much. "In Boston, things are rosy, for the super-rich anyway. In the posh Back Bay neighborhood, there are about 20 condo buildings undergoing complete restorations. If the price of copper is up, it sure isn't affecting any budgets here. Copper gutters, copper down spouts, copper roof trim. Lavish brick work, lush landscaping, designer windows, and I heard one place was installing a bowling alley for the children. It is obscene but a good example of the trickle-down effect in action; this neighborhood is swarming with carpenters, plumbers, electricians, architects, decorators, and so on. Sooner or later, those people will all have enough money to spend on their own homes."

Cincinnatikid, meanwhile, isn't getting too concerned about the macroeconomic housing climate and is instead letting his own wishes dictate the next steps. "My wife and I are investing in our place--a kitchen and new master bath. We know that we'll probably not get our money back, but we're enjoying our house more."

See More Articles by Christine Benz

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Christine Benz does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.