Where Real-Estate Market May Be Headed, and How to Plan for It

One view of where the real-estate market is headed -- and how to plan for it

Like everyone else, I can only guess the near-term path of the real-estate market. With that disclaimer on the books, here's my guess.

The real-estate meltdown has gone deeper and wider than most people thought. Including me, I'll admit. We've all witnessed the results, and naturally everyone wonders what's next and what to do about it.

Evidence of a Bottom

There are some signs that the relentless foreclosures and price erosion are easing. We may be hitting bottom.

1. Escrow index. Last week, pending home sales, as measured by the National Association of Realtors pending home sales index, were up unexpectedly to 89, the highest since October of last year. A leading indicator of sales, it shows buyers may be coming off the sidelines.

2. Sellers market in lower price ranges? While overall U.S. months-of-inventory remains over 11, the figure appears to be dropping at the lower price ranges. In the Sacramento market, for instance, a previously overheated market, homes under $500,000 are seeing months of inventory between three to four vs. 12 or 13 for higher price ranges.

This isn't good news for sellers of higher priced homes, but it does show the market is starting to clear at the bottom. It also supports my hunch that the dismal year-over-year price declines reported by the S&P Case-Shiller home price index and others may be overstated. They simply reflect more homes sold in the lower price ranges, many out of foreclosure. When the price mix returns to normal, reported average and median prices should rise.

3. Foreclosures down? New federal and state laws mitigating the foreclosure process should help reduce foreclosures. Foreclosures were down 3% in June from May but then shot up 8% in July. The experts disagree about what's next, but I feel there's a good chance we'll stabilize or turn the corner by the end of the year.

4. Rate resets on subprime loans to drop. Subprime rate resets are a big foreclosure driver, and according to research firm First American CoreLogic subprime resets should drop dramatically by October.

Flies in the Ointment?

While these facts seem like good news, two factors bear watching:

1. Some principal payments required. Many option loans allowed borrowers to defer principal payments for several years. As those years go by, principal payment requirements could act like subprime resets, pushing some owners over the edge.

2. Interest rates up. Inflation risk and Fannie Mae and Freddie Mac turmoil have helped push up rates to the highest point in 12 months, near 6.5% for a 30-year fixed mortgage. Further increases could nip a recovery in the bud.

What to Do

Here's what I'd do, especially if I was considering buying or selling:

1. Watch the lower-cost end carefully. Your local media or a real-estate professional should be able to read months of inventory by neighborhood and by price range. Where those figures indicate a buyer's market (usually a figure below six) you may be approaching a bottom.

2. Look for bargains this fall. At least three factors should lead to a price nadir this fall, if it hasn't happened already, and the typical seasonal fall sales decline will magnify the effect:

• REO-holding banks get more desperate. A lot of banks have been holding a lot of real estate for a long time, and you know what that means.
• Investors sell for tax reasons. A lot of investors hoped for better but may throw in the towel to capture tax write-offs.
• Homebuilders clear inventory, to get it off the books and start 2009 fresh.

As always, you should approach all predictions, including mine, with caution.

Jennifer Openshaw can be reached at jopenshaw@themillionairezone.com.