miércoles, 20 de febrero de 2013

miércoles, febrero 20, 2013

February 18, 2013 7:11 pm
 
Housing: The long climb back
 
Investors made a killing after the US bubble burst, but for average Americans the recovery is likely to be gradual
 
©Reuters
On the up: builders work on the roof of a new house in Alexandria, Virginia



To the Green brothers, everyone seemed to be getting rich off the great Florida housing boom of the last decade except them. Their fledgling construction company couldn’t compete with cash-rich rivals who had been building houses in Cape Coral, a city carved out of a mangrove swamp on the Gulf Coast.


By 2008, the Greens were in trouble. “Our margins were razor-thin and we were constantly being outbid on jobs,” says Bill Green, a bearded former construction worker with a degree in real estate from Florida State University.
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They had borrowed from friends and family, and their savings were nearly depleted. It was becoming obvious that the downturn in housing was less a dip than a disaster. As the crisis spread and banks began to foreclose on houses in Cape Coral, the Greens changed tack. Instead of building houses, they would buy them.


The Greens bought a foreclosed house for about $31,000. They renovated it, rented it out – and discovered a successful new business model. Today they own 76 homes, most of them painted with a signature blue front door.


“Our farming upbringing of being frugal with our money and hard work got us through a very rough period, for us and for Lee County,” says Ben Green, the clean-shaven accountant of the pair, of the housing crash. “But it presented a great opportunity for us”.


Now the Greens have a different problem: there are no cheap houses left to buy.


The nature of the recovery in Cape Coral and similar areas is bringing back bad memories: it is bubbly, driven by financial investors, and focused on the samesand states” as the last boom. In Cape Coral, one of the hardest-hit markets in the country, prices are up by 13 per cent on a year ago; in Phoenix, Arizona, they are 24 per cent higher.


But this is not the start of a new US housing bubble, nor is one likely for years to come. After five years in free fall, US houses are now at something like fair value, and new regulation means there is little mortgage helium to inflate prices again.


More likely, the US housing market is in the first, volatile stage of a return to normality, with gently rising prices and the return of new construction. That should support growth in the US economy – but not dominate it like a decade ago. This means Americans still hoping to build most of their wealth from their houses – a persistent notion even after the experience of the past five years – are likely to be disappointed.


stable housing recovery can only happen if prices really are back to normal. The six-year bubble upset all notions of what a house is truly worth. Sleepy little bungalows in Florida doubled in price; your house, suddenly, could make you rich.


There is no good way to define fair value for houses, says Robert Shiller, a Yale professor who warned of both the internet and housing bubbles. Today, he says US home prices are close to their long-run trend. The median sale price for an existing home was $178,900 in the fourth quarter of 2012, according to the National Association of Realtors, up 10 per cent on a year ago.


The US has plenty of land, so outside big cities the main cost of a house is construction, and the main cost of construction is labour. That means that in the long run, house prices should track rising wages – but not run ahead of them.


House prices have gone up a little bit since 1890 in real terms,” says Mr Shiller. With prices about right relative to history, there is no reason to expect big moves up and down over the next decade or two.


Another requirementabsorbing unwanted houses built during the boom – also seems to be met.
Although the US housing crash evokes an image of endless stretches of unwanted houses in a desert, over-construction was only a small part of the US housing bubble from 2003 to 2006. In fact, new building never matched its 1970s peak.


“I think the excess was in terms of home price appreciation and the excess was in terms of home ownership,” says Michelle Meyer, a housing economist at Bank of America Merrill Lynch in New York.


The slump in building during the credit crunch, however, was prolonged, extreme and spread across the whole country. Even today, construction is barely above the lowest levels of past slumps. “We’ve more than offset any overbuilding that we’ve seen,” says Ms Meyer.


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That lack of unwanted houses is clear from a foreclosure auction in Lee County this January. The Green bid team is four-strong: Ben in his office on the website of the country clerk; Bill on his cellphone at another property; their assistant Heather Lawrence; and Brutus the poodle.


“They always talk before they buy anything”, confides Ms Lawrence. But all the houses in this auction are too dear and the Greens bid $150,100 on a vacant plot instead. The foreclosure was so long ago that the house there fell into disrepair and local officials demolished it.


The former occupants owed $632,000 on their mortgage. The bank wanted $147,500. “We got it,” Ben tells his brother. It is no longer enough to buy cheap houses; it is time to build.


