Biggest real estate story of 2013: Homeowners gain $2.2 trillion in equity

The fact that U.S. homeowners gained $2.2 trillion in equity during the year ending Sept. 30 as home values rebounded was the “biggest story in American real estate in 2013,” but hasn’t gotten the attention it deserves, columnist Ken Harney says.

Harney says the gains are crucial because as more homeowners get out from underwater, they can sell without bringing money to the closing table, borrow against their homes to help pay for home improvements and other expenses, or refinance their mortgages.

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Experts mull over housing bubble expectations

Despite rapid increases in home prices over the past year, prices are 4% undervalued in the fourth quarter — meaning the market is nowhere near another housing bubble, Trulia (TRLA) claims in a new report.

To put it into perspective, prices were as much as 39% overvalued in the first quarter of 2008 — at the height of the bubble — then dropped to being 15% undervalued in the fourth quarter of 2011, the real estate firm says.
“If prices nationally are 4% undervalued, why are so many people worried that a new bubble is forming,” questioned Trulia chief economist Jed Kolko.
He added, “Because prices have risen quickly over the past year, and even with the recent slowdown in the past few months, rising prices stoke bubble fear.”
In October, asking prices were up 11.7% year-over-year, which is roughly the same sharp increases seen in 2004 when the housing bubble was inflating. Consequently, some market analysts believe that housing is in the depths of a bubble.
Given the fact that home prices are rising faster than real median household income as well as mortgage purchase applications, it signals the same factors experienced in the previous housing bubble, explained George Mason University finance professor Anthony Sanders.
“For the average American household, they are in a housing bubble,” he said. “For Chinese and other domestics and foreign investors, house prices are a bargain.”
However, other combat this conclusion and believe that measuring previous housing bubble metrics to today’s current industry is counterproductive.
They key is that the level of prices, relative to fundamentals, is much lower today than in 2004.
For instance, prices were 24% overvalued in 2004, compared with 4% undervalued today, Kolko pointed out.
What the market witnessed over the past two years was a bounce off the bottom after a precipitous drop in home prices – an overcorrection in a lot of markets during the downturn, explained executive vice president Rick Sharga.
“If home prices had continued to appreciate at 10-20% a year, we would have inevitably created a new bubble,” Sharga stated.
He continued, “Instead, we’ve seen market forces behave the way they’re supposed to: rising prices and higher interest rates led to lower affordability, reduced demand, and a slowing in home price appreciation.”
At the metro level, home prices are above their fundamental value in 17 of the 100 largest cities.
Several California metros stand out for having both overvalued prices and sharp price increases, including Orange County, Los Angeles, Oakland and the Riverside-San Bernardino area,Trulia noted.
With extremely tight credit standards and the obstacles set in place for most borrowers to obtain a loan, the fuel needed to create another bubble simply doesn’t exist.
“Lending will tighten further when the qualified mortgage rule goes into place, and the economy isn’t created enough high-paying jobs to stimulate another overheated housing market right now,” Sharga said.
He concluded, “We may actually see prices decline slightly over the next two quarters before edging up again later in the year.”

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Homebuilders Show Housing Recovery Hasn’t Crumbled Yet

The foundation for the housing recovery hasn’t been shaken by the threat of rising rates.

The proof ? That two of the nation’s largest homebuilders put up better-than-expected quarterly figures in a period when economists worried interest-rate concerns would sap the housing recovery’s strength.
Firstly, Lennar LEN -1.28% Corp., the largest U.S. homebuilder by market cap, says its profit rose to $120.7 million, 54 cents a share, from $87.1 million, 40 cents a share, a year earlier. Analysts predicted Lennar would earn 45 cents a share. Meanwhile, revenue jumped 45% to $1.6 billion, matching Wall Street predictions.
And KB Home, one of the smaller homebuilders concentrated mostly on the West Coast, reported a surge in profit: $27.3 million, 30 cents a share, from $3.3 million, 4 cents a share. It too beat Wall Street’s estimates, which called for 22 cents a share in earnings. Revenue shot up 29% to $549 million.
KB Home CEO Jeffrey Mezger described the housing recovery’s fundamentals as “firmly in place, supported by low inventory levels, an improving economy and positive demographic trends.” Even if mortgage costs do rise, Mezger says, the result would only be temporary. Similarly, Lennar CEO Stuart Miller admitted his company might see “bumps along the road that may impact the short-term pace of the recovery,” but he sees a long-term outlook that “remains extremely bright.”
Another welcome sign was the increase in home prices reported by the two homebuilders. KB Home said overall selling price rose 22% to $299,100, and it delivered 6% more homes. At Lennar, selling price rose 33% to $291,000, and homes delivered increased 37%.
In addition to KB Home and Lennar, other major U.S. homebuilders include D.R. Horton, the second largest by market cap, NVR Inc., and Standard Pacific.
The increase in housing prices and sales–strong signals that the recovery continues apace–was also reflected this morning in new economic data. According to the S&P/Case-Shiller composite index, home sales increased 0.6% in July, and prices rose 12.4%. The Case-Shiller surveys housing results in 20 metropolitan areas.

