By KARL E. CASE

IF you read the coverage of the latest figures on the sales of existing homes from the National Association of Realtors, you may well have come to the conclusion that the American dream is dead. It is indeed worrisome that sales in July were down 25 percent from a year ago.

But a little perspective is in order.

First, the bad news. What has happened in the housing markets since 2005 is a catastrophe that may take years for our economy to recover from.

Anyone who believed that home prices never fall has learned a tough lesson. The Case-Shiller price indexes released on Tuesday suggest that since their national peak in 2006, home prices have fallen by 29 percent. Some areas of course look better than others. Las Vegas is down 57 percent from its peak and Phoenix is down 51 percent. On the other hand, Boston is down just 13.5 percent and Dallas only 4.2 percent.

The effect on household wealth has been huge. Data maintained by the Federal Reserve show that the value of residential real estate directly held by households fell to $16.5 trillion in the first quarter of 2010, down from $22.9 trillion in 2006. It has yet to be determined who will end up bearing those losses. The decline in wealth has substantially reduced consumption, stifling the economy.

Depressing, yes — but the end of a dream? Not exactly. I have never quite understood what the American dream really means when it comes to housing. For some people, it means having a solid and fairly safe long-term investment that is coupled with the satisfaction of owning the house they live in. That dream is still alive.

Others, however, think the American dream is owning property that appreciates by 30 percent a year, making a house into a vehicle for paying bills. But those kinds of dreams have become nightmares for the millions of foreclosed property owners who have found themselves sliding toward bankruptcy.

But for people with a more realistic version of the American dream, buying a house now can make a lot of sense. Think of it as an investment. The return or yield on that investment comes in two forms. First, it provides what is called “net imputed rent from owner-occupied housing.” You live in the house and so it provides you with a real flow of valuable services. This part of the yield is counted as part of national income by the Commerce Department. It is the equivalent of about a 6 percent return on your investment after maintenance and repair, and it is constant over time in real terms. Consider it this way: when Enron went belly up, shareholders ended up with nothing, but when the housing market drops, homeowners still have a house. And this benefit is tax-free.

The second part of the yield on investment in a house is the capital gain you receive if it appreciates and you sell the house. Gains are excluded from taxation if the property is a primary residence and the gain is less than $250,000 for a single filer or $500,000 for a married couple filing jointly.

Consider a few other bonuses of buying a home today. You can deduct the interest you pay on the mortgage. Interest rates are about as low as they can get. And, don’t forget, home prices are down by 30 percent on average from the peak. The mortgage-interest deduction and the tax-free income from housing cost the government at least $200 billion a year.

During this recession the government has been doing even more on behalf of the American dream. It offered a tax credit of $8,000 to first-time buyers, and eventually $6,500 to other qualified buyers. Not only did the Federal Reserve continue to keep the short-term interest rates it sets at essentially zero, it purchased $1.4 trillion in mortgage-backed securities so that lenders could keep mortgage rates low.

Do the math. Four years ago, the monthly payment on a $300,000 house with 20 percent down and a mortgage rate of about 6.6 percent was $1,533. Today that $300,000 house would sell for $213,000 and a 30-year fixed-rate mortgage with 20 percent down would carry a rate of about 4.2 percent and a monthly payment of $833. In addition, the down payment would be $42,600 instead of $60,000.

IN fact, until about two months ago, it looked as if potential buyers were beginning to understand all these advantages and that the market was turning around. By May 2009, housing prices had stopped falling in a majority of the metropolitan areas surveyed in the Case-Shiller index. Sales were also up. In 2008, 4.9 million existing homes were sold. In 2009, the figure rose to 5.2 million; last November, sales hit an annual rate of 6.5 million (a boom-time number). Even new construction showed a pulse.

So, what happened to kill the momentum? For one thing, the first-time buyer credit expired at the end of April. And some longer-term demographic changes may also be affecting the housing market.

