To-Do List

As appeared Sunday, September 28, 2008
Michael Saunders & Company

Amid all the hugely unsettling news that continues to explode daily from the canyons of Wall Street, several highly-regarded economists are still able to detect signs that our wounded real estate market is slowly beginning to heal.

According to financial analyst Eric Landry—writing for Morningstar, Inc., a leading provider of independent investment research—the underlying rationale that a real estate recovery is in the works relies primarily on two fairly basic market fundamentals and one brand new one.

First among the two basic fundamentals: In former “bubble” markets—of which Sarasota-Bradenton is definitely a prime example—housing affordability has been significantly restored
and actually sits at better-than-average affordability levels. Buyers not only perceive real values in today’s best priced housing opportunities, but find them well worth acting on.

Housing affordability is one of the most encouraging trends contributing to the real estate market’s recovery. According to the widely-used Case-Shiller Index, affordability is finally back
in line with historical averages. This means that in markets like Sarasota, where prices have returned to pre-boom levels, median-salaried earners can now comfortably commit to servicing
the mortgage on median-priced homes. “In fact,” Landry says. “Only one city in the 20-city Case-Shiller Composite Index sits more than 20% above the fair value estimate, and
only four are more than 12% above that metric. Compare this to mid-2006 when 12 of the 20 cities in the study were more than 20% overvalued, nine of them by more than 30%.
Although a few metropolitan statistical areas still have a way to go before their homes are reasonably priced, it’s pretty evident that affordability has gotten appreciably better across
most of the country.”

Having taken the time to analyze historic trends in the Case-Shiller index, it’s important to note Landry’s most noteworthy observation regarding the significance of any market’s return to affordability: Although prices may still decline marginally, once a region recaptures its affordability you will no longer see much more in the way of significant price erosions.

The second fundamental affecting the market’s comeback is this: Although inventories of unsold homes remain uncharacteristically high, they are no longer rising noticeably. In some cases—Sarasota-Bradenton Included—inventories have declined substantially, even in the face of the increase in bank-owned properties.

So far this year—between January and late September—17,091 homes have been actively listed for sale in Sarasota County at one time or another. Compare this to the 23,899 homes
that were actively listed during the same period in 2007 and you’ll note a 28.4% year-over-year reduction in available inventory between 2007 and 2008. (Source: Sarasota MLS) There
are now 17.5 months of unsold inventory, compared to 26.2 months of unsold inventory just six months ago. Seven months of unsold inventory is widely considered a healthy reserve.
The new fundamental that will almost certainly push our real estate market more quickly toward recovery is now falling into place. The Wall Street meltdown has made Washington
all-too-painfully aware that the road to substantive economic recovery will go nowhere until the bulk of bad mortgage loans have been bought up and temporarily purged from the system.
This will enable banks and other lending institutions to focus their energies and resources on re-building their depleted earnings, which in turn will restore their ability to offer traditional
fixed-rate mortgages to qualified home buyers with acceptable credit.

The bottom line in a nutshell: If the colossal crisis on Wall Street is to resolve itself in favor of the very taxpayers who are financing its bailout, home prices must quickly stabilize
so that additional defaults are averted and qualified buyers are empowered to easily capitalize on the best buying opportunities of a lifetime—a mission that you can bet will most
certainly top the “to-do” lists of Fed Chairman Ben Bernanke and Treasury Secretary Henry Paulson.