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How Low Will Real Estate Go?
By Matt Woolsey, Forbes.com
Apr 17th, 2009

These places in America have fast-falling home prices that have yet to hit bottom.
Two weeks ago, Joyti Goundar, an agent at Redfin, a residential real estate brokerage, entered a bid of $420,000 for a three-bedroom, 1,625-square-foot La Crescenta home outside of L.A., listed at $299,000. When she lost the bid, she wasn’t surprised. In July of 2008, Goundar bid $559,000 for a two-bedroom Arcadia house, also outside L.A., listed by Wells Fargo for $459,900. That one received 105 bids, driving the price up to $628,000, according to Los Angeles County records.

In Depth: How Low Will Real Estate Go?

“Sellers want to generate a bidding war, and it’s working,” she says.

So does this mean Southern California prices have reached bottom?

Not by a long shot. Even with the bidding wars, prices aren’t nearly as high as they were at the peak of the real estate boom. Values plummeted 31% in the L.A. metro area in 2008, according to the National Association of Realtors.

And values still have a long way to go. Based on historical balances of employment, housing sales, income, lending availability, foreclosures and vacancy rates, all dating back to 1982, home prices in the Los Angeles metro area still have 29% further to fall, according to Moody’s Economy.com.

The best real estate deals, it seems, are yet to come.

Behind the Numbers
To figure out which housing markets have yet to reach bottom, we looked at the 50 largest metropolitan statistical areas in the U.S., as defined by the Office of Management and Budget and, using calculations from Moody’s, analyzed each area’s spending power, unemployment, housing and credit availability going back 27 years.

Over that time, each area’s home prices have fluctuated differently according to these factors. Moody’s calculations determine how much each area’s home prices would have to change to bring that particular housing market back to a state of balance. The further from equilibrium, the further the market has to go. Projections were made on the basis of the current rate of price decline, absorption rate, employment and salary deterioration, and how long it would take each metro to wash out to a historical point of balance.

All of this adds up to bad news in one of the states hardest hit by the real estate bust, Florida–particularly Miami, Orlando and Jacksonville. Home prices are down 32%, 27% and 9%, respectively, in year-over-year terms, and are expected to decline a further 53%, 48% and 39% in each area, according to our calculations. Each has decade highs in unemployment, not to mention still out-of-balance price-to-home-price ratios.

In Miami, home prices are $234,200 at the median, and that’s still six times the median income of $39,350, making it one of the nation’s least affordable markets. Unaffordable housing markets are hit particularly hard when unemployment spikes, especially over multiyear periods. In Miami’s case, unemployment has gone up steadily since 2007.

“These price decreases tend to add up in metro areas that have had continuous increases in the unemployment rate over the past two to three years,” says Andres Carbacho-Burgos, an economist at Economy.com.

And unemployment has a nasty way of compounding with other factors.

“Rising unemployment is accompanied by a whole host of other occurrences–rising defaults and foreclosures, reduced mortgage originations, falling incomes, reduced industry investment and construction, increasing outmigration, and lower long-term income prospects,” says Carbacho-Burgos.

In other words, as jobless rates go up a little, home prices sink a lot.

All Markets in this Together
It’s not just broader metro areas, with their vacant outer suburbs, overbuilt beachfront and overly hopeful new developments that are taking hits. In New York, Manhattan has been showing signs of cracking for months, in the form of rising inventory and slowing sales.

Yet it wasn’t until the first quarter of 2009 that it became apparent how much of a hit that market would take.

Manhattan median prices were down 21% in year-over-year terms, from $852,500 to $675,000, according to Miller Samuel, a Manhattan-based appraisal firm. While Moody’s expects the broader metro to decline another 23%, and Manhattan will no doubt contribute to that, the price drops have at least piqued interest among those still employed, a lone bright spot.

While a slower housing price decline won’t bring jobs back to AIG–or resurrect Lehman Bros. from the dead–and save housing prices, it at least wards off some fears of a return to the frightening bankrupt New York of the early 1980s.

“By the end of the first quarter there was a noticeable uptick in contract activity and attendance at open houses,” says Jonathan Miller, president of Miller Samuel. “While this is partially attributable to seasonality, it is also a sign of first-time qualified buyers seeking to take advantage of improved affordability.”

Though, as is the case in Los Angeles and most other parts of the country, that increased interest has yet to result in price reversals to sustainable levels. As long as unemployment continues to rise, don’t expect that we’ve seen the worst of it.

In Depth: How Low Will Real Estate Go?

Top 5 Places With Fast-Falling Home Prices
1. Raleigh, N.C.
(Raleigh-Cary metro area)
2008 Population: 1,088,765
2007-2008 Change: 4.29%

2. Austin, Texas
(Austin-Round Rock metro area)
2008 Population: 1,652,602
2007-2008 Change: 3.77%

3. Charlotte, N.C.
(Charlotte-Gastonia-Concord, N.C.-S.C., metro area)
2008 Population: 1,701,799
2007-2008 Change: 3.36%

4. Phoenix, Ariz.
(Phoenix-Mesa-Scottsdale metro area)
2008 Population: 4,281,899
2007-2008 Change: 2.78%

5. Dallas, Texas

(Dallas-Fort Worth-Arlington metro area)
2008 Population: 6,300,006
2007-2008 Change: 2.38%

Click here for the full list of How Low Will Real Estate Go?

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