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U.S. Land Gets More Expensive

A year ago, Nate Nathan, an Arizona land broker, struggled in vain to sell several hundred home sites in Vistancia, a new-home community about 15 miles from downtown Phoenix. He listed the lots for $54,000 apiece, but no buyers would offer more than $45,000.

All that changed over the past year. As Phoenix home prices picked up, builders suddenly started coming to Mr. Nathan and making ever-higher offers. This year, he has sold 850 lots, including 250 lots for $96,000 apiece in the past 45 days.
What is happening in Phoenix is happening in real-estate markets all over the U.S. The rebounding housing market has sparked a sharp rise in land prices, creating big profits for land investors but putting pressure on builders to further increase the price of new homes.

Land values across the U.S. rose on average 13% in 2012, the first annual gain since 2005, according to estimates in a March report by Zelman & Associates, a housing consultancy. The increase was fuelled primarily by growing demand among builders for finished lots, or ready-to-build home sites with roads, sewage lines, electrical-power hookups and other infrastructure in place.

“There’s no question the land market has gotten heated of late,” said Richard Dugas, chief executive of PulteGroup Inc., PHM +0.47% the nation’s second-largest home builder by volume, on the company’s most-recent earnings conference call. “In some markets it’s a real challenge to get land deals to pencil.”

Corelogic reported its home price index for February grew at the fastest pace since 2006. Nick Timiraos and Redfin CEO Glenn Kelman explain what it means to the industry and homebuyers.

For consumers, costlier land means more-expensive houses. Land cost constitutes 21.7% of the final sale price of a new home, according to the National Association of Home Builders. As land prices rise, builders tend to pass 100% of those costs on to consumers.

Buck Horne, a housing analyst with Raymond James & Associates, predicts that new-home prices will rise 10% to 15% in 2013, chiefly because of rising demand and because of the scarcity of land. “Buyers who can’t afford to pay up now are going to have to wait. Maybe they’ll have to rent for a while,” Mr Horne said. “They may miss out on the first stage of price appreciation.”

This is a significant shift from the economic downturn, when builders halted development and liquidated land for pennies on the dollar. From 2006 through 2011, residential land lost a cumulative 58% of its value, Zelman says.

To be sure, land prices nationally are still far from the peak levels reached in 2005 and 2006. They also are notoriously volatile. In 2009, for example, as the first-time home buyer tax credit stimulated demand for lower-priced new homes, land prices rose, but levelled off and fell slightly when the tax credit expired and demand cooled.

This time, the new-home market appears to be gaining traction. The Census Bureau reported that in February, builders were on pace to sell 411,000 homes this year, an annual increase of 12.3%, while the rate of new-home construction rose 27.7% in the past year. Finished-lot prices rose about 18% in the past year in Raleigh, N.C., a market that has seen several national builders open up shop recently, research firm Metrostudy reports.

In Houston, finished lots in “A” locations—in good school districts with easy commuter access to job centres—are selling for $1,000 per foot of frontage, according to Metrostudy. At the peak of the housing boom, Houston lots sold for $800 per front foot, said Brad Hunter, Metrostudy’s chief economist.

That is great news for private-equity firms and other land investors, including Paulson & Co., Angelo, Gordon & Co. and Starwood Capital Group, that crowded into the land market at its 2009 trough.

“This is exactly what we predicted would happen,” said Tom Shapiro, president of GTIS Partners, a New York-based private-equity firm that 3½ years ago started buying lots in suburban new-home communities at an average of about 20% of peak pricing. “The rate of recovery in some of these markets has just been incredible,” he said.

Since 2010, GTIS has amassed a portfolio of about 30,000 home sites and has started selling out of its land positions for large profits. In the past three months, the firm says it has almost sold out 400 lots in Carillon South Lake, a development near Dallas, where it bought land in 2010. “We doubled our equity,” said Rob Vahradian, a senior managing director with GTIS.

Meanwhile, with the inventory of finished lots dwindling, investors are beginning to bid up raw land, as well. A recent survey by Zelman showed that demand for raw land has grown in each of the past five fiscal quarters.

Justin Good, a land broker with the Raleigh office of Cassidy Turley, points to a parcel of raw land in North Raleigh that sold in April 2012 for $235,000 per acre. Now, builders are making offers more than 35% higher than that price on an adjacent piece of raw land. “That’s staggering,” Mr. Good said.