Is Housing Nearing the Floor?

The last piece of the last residential construction crane in Miami is coming down, and locals don't expect to see another one for a while. Developers threw up some 23,000 housing units along South Beach and its environs beginning in 2003, many of them bought by speculators who thought they could flip the properties for a quick profit. Then the music stopped. "Our best guesstimate--and we've talked to lenders and developers--is that you will not see a residential construction crane in the sky in downtown Miami for a generation," says Peter Zalewski, a real estate broker and founder of Condo Vultures, a realty-intelligence service. "Well, at least seven years," he says before modifying his forecast yet again. "Let's go with a decade," he finally concludes.

When it comes to the U.S. housing market, it's sensible to plan for the worst. The latest Case-Shiller Home Price Index for a 20-city composite showed that prices recorded a 1% drop in August and were down 17% for the past 12 months. Miami had a 2% monthly drop and a 28% tumble over the last year; in San Francisco it was −4%, and −27% for the year.

But the picture is brightening in pockets of the country, where there are nascent signs of a bottoming: the rate of decline slowed in August, according to Case-Shiller, and in September, existing home sales rose 6% nationally. That means buyers are finally being lured to the market by low prices. In Los Angeles, and even in Miami, there is evidence that the housing market is lifting its head off the deck, even as foreclosures continue to pile up and prices edge downward. Some banks are grudgingly agreeing to short sales--that is, selling below the mortgage amount--and doing some workouts. For owners, buyers and policymakers, such signs of a recovery raise a big question: Will a recession that is gaining momentum break through housing's floor again? In other words, is this real estate's dead-cat bounce?

Oddly enough, talk of a possible federal mortgage bailout is slowing deals. "Recently, a lot of the financial institutions have stopped accepting short sales to find out if the government is going to buy their loans that are in default. They're waiting to see what happens with the recent rescue plan to buy back mortgages," says Fred Arnold, president of the California Association of Mortgage Brokers. In Miami, banks can't wait to throw underwater mortgages into the government's pool. Says Zalewski, "I can see the Federal Government giving them a mulligan and allowing them to sort of do a do-over."

He can expect a do-over from the outgoing Administration, but not a paper-over that would rescue speculators. FDIC chief Sheila Bair has been pushing to use new loan-guarantee authority passed under the $700 billion banking bailout to adjust troubled homeowner mortgages. The plan would provide $50 billion from the government to be tapped as insurance for banks willing to adjust mortgages in a loss-sharing agreement. The FDIC would guarantee any losses on loans readjusted for homeowners who can show a 38% debt-to-income ratio, similar to what the FDIC worked out for the 60,000-odd bad loans it ate when it closed IndyMac bank.