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.
Texas is an example of an area with a strong economic base that is not restricted in terms of housing supply, so Boud does not see the Lone Star State as a prime investment opportunity. He sees downward pressure in the near-term continuing in Phoenix and Las Vegas, and says that places like Salt Lake City and Denver “entered the down cycle a little bit later than most and will be a little bit slower coming back.” He cited Sacramento as having poor prospects because its economy is so tied to California’s government, which is expected to shed jobs for some time to come.
The most distressed housing markets like Las Vegas, where it is reported that a majority of homes are now bought with cash, the foreclosure market presents a business opportunity. “What we’re seeing is a lot of investors, those who are relatively wealthy, purchasing homes at very low prices and putting renters in them,” says Boud. “The rental rate is higher than the mortgage rate, so investors can be in the black right way.” Boud says buying foreclosed properties and renting them for five years is “a viable business plan” for those willing to be a landlord, and it also helps the economy by reducing the supply of distressed homes.
Aside from short-term investing opportunities, Boud is most enthusiastic about the long-term, saying, “There are drivers in place that can create an economic cycle such as we have never seen.” Just as the world has seen an industrial age and an information age, the next wave will be an energy age, he says, arguing that energy-efficient housing can lead the way. Boud says there will be a very large multiplier effect if we build homes with both energy conservation features–solar panels, high-efficiency HVAC systems and LED lighting –and energy-producing capacity through fuel cells and wind turbines that produce electricity. Boud cites the automotive industry as an analogy. When energy efficiency standards impelled car companies to produce a new generation of cars getting 40 to 50 mpg rather than 15 to 20 mpg, there was a surge in demand for the new cars, which had an enormous impact throughout the economy. If these changes come to housing, “everyone gets a new home or refits their old ones,” Boud says.
In the policy arena, Boud panned ideas the administration is considering to facilitate homeowners with government-backed mortgages refinancing at today’s lower rates. “That is just fiddling with the system,” and will lead to higher taxes or a larger burden on the banks. “We’ve already had a massive failure of banks. Why increase their burden? Why increase taxes, especially when mortgage rates are at 3.5%?” he said.
“The thing that loosens mortgage lending is economic growth, not government policy. The best thing the government can do is get out of the way and let markets take care of themselves,” Boud says, citing the tax credit for first-time buyers in 2010 as an example of a failed government program. “It created a false upward trend. All we were doing is borrowing demand from 2011. And it cost us tax money and subsidies.”