Right now, rapid house price rises are confined to markets such as Arizona, Nevada and northern California, which were at the heart of the bust. States where a judge must approve foreclosures, such as Illinois and Ohio, are further back in the process.


Of the 100 largest housing markets, 15 are up by more than 10 per cent on a year ago; in 32 others, including big cities such as Chicago and Philadelphia, prices fell or rose by less than 3 per cent.


The narrowness of today’s revival – and the reason it is likely to evolve into a gentler recovery – is confirmed by the curious mixture of investor demand and restricted supply that is playing out in housing markets such as Cape Coral.


The demand comes from private equity firms gorging on distressed housing. Over the past year, Blackstone, one of the biggest, has spent $3bn on more than 17,000 houses in a dozen cities, says Jonathan Gray, the company’s global head of real estate.


Mr Gray says he began considering how to invest in US housing in early 2011, when “almost every statistic, other than reading the newspaper, told you things should be getting better”. Blackstone has dedicated nearly 1,000 workers to housing investments, with thousands of subcontractors scattered across the US.


Blackstone and the Green brothers rent out their properties – a big reason for the lack of supply for sale today. Meanwhile, those homeowners who avoided foreclosure still have mortgages worth more than their house, and so cannot sell. A pop in prices is the result.


Sam Khater, deputy chief economist at housing data supplier CoreLogic, points out that this situation is somewhat artificial and the house price rally may soon run out of steam. There are lots of peopleinvestors and homeownerswho will want to sell as soon as prices get a bit higher. “What you might have is a series of rolling bubblettes,” says Mr Khater, as investors work through the available inventory in distressed markets.


Ms Meyer expects another shift in the market once it is driven less by investors and more by people seeking a place to live. “We’re not in a normal market. There’s still a higher share of institutional investors than normal; there’s still a higher share of distressed homes than normal,” she says. “As we see these being handed back to primary homebuyers I think we’re going to see some volatility in prices.”


In theory, conditions are good for those regular buyers: interest rates of just 3.5 per cent fixed for 30 years mean that houses are cheap relative to incomes and rents. But at the moment only strong borrowers, most of whom already have their own home, can get credit.


. . .


Since the bubble burst, the federal government has struggled to revive the supply of credit – and it is still struggling. Obama administration policies have had, at best, a modest effect on the housing recovery.


Over the past 18 months a revamped scheme called the Home Affordable Refinance Programme, or HARP2, has helped those with a mortgage worth more than their house to refinance at today’s low interest rates.


HARP2 only works for those with mortgages backed by the government controlled housing agencies Fannie Mae and Freddie Mac. Barack Obama, US president, has endorsed the idea of allowingunderwaterborrowers with private mortgages to refinance too. More refinancing would help the move back to a normal housing market, but the odds are slim that Congress will act on Mr Obama’s plan.


Unless regulators ease up on the strict lending requirements brought in after the crash, house prices are likely to be steadier. All the signs are that loans with no deposit or proof of income – the so calledliar’s loans” that were a hallmark of the bubble years – are gone.


Credit availability defines what kind of access to home ownership people have,” says Ms Meyer.
After years in which home ownership was an important policy goal, the debate now is how far government should retreat from housing finance. The home ownership rate in the US is down to 65.4 per cent after peaking above 69 per cent during the bubble. If people remain in rented property because credit conditions are too strict for them to buy, then the fuel for a new bubble is not in place.

 
That means that housing can help the overall growth in the US economy, but not drive it. In the best year of the last recovery2004, when the economy grew by 3.5 per cent housing investment directly provided 0.5 percentage points of growth. Borrowing against rising house prices contributed to the 2.3 percentage points that came from rising consumption.


In 2012, housing added 0.3 percentage points to growth, after six consecutive years when it subtracted from the total. That return to expansion is a big boost for the economy.



Bill Green compares his strategy in the immediate aftermath of the financial crisis in 2009 to being “a fireman, running in when everyone else is running out”. Conditions have improved lately, so it may be time to do the opposite, he says.


“We used to look at 15 to 20 houses a day, cherry-picking the best ones,” says Ben. Now we’re lucky if we see two to five good houses a week.”


But they are confident that the fundamentals of their market – a steady stream of retirees who come to Florida for the sun and low taxesfavour rising house prices in the long term.


Many tried to live the dream of riches from housing during the bubble; what let the Greens succeed was the bursting of it. Unless there is a shift in US financial regulation, however, they may be some of the last Americans to make big money from houses for some years to come.

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Copyright The Financial Times Limited 2013.

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