In the next several years, the Census Bureau and other demographers project that the number of American households will increase by 1 to 1.5 million each year. With new construction sagging, we should be experiencing a tightening market with low vacancy, as has occurred in every housing cycle since World War II. But instead of falling, vacancy rates remain at near-record levels.

My guess is that the number of households has not been growing as much as projected and may even be falling. We won’t know for certain until the 2010 census is complete. This figure depends on many factors: immigration, emigration, the age distribution of the population and the number of young adults staying at home or doubling up. Unemployment is high, and we know that without jobs people tend to move in with Mom and Dad. And we don’t make immigration easy, even for those with advanced degrees who would be most likely to enter the housing market. None of this bodes well for a quick recovery.

While demographic trends are uncertain, one important reason for the recent downturn is clear: The steady drip of bad news about the economy has sapped the confidence of buyers, sellers and lenders. And there is no understating the importance of expectations and confidence in this industry.

Real estate sales are unlike other financial transactions. You can place a rough inherent value on a stock or bond by looking at fundamentals: a company’s profits, price-to-earnings ratios, quality of its products and management, and so forth. But a house is worth what someone is willing to pay for it. That’s a very personal, emotional decision.

And emotions can change on a dime. To try to track moods and expectations as part of our Case-Shiller data, the economist Robert Shiller and I send out 2,000 questionnaires each year to recent homebuyers in San Francisco, Los Angeles, Milwaukee and Boston, asking them what they think is likely to happen to the value of their houses over the next year.

In 2005, respondents felt on average that prices would rise 9.6 percent. In 2008, they anticipated a small drop. In 2009, the figure turned positive again in all four cities, with an average anticipated gain of 2.2 percent. We have just tabulated this spring’s survey, which found that homebuyers anticipate a gain of 5.2 percent in the next year.

In a given year, the number of completed sales is about 4 percent to 5 percent of the housing stock. Thus it doesn’t take a change in mood of a large number of buyers to change the overall direction of the market.

This financial crisis has made us all too aware that we live in a Catch-22 world: the performance of the housing market drives the economy, and the performance of the economy drives the housing market. But housing has perhaps never been a better bargain, and sooner or later buyers will regain faith, inventories will shrink to reasonable levels, prices will rise and we’ll even start building again. The American dream is not dead — it’s just taking a well-deserved rest.

Karl E. Case is a professor emeritus of economics at Wellesley and co-creator of Standard & Poor’s Case-Shiller housing index.

Article

money.cnn.com

By Les Christie, staff writerJune 15, 2010: 5:58 AM

NEW YORK (CNNMoney.com) — As the nation struggles to shrug off the worst housing crash since the Great Depression, it may be hard to believe a housing shortage could be on its way.

The nation is simply not building enough homes to keep up with potential demand. Just 672,000 new homes were started in April, less than half the long-term run rate needed to meet the nation’s natural population growth.

“It is ironic, but there is a growing consensus that there may be a new housing shortage coming,” said James Gaines, a real estate economist with Texas A&M.

So far, the shortfall has been masked by a weak economy that has put a damper on homebuying. Once the job market rebounds, however, people will look to have their own homes again. This pent-up demand could get unleashed on unprepared markets, causing shortages and rising local prices.

Household formation — the technical term for people moving in together — has been on hold during the past few years as young people, especially, have been unable to find jobs. In the past, an average of more than 1.3 million households were formed each year, causing demand for 1.5 million new homes. (More homes than households are needed to replace those destroyed by fires, floods, teardowns and neglect.)

In 2009, only 398,000 new households were formed, according to the Census Bureau. That is much lower than average and a quarter of the number formed just two years earlier.

“The decline in household formation is artificial,” said Gaines. “The young are moving in with their parents. There’s even doubling up among working class people. There’s a pent-up demand coming if and when the economy recovers.”

Those doubting a new bubble is near point to a large inventory overhang. As many as 7 million homes are vacant but not for sale, according to the Census Bureau, which should provide cushion to offset increased demand.

