metro areas were judged to be overvalued during Q1 2007, representing a decline from 62 metro areas during the Q3 2006. More important were declines in the share of all housing units, and real estate assets, judged to be overvalued. In terms of housing units, the percent deemed to be overvalued declined from 17% to 14%. In terms of single-family asset value, the percent deemed to be overvalued declined from 33% to 25%.
California, Arizona, Florida, parts of Oregon, Washington and New York were judged to be overvalued. Parts of mid-west states were judged to be undervalued.
House Price Appreciation
House prices have been resilient in the interior West, though we see overvaluation there increasing, making those gains precarious. Bend, Oregon and Prescott, Arizona are now the nation’s most overvalued markets. Alternatively, price gains in Texas seem more firmly based, as valuations there are attractive by historical standards.
157 of 317 metro areas suffered price declines during the last quarter. These 157 metro areas accounted for 38% of all single-family units and half of all single-family real estate assets in the nation. Declines were widely dispersed, though most highly concentrated in California, Florida, New York, New England, and the industrial Midwest.
Percentage Change In House Prices
Nationally, house prices advanced during the first quarter at an annualized rate of just 2.2%. This latest gain falls between the third quarter pace of 2.0% and the fourth quarter pace of 2.5%. On a year-over-year basis, prices are up 3.0%, the weakest gain in a decade.
A study showed that 139 of California’s zip codes fell within the top 500 for total foreclosure filings in the United States. The next highest count for any state is less than half that at 72 and is in another sun-belt state Florida. However Cleveland’s zip 44105 saw the highest number of foreclosures in the nation with a total of 784 filings during the three months ended June 15. The hardest hit zip in California was Sacramento, 95823, where there were 634 default notices, repossessions and auction notices. It had the sixth most foreclosure filings for any zip code in the nation.
California boasts a vibrant economy and a fast growing population. High number of foreclosures occur due to serious underlying economic problems such as job layoffs or plant closings. But the California foreclosure spike, as well as those in Florida, Arizona and Nevada, was set up by a huge appreciation in house prices that put the market beyond affordability. In last few years the house prices have appreciated in double digits making it an attractive proposition for real estate investors. When markets cooled, speculators added to downward price pressure by unloading their properties onto already lengthening inventories. In many of these markets, prices fell below what investors paid. Many of them havent been able to pay up for the mortgage, leading to foreclosure.
Many Sun-Belt buyers bought their high-priced houses using adjustable rate mortgages (ARMs) which featured very low initial, or teaser rates that reset much higher. Many buyers used ARMs to get into a house with little regard for whether they could afford the payments, betting that rising prices could build enough home equity they could tap for cash. When prices stabilized or fell, that safety valve disappeared. Owners couldn’t pay monthly bills, and they had no equity to draw on.
In the Rust Belt, it was the ripple effects of a dying industrial economy instead of speculation that crushed the finances of many borrowers in states like Michigan, Ohio and Indiana. People in these area have lower than average income, higher than average unemployment and a large stock of older, single-family homes. Many of them sell for less than $100,000, some for under $30,000.
In Sacramento, 95823, by contrast, residents depend more on government jobs and service industries for employment, although wages are still below average for the state. Homes there are more modern and more valuable than in 44105; even modest three-bed/two bath houses go for several hundred thousand dollars.
Neither the Rust Belt nor Sun Belt are likely to see easier conditions any time soon. In the Sun Belt, the subprime mortgage mess will take many months to work through as the many borrowers who took out 2/28 and 3/27 ARMs during 2005 and 2006 will hit their reset points this year and next. It is expected that delinquencies will peak by the end of the year and so will foreclosures in 2008.
Commercial Real Estate Hits Record
U.S. commercial real estate investment reached a record $157 billion in the first four months of 2007, up 62% from a year earlier, as office purchases surged. Markets with the highest transaction volume were Manhattan, Chicago, Northern Virginia and San Francisco.
Homebuilder Confidence Drops to 16-Year Lows
The Homebuilder index decline was in line with economist expectations. The index bounced in early 2007 on unseasonably warm weather, but builders are more pessimistic as delinquencies and foreclosures force lenders to send potential homebuyers away.
Copper Dips Amid Renewed Worries Over US Housing Market
Copper dipped as traders remained cautious following weak US housing data. On the surface this could undermine confidence in metals, however it may also reduce the chance of the Fed having to hike interest rates, which in turn could see bond yields dip, treasuries rise and the dollar weaken.
Some Top-Rated Subprime Bonds Downgraded
131 bonds backed by second-lien or piggyback subprime mortgages were downgraded, which allow home buyers to borrow the cash needed for a down payment, effectively putting no money down for a house.
(Source: CNN Money, SeekingAlpha)