Atlanta Housing Market

THE ATLANTA REAL ESTATE BUZZ………WHAT EVERYONE IS TALKING ABOUT……….

As the housing market continues to correct itself, Atlanta continues to be the envy of the nation and remains the Hub of the Southeast.

Atlanta continues to outpace the country in absorption, future growth, quality of life and entertainment which in turn fosters a hot bed for stronger relocations, healthier appreciation levels and national and international exposure.

From the mountains to the coastal waters – Atlanta is a destination, whether a primary residence or a second home, and is the place to own real estate.

Wall Street Journal
May 2008

The Housing Crisis Is Over

The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.

How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won't happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.

Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.

Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what's going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.

The boom made housing unaffordable for many American families, especially first-time home buyers. During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much.

Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the bubble to burst.

Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in.

The next question is: Even if home sales pick up, how can home prices stop falling with so many houses vacant and unsold? The flip but true answer: because they always do.

In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.

The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in "months of supply" terms. That's the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high – but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.

Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually.

Inventories will drop even faster to 400,000 – or seven months of supply – by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won't stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.

Many pundits claim that house prices need to fall another 30% to bring them back in line with where they've been historically. This is usually based on an analysis of house prices adjusted for inflation: Real house prices are 30% above their 40-year, inflation-adjusted average, so they must fall 30%. This simplistic analysis is appealing on the surface, but is flawed for a variety of reasons.

Most importantly, it neglects the fact that a great majority of Americans buy their houses with mortgages. And if one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one's income is required to be able to make the mortgage payments on the house. Today the rate on a 30-year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today's house prices to the 1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading.

This is all good news for the broader economy. The housing bust has been subtracting a full percentage point from GDP for almost two years now, which is very large for a sector that represents less than 5% of economic activity.

When the rate of house-price declines halves, there will be a wholesale shift in markets' perceptions. All of a sudden, the expected value of the collateral (i.e. houses) for much of the lending that went on for the past decade will change. Right now, when valuing the collateral, market participants including banks are extrapolating the current pace of house price declines for another two to three years; this has a significant impact on the amount of delinquencies, foreclosures and credit losses that lenders are expected to face.

More home sales and smaller price declines means fewer homeowners will be underwater on their mortgages. They will thus have less incentive to walk away and opt for foreclosure.

A milder house-price decline scenario could lead to increases in the market value of a lot of the securitized mortgages that have been responsible for $300 billion of write-downs in the past year. Even if write-backs do not occur, stabilizing collateral values will have a huge impact on the markets' perception of risk related to housing, the financial system, and the economy.

We are of course experiencing a serious housing bust, with serious economic consequences that are still unfolding. The odds are that the reverberations will lead to subtrend growth for a couple of years. Nonetheless, housing led us into this credit crisis and this recession. It is likely to lead us out. And that process is underway, right now.

Atlanta Journal Constitution
April 2008

Atlanta Spared The Worse

While areas of the country have experienced price declines of up to 22.8 percent, the South, by comparison saw the smallest dip in March of only 4.6 percent.

Atlanta Metro Chamber of Commerce

Atlanta's strong relocation market keeps home values steady

Despite the gloomy housing outlook in many parts of the country, Atlanta's strong relocation market is insulating the area's housing market from encountering the sharp declines that other areas of the country are experiencing. According to the Atlanta Metro Chamber of Commerce statistics, the metro area added approximtely 150,000 new residents in 2007. Nearly 60 percent of those relocated here from other parts of the country.

The metro area added over 1.3 million people between 1997 and 2007, and two million more people are expected to move here in the next dozen years. Experts predict the region will continue to experience a strong demand for housing and home values should stabilize and begin to increase by the end of the year.

New jobs lure new homebuyers

Atlanta's strong job growth is a significant factor in the region's ability to continue to attract newcomers. The Atlanta Metro Chamber of Commerce predicts 30,000 to 40,000 new openings for 2008.

While the national figures show 2008 job losses at over 230,000 to date, employment projections for metro Atlanta continue to show a healthy increase. Employment in 2009 is expected to increase by 45,400 jobs and 66,100 in 2010 according to Dr. Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University.

Time Magazine
February 2008

Ignore the Headlines

Famed Money Manager is perhaps best known for his timeless wisdom that you can beat the pros by focusing on stocks of companies where you either work or shop or have some other edge. But a more relevant Lynchism today is this gem: Ignore the headlines.

