Housing: How Low Can It Go?

Illustration by: Matt Mahurin

For the first time in more than a year, the nation’s decimated housing market is showing a spark of life. But like everything else that’s been turned upside down by the credit crunch, it’s not clear whether foreclosed homes selling at fire-sale prices are an encouraging sign — or just a false hope of a rebound that’s still nowhere on the horizon.

In hard-hit Southern California, sales of existing houses shot up by 65 percent in September, compared with a year earlier — the biggest annual increase in two decades, according to the real-estate information provider MDA DataQuick. Sales rose the most in areas where foreclosures drove down prices, the data showed. In the San Fernando Valley, the sales jump was even higher — 82 percent, with foreclosure sales spurring the spike.

Illustration by: Matt Mahurin

In Prince William County, Va., the heart of the exurbs of Washington, foreclosure sales are so hot they’ve set off a buying frenzy, with realtors who had long time on their hands busy once again. Foreclosure sales are also spiking in Atlanta, parts of Florida, Nevada and even in neighborhoods in Detroit, which barely experienced much of a housing boom to begin with.

The uptick in sales comes after a brutal 12 months for the housing market, which has been in free fall since the meltdown of subprime mortgages last year and the credit crunch that followed. In July, the nation’s inventory of unsold homes hit an all-time high of nearly 4.7 million, the National Assn. of Realtors said.

At the same time, home prices recorded their sharpest ever annual drop, falling 16.3 percent, according to the Standard & Poor’s/Case-Shiller Housing Index, a closely-watched measure. Meanwhile, foreclosures in the third quarter rose by 71 percent over the same period last year, RealtyTrac reported.

Given that dismal reality, any kind of movement in the housing market should be cause for celebration. But it’s way too early for champagne.

At L.A. Land, blogger Peter Viles of The Los Angeles Times took a closer look at the September sales figures for Southern California, and pointed out that sales of homes not in foreclosure actually fell — probably to their lowest levels in recent history. The Orange County Register blogger, Jon Lansner, concluded that sales last month were weakest in the county’s beach towns, which experienced far fewer foreclosures than in communities like Modesto or Stockton.

That helps explain why overall sales are up — while prices are still down. In the nine-county Bay Area, for example, the median sales price fell by 36 percent, while sales soared by 45 percent — leading The San Jose Mercury News to proclaim “Homes Sales Sizzle, Prices Fizzle.” That 82 percent sales jump in the San Fernando Valley, meanwhile, was accompanied by a 37 percent drop in median sales prices.

Even figures for new home sales released on Monday didn’t change the picture. The report from the U.S. Census Bureau showed a slight 2.7 percent increase in September sales, compared to August. But Calculated Risk noted that this marked the lowest September sales volume since 1981, and called the numbers “very weak.”

Foreclosed home in San Diego County, Calif. (Flickr: Sean Dreillinger)

Homebuyers are looking for Basement Bob-style real-estate bargains. And that’s about it.

“You’re going to see a lot of bottom-feeding right now,” said David Wyss, chief economist at Standard and Poor’s. “The vultures are out. But they’re providing a needed ecological service. We’ve got to get rid of these diseased properties.”

Wyss put a Churchillian spin on all this, explaining that selling off foreclosed properties is “a necessary phase” to the start of any housing recovery — it’s the end of the beginning. Still, there are reasons for the lack of enthusiasm among housing experts looking at these foreclosure sales.

It’s not clear yet what kind of buyers are purchasing the homes, said Danilo Pelletiere, research director of the National Low Income Housing Coalition, an advocacy group.

If a buyer is “an individual homeowner deciding to get off the fence” and buy, that’s a positive change, because there’s nothing worse for a neighborhood than a vacant, abandoned property. Plus, it means someone who might not have been able to afford a house in the past finally achieved a dream.

But if buyers comprise mostly investors and speculators, that could be a problem, Pelletiere said. It means the home might stay empty, which does little for the community.

And the property could keep falling into disrepair. Some speculators buy properties in bulk and hold them, which can artificially prop house prices up.

“We just don’t know who is buying the houses,” Pelletiere said. “The other problem is the degree to which the market still has yet to fall.”

In communities like Fairfax County, in Virginia, local governments are preparing to launch programs to buy up foreclosed properties and make them available to middle-income families looking for affordable housing. If the foreclosure market is hot, local authorities will be tempted to get in now and buy the homes.

Fairfax County alone is preparing to spend $10 million and buy up to 200 homes. But if the values of those homes drop, the local government will take a financial hit, Pelletiere said.

All this is a difficult balancing act for local governments, that have to figure out how to time the market correctly — something that has tripped up everyone from Donald Trump to amateur speculators who watch late-night infomercials.

It’s hard enough to do in ordinary times. With a credit crunch, it could become a guessing game. This means the first opening in years for affordable housing will be increasingly difficult to navigate, said Peter Tatian, a senior research associate at the Urban Institute, who studies subprime lending and housing policy.

“This whole situation is unprecedented,” Tatian said. “There is an opportunity here to take advantage — in terms of affordable housing. It looks like people are finding a lot of bargains right now. But it’s also unfortunate that a whole lot of people had to suffer first. That makes it hard to say if the foreclosure sales are a good thing or a bad thing. We don’t know how much they are going to help in the long term.”

The sales spike in Prince William is particularly noteworthy, because prices rose to record highs here during the boom and fell just as hard. Prince William, along with Prince George’s County in Maryland, last spring racked up foreclosures at one of the fastest rates in the nation, according to a study by George Mason University’s School of Public Policy.

Lance Young, a real-estate investor in Northern Virginia, said he’s still shying away from buying foreclosures in Prince William: “It’s too hairy there,” he said, referring to the sharp swings in home prices.

It’s also difficult for investors to buy up the kind of five-bedroom, luxury homes that fill Prince William’s subdivisions and rent them out, because you can’t charge enough to cover the mortgage payment, Young said. He thinks prices still have far to fall, with more foreclosures looming.

“There’s still a lot of pain out there,” he said. “We’re only halfway through this thing.”

In recent months, Young has bought four foreclosed houses inside the Washington Beltway, far closer in to the District of Columbia than Prince William County. He flipped three, and lives in one.

It’s not like the old days of four or five years ago, when you could buy a house, demand any price, and quickly sell it, he said. Young gets his foreclosed houses at a steep bargain, meticulously rehabs them and then sells them for modest profits.

Everything’s different now, Young said. It’s not worth it to buy out in the exurbs like Prince William, because house values have fallen so far, they no longer compensate for the long commute.

Foreclosed houses are often in bad shape, making wading into that market an expensive venture. Young has viewed houses where the former owners let the taps run, locked the doors and left. By the time neighbors saw water pouring from the house, the hardwood floors were ruined.

All around the country, losses on foreclosures have been higher than lenders expected, S&P’s Wyss said. Banks have far more foreclosures than expected on their hands, and they have no experience at managing so many. It’s one reason why foreclosure prices are so low, and may not climb much.

There’s more to complicate the question of a rebound. The foreclosure sales spike happened in September, before the credit markets imploded. Buyers might have gotten loans in September, but they might not get them now. In addition, winter is coming, traditionally a slow time for real-estate sales.

The spikes in foreclosure sales could mean the end of the beginning, as Wyss says. But in a credit crisis in which banks just aren’t lending, and homes that haven’t been foreclosed on aren’t selling, it could also be true that the end of the beginning remains nowhere in sight.