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Juli Niemann: It's a split housing market
A sign sits in the front yard of a home being offered for sale in Pleasant Prairie, Wis.
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Jeremy Hobson: We just got a mixed picture on home prices from the closely watched Case-Shiller Index. It says home prices fell 3.8 percent in August, though prices rose in 10 of the 20 cities in the survey.
And that's where we'll start now with Juli Niemann, analyst with Smith, Moore, and Company, who is with us live from St. Louis. Good morning.
Juli Niemann: Good morning.
Hobson: Juli, let's start with the good -- biggest price increases in Detroit, Chicago and DC -- what's the story there?
Niemann: Well, it really is a split housing market. We've stabilized, in fact, we're seeing a little rising employment in some of these cities. For example, Washington D.C, well, we know that. The federal government is always growing, so that's always the mecca for housing there.
But if you take a look at Chicago, for example, the 18-34 year old population -- and there are about one and a half million of these people living at home -- are moving out, they're going to where the jobs actually are. And in Chicago, you have a core that is growing because you have finance in there, trading, agriculture. But the suburbs, you still have very high unemployment, that part isn't growing, so you really have a reverse donut hole here.
Hobson: And Juli, what about the bad here? The biggest declines came in Los Angeles and Atlanta -- what's going on in there?
Niemann: Well in Los Angeles, some of it is technology too, but it was very, very high prices from which they've been coming off, so you still have way high prices typical of the "sand states" still hitting L.A.
When you take a look at some of the other cities, like Detroit, housing prices are the price of a really good New York dinner, so that's going up; it doesn't really mean anything. So it's very split in terms of where the new jobs are coming, and that's where you're going to see stabilization first.
But the core cities that have sand problems -- Phoenix, Miami, Los Angeles -- are still going to have those way overpriced houses that have to be worked off.
Hobson: Juli Niemann, analyst with Smith Moore and Company, thanks as always.
Niemann: You bet.
No question that this is a dysfunctional housing market. I’ve heard many homeowners complain about their counterparts not owning up to their obligations, but should people really be expected to do the irrational? As a renter, the division I see is along the lines of property owners vs. non-property owners. My group got screwed as rents rose during the bubble, and again now as rents increase even further from a market flooded by people losing their homes. There are surely those homeowners who must charge higher rents to make payments, but also be those who just want to get the “market rate†and can afford to sit on them and leave them vacant without fear of foreclosure (corporate owned, for instance). When government programs are intent on propping up the market and re-inflating the bubble, the market cannot adjust to real world levels. Why should renters pay, in any case, and how does anyone think they might be able to? The truly responsible thing would be to realize that this was a Wall Street-created bubble that never did, and still doesn’t, have any relationship to individuals’ income level. Homeowners speculated, too. Way back in ‘04, I heard that over 80% of Californians could not afford to be first-time homebuyers. The market was geared to refinancing and current homeowners. The writing has been on the wall for a long time. In my view, those underwater homeowners who walk away are only doing the rational thing; either because it’s all they can do, or because housing prices must come down to realistic, affordable levels.
A growing trend has been brought to my attention in San Diego, CA. I know people who currently own homes and can afford to make their mortgage payments, but realize that they are under water with the home value. So they intentionally cease paying their mortgage and let the home go into default. However, they take advantage of the sluggish pace of the foreclosure process and stay in the home rent/mortgage-free until they are evicted. Some have stayed in their homes for up to 2 years! Rent/mortgage is the largest expense of most people's budgets, so by avoiding this expense, they have a lot of capital they could infuse into the economy. However, there has to an economic impact of the foreclosed home. If this becomes a growing trend, what will be the overall economic impact on the country?
