Good news about the housing market

Andrew Roberts

Given the good news about Boeing's new contract (many more jobs in our area) and the prediction that Tacoma is projected as the number one growth city in the nation, I am posting this reprint. Remember that all real estate is local. Our area is performing even better than those mentioned.

Thanks to Simon Constable of the Wall Street Journal. 

There might finally be some good news this year about the nation's dismal housing market. Or, at least, the bad news could stop.

Either way, it will be welcome relief for current homeowners as well as for potential real-estate investors. Reasons to be optimistic have been sadly lacking since the housing bubble burst in 2006.

For sure, last week we learned the widely watched S&P/Case-Shiller home-price index fell 1% in December, its fifth straight decline. The index tracks 20 major markets.

But that figure belies real reasons to be optimistic, according to some experts. If they are right, it might make sense to jump into real estate. The trick is avoiding getting burned again, and it doesn't necessarily mean owning a home.

First, let's recap the economic signs a bottom is close.

Houses Are a Good Deal

Housing is the most affordable it has been in decades, according to analysts at Moody's Analytics. They don't just look at house prices. They also look at incomes.

Nationally, the cost of a house is the equivalent of about 19 months of total pay for an average family, the lowest level in 35 years. Prices usually average close to two years' pay, although that varies nationally.

At the peak, midway through the last decade, a home in Los Angeles cost the equivalent of 4.5 years' pay. The average price has since fallen to just over two years' income now. That's well below its pre-bubble average of 2.6 years. This means average Los Angeles homes are cheaper in "real terms" than they were typically during the period 1989 through 2003.

The opposite is true around the Washington beltway, where it will take 26 months of pay to buy a home, versus the historical norm of 22 months.

In the end, it will be affordability that will drive people to buy homes.

"Pricing is down so much in some markets that when you analyze renting versus owning it makes much more sense to own," says Michael Larson, a real-estate analyst at Weiss Research in Jupiter, Fla.

It is definitely bullish. But what about timing?

"Housing prices will probably bottom in 2011," says Scott Simon, a managing director at money-management firm Pimco in Newport Beach, Calif. He foresaw the housing crash, helping his firm dodge losses that plagued Wall Street.

Mr. Simon says prices might dip another 5%. Still, in the scheme of things, that's small. Consider this: In some markets, home prices have fallen by half or more since 2006.

For instance, in once-hot Miami you can snap up an average house for under $166,000, according to recent data from the National Association of Realtors. That's down from $371,000 in 2006. Another 5% drop would take it to $158,000.

Investors Stepping Up

Here's another sign the market is nearing a bottom: Investors have started to buy up houses and condos, in some instances paying entirely in cash. That's a far cry from the heady bubble days when borrowed money seemed the key to riches. The bubble-era speculators who got burned tended to buy at the peak and borrowed heavily to do so. When the crash came, they quickly saw their wealth erased.

Take Miami again. Last year, more than half of all transactions were made entirely in cash, according to a recent report in The Wall Street Journal. That compares with 13% of deals in the last quarter of 2006, the height of the bubble. Similarly, in Phoenix 42% of sales in 2010 went to all-cash buyers, up threefold since 2008.

It's a sign that these investors are betting on a rebound. Investors buying at current prices are looking for deals, or so-called bottom fishing. They typically like to pay entirely in cash (or with a relatively small loan) to speed up transactions. That can be vital for an investor wishing to lock in a deal fast.

If this is a turn in the market, then it might make sense to go out and buy a home. But, warns Pimco's Mr. Simon, "buy in areas you really know."

Plan to Stay Put

Buy and hold. While the good news is that the worst of the housing crash might be over, the bad news is that the fast gains of the glory days of 2005 and 2006 won't be back any time soon. So to cover the costs of buying and selling, and what could be a prolonged recovery, plan to own for more than 10 years, explains Jack Ablin, chief investment officer at Chicago-based Harris Bank.

Also remember that borrowing money to buy a house can still be risky. If you pay for a $100,000 property with $20,000 cash and borrow the rest, a dip in the value of $20,000 would leave you with zero equity. On top of that, you'd have to pay to maintain and repair the property, something not necessary when renting.

—Simon Constable is author of the forthcoming book "The WSJ Guide to the Fifty Economic Indicators That Really Matter: From Big Macs to 'Zombie Banks,' the Indicators Smart Investors Watch to Beat the Market." simon.constable@dowjones.com

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Building green

There is buzz on Bainbridge about green building, not surprising in an area so concerned with the environment. The following article is instructive.

By CHARLES LOCKWOOD, for the Wall Street Journal

High-performance green, or "sustainable," buildings can be found across the U.S. Offices, schools, stores, factories, hospitals and, increasingly, homes. Even green police and fire stations, convents, pet shelters and car dealerships.
Green buildings aren’t just a U.S. phenomenon. In the U.K., over 95,000 buildings have received "green" certification from the BREEAM (Building Research Establishment Environmental Assessment Method) program, and over 670,000 buildings have been registered for a BREEAM rating What is a high-performance green building? Is it much more than just energy-efficient?"


