Housing market faces headwinds

A bank-owned house for sale in Pasadena, Calif.

Kai Ryssdal: Spring is the traditional home-buying season, right? Sadly, a lot of people seem not to have been told, and those people were home-buyers the past couple of years. And a gloomy report out today isn't doing the American housing market any favors.

The real estate website Zillow.com says that in the first three months of the year, home values had their sharpest drop since the worst of housing recession back in 2008. Worse, with prices still dropping long after a lot of people said they'd start bouncing back, predictions of the long-awaiting housing bottom are anybody's guess. Marketplace's Janet Babin reports.

Janet Babin: The Zillow report comes as no surprise to real estate agent Ed Kiniry in Seattle. His business is off 40 percent from last year. And he knows what's holding his sales back.

Ed Kiniry: People with relatively good credit still having trouble getting financing, and people still being a little gun shy, a little weary of getting back in the market because they're not sure if it has bottomed out.

Many economists thought that bottom would come some time this year. But now Zillow and others have revised their forecasts and believe prices will keep falling until at least 2012, in part because of a glut of foreclosed homes.

Jonathan Miller is president of Miller Samuel real estate appraisers in New York.

Jonathan Miller: Foreclosures are probably peaking this year, but that only means we're about halfway. We still have four to five more years of above-trend foreclosure activity.

Many of those foreclosed properties sell at discounts that drag down home prices even further. And foreclosed homes still on bank books serve as a grim reminder of all the lending mistakes they made.

Duke University economics professor Jacob Vigdor says that's made banks afraid of their own shadow.

Jacob Vigdor: A lot of lending institutions out there got burned pretty badly. Because of that, they're really scaling back and they're looking more carefully at people's credit records and asking for bigger down payment.

On top of conservative banks and shy buyers, the next hurdle for the housing market could be higher interest rates.

I'm Janet Babin for Marketplace.

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conservative banks and shy buyers, the next hurdle for the housing
~~Jacob Vigdor~

Lot of banks, lot of sellers, and lot of buyers need to consider the overlooked factor. Now that housing has recovered, few people recognize the recovery. Why they don't see it? They have overlooked *depreciation*.

Tell me something! When you buy car, do you consider price of gasoline, price of car-wash, price of depreciation? Ah! But you forgot to factor in depreciation on home purchase. Home prices have now stabilized. Interest rates are at bargain prices. But everyone who has left depreciation out of the mathematical model does not realize that the smaller price each year is only depreciation on the investment. Market is not still collapsing on you SUV. Right? Price goes down each year, but that does not indicate instability of SUV-market, bad karma, vicious circle of pessimism, etc. Price going down on you SUV indicates normal amount of depreciation. Got it? Same thing with house. Each year it becomes more obsolete, less energy efficient than updated upgraded design homes. Right? Home will not fit-in with current technology, current building code, current outward appearance, etc. for more than few years. Same as with car, computer, fishing-rod-and-reel, etc.

After you factor in technological-era-accelerated-rate of depreciation, you then find that the home-price-plus-depreciation is greater each year than year before. Tell me something else! Does limousine depreciate faster than puddle-jumper? You bet. Now is a bang up good time to buy a smaller-family-home. Buy small home with small depreciation until your family is larger from adoption of extra-child or mother-in-law moving in, or Saint-Bernard-Puppy outgrowing his doggy house then moving into one of you bedrooms.

Housing market is about to accelerate upward, but interest and points on home loans will start up first. When this happens employers who finally visualize the *looming labour shortage* will snap up every job applicant in a rush to grab workers first. At that moment home prices will skyrocket out of reach. You should expect this entire spectacle of dominoes to fall *clunk* on bargain home prices with a thud. Best to snap up unimproved real estate now. By November it will be time to snap up homes under construction. By December you should be in top gear at snapping up depreciated homes.

Good luck

The amazing part about this story to me is that this is somehow a surprise. Nothing has changed over the last two and a half years that would correct the housing market, because no one is ready to take on the pain of realizing losses.

We bought a foreclosed house last year in September. Getting the financing was the hardest part, and we have a good income & and good FICO score. I cannot imagine how tough it must be for someone who has either a less than perfect FICO score, or does not make a great income.

Sadly, we are now landlords, as we cannot afford to sell the 2 other homes we own.

"People with relatively good credit still having trouble getting financing..."

Or, perhaps, housing is still overpriced. In the northeast home prices are still 4x+ income levels. When housing prices fall to the traditional 3x income levels for the community in which it resides, people won't "still having trouble getting financing".

Who is going to sign for a 30 year mortgage when they can't be sure they'll still have a job in 30 days?

If McJob incomes are the new normal, then house prices will have to come down to that level.

No matter what they say, talking about "home values" rising or falling is an error. All that anyone can report on is changes in home *prices*. And I strongly suspect that even now real estate prices are well above their actual values.

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