Financial Watch

A new study by the South Carolina Association of Realtors suggests the housing market is beginning to recover.

Data comparing February 2010 to February 2009 shows an increase of 46.7 percent in the number of homes, condos and villas sold along in the Coastal Carolinas. The study also compares the average price of a home, which the association says has dropped. Data comparing the median home price shows a decrease of 3.8 percent from 2009.

For people who are trying to sell their house, the drop in price could make it harder to accept an offer.

The recovery in the housing market is at risk of collapsing.

Home sales are sliding, prices are stalling and foreclosures are rising. And mortgage rates are likely to go up after next week, when the Federal Reserve ends a program that has driven them down.

The trend could threaten the broader economy, economists warn. People whose home equity is stagnant or shrinking are less likely to spend freely.

In a move that will help at least some homeowners avoid foreclosure, Bank of America unveiled a $3 billion plan Wednesday to help some of its most troubled borrowers. It said it will forgive up to 30 percent of their total mortgage balance. About 45,000 borrowers are expected to qualify, the bank said.

In the past couple years whenever Financial Watch has discussed the state of the housing market, we’ve always focused our discussions around a collapsing bubble. We’re not going to completely move away from that here, but will also include our thoughts on where opportunities exist for above trend appreciation in the long run. First off, before housing resumes appreciating on a nationwide basis the market is going to move significantly to the downside. At the present a record number of homes are for sale. Lots has been made about problems in the subprime market, however its impact has not arrived. Based on the statistics we will see the first true wave of foreclosures this coming winter. By many accounts $500 billion of mortgages will reset to higher rates in the back half of 2007. With even tighter lending standards arriving next year, it will take at least another couple years to work off the excesses in the housing market. By our predictions, Financial Watch expects to see the “housing recession” last until 2011.

Experts across the nation have been predicting since the start of the year an orderly slow down to the unprecedented real estate boom of the past few years. Those same experts have been out in full force the past couple weeks claiming their earlier predictions of an orderly slow down to the real estate boom are being confirmed by recent data. Inventories are running at record levels, but on the whole prices are remaining steady nationwide. Sales are way down compared to the peak last summer. Homebuilders are beginning to offer incentives to unload their massive inventories. Investors are desperately trying to dump their overvalued properties on anyone willing to buy at a steep discount from prices found just a few months back. This brings up a huge problem with relying on economic statistics to see what the future might hold. Statistics we are seeing in the media showing an orderly slowdown in the housing market show what was happening several months back. It may be stated as June’s data, but depending upon the survey the information gathered might go as far back as last winter.

Today’s report that existing home sales fell 5% during January lends more support to the possibility the housing bubble may not experience a soft landing. The report on existing home sales followed a report earlier this week showing a similar fall in the sales of new homes. Falling sales volume is not the only concern Financial Watch has over the most recent reports on the U.S. housing market. Inventories are at an all-time high and construction continues to occur at a rapid pace. In the coming months even more supply will be put onto a falling market as homebuilders continue construction at a robust pace. At the present pace it will take more than five months to sell the average house. For new home sales this is the highest number since 1996 and for existing homes this is 45% longer than it took just one year earlier.

Recent data shows conflicting signs about the present state of the housing market. New home construction shows no signs of slowing down, but at the same time mortgage applications and existing home sales are clearly showing signals of a cooling housing market. While many analysts are conflicted over this puzzling data, Financial Watch believes recent data further points to signs we are in a housing bubble. The real estate bubble will deflate itself over a much longer period than past bubbles in stock prices or the commodity markets. The simple reason for this is the fact homes are a necessity in our economy. In some markets it may take up to a decade to completely absorb the excess housing inventory created during the past couple years. Miami’s condominium market is a prime example. Most markets will recover much more quickly or may even go untouched. Much of the real estate appreciation has occurred on the coasts. Cities such as Dallas that have not experienced the rapid run-up in prices and should not have their real estate markets dramatically impacted by the slowdown.