“The housing market hasn’t been this way before,” said Nicolas Retsinas, director of Harvard’s Joint Center for Housing Studies. “The gravity of the problem is deeper and the challenges different. You have to get through that inventory.”

The inventory number, however, can be deceiving for two reasons: People may not want to live in hard-hit areas where the houses are (think: California exurbs and Detroit neighborhoods) or the homes may be beyond repair.

“Many of these vacant homes may not be habitable or are in locations where nobody wants to live,” Gaines said.

Building out of the lows

Ordinarily, the nation’s homebuilders can react quickly to meet surges in demand. But several factors are preventing them from being nimble. The biggest is the difficulty getting loans, according to Jerry Howard, CEO of the National Association of Home Builders (NAHB).

“When we came out of past recessions, there wasn’t the difficulty of obtaining financing that there is now,” he said.

Many small builders have been unable to obtain construction loans or lost their financing in mid-project. That has prodded NAHB to support federal legislation that would make $15 billion in lending guarantees available for private builders.

Hard times also persuaded builders to postpone purchases of land they could prep for future development. It will take them that much longer to gear up production once the housing market improves.

Too, many builders went out of business in the bust, so there will be fewer companies out there to do the building. The survivors will confront a transformed regulatory environment, according to Howard, that will make new homes harder to build and more expensive.

“There is an increased focus on smart growth that will create regulatory barriers to the kind of sprawling development that has characterized a lot of recent building,” said Retsinas.

The regulations come under two categories, according to Susan Asmus, NAHB’s senior vice president for advocacy, covering where new homes are built and how they’re built.

One category is storm water runoff. The Environmental Protection Agency tightened requirement governing how builders handle that. Builders will have to install controls such as catchments or retaining ponds that slow the flow of storm runoff into the local watersheds.

“It could add as much as $15,000 to $30,000 an acre in extra costs, depending on the soil,” said Asmus.

Another proposed regulation mandates sprinkler systems in each new home. This is already state law, starting January 2011, in California, Maryland and New Jersey. That adds as much as $10,000 to the cost of construction.

Where the shortages will be

Previous overbuilding one-time boom towns, such as Las Vegas and Miami, should provide enough inventory of like-new homes to counter any strong pent-up demand that breaks free.

It’s the more constrained markets, where it’s particularly hard to build — such as New York, San Francisco and Seattle — that will field the bulk of the new bubble problems, according to Retsinas. He, however, is less worried about the purchase market than about rentals, the usual entree for the young buyers expected to lead the new housing market charge.

“Nobody is building any rental inventory,” said Retsinas.

Inventory Issues

Andy Smith
Providence Journal
April 22, 2010
http://www.projo.com/news/content/NEW_HOUSE_CONSTRUCTION_04-22-10_F4I5199_v27.3b30db9.html


Rhode Island’s homebuilders have been in a deep slump.

But this spring, the banging of hammers and the whine of power tools working on new houses is being heard once more in some neighborhoods around the state.

“The last two years, we’ve been deader than dead,” said Bob Baldwin, owner of R.B. Homes and vice president of the Rhode Island Builders Association. “Now we’ve gone from death to life-support.”

Roger Warren, executive director of the RIBA, the trade association for the state’s homebuilders, said there are signs of an uptick in the state’s building permits for single-family houses. Statistics for January and February of 2010, the most recent months available, show 101 permits. By comparison, there were only 41 in the first two months of 2009. Still, that’s far below the same period in 2006, when 258 single-family building permits were issued.

“Two months doesn’t make a recovery,” said Warren. “But even during the last half of 2009, we saw the decline [in building] starting to flatten out.”

Nationally, figures for March from the U.S. Department of Commerce showed home-building permits climbed to the highest level since October of 2008. Houses under construction also rose in March, to an annual rate of 626,000.