That's no easy thing. How do you tune out all the chatter and ink on recession, housing, subprime woes, the credit crunch, rogue traders, insolvent bond insurers, $100 oil and nukes in Iran? It's enough to make you sit on your thumbs and wait before making any big moves. But what, exactly, are you waiting for?

There has rarely been a moment in history when you couldn't scare yourself into doing nothing. And yet, as Lynch observed nearly 20 years ago, "in spite of all the great and minor calamities that have occurred ... all the thousands of reasons that the world might be coming to an end--owning stocks has continued to be twice as rewarding as owning bonds."

A top reason to not buy stocks, in Lynch's view, is if you don't already own a home--in which case, that should be your first investment, since an owner-occupied home is nearly always profitable. Through a spokesman, Lynch reaffirmed these views to me--housing debacle and all.

When prices are falling, few people have the discipline to buy stocks, a house, gold, art or any other asset. But those who do pull the trigger excel in the long run. As John D. Rockefeller famously said, "The way to make money is to buy when blood is running in the streets."

And the streets are stained crimson. Start with stocks. They have been pummeled this year. GDP braked sharply last quarter, and there has been plenty of panic about a recession. The Federal Reserve is slashing short-term interest rates at the fastest clip in decades. But if you stick to your steady, diversified plan while everyone else is retreating, you will be happy years from now. For one thing, Fed rate cuts always lift the economy eventually, and the stock market typically starts responding just as headlines get gloomiest. Sure, the market could fall again before recovering. But the recession may be half over already--or we may avoid one altogether. You just never know.

As for housing, certainly some skepticism is in order. Formerly sizzling markets in Florida, Nevada, Arizona and California probably haven't seen the worst headlines just yet, though they may well be close. And "jumbo" mortgages, those more than $417,000, are likely to remain artificially high for a few more months while banks work through their credit issues.

But let's say you are emotionally ready to be a homeowner. You have good credit, plan to stay put for five years and have been waiting for the perfect entry point. It's time to get serious--before an inevitable rise in interest rates wipes out your advantage. "The thing that will make home prices stop falling is the very same thing that will push mortgage rates higher," says Jim Svinth, chief economist at mortgage firm Lending Tree. So anything you gain by a further drop in prices might be offset by rising financing costs.

Consider a typical home that sells for $218,900. You put down 20% and get a 30-year fixed-rate mortgage at today's rate of 5.5%. Monthly principal and interest come to $994.31. Let's say that 12 months from now the same house goes for 10% less, or $197,010. But by then the recession is history and the Fed is jacking up rates to stem inflation. If mortgage costs rise a point, to 6.5%, your monthly payment would be $994.94 and you'd have saved nothing. Meanwhile, home prices might steady and sellers might become less willing to negotiate. And you have spent a year living someplace you'd rather not be.

It's more complicated if you must sell before you can buy. But that logjam won't persist forever--and if it appears you'll be trapped for a few years, try to refinance at today's lower rates. Risks always seem most acute when the headlines give you ulcers. But that's exactly when you should think long term--and get off your thumbs.

The CG Post It
December 2007

What's The GOOD News?

Metro Atlanta ranks as Number 10 on the Brookings Institution list of metro economies. The study measures economic assets of the top 100 metro areas based on 2005 data. Atlanta had a population of 4,972,219 and 2,427,921 jobs with a gross domestic product of $99,831 per job which is 113.7 percent of the national average; 34.3% of metro Atlanta adults had a bachelor's degree and 11.6% had a graduate degree in 2005.

Site Selection Magazine named Georgia as the second best state in the nation in which to do business; our state has moved up from #4 last year.

The Standard & Poor's Case-Schiller Index of national home prices for August shows only 5 in the positive column - Atlanta is one of them. According to the index, home prices in Atlanta have appreciated by 0.8% between August 2006 and August 2007.

A recently released report by ForSaleBy Owner.com shows Atlanta with only 2% of its listings not represented by a Realtor for the six-month period ending June 30, 2007.

The metro area is forecast to be in the positive column for jobs created for the fourth year in a row with an estimated 45,000-plus new jobs added in 2007.

In a study predicting population growth through 2020, Wharton professors name the I-85 corridor between Raleigh, NC and Atlanta as having the greatest potential for future growth because of its long stretches of good weather.