While this week has produced mostly grim news in the housing sector, a top real estate industry consultant offers a far more encouraging big-picture view of the key economic sector. Mark Boud of Real Estate Economics in Irvine, Calif., said he believes home prices may have finally hit bottom, that the foreclosure mess creates genuine business opportunities and that energy-efficient housing has the potential to revitalize the entire economy.
The Commerce Department announced Tuesday that new home sales declined by nearly 1% in July, and for the third straight month; the Federal Housing Finance Agency on Wednesday said home prices declined 5.9% in the second quarter; and the Mortgage Bankers Association (MBA) this week reported a rise in mortgage delinquencies for the second consecutive quarter.
While these statistics suggest that real estate continues to be a drag on the economy, they may mask more positive emerging trends. For example, longer-term mortgage delinquencies, those that are 90 days or more past due, are at their lowest point since early 2009, and the MBA sees no signs of a large backlog of homes that banks on which are waiting to foreclose.
Explaining the reasons for the slowing rate of foreclosures, Boud (left) says: “Banks are working with owners to short-sell instead of foreclose.” Boud adds that homeowners still hanging on to their homes today are more resourceful than those who gave up on their homes earlier in this economic cycle and says a slowly reviving economy is also helping slow foreclosures.
Boud, whose consulting firm produces feasibility studies, asset valuation reports and market reports for capital groups and developers, was not overly concerned about the slump in new homes sales. “Builder margin is quite low,” he says. “Bankers are not willing to offer construction financing. So builders are confined to those who can finance their own construction.” This weakness in new construction corrects for excess supply of other housing, which has put downward pressure on prices. “I think we’ve truly formed a floor on pricing this year,” he says.
Investors seeking to capitalize on a turnaround in real estate should look for markets that are both undervalued and have long-term potential for economic growth. “One of the most undervalued markets is Phoenix, which is significantly undervalued and is experiencing job growth. In terms of rental support, economic growth, it’s a good long-term bet. Coastal California is a good near term and long term bet,” says Boud, noting particularly the San Francisco Bay Area excluding the East Bay and Silicon Valley. Seattle and Los Angeles are also poised for a rebound, he said. Places like these that are “supply-restricted” tend to snap back fairly quickly if they have a strong economic base.