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August 3, 2009

What's driving real estate now

Very good WSJ piece in the longer entry below. Basically, overclaims the point ("High end is still toast") but correctly builds on the thesis that "the lower end of the real estate market is getting more support and rebounding faster" -- FHA, jumbo loan cutoff, changing purchasing appetites, the first-time homebuyer credit (and the fact that first-time homebuyer continue getting married/having kids in all economies).

High-End Homes Frozen Out of Budding Housing Rebound

By NICK TIMIRAOS and JAMES R. HAGERTY

KENILWORTH, Ill. -- Housing is fast dividing into two markets: Sales of low- and moderately priced homes are picking up and values have stopped falling in some parts of the nation. But on the upper end, sales remain mired in a deep slump and price declines are expected to accelerate.

Signs of the divide are visible across the country, including in suburban Chicago. In middle-class Schaumburg, Ill., which had a median income of $65,000 in 2007, sales were up 41% in June from the depressed level of a year earlier and bidding wars have broken out on some properties. "I can't even tell you how many I've been in over the last two months," says Joe Stacy, a local real-estate agent.

But 25 miles away in the affluent town of Kenilworth, with a median income of $230,000, home sales have stalled. While there are 65 homes on the market, just 13 have sold this year. "We're extremely oversupplied," says Sherry Molitor, a local real-estate agent. "Sellers are struggling to realize that we're back to 2001-02 prices."

The divide between the mass market and the high-end -- generally defined as homes that cost above $750,000 -- partly reflects the effects of Washington's housing-rescue plan, which is producing winners and losers.

Policymakers have helped spur sales of lower-priced homes by offering first-time buyers a federal tax credit of as much as $8,000, by driving mortgage rates to near 50-year lows and by expanding the mission of the Federal Housing Administration, which will guarantee mortgages for consumers buying homes with down payments as low as 3.5%.

Sales at the lower end are also helped by the large number of foreclosed homes that banks have dumped at fire-sale prices, which has pulled down values of neighboring houses and sparked bargain hunting. Prices in both Las Vegas and Phoenix are down more than 50% from their peaks of several years ago, according to the S&P/Case-Shiller index.

Home prices tracked by that index rose 0.5% for the three-month period ending in May versus the three-month period ending in April, the first monthly gain in nearly three years. Prices have shown signs of stabilizing in recent months as the share of distressed homes, including those that sell out of foreclosure, falls from highs reached earlier this year.

Low prices have ignited a home-buying boom in some markets. In June, sales of single-family homes in the Las Vegas area were up about 70% from a year earlier.

For affluent buyers, it's a different story.
Housing's Highs and Lows

See declines in the Case-Shiller home price index divided by the bottom, middle and top third of select housing markets.

The $8,000 tax credit for first-time homeowners phases out for single buyers whose incomes exceed $75,000, or married couples earning more than $150,000. Low-interest-rate mortgages backed by the FHA and government-controlled mortgage companies Fannie Mae and Freddie Mac are only available on loans below limits set by Congress. Last year, Congress increased those limits to $417,000 in most markets, and to as high as $729,750 in certain high-cost markets, including parts of Hawaii, California, New York and Washington, D.C.

Mortgages for amounts that exceed those limits are called "jumbo" mortgages, and face higher interest rates. Last week, the average rate on a 30-year mortgage below the limits was 5.42% compared with 6.33% for jumbos, according to HSH Associates, a financial publisher.

Extremely wealthy people may not need a mortgage. But buyers who take mortgages for expensive homes generally face higher rates and tighter lending standards. Most banks that offer jumbo mortgages are generally requiring down payments of 20% to 30% or more, knocking out potential buyers who don't have much equity in their homes and have seen retirement savings fall.

While subprime mortgages sparked the first round of housing problems two years ago, now "troubles are lurking further up the food chain," says Joshua Shapiro, chief U.S. economist at MFR Inc. White-collar job losses have accelerated while more adjustable-rate loans to prime borrowers are resetting to higher payments. "You put all that together, it leads me to believe that the next leg down on home prices is going to come from the top," he says.
[High-End Homes Miss Out on Rebound]

To be sure, the affluent housing market is substantially smaller than the mass market. Sales of existing homes priced over $750,000 accounted for 2.3% of all sales in the first quarter of this year, compared to 4.4% of the housing market in 2007, according to the National Association of Realtors.

Still, the distress in high-end market has implications for consumer spending: the top 10% of U.S. households in terms of income accounted for 23% of consumer spending in 2007, according to government statistics. As those households watch their home equity evaporate, they are more reluctant to spend on housing upgrades or other items.

Inventory of expensive homes is rising. Overall, the inventory of unsold homes in June was enough to last 9.4 months at the current selling pace, down from 11 months a year ago, according to the NAR. But the supply of unsold homes priced above $750,000 swelled to around 17 months in June, up from a 14.5-month backlog one year ago. A recent forecast by analysts at J.P. Morgan Chase & Co. said it would take until at least 2012 for the expensive-home market to recover and that peak-to-trough declines could surpass 60%, compared to 40% for the rest of the market.

Defaults are rising, too. Among prime mortgages, jumbo mortgages are now leading delinquencies and defaults and are the fastest-rising category for defaults of all types of mortgages. The rate of 60-day delinquencies on prime-jumbo mortgages jumped to 7.4% in May, from 4.5% in November, according to First American CoreLogic. By comparison, 60-day delinquencies on prime-conforming loans reached 4.9% in May, from 3.6% in November.

