February 2011  Market Update

Gradual improvement in the housing market continues at a steady pace without government support. Six months after two consecutive years of tax incentives for buyers; starting in July 2008 with a $7,500 repayable first-time buyer tax credit, extending to a $8,000 nonrepayable first-time buyer tax credit in January 2009, and ending in June 2010 with the expanded credit to repeat buyers; the market has shown remarkable improvement from the initial drop this past July. With mortgage rates remaining near historic lows and home prices having generally stabilized, economists are expecting further strength in 2011.

Consumers are showing some signs that they’re feeling better: a significant boost in the food and services industry implies they are eating out more, vacations are back on the rise as spending on travel and tourism increased 8% in the third quarter, and household net worth has risen notably thanks to a strong stock market even as they continue to shrink their debt.

As the economy improves, current stimulus efforts by the government and the Federal Reserve Board are expected to gradually wind down, which typically means rising interest rates. Meanwhile, buyers continue to benefit from historically favorable buying conditions and sellers enjoy increased stability in the market.

Home Sales

in millions

The uptrend in existing home sales activity continued through December, increasing by a substantial 12.3% from a month ago. This marks the fifth monthly increase in the past six months and indicates a recovery that’s gaining a firmer footing. While home sales remained 2.9% below the level seen last year, the market’s upward momentum, despite the absence of the tax credit, is a welcoming sign.

Home Price

in thousands

Home prices softened in December: median home prices edged down slightly to $168,800, 1% below the year-ago level. Contributing to this is a larger share of distressed homes sales which accounted for 36% of sales in December. This is compared to 33% in November 2010 and 32% in December 2009. Prices continue to hold steady and mortgage rates remain historically low, offering favorable buying opportunities.

Inventory- Month’s Supply

in months

The surge in home sales and a shrinking inventory pared down the month’s supply to 8.1 months. This is down 1.4 months from November but remains 0.9 months above last year at this time. While still at a relatively high level historically, months of inventory has declined steadily from its peak of 12.5 months in July and is now back to pre-tax credit expiration levels.

Source: National Association of Realtors – December housing data released Janurary 20.

Interest Rates

Mortgage rates are inching up but remain historically low. This trend continues to support home buying, as it translates to significant savings for buyers. As overall economic recovery remains on track, rates are expected to rise to keep inflation in check.

Source: Freddie Mac, Rates as of Feb 7 .

This Month’s Video

Topics For Home Owners, Buyers & Sellers

‘Anti-Flipping’ Waiver Extension

In 2003 the Federal Housing Administration (FHA) feared that flipping homes was the cause of the skyrocketing home prices throughout individual neighborhoods. Because of this, the FHA no longer approved property loans that were resold within 90 days of the original purchase, with the exception of foreclosures owned by government sponsored enterprises (GSEs) such as FHA, Fannie Mae, and Freddie Mac. The anti-flipping rule is designed to help protect the FHA’s mortgage insurance program and federally chartered financial institutions from losses.

In February 2010, the FHA initiated a one-year suspension on the regulation that prevented “flippers” from purchasing single-family homes and releasing them into the