A Trickle of Hope for Housing

The real estate bears have plenty of fodder. There's the $230 billion in variable-rate home loans that will reset between now and 2012—a wave that could trigger another round of defaults. And more problems are brewing in commercial real estate, which some experts believe will generate $375 billion in losses on top of the $1.1 trillion hit from housing.

But, as the saying goes, all real estate is local. And amid all the Sturm und Drang, small signs are emerging that the housing market is starting to stabilize, even in such hard-hit areas as Las Vegas, Washington, D.C., and coastal Florida. For the first time since 2004, sales of existing homes have risen for three straight months. At the same time, the inventory of unsold homes has decreased. Equally important, more homeowners are selling their properties at or near their asking prices. Here's a look at the four groups that make the housing market go: buyers, homebuilders, mortgage lenders, and sellers.

BUYERSEarlier this year, Angie Hunter, 34, got a call from her landlord. The owner of the Las Vegas property was being foreclosed upon, and Hunter—whose husband, Craig, 33, is on active duty in the U.S. Air Force—was going to have to move out. "I have four children, and my husband's in Iraq," she told the landlord. "Are you joking?"

But with Las Vegas awash in foreclosed properties, the Hunters realized they could afford to buy a place rather than rent one. In June, they snapped up a four-bedroom ranch house for $204,000—nearly half what the last owner had paid for it back in 2005. And while their previous neighborhood was littered with vacant houses, the couple's new home is in a gated community with parks, a recreation center, and golf course. And if the military transfers her husband to a new city, Angie feels confident they can rent out their house for more than their monthly mortgage payment. "I think we got a great deal," she says.

HOMEBUILDERSLike many other builders, KB Home (KBH) is deep in the red, with analysts forecasting the Los Angeles-based company will lose $209 million this year. But CEO Jeffrey T. Mezger is upbeat. The company reported a 60% jump in new-home orders in the second quarter. And Mezger says he expects KB to show year-over-year increases in sales for the current quarter. The company now has orders for 3,800 homes worth around $800 million. He attributes the spike in part to a new build-to-order model adopted late last year that lets buyers pay for just the amenities they want.

To cut its construction costs and make its homes affordable to a broader pool of buyers, KB also reengineered how it builds. It now uses prefab floor and wall panels. It also designed new floor plans to give buyers the same number of rooms in less square footage by shrinking the size of hallways and stairways.

Still, prices are weighing on profits. KB Homes' average sale price was $216,000 in the second quarter, vs. $295,000 in the same period three years ago. But the design changes may enable KB Homes to do well even if prices don't rise dramatically.

Right now, more than three-quarters of its current orders are coming from first-time buyers, many of whom say the mortgage payments for KB Homes' new models are less than what they were paying in rent. Says Mezger: "We're pulling people out of apartments."

LENDERSBanks and other lenders have been criticized during the downturn for selling tricked-out mortgages to millions of borrowers with little due diligence—and now they're being vilified for refusing to modify the loans with new terms homeowners can afford. But one lender has withstood the mortgage meltdown relatively unscathed and could serve as a model for others: the North Carolina State Employees' Credit Union (SECU).

Commercial bankers grumble that credit unions such as SECU enjoy an unfair advantage because of their tax-exempt status and the fact that they don't have to deliver ever-higher profits to Wall Street. While there's no denying the benefits of being a nonprofit, SECU's real success comes from its old-school approach to lending: Before approving a mortgage, loan reps for the $16 billion credit union—the nation's second-largest—visit with the applicant and painstakingly build a household budget that determines what the borrower can really afford. And if a homeowner falls behind on payments, SECU grants brief extensions, usually for 30 days. But it also dispatches a loan rep to help the borrower put together a new budget.

This approach works: SECU executives expect to write a record $2.5 billion in new mortgages and refis this year, with roughly 20% of that volume coming from members who are refinancing an existing loan with another bank.

The credit union's hands-on underwriting is also holding up better than the approach that is used by many banks—a system that relies mostly on credit scores and other predictive modeling. Only 0.5% of the mortgages SECU has underwritten are more than 90 days past due. That's significantly below the delinquencies of most other lenders. "We make loans face to face, and we eat what we cook," says CEO James C. Blaine. "The commercial banks can do what we do—they'd just have to relearn the lending business."

SELLERSWashington, D.C., was ground zero for the bubble—and the bust. After a seven-year stretch where home prices more than tripled, prices have tumbled roughly 20% even in popular areas such as Dupont Circle—and by as much as half in up-and-coming places like East Columbia Heights. But some analysts think the Washington housing market may have finally hit bottom and is poised for a gradual recovery.

Why? The inventory of unsold homes has dropped to five months, and this relatively tight supply is creating the kind of bidding wars that were seen at the height of the bubble. Eric Rice, a local agent, notes that one client listing a row house in the Adams-Morgan area received a half-dozen offers within five days—including several above the asking price. "Prices have stabilized, and multiple offers are back in vogue," he says. Rice cautions that it's a long way to a full-blown recovery, since supply is being constrained by the thousands of foreclosed properties that banks are holding off the market. But by managing the inventory, lenders are helping ensure that the recovery, while modest, will at least be orderly.

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