Real estate returns are not rocket science.  Because they’re such a huge portion of the consumer balance sheet they tend to be tied very closely to wage growth.  Wage growth, by definition, is very closely tied to the rate of inflation.  That explains why the long-term historical return of real estate is roughly in-line with the rate of inflation.  But this survey from Zillow shows that real estate “investors” are probably still too optimistic.

I can see why these assumptions are attractive, but they are not quite what drops out of macroeconomic analysis.

Fundamental Upward Pressure of Prices

Wage growth, per se, shouldn’t drive housing prices. What we might expect is that wage growth drives rents and rents drive housing prices.

The wage-rent relationship, however, is not an iron law.

Matt Yglesias and Ryan Avent are famous for pointing out that rents – and hence housing prices – could be much lower in coastal cities if residents would abandon restrictive zoning laws. For example, Dallas and Philadelphia have roughly the same median household income, but home prices in Philly are much higher than in Dallas.

In general, if a fundamental driver – regulation, technology, preference – causes rents to eat up a higher portion of folks pay checks then rents and home prices will be higher.

To some extent the national rise in home prices is due to both technology and preferences driving more people to want to live in high rent areas like the Northeast Corridor.

Those same forces are leading some people to want to live in Houston, Austin and Raleigh-Durham, but because of looser regulation that simply translates into booming housing supply and a booming population rather than higher prices.

In addition, the relationship between rent and housing prices depends on interest rates – both the real portion and expected inflation. A house is like a utility company. Instead of providing power services, it provides shelter services and keeps you from having to pay rent.

Many finance folks are familiar with the rule-of-thumb that utilities tend to trade like bonds. Higher interest rates lead to lower bond and utility stock prices. Lower interest rates lead to higher bond and utility stock prices.

This is because – like a house – you are receiving a fixed stream of services over a long period of time.

Though this framing is kinda technical, most of these factors can be summed up in a really straightforward comparison: monthly rent vs. monthly mortgage payment for similar homes.

When the market is balanced the monthly mortgage payment should be slightly higher than the rental payment because 1) Mortgages get a tax break and 2) Traditional rate mortgages offer you the stability of a fixed payment.

Adjustable rate mortgages  (ARM) need to produce a payment close to or even below rent to be a good buy. That’s because you lose the security of a fixed payment and depending on the terms of the ARM you may actually be facing more payment volatility than with renting.

Trulia crunches the numbers and it looks like under their baseline assumptions its cheaper to buy than to rent in every one of the top 100 metropolitan areas in the United States.

In traditional hotspots like the San Francisco Bay area, New York City and Orange County, CA, the discount is low. Still this is a recipe for fundamentals house price appreciation.

Bubble Territory

If housing prices merely stabilized into a sustainable equilibrium with rents then the future probably wouldn’t be too dramatic. We would see a rapid shoot-up in home prices now, followed by a long period of little to no price growth as the Fed raised interest rates.

Rents would still be going up and monthly mortgage payments would rise with them to maintain equilbrium. However, mortgages payments would be rising because interest rates were rising, not because home prices were rising.

Eventually, the Fed would stop raising rates and home prices would start to drift higher and eventually home price growth would converge to rent growth.

Article source: http://www.forbes.com/sites/modeledbehavior/2013/03/25/the-housing-bubble-is-back/

While the percentage jump is large, in a twist, some argue the foreclosure delays still persist and are hurting the recovery.

(Read More: No Money? No Worries. Home Lenders Ease Rules)

“While policy makers state that the purpose of government intervention is to help homeowners by delaying foreclosures, instead they have created an artificial shortage in bank-owned inventory (REO). The combination of the decline in REO inventory and lack of motivated sellers has left the California real estate market with an acute lack of inventory, which is putting upward pressure on prices,” say analysts at ForeclosureRadar.

(Read More: REO: CNBC Explains)

While price gains help recovery, if they happen too fast, they price would-be buyers and investors out of the market, which slows sales again. Price recovery has many believing that housing is suddenly not just back on its feet again, but surging ahead—much of the price recovery is based on lack of inventory of homes for sale, which in turn is due to foreclosure delays, which as we now see, can turn very quickly.