Green buildings incorporate design, technology and construction practices that significantly lessen their negative impact on the environment through reduced use of natural resources, lower energy and water consumption, and fewer greenhouse gas emissions. They also provide healthier indoor environments for their occupants-you, your family, your co-workers-compared to conventional buildings.
A Fundamental Change
In 2002, only 38 buildings had received a LEED® (Leadership in Energy and Environmental Design) rating from the U.S. Green Building Council (USGBC). LEED is a voluntary green building rating system that measures and verifies the environmental performance of a building. It has four award levels: Certified, Silver, Gold and Platinum.
Just five years later, as of October 1, 2007, 1,326 residential and non-residential buildings had earned LEED ratings, and 16,047 projects had been registered for LEED ratings.
"Looking three to five years ahead, and based on the current trajectory of growth, we should see a 50" increase every year in the number of new-construction buildings that apply for LEED certification," says S. Richard Fedrizzi, president, CEO and founding chair of the USGBC. "By 2010, I expect to see 100,000 commercial buildings involved with LEED . . . and over 1 million homes."
Leading the way toward higher-performance green buildings are corporate and government offices (from the local to the federal level), and schools and universities. Playing a rapid game of catch-up are single and multi-family residences, along with hotels, manufacturing facilities and retail outlets.
"We are in the middle of a major transformation in the real estate market," says Brenna S. Walraven, chairman of BOMA (Building Owners and Managers Association) International. "In no more than 5 years, and maybe in as little as 24 to 36 months, building owners will be at a competitive disadvantage if they aren’t operating green buildings."
Green Drivers
The proliferation of high-performance green buildings is gaining momentum because of several powerful forces.
The most significant driver is the documented financial benefits of green buildings, from lower operating costs, including a 20" to 50" or more reduction in energy consumption, to improved workforce productivity, reduced employee absenteeism, and skilled-worker attraction and retention.
Second, green buildings offer increased profits for real estate owners and investors. According to McGraw-Hill Construction’s "2006 Green Building SmartMarket Report," compared to conventional buildings, green buildings generate 3.5" higher occupancy rates, 3" higher rent rates, an average increase of 7.5" in building values and improved ROI. Many buildings are doing even better.
Upon its early 2006 completion, the 40-story LEED-Silver One South Dearborn Street building was already 93" leased in downtown Chicago’s soft market, which had a 14.3" vacancy rate. One Crescent Drive, a four-story LEED-Platinum office building in the Philadelphia Navy Yard Corporate Center, has rental rates that are 25" to 50" above the market average.
Some green buildings are selling at impressive prices. In 2006, Hines sold the One South Dearborn Street tower to the Olen Properties Group for $344 million, a profit of $144 million over construction cost.
A third driver is the growing concern about both global climate change and rising energy prices to heat and cool our buildings. Green buildings address both issues.
Fourth, the formation of the U.S. Green Building Council in 1993 and the launch of its LEED green building rating program in 2000 gave the U.S. a national green building definition and rigorous standards that have assured buyers and renters that a building is really high-performance and sustainable, not just tagged with a "greenwashed" marketing label.
Fifth, cities, states and utility companies have been offering a wide variety of incentives-from tax credits to density bonuses and expedited approvals-to encourage energy-efficient and green building development and renovations.
Finally, a growing number of building regulations have been mandating green development, first in the public sector and now, increasingly, in the private sector.
Debunking the "Green Costs More" Myth
Most people still believe that it costs substantially more to construct a green building than a standard building. That was true 10 years ago, when green buildings in the U.S. were still experimental, but not any longer.
As recent studies have shown, LEED-Certified, LEED-Silver and, increasingly, LEED-Gold buildings cost no more-and sometimes less-than comparable conventional buildings. PNC Financial Group and Wachovia have both embarked on major green bank branch construction programs. Each of these LEED-Certified branches cost Wachovia $80,000 less and PNC $100,000 less to build than comparable conventional bank branches.
"Green premium" no longer means higher-cost green buildings. Today it means higher property values, lower operating costs, and health benefits for building owners and tenants.

Reverse mortgages: the choices expand

By KELLY GREENE and VALERIE BAUERLEIN
November 13, 2007; Page D1 Wall Street Journal

It may sound hard to believe, but one part of the mortgage market is hot: reverse mortgages. And that's giving older homeowners more options to tap the equity in their homes -- but also opening the door to more confusion and mistakes.



Only a year ago, homeowners interested in reverse mortgages had little to choose from beyond the plain-vanilla, government-backed products that have long dominated the market. Such mortgages essentially allow homeowners at least 62 years old to sell a large chunk of their home equity back to a bank or other lender in exchange for a lump sum, monthly payments or a line of credit.


Now, nearly a dozen large banks and mortgage lenders have launched reverse-mortgage products with lower fees and larger payouts. One lender has reduced the minimum age requirement to 60; others are making loans on second homes and vacation rentals. "Jumbo" reverse mortgages -- for houses valued at as much as $10 million -- are becoming more common.

Read entire article! It's worth your time.