Following the Lehman Brothers collapse, “real estate” became a dirty term in the popular media, and politically motivated blame was hurled among the lenders, real estate agents, appraisers and investors for declining home values. To discourage inflated appraisals, the federal government created a brand-new system for how lenders hire appraisers.
Lenders no longer could call their favorite local appraiser to review a property. Instead, they had to utilize a Centralized Appraisal Service, which auctions the homes out to hundreds of appraisers for online bidding. The intent was to make appraisals more fair, but the result was appraisals by persons with no knowledge or understanding of the local markets, and thousands of home sales have not closed due to ridiculously low appraisals.
However, despite all of the difficulties, a slow and steady rise in real estate values began in late 2011, and has been sustained nationwide.
As I reported recently, the real estate market, which began a turnaround in 2012, has really been gathering steam in 2013. A confluence of lower prices, miniscule interest rates, improvements in short sales, depleted inventory and the ability of owners of previously foreclosed home to qualify again have been contributing factors.
However, a larger-than-usual percentage of these sales has been to investors with cash. The areas previously cited that were hit the hardest have seen a tremendous rebound in prices, due in part to large numbers of hedge funds buying up foreclosures to rent out in those locales.
While investor sales have sparked the real estate market, more first-time and step-up buyers are required to sustain the recovery going forward.
Real estate in 2013 still faces several challenges. For several years, banks have been holding on to a “shadow inventory” of millions of foreclosures in an effort to artificially raise values. With so many homeowners upside down on their mortgages and unable to sell their homes, this has produced historically low inventory rates in many larger cities.
But the low inventory levels may have bottomed this summer. Some areas are beginning to see a rise in the foreclosure numbers, as banks feel more confident in releasing them. Many early hedge fund investors have completed their purchases of rental properties. In addition, the 12% nationwide increase in home values, coupled with a decline in principal owed, has reduced the number of upside-down borrowers.
High levels of unemployment continue to put a lid on real estate sales, and many of the jobs being created are only low-wage or part-time, and not conducive to home ownership growth. In fact, home ownership rates have continued to decline in recent months. Amid the march toward the Affordable Care Act, employers have reduced workers’ hours and have shown reluctance to create new jobs. If this trend continues, it will impact negatively on future real estate sales.
Five years after Lehman, the real estate market has been to the bottom and back. Where it goes from here is subject to a myriad of economic, political and social forces.
As of this writing, Ethan Roberts did not hold a position in any of the aforementioned securities.