—By CNBC’s Diana Olick; Follow her on Twitter @Diana_Olick or on Facebook at facebook.com/DianaOlickCNBC

Questions? Comments? RealtyCheck@cnbc.com

Article source: http://www.cnbc.com/id/100553116

Home News San Francisco Leads Nation in Foreclosure Reduction

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By Brandon Cornett | November 1, 2012
© 2012, All rights reserved

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Trending: Mortgage Rates are Rising
On August 16, 2012, the average rate for a 30-year fixed mortgage rose to 3.62%. What kind of rate can you get?

• Conventional:
• FHA:

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Colorful houses in San Francisco. Ian Ransley.

The San Francisco housing market continues to recover, and in more ways than one.

New research shows that foreclosure activity has dropped significantly across the Bay Area. This will support home prices and increase market stability going forward.

The Federal Reserve recently published a positive outlook for the San Francisco metropolitan-area housing market. Among other things, it predicted strong demand for homes into 2013. That’s good news for sellers.

Here’s more good news for homeowners in the area. Foreclosure filings are receding — and fast.

36% Drop in San Francisco Foreclosures

Last week, RealtyTrac released their Metropolitan Foreclosure Market Report for the third quarter of 2012. Among the nation’s largest metro areas, San Francisco experienced the largest reduction in foreclosure activity. Third-quarter foreclosure filings fell 36%, compared to the same time last year.

RealtyTrac’s report included all properties with at least one foreclosure filing, across all three phases of the foreclosure process — defaults, auctions, and bank repossessions. In total, there were 9,798 filings in the San Francisco metro area, during the third quarter of 2012. That marks a 3% reduction from the previous quarter, and a 36% reduction from the same period in 2011.

Typically, a major reduction in foreclosure activity helps to stabilize the market in two ways. First, we have an overall drop in the number of homes for sale. With a consistent level of demand, a drop in supply will put upward pressure on home prices.

Secondly, we have less price erosion resulting from distressed properties. Foreclosure homes are often priced and sold below their market values. So they end up as low-end comps, or comparable sales, putting downward pressure on home prices. Thus, the San Francisco real estate market benefits in two ways from this trend.

On the broader stage, this is just one of several factors boosting Bay Area home prices. The metro-area unemployment rate hit 7.4% in August, down from a recession high of 10.1% in January 2010. Housing inventory has fallen across the board, not just in the foreclosure sector. Meanwhile, demand is growing among investors and ‘regular’ home buyers alike.

Homes are Selling Faster, and for More

According to data provided by ZipRealty, San Francisco’s real estate market is still bustling. Home sales typically drop off in the fall, after the summer buying ‘season.’ But that doesn’t seem to be the case here. In most Bay Area counties, homes sold faster this September compared to last. List prices and sale prices both rose at the same time.

Within San Francisco County, the median number of days on market (DOM) was 40 days in September. That marks an 18% decline from the same time last year. At 12 days, Santa Clara County had the lowest median DOM for the Bay Area (it’s no wonder prices are jumping in places like Saratoga). The median DOM declined in eight of the nine Bay-Area counties over the last year. Only Solano County saw an increase in this metric.

The median listing price rose in eight of nine counties as well, again with exception of Solano County. Median selling prices rose in all nine counties over the last year. This is according to data from ZipRealty, a real estate company headquartered in Emeryville, California.

The latest SP/Case-Shiller Home Price Index was released the day before Halloween. According to that report, home prices rose 5.3% across the San Francisco metro area, from August 2011 to August 2012.

While California seems to be leading the recovery, it’s becoming a national trend. At the monthly level, prices rose in 19 of the 20 major metro areas tracked by Case-Shiller. “The sustained good news in home prices over the past five months makes us optimistic for continued recovery in the housing market,” said David M. Blitzer, chairman of the index committee at SP Dow Jones Indices.

