Home Prices Hit a Milestone

The Wall Street Journal December 26, 2012

by Nick Timiraos

Home prices are on track to notch their first yearly gain since 2006, the strongest performance since the housing bust and a development that could accelerate the real-estate rebound even as the broader economy stutters.

The housing market's revival has had several false dawns in recent years, but a recovery that began in the spring has strengthened throughout the summer and fall. The latest confirmation came on Wednesday, when the Standard & Poor's/Case-Shiller 20-city index showed that prices rose by 4.3% from a year ago in October. Since January, prices are up 6.9% so far this year, the largest year-to-date gain since 2005. A separate index released Wednesday by Lender Processing Services Inc.showed that national home prices were up by 5.2% this year through October.

"The tide has changed," said Ivy Zelman, chief executive of research firm Zelman & Associates. "People feel it's OK to go back into residential real estate—it's no longer taboo—and that change in sentiment could have a very powerful effect."

Prices have risen this year amid stronger demand and sharp declines in the number of homes for sale. Banks slowed down foreclosures after abuses in processing paperwork surfaced two years ago. Since then, banks have become more aggressive at modifying loans or approving short sales, where the home is sold for less than the amount owed. The decline in new foreclosures has reduced the number of homes on the market that sell for large discounts.

Homeowners who normally would sell their properties have been holding them off the market rather than sell at what they perceive to be a lowball prices, leaving inventories of previously owned homes at an 11-year low.

Weak home construction in past years also is a factor and has left inventories of new homes for sale near the lowest levels in at least 50 years.

Demand, meanwhile, has picked up, first as investors scooped up perceived discounts on properties that can be rented out or resold quickly for a profit. Traditional buyers—those planning to live in the property and not flip it—also returned to the market, drawn by record-low mortgage rates, rising rents and steady job gains that are increasing household formation.

"People got tired of living in mom and dad's basement, and rents have gotten much higher than your mortgage payment," said Glenn Kelman, chief executive of Redfin, a real-estate brokerage.

To be sure, housing markets are still fragile and face stiff headwinds. Mortgage lending standards are still strict, as lenders scrutinize appraisals and borrowers' income history to make bulletproof mortgages. Millions of borrowers owe more than their homes are worth or don't have enough equity to sell their home and make a down payment on a comparable property.

Median sales prices of previously owned homes stood at $180,600 in November, according to the National Association of Realtors, and have posted year-over-year gains for nine months, the longest such streak since May 2006, when home prices peaked.

Still, sales of existing homes in November were up 14.5% from a year earlier, putting them on pace to reach their highest level since 2007. On Thursday, the Census Bureau is set to report new-home sales for November.

The upshot is that more buyers have been chasing fewer homes for sale, putting upward pressure on prices. "We've been seeing just crazy competition. Supply and demand has tipped in the seller's favor," said Nani Luculescu, a real-estate agent in Anaheim, Calif.

Last month, she represented a buyer who made the winning bid—among 52 offers—for a $320,000 four-bedroom home in Garden Grove, Calif., that sold for 10% more than the asking price. Although the home drew better offers, the owner sold to her clients, a newlywed couple buying their first home, after they included pictures of themselves and their pet dogs—two Pugs—in a cover letter.

Some buyers aren't only bidding above the list price, but also are making all-cash offers and forgoing home inspections in an effort to make the sale as easy as possible for the seller.

Frustrated by a lack of inventory, others are instead purchasing new homes. Sonal Basu, a real-estate agent in San Francisco's East Bay, said in August she noticed that prospective buyers began camping out in tents at the new-home development where she lives in San Ramon, Calif. Some of the "campers," she says, are being paid $250 a day by buyers to wait in line for them.

Since August, every area new-home development has also had campers waiting in line to buy homes, she said. "A year and a half ago, nobody wanted to move out here because they felt it was the boonies," Ms. Basu said. "Now, they're not hesitating with this commute."

Prices are rising in part because the share of "distressed" homes—those selling out of foreclosure or in short sales—has dropped. While 18 of 20 cities posted year-over-year price gains in October, the largest increases have taken hold in some cities hit hard by the housing bust. In Phoenix, for example, prices have jumped by 21.7% over the past year. Prices gained by 10% in Detroit and 8.5% in Miami.

Economists say many such gains aren't sustainable and instead reflect prices rebounding from very low levels. "They're not going to continue at that pace," said Thomas Lawler, an independent housing economist in Leesburg, Va. He said he expected prices to go up next year, but at a slower pace than this year.

Also, some states where banks have struggled to follow court-administered foreclosure processes have large overhangs of mortgages where borrowers haven't made any payments in at least a year. Those homes could eventually hit the market, putting pressure on prices if demand isn't strong. Prices in New York and Chicago, which both have large overhangs, saw prices decline by 1.2% and 1.3% in October from one year ago.

A more immediate concern is how consumer confidence might fare if lawmakers don't reach a solution to avoid the "fiscal cliff," a raft of automatic tax increases and spending cuts set to take place in early 2013.

For now, low inventories of distressed properties are finally boosting the fortunes of the nation's home builders that have long been sidelined by competition from cheap bank-owned properties.

The stock prices of U.S. home builders, as measured by the Dow Jones home construction index, were up more than 75% year-to-date as investors are betting that the housing recovery could be sustainable. Others are plowing money into startups that invest in single-family homes as rentals. That, in turn, is ramping up construction hiring and spending on everything from lumber to cement to air-conditioning units.

"It hasn't gotten to any big level yet, but our carpet businesses and brick businesses and all of that will come on with residential construction, and that has turned," said Warren Buffett, chief executive of Berkshire Hathaway, in an interview last month with CNBC.

Real-estate executives say their biggest worry right now is that more homes aren't available to meet demand. Mr. Kelman says he is looking to increase Redfin's workforce of 400 agents nationally by 50% by the end of January. "I'm going across the country meeting with managers, and the only topic we're talking about is hiring," he said.

Earlier this year, the company ended up referring about half of its potential customers to other companies because "demand outstripped the supply of agents," he said. Redfin is unusual among real-estate companies because it pays a salary and benefits to its agents instead of commissions. "Our model means we have to go long on real estate," Mr. Kelman said, "and we did not go long enough."

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