Realities of Real Estate: The health of the market; looking back and going forward

Every so often we look at the overall performance of the real estate markets, and based on what the numbers tell us, try to glean a glimpse of what the future might hold. As with many things, the beginning of a new year is an appropriate time to get some fresh perspective.

In evaluating the market, it’s important to distinguish between national trends and what’s happening in our local area. The health of housing can vary drastically from one area to the next.

Nationally, the housing market, like the economy, is fairly stagnant. Regardless of which measures you use (units sold, prices, etc.), the best way to describe the overall market during 2011 is flat to declining.

One of the most widely respected methods for tracking house prices is the Case-Shiller Home Price Index. Published by Standard & Poor’s, this index follows home prices in 20 major metropolitan markets across the country.

The high point in prices for Case-Shiller was in June 2006, when the index for the 20 market composite stood at 206.8. The baseline of 100 for the index is January 2000. For the most recent data (November 2011), the index was down to 138.49.

For most all of 2011, the index was essentially flat. In fact, national figures for the Case-Shiller Home Price Index really haven’t moved appreciably in one direction or the other since the spring of 2009.

Another home price index used by many economists, as well as the Federal Reserve, is produced by a company called CoreLogic. For 2011, their index indicates that, nationally, home prices declined by 4.7 percent. However, when distressed sales (foreclosures and short sales) are removed from the CoreLogic sample, they show that prices only fell by only 0.9 percent.

From the peak of the market in 2006, the Case-Shiller index has prices down 33.1 percent; CoreLogic says prices off by 33.7 percent. As a result, it would appear that the numbers for Case-Shiller and CoreLogic are fairly consistent. Overall, 2011 was pretty much a continuation of 2010 and most of 2009. The free-fall in prices was over, and we find ourselves just bumping along the bottom.

When you look at individual markets across the country, some have shown more firming in prices; others aren’t just bumping along the bottom; they’re still looking for a bottom.

The Las Vegas market and southern Florida are two such places. In those markets, high unemployment and large numbers of foreclosures are keeping downward pressure on home prices. For them, 2011 was a continuation of the price deterioration they saw throughout 2010. As we mentioned, Case-Shiller shows that national home prices have fallen about 33 percent from the peak. In Miami, they’re down 51 percent, and in Las Vegas, they’re off 62 percent and still sliding.

Conversely, the numbers closer to home are much better. Albeit not dramatic, Case-Shiller shows that prices for the Washington, D.C., market have shown fairly steady growth since they bottomed out in the spring of 2009. From that time, prices are up 11.5 percent.

So, in this area we’re showing some recovery. From the 2006 peak, Washington-area home prices are now off by only 26 percent. That’s still a pretty good haircut, but it’s better than the national numbers and nothing like what they’ve experienced in places like Miami and Las Vegas.

As with Miami and Vegas, the health of our real estate market tends to be a reflection of the local economy. The tremendous growth in the Federal government has helped to partially insulate us from the effects of the recession, and correspondingly, real estate prices around Washington didn’t fall as far as other cities. Plus, local prices were much quicker to make a bottom and begin to rebound.

Going forward, some people say that the housing market must recover before the economy as a whole can get back on its feet. Others say improvement with the economy must come first. It can be a bit of a chicken-and-the-egg sort of thing, but we’re probably more in the camp of seeing economic growth precede a turnaround for real estate.

Short term, continued deleveraging in the mortgage markets and the resulting high levels of distressed sales will be a drag on the economy, but it shouldn’t prohibit the appropriate policies from allowing the economy to cycle out of recession.

Another casualty of the recession is the American psyche. The Consumer Confidence Index is around 60. That’s an improvement from August, September and October of 2011, when it dipped into the 40’s, but 60 is still a miserable number. People have a fairly negative view of the world these days, and that will also take some time to heal.

With was promises to be a highly partisan presidential election in 2012, the environment for building a positive attitude won’t be great, but as the economy recovers, people will brighten up, seeing that there’s light at the end of the tunnel.

In sum, 2012 for real estate probably won’t be a whole lot different than 2011. Barring any extraordinary events, we should see slow, but steady improvement.

Bob and Donna McWilliams are practicing real estate agents in Maryland with more than 25 years of combined experience. Their email address is [email protected]