In Rhode Island, Baldwin said R.B. Homes is building two houses so far this year, compared with none last year. One of them, a 4,100-square foot house with a “sold” sign already on the lawn, is being built on Wilbert Way in North Kingstown. Baldwin said houses on Wilbert Way sell for between $600,000 and $1 million.

Eric Gonsalves, a foreman for Faria Construction in Woonsocket, was working with a crew of six to install the siding last week.

“There hasn’t been a lot of work on new houses, although we just finished one up in Lincoln,” he said. “We’ve done a lot of remodeling jobs — kitchens, bathrooms — but that’s not as good as a new house. We can only keep our fingers crossed. We’re out here to make a living, and, sometimes, it’s not that easy.”

Gonsalves, 38, said he’s been working in construction since he was 16, and knows how to build a house from the foundation up. Ultimately, he said, he would like to have his own company, but the economy would need to improve before that could happen.

The RIBA has more than 1,400 members with 13,663 employees who were hit by the recession that began in Rhode Island in 2007 with a subprime mortgage crisis that resulted in a high rate of foreclosures. The recession also tightened credit, making it difficult to obtain mortgages, and left Rhode Island with a 12.6-percent March unemployment rate.

Warren said it’s difficult to say how much the wave of foreclosures affected new house construction, since the market for foreclosed properties and the market for new construction are mostly different. But, he said, declining home values, a lack of job confidence, and general unease about the economy have made Rhode Island consumers reluctant to make a big investment in a new house.

But builders say that federal tax credits, low interest rates and some renewed lending by banks, at least for those with good credit, have caused the market for new houses to improve slightly in the past few months.

But they are being very cautious, generally making sure one house sells before building another one.

Thomas McNulty, president of E.A. McNulty Real Estate, which has new developments in Lincoln, Cumberland and Burrillville, said he likes having at least one finished house in a development to show to prospective buyers. Unless there are sale contracts already in hand, he said, the company will wait before building more.

At a Lincoln development called Sableswood, he said, his company built two houses in 2009. One just sold, so the company is breaking ground on another. The development is planned for 15 houses.

McNulty said the company built about 20 houses in 2009, and is on track for about the same this year. Its peak year was 2005, when it built 50.

Single-family building permits in Rhode Island have dropped every year since 1999, even in prosperous times such as 2005 and 2006. McNulty said some of that decline is because many Rhode Island cities and towns have adopted more restrictive policies on how many new houses they will allow in their communities.

“We have a fundamental problem with affordable housing in Rhode Island,” he said. “There’s pressure to build at the higher end in terms of price in order to make the economics work.”

McNulty sees a slow recovery for Rhode Island home building in 2011 and 2012.

Chris Barrett
Providence Business News
April 22, 2010
http://www.pbn.com/detail/49350.html

WARWICK – Sales of single-family homes rose 8.5 percent and the median sales price increased 7.2 percent in the first quarter compared with a year earlier, the Rhode Island Association of Realtors said Thursday.

The association said 1,365 homes sold in Rhode Island during the first three months of 2010, up from 1,258 in the first quarter of 2009.

The median sales price rose to $193,000, up from $180,000. Sales in March alone reached 576, up from a 484 last year. The median price last month was $193,500, up from $180,000 a year ago.

“We’re pleased with what we’ve been seeing,” Realtors President Karl Martone said in a statement. “Consumer confidence is growing and the [federal homebuyer] tax credit has helped as well, especially in March when sales increased almost 20 percent.”

He added: “It’s still critically important for sellers to be realistic in pricing in order to keep this sales momentum going and achieve a balanced market.”

On a percentage basis, communities showing the biggest increases in sales included Richmond, where sales rose 275 percent to 15; Jamestown, where they increased 266 percent to 11; and Middletown, which saw an increase of 233 percent to 30.

On the opposite end of the spectrum, in Charlestown the number of sales fell 46 percent to 7, and in Providence the total dropped 38 percent to 97.

Sales in the state’s multifamily home market were not as strong.