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Filed under San Francisco

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Article source: http://www.homebuyinginstitute.com/news/san-francisco-foreclosure-reduction-275/

Home News San Francisco Real Estate Prices Rise as Inventory Falls

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By Brandon Cornett | 7/14/11
© 2011, All rights reserved

Recent reports show San Francisco real estate prices rising, partly due to a reduction in housing inventory. It’s a blip on the EKG of an otherwise flat-lining housing market.

The Alamo Square neighborhood of San Francisco

On Monday, real estate analytics firm Altos Research released its latest market report. The company’s “Real-Time Housing Market Update” focuses on the same 20 metro areas featured in the SP/Case-Shiller Home Price Index. Their latest data shows that home prices in San Francisco rose 2.34 percent in June, compared to the previous month.

That’s not a big leap by any means. But it was the second largest increase of all 20 metro areas included in the report.

San Francisco took the lead in the three-month category. Based on data for April, May and June, San Francisco home prices rose by 5.75 percent. This was the largest three-month increase of all 20 cities contained in the report.

Inventory Reduction Supports Prices

San Francisco stood out in other ways, as well. The city had the second largest inventory reduction of all 20 metro areas tracked by Altos Research. If this trend continues, it could put continued upward pressure on San Francisco real estate prices. This is good news for homeowners who have lost significant equity since the housing market crashed.

In most real estate markets across the country, excessive inventory is the biggest drag on home prices. Mortgage rates are low, and homes are more affordable than they’ve been in years. But high inventories have been pushing prices south, making potential buyers wary about taking the plunge.

If you take the falling prices out of this equation, you have a perfect scenario for buyers and investors — low mortgage rates, and low (but rising) home prices. This is how things are shaping up in the San Francisco real estate market.

Granted, most housing analysts are predicting a long and flat bottom for housing markets — San Francisco included. But when the patient has been in a coma for years, any sign of life is worth noting.

San Francisco Home Prices in Second Half of 2011

On July 8, 2011, real estate valuation firm Clear Capital released a report showing home-price trends and forecasts for 50 U.S. cities. Their predictions were mostly gloomy for the second half of 2011, with a few exceptions. San Francisco was one of the exceptions. It was one of only five metro areas where home prices were predicted to rise in the second half of 2011 (New York, Dallas, Orlando, and Washington, D.C. were the other four).

Stated differently, San Francisco was in the ten-percent club. The other ninety percent of the metro housing markets tracked by Clear Capital were predicted to see flat or declining home prices for the rest of this year.

The Truckee, California-based company expects San Francisco home prices to rise by 0.2 percent between July and December of this year. It’s a small number by any yardstick. But given the price erosion predicted for the rest of the country, it’s a noteworthy number.

Jump in Home Sales – May to June 2011

We also witnessed an unexpected jump in home sales in San Francisco, from May to June. Bay Area home sales rose by 14.5 percent during that month-over-month period. This marked the highest level of home sales since June 2010 (when the home-buyer tax credits were expiring).

DataQuick president John Walsh pointed to a number of factors that could have caused the spike: “June likely benefited from a combination of factors, such as price reductions, low mortgage rates and perhaps a batch of short sale transactions from spring that took months to close.”

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Filed under Market Reports

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Article source: http://www.homebuyinginstitute.com/news/san-francisco-prices-172/

According to the Fannie Mae 30-Yr MBS, mortgage rates are lower by about 5 basis points, thanks to the rally in US Treasurys, which produced a drop in yields.

Bankrate.com’s overnight on the 30-Yr fell to 4.81 percent from 4.87 percent last week.

Given the uncertainty in Japan, rates now get tricky:

This from Peter Boockvar at Miller Tabak:

“On one hand the news in Japan may lead to slower global growth and therefore a bid to US Treasurys/drop in yields, but on the other hand, Japan is the 2nd biggest foreign holder of US Treasurys and may elect to sell in order to repatriate funds back home. That may lead to upward pressure on US yields.”

Questions?  Comments?  RealtyCheck@cnbc.com And follow me on Twitter @Diana_Olick

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