IHS Global Insight - Q4 2008 Housing Report

[zoog]

See attached PDF. They consider housing in many markets and the nation overall to be undervalued. That may or may not be true but it doesn't mean prices won't fall further (they make no predictions or speculations on future declines). Their analysis aligns with my amateur observations that my region (Pacific Northwest) remains overvalued.

House price depreciation accelerated sharply and became more widespread during the fourth quarter of 2008.

While 92% of metro areas are now experiencing price declines, the severity of the contraction continues to be greatest in the Southwest and Southeast.

Extreme overvaluation is now essentially nonexistent. Only Atlantic City, New Jersey met our definition for extreme overvaluation during the fourth quarter, a sharp contrast to 2005 when 52 metro areas were judged to be extremely overvalued.

Only the Pacific Northwest remains overvalued across a wide region. And the protracted declines in 17 metros in California and Florida have now resulted in their undervaluation.

Top 25 on their list of most overvalued markets:

Atlantic City, NJ
Wenatchee, WA
Honolulu, HI
Ocean City, NJ
Bend, OR
St George, UT
Longview, WA
Bellingham, WA
Portland, OR-WA
Eugene, OR
Vineland, NJ
Salem, OR
Asheville, NC
Provo, UT
Myrtle Beach, SC
Mount Vernon, WA
Grand Junction, CO
Spokane, WA
Dover, DE
Medford, OR
Wilmington, NC
Boise City, ID
Salt Lake City, UT
Olympia, WA
Ogden, UT

[zoog]

Re: IHS Global Insight - Q4 2008 Housing Report

Q2 2009 report attached.

[KenD]

Re: IHS Global Insight - Q4 2008 Housing Report

Required disclaimer - I have no right to be offering an opinion in this forum as I am still learning the basics of this subject. I hold many of you here in the highest regard and am deeply grateful for much of what you have done to educate me already.

With that said, and in keeping with the small child who noticed that the emperor had no clothes, I cheerfully call bu11shiat on this report.

While it is ludicrous to make sweeping generalizations across this nation, one point keeps resonating inside me that I would like to share with you all and quite possibly be soundly corrected on.

To my way of thinking, no property is worth more than its replacement cost. With the exception of choice historical pieces, Falling Water comes to mind as an example, if I can purchase a piece of land in any given location and build a brand new house with exactly the same appointments as any other comp property in the same location the newly built home should command a greater value than any similar existing home, with all other variables being even. I do make allowances for mature landscaping and several other factors to be taken into account but a new home when compared to an aging structure should have a greater value in most situations, again, to my limited way of thinking.

Admittedly, there are many areas where a buildable lot cannot be purchased but there is still an ascertainable value as to what the lot costs are and what the construction costs will be.

I submit that based on that analysis, amateur that is most certainly is, many areas of this country are still overvalued and the next dramatic increase in energy costs will create another round of reevaluation.

I look forward to having my a$$ reamed for my educational benefit and thank you all for the experience - I think.

[jtabeb]

Re: IHS Global Insight - Q4 2008 Housing Report

Q2 2009 report attached.

Thanks Zoog, I'm counting on you to tell me when I can buy in oregon again (I want to go home!)

V/R

JT

[ThePythonicCow]

Re: IHS Global Insight - Q4 2008 Housing Report

To my way of thinking, no property is worth more than its replacement cost.

Well, yes, with a key exception.

Location, location, location. In areas where zoning laws, geography constraints or other constraints limit the supply of new home lots, if those areas are desirable, then both newly built and existing homes can become artificially scarce, driving up prices.

For example, homes in the San Francisco Bay Area communities (where I lived for a few decades) that (1) have higher rated school districts and (2) were closer to the best employment areas were priced, even in ordinary times, several times the equivalent home in almost any part of North Texas, where I live now. A $150,000 home in North Texas will be comparable in size, quality and land area to a $400,000 to $800,000 home in -some- parts of the Bay Area (depending on exact location there) to compare homes I am quite familiar with. Land is still almost "unlimited" in North Texas. Land that is close to good schools, close to good jobs, and where zoning and geography permit building is quite scarce in the Bay Area.

P.S. -- I see you noted this, now that I finished reading your post (sorry) when you said "Admittedly, there are many areas where a buildable lot cannot be purchased".

[zoog]

Re: IHS Global Insight - Q4 2008 Housing Report

These reports tend to be conservative, in my opinion. Additionally, I think many of us here expect home prices to overcorrect, especially in markets that were extremely overvalued. So even though the valuation map indicates most of the country is fairly valued or even undervalued, I would not take this report as a sign that the housing bust has hit bottom.

To my way of thinking, no property is worth more than its replacement cost.

ThePythonicCow has offered a counter to your argument that houses should only be worth their replacement value: location. In many areas of the country, homebuyers tend to shun older houses (even 10 to 20 years old) in favor of new homes. I think it is no coincidence that these areas of the country have a large supply of buildable land. Why buy an old house that needs some work, when you can just clear a farmer's field and build a brand new house only a couple miles away? In old, large, densely developed cities those older homes become more valuable, primarily because most of the available buildable land is many miles away from where most people work, play, shop, etc.