A recent survey by the NAR found nearly three-quarters of real-estate agents said buyers were purchasing smaller houses due to tighter credit requirements. "We're in a 'trade-down' environment for the first time since the 1930s," says Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley.

High-end homes are also being hurt by changing perceptions about how much home one should own. For years, people were encouraged to buy the most expensive home they could afford because there would be a payoff when it was time to sell. But buyers can't count on that any longer.

Having lost large amounts in the stock market and on real estate, "a lot of people are licking their wounds and hoarding their cash," says Sally Daley, a real-estate broker who sells luxury homes in Vero Beach, Fla. She says many customers are asking, "Do I really need this big a house?"
[High-End Homes Frozen Out of Budding Housing Rebound]

Even families who can come up with the hefty down payments are buying more conservatively. Gabi Marks, an attorney, and her husband Don, an engineer, recently sold their condo and bought a five-bedroom Victorian house in San Francisco to accommodate their growing family.

They paid about $1.58 million, staying below their self-imposed ceiling of $1.8 million. "We made sure we had a sufficient [financial] cushion," Ms. Marks says. They made a down payment of about 30%, partly to qualify for a lower-cost loan, and plan to pay down a big chunk of debt as soon as the sale of their condo is completed.

When the foreclosure crisis began two years ago, there were few signs the high-end market would suffer. "It's God's country," Leslie Appleton-Young, chief economist for the California Association of Realtors, told an audience of real-estate agents in 2007. "When is the 30% decline in Marin County's market going to happen? Not in my lifetime."

Home prices there have fallen by 21% from their 2006 peak, according to Zillow.com, a real-estate Web site. Ms. Appleton-Young now says there's "no doubt that the high-end housing prices have adjusted and will continue to adjust."

Few in Kenilworth ever expected the price declines that began in markets decimated by subprime loans and house-flippers would ever reach their streets, which are lined with Tudor mansions, manicured lawns, and for-sale signs.

The community, which has a bowling league and a sailing club and is consistently named as one of America's wealthiest towns, was developed as a planned community 100 years ago on land purchased by Chicago retailer Joseph Sears, son of the founder of Sears, Roebuck & Co.

Today, the neighborhood is a microcosm of other high-end housing markets across the country, where homeowners are frozen in their homes, postponing relocations or a planned downsizing because they aren't willing to cut prices.

Those who do drop their prices risk raising the ire of the neighbors. Peter Cummins, a local real-estate agent who lives in Kenilworth, caught some flak from residents in June after chopping the asking price of a six-bedroom home to about $1.6 million from nearly $2 million. To draw attention to the cut, he produced a flier reading: "Hey Chicken Little, is that the sky falling in Kenilworth?"

Some residents are angry because policymakers in Washington specifically excluded jumbo mortgages in housing-rescue plans. "We're considered either rich people who don't deserve help or deadbeats who bought too much house," says Kelli Kobor, a 42-year-old substitute high school teacher. "I don't see Washington prepared to deal with us."

Five years ago, she and her husband bought their five-bedroom Dutch colonial in Kenilworth for $1.3 million with a 25% down payment using equity they'd built up from two previous homes. Her husband lost his job in December and took a new one that pays much less, making it harder to make mortgage payments. Ms. Kobor says she missed her first mortgage payment in the spring but is now current.

In July, her mortgage servicer agreed to temporarily lower her interest rate for six months, and the unpaid balance will go into a balloon payment due when the loan is paid off.

Like many young families that move to Kenilworth, Ms. Kobor and her husband were drawn by the town's top-rated public elementary school, which is just a few steps from their home, and the tight-knit community of 800 households.

Local real-estate agents have told her she'd be lucky to sell the house for the $960,000 that's owed on their jumbo adjustable-rate mortgage. Her lender, Thornburg Mortgage, specialized in prime jumbo loans and filed for protection from creditors under bankruptcy law in March.

Unable to sell his home in nearby Winnetka, Ill., Brad Davis, a 43-year-old attorney, has commuted to Washington, D.C., for the past year after taking a new job there.
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He recently cut the asking price on his four-bedroom brick Tudor by $100,000 to around $1.4 million after it didn't draw any offers in eight months on the market. Most potential buyers have a big obstacle: They would first have to find buyers for their own homes.

"You're not sure if it's a price issue or if there just aren't any buyers," says Mr. Davis, a father of two young children. While he says he doesn't mind the long commute, "not being able to come home every night is the hard part."

Others have pulled their million-dollar homes off the market and are offering them as rentals. Susan Forney rented her six-bedroom Georgian colonial in Northfield, Ill., for $7,500 a month after it didn't sell.

Over the past two years, she reduced the price by $1 million to $2.25 million, but her only offer came in at $1.6 million, about $100,000 less than she paid for the house in 1999.

Ms. Kobor says it is ironic that two of the most powerful men in the country know of these problems first hand.

Treasury Secretary Timothy Geithner decided to rent out his Larchmont, N.Y., home after it failed to sell and President Obama purchased a $1.65 million Chicago home with a $1.3 million jumbo mortgage in 2005, at the height of the real-estate bubble. The property is now worth $1.2 million, according to an estimate by Zillow.

The Treasury Department and the White House declined to comment.