The Realtors said sales of multifamily homes in the first quarter dropped 26 percent compared with a year earlier, declining to 399 from 541 in 2009. But the median sales price increased almost 34 percent to $107,500, up from $80,000.

“Clearly, the multifamily market is stabilizing in Rhode Island,” Martone said. “We saw a feeding frenzy last year when prices were plummeting, but it appears that the fire sale mentality if over. We’re getting back to business as usual.”

In the condominium market, sales increased 13 percent year over year, the association said, rising to 214 from 189. The median sales price for condos rose slightly to $177,000, from $175,000 in the first quarter of 2009.

“Double digit growth in sales volume is important in the condo market because we still have an abundance of units for sale,” Martone said. “Rhode Island had a 16-month supply of condos for sale at the end of March.”

By Christine Dunn
Providence Journal Staff Writer
3/27/10
Article

Earl and Susan Sampson, the owners of Sakonnet Vineyards, had Broadlawn, their English-style farmhouse in Little Compton, on the market for $4.5 million in 2008.

Two years later, they have cut the price to $3.45 million, changed their real-estate agent, and become flexible about their wish to sell the 19-acre property all in one piece.

The Sampsons’ plans to sell were caught in a downturn in Rhode Island’s luxury home market, the last segment to decline when the recession hit, and now the last to emerge.

While there was a 16-percent increase in house sales in Rhode Island in 2009, compared with 2008, there was a 40-percent decline in sales of houses priced at $1 million and above during the same period. The Warren Group reported only 76 high-end sales in 2009, compared with 128 in 2008.

The slowdown in sales can be attributed in part to the reluctance of buyers to pay the list prices that some houses commanded in 2006 and 2007, the peak of the bubble in the luxury market.

Now that sellers are finally adjusting their prices downward, buyers are returning to the market.

Buyers “may have changed their price range, from two million to one million, they may have changed their dream house from huge to smaller, but there are many more people out there today as buyers than there were this quarter last year when there was so much paralysis,” said Sally Lapides, president and CEO of Residential Properties Ltd.

“We had some very unrealistic price points between 2006 and 2007,” Lapides said.

But “there are more people that now feel that our market is, if not at the bottom, is close to the bottom,” she said, and this makes buyers feel more “confident.”

One example of a major price cut is Gray Craig, the Middletown mansion purchased in August 2007 by actor Nicolas Cage for $15.7 million. It is now on the market for just under $10 million, after starting at $15.9 million in October 2008. Gray Craig is an extreme example, the case of “an emotional impulse buyer” who bought at a market peak, said John Hodnett, a principal broker with Lila Delman Real Estate.

In January, Middletown’s finance director reported that Cage owes roughly $128,000 in unpaid taxes on Gray Craig, and in October 2009, the Oscar-winning actor sued his former business manager, claiming the man’s advice led Cage toward financial ruin.

But Gray Craig is not the only marked-down mansion in Rhode Island.

Wrentham House, an 1891 stone mansion on Ocean Avenue in Newport, was sold last summer for $6.51 million. The historic property, designed by renowned Newport architect Richard Morris Hunt and landscape designer Frederick Law Olmsted, had been on the market for more than four years, and had been earlier priced at $14.4 million.

Oakwood, a historic mansion on Narragansett Avenue in Newport, recently went under contract, according to Hodnett. The house, restored by owner Brian O’Neill, the developer of the Carnegie Abbey Club in Portsmouth, was most recently priced at $7.9 million, but it went on the market in 2008 with an asking price of $10.75 million.

Oakwood sold for $2 million in 2000, $3.5 million in 2002, and $4 million in 2005, according to Hodnett.

Ray Mott, broker/owner of Properties Unlimited, in Charlestown, said he typically withdraws unsold houses from the market in the winter and reintroduces them in the spring.

He said that in late 2009, in conversations with clients whose properties had failed to sell in 2009, 16 of 18 clients told him that they “really want or need to sell” in 2010.

“Almost to a person,” those properties are being re-listed with lower prices this spring, Mott said.