I submit that based on that analysis, amateur that is most certainly is, many areas of this country are still overvalued and the next dramatic increase in energy costs will create another round of reevaluation.

I agree that energy costs will factor into further declines in housing values. During the housing boom, many people decided to trade a longer commute for a newer, bigger house in the suburbs or exurbs. That was back when gasoline was still relatively inexpensive. Last year we got a taste of things to come when oil prices ramped up and those far-flung abodes started to lose their luster. There were various news reports on the subject, such as this PBS NOW program from last October, Driven to Despair.

NOW’s David Brancaccio introduces us to homeowners in Riverside, California, who face a daily 144-mile round-trip commute to their jobs in San Diego. Since gas prices have skyrocketed many Riverside residents find themselves making unexpected economic choices: do they pay for the gas to drive to work or do they
pay the monthly mortgage on their homes?

It's worth reviewing EJ's March 2006 housing bubble correction update focusing on the geographical aspects of the housing bubble. Rising energy prices will put more downward pressure on home prices in exurbs and suburbs of major cities. Ironically this may actually put some upward pressure on home prices closer to city centers as people move back in. Given the much-reduced availability of credit however, most exurban and suburban home sellers (or "foreclosure-ees") will be renting, not buying.

[KenD]

Re: IHS Global Insight - Q4 2008 Housing Report

zoog and ThePythonicCow,

Thanks for the opinions and I am going to respond to both of you using zoog's message.

These reports tend to be conservative, in my opinion. Additionally, I think many of us here expect home prices to overcorrect, especially in markets that were extremely overvalued. So even though the valuation map indicates most of the country is fairly valued or even undervalued, I would not take this report as a sign that the housing bust has hit bottom.

Absolutely.

ThePythonicCow has offered a counter to your argument that houses should only be worth their replacement value: location. In many areas of the country, homebuyers tend to shun older houses (even 10 to 20 years old) in favor of new homes. I think it is no coincidence that these areas of the country have a large supply of buildable land. Why buy an old house that needs some work, when you can just clear a farmer's field and build a brand new house only a couple miles away?

There is also economic justification for a decision like that. Sometime around the end of WWII we turned from a country that used to build homes meant to last to homes that were cheaply and quickly put together. A 20 year old house is probably looking at extensive renovations, roof, HVAC system, plumbing and electrical plus modernization of the kitchen and bath(s). In a good sized home you could easily drop $100K. Instead take that $100K plus the cost of the older home and build what you really want.

In old, large, densely developed cities those older homes become more valuable, primarily because most of the available buildable land is many miles away from where most people work, play, shop, etc.

Here the valuation still holds true but the price of the lot is the only difference. Admittedly, a house needs to be bought and torn down so that a new one can be built but there is a cost assigned to that number that should indicate real value.

Let's assume that a rundown house goes for $400K in BigCity America where most of the comparible houses are selling in the $800K range. The cost to demolish the house is X and the construction cost for a house similar in size to the comps is Y. If we assign a value to X of $50K and Y of $200K the reality is that the comparable homes should have no higher value than $650K and even that number equates an older house as having the same value as a new one.

I agree that energy costs will factor into further declines in housing values. During the housing boom, many people decided to trade a longer commute for a newer, bigger house in the suburbs or exurbs. That was back when gasoline was still relatively inexpensive. Last year we got a taste of things to come when oil prices ramped up and those far-flung abodes started to lose their luster. There were various news reports on the subject, such as this PBS NOW program from last October, Driven to Despair.

I agree - but I was taking a different tangent.

I lived in Vermont for a number of years (no Newhart jokes please) and when we moved in 2005 energy prices skyrocketed. A friend of ours received a his "budget" for oil heat for the 2005-2006 heating season as being $730/month. Previously, he had been paying $165/month. It literally became cheaper for him to bulldoze his house and replace it with an ultra energy efficient home.

I would suggest that it is only a matter of time before heating oil climbs above $5.00 gallon and the majority of these "older homes" are fed to the local landfill.

In other words, land value plus replacement cost should equal true real estate valuation.

It's worth reviewing EJ's March 2006 housing bubble correction update focusing on the geographical aspects of the housing bubble. Rising energy prices will put more downward pressure on home prices in exurbs and suburbs of major cities. Ironically this may actually put some upward pressure on home prices closer to city centers as people move back in. Given the much-reduced availability of credit however, most exurban and suburban home sellers (or "foreclosure-ees") will be renting, not buying.

Well, yes and no - not that I am disagreeing with EJ - but it leaves out variables like how many people will adopt telecommuting and other ways that technology will impact our lives.

In fact, telecommuting itself may create an ripple effect where people in rural areas or even the exburbs may end up exerting wage pressures on the people in the more expensive urban areas as they can do the same work for less due to lower cost of living.

But I digress.