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Real Estate Market Commentary - June 2012
by Peter L. Zachary, MAI, MRICS

It was an interesting month of June, 2012 for the housing market. An article printed on the New York Times website this month showed possible hope for a recovery of the market. In an article from June 27th, 2012 titled “After years of False Hopes, Signs of a Turn in Housing” it stated:

“The housing market is starting to recover. Prices are rising. Sales are increasing. Home builders are clearing lots and raising frames.”

The Article cited: Joe Niece, a real estate agent in the Minneapolis suburb of Eden Prairie, MN said he recently concluded a streak of 13 consecutive bidding wars over homes that his clients wanted to buy. Each sold above the asking price. “I just had a home that wasn’t supposed to go on the market for two weeks sold before it even went on the market,” Mr. Niece said. “It’s definitely a lot different than what we saw” during the last few summers.

The article continues and states that: “Like the economic recovery that began three years ago, what happens next is likely to prove a little disappointing. The pace of recovery will probably be slow, and the prices of many homes will continue to decline. Millions of people remain underwater, owing more on their homes than the homes are worth, and unable to sell. Millions of families still face foreclosure. And a setback in the still-fragile economic recovery could easily reverse the uptick in housing prices, too.”

The article also states that: “Roughly six years after the housing market began its longest and deepest slide since the Great Depression, a growing number of experts and people who actually put money into housing believe the end has come.

“Our sense is that the market is recovering, and we’re extremely confident that it’s not going to get worse,” said Ronnie Morgan, a San Diego real estate professional who recently created a $10 million partnership to buy foreclosed homes. The group, Alegria Real Estate Funds, already has bought about 20 homes in suburban communities, most of which they plan to hold as rental properties.”

It continues to say: ”The trend is clear in the data. The widely respected S.&P./Case-Shiller index reported earlier this week that sales prices for existing homes rose in April for the first time this year. Several other measures, including a seasonally adjusted version of the index, show that price increases began in February. The pace of housing construction has increased. And the National Association of Realtors said Wednesday that pending home sales climbed to the highest level since the end of a federal tax credit for first-time buyers in September 2010.

This is the fourth consecutive year that the housing market has shown signs of revival, and each previous episode ended with prices renewing their downward slide. But with each passing year, an eventual recovery has grown more likely. Prices have continued to fall, and the economy has continued to recover, a combination that has expanded the pool of potential buyers. The population has continued to grow while few new homes have been built.

The pace of economic growth remains slow and fragile, shadowed by the risk that politicians in Europe and Washington will fail to address looming problems, And the rise in prices is happening despite the vast number of vacant houses awaiting buyers, up to two million more than the normal level, with several million more houses still at risk of being foreclosed.

But this “shadow inventory” is not distributed uniformly, according to a new analysis by Goldman Sachs. Even within metropolitan areas like Phoenix, the vacant houses are clustered in less desirable neighborhoods, while buyers are seeking homes in areas where there are few vacancies.

Under these circumstances, the researchers concluded, “It is possible for us to see both house price increases and excess housing supply at the same time.”

Another Article from the New York Times from June 23, 2012 Titled “Reviving Real Estate Requires Collective Action”, written by Robert J Shiller, discusses possible solutions to helping homeowners, while increasing home values & helping the economy. It stated:

“In the current real estate market, the relevant group is enormous and complex. It includes those who own first and second mortgages or home equity lines of credit or residential mortgage-backed securities or the various tranches of mortgage collateralized debt obligations or shares in banks and finance companies that in turn own mortgages. These people live all over the world and have no way of communicating with each other, let alone coming to an agreement to give homeowners a break.

My colleague Karl Case and I showed in 1996 that when the value of a home falls below the value of the mortgage debt — when it is underwater — a person is much more likely to default on the mortgage. And it is well known that in foreclosures, lenders lose so much on the legal costs and depressed market values of the homes that it would be in their interest to lower mortgage balances so the homeowners stay in place and don’t default.

If such mortgage principal reductions could be applied on a large scale, there could be large neighborhood effects, raising a sense of optimism among homeowners and bolstering the value of all homes and, ultimately, the whole economy. But mortgage lenders in all their different forms lack a group strategy.

ROBERT C. HOCKETT, a Cornell University law professor, has outlined another approach, which uses the principle of eminent domain, to solve this collective action problem. Eminent domain has been part of Western legal tradition for centuries. The principle allows governments to seize property, with fair compensation to owners, when a case can be made that such seizure serves the public interest. Traditionally, we think of eminent domain law as applying to land and buildings. For example, a government can use eminent domain to seize real estate along a proposed new highway route so the highway can be built in a nice straight line. It would be absurd to expect the government to bargain with each property owner to buy a strip of land along the proposed highway route and to have to redirect the highway around a farm whose owner refused to sell. That is common sense.

But eminent domain law needn’t be restricted to real estate. It could be applied to mortgages as well. Governments could seize underwater mortgages, paying investors fair market value for them. This is common sense too. The true fair market value for these mortgages is arguably far below their face value, given the likelihood of default, with its attendant costs.

The original mortgage holders, the investors in the new mortgages, the homeowners and the nation as a whole will generally be better off. There will surely be some who may not agree, like the holdout farmer opposing the highway, but eminent domain ought to be able to push ahead anyway. But first we have to realize that much of our economic suffering takes the form of a collective action problem. We have to stop the wishful thinking that the problem will solve itself through a spontaneous rally in home prices. We need to summon our resources to exercise the authority that allows collective action.” Could all this good news on the housing front be a foreshadowing of more good news to come, or it is just too good to be true?

More to come next month.

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