In Jamestown, a waterfront house at 716 East Shore Rd., priced at nearly $5.8 million in 2006, was sold on Nov. 2, 2009, for $4.6 million.

Judy Chace, of Residential Properties Ltd., who was the listing agent at the time of the sale, said the property at last “was priced correctly.”

Chace said it sometimes takes time for a seller to accept that the market has changed. Chace was not the first agent to list 716 East Shore Rd.

“It’s better to be the first born, the second wife and the third Realtor,” she said.

Dr. Lucia Matthews, a therapist, said potential buyers who looked at her waterfront contemporary house in the Rumstick section of Barrington in 2009 “were resisting the concept of negotiation.”

She said she and her husband, Paul Matthews, who is an international business consultant, had priced their house at $3,995,000 –– 20 percent above the assessment –– because that “traditionally has always been the starting point.”

But buyers “thought we were pricing the house high above the going rate,” she said.

The couple have withdrawn their house from the market, but they plan to re-list it in 2010. They also are exploring creative marketing strategies, including the use of social media.

Dr. Matthews said they haven’t settled on a new listing price for their house, but one thing is certain: It will be lower than before.

BY THE NUMBERSLuxury home sales

The number of single-family houses sold in Rhode Island at prices of $1 million and above

2009: 128

2008: 177

2007: 154

2006: 145

2005: 76

SOURCE: THE WARREN GROUP

By Andy Smith
Journal Staff Writer
3/25/10
Article

Nine local projects designed to expand the state’s “knowledge economy,” a cluster of high-tech, biotechnology and design enterprises, were awarded $150,000 in grants from the federal government and the city of Providence Wednesday.

Six of the projects will be funded with $100,000 from the U.S. Department of Commerce Economic Development Administration and three with $50,000 from the Providence Economic Development Partnership.

Many of the projects are designed to link researchers and entrepreneurs in the hopes of developing new business ventures. They were selected by the Innovation Providence Implementation Council (IPIC) set up by the Greater Providence Chamber of Commerce.

“We’re pushing forward the reinvention of our economy,” said Laurie White, president of the chamber. Eleven similar grants were awarded in 2009. White said this year’s grants focused on design and life sciences, with an eye toward job creation. Providence Mayor David Cicilline pointed to promising developments in the Jewelry District, which the city hopes will become a center for the knowledge economy, such as the new location for Brown University’s medical school and proposals for a joint nursing school by URI and Rhode Island College.

The nine projects receiving grants are:

•Ambulatory Clinical Research Center, $20,000: A proposed research center in the Jewelry District will be a partnership between local hospitals, Brown’s medical school and the URI schools of pharmacy and nursing.

•Smart Vaccine Design for Entrepreneurs, $20,000: A six-week program run by URI to educate participants in business opportunities related to vaccine development.

•RI Business Plan Competition, $10,000: The competition provides support and advice for business planning on three tracks –– student, entrepreneur and a new green economy category.

•Toy Technology for Rehabilitation, $20,000: A collaboration among Brown University, RISD, Lifespan, Hasbro and Bay Computer Associates to create, test and manufacture toys that would help the rehabilitation of children with cerebral palsy and other impairments.

•RI-CIE Entrepreneur Boot Camp, $10,000: The Rhode Island Center for Innovation and Entrepreneurship will run a workshop for 10 new ventures within the knowledge economy.

•Change Accelerator (Social Venture Partners of Rhode Island), $20,000: A project to provide social entrepreneurs, who combine business and efforts to improve society, with expertise, mentors and access to investors.

•Design Focused Accelerator (Providence Foundation), $15,000: The Providence Foundation will study how to help young designers in the state create new business.

•Building the Green Economy (Apeiron Institute for Sustainable Living), $15,000: Money will be used to create an interactive green economy Web site to support economic development.

•Workforce Portal Tool (Tech Collective), $20,000: The Tech Collective plans a Web site that will link information-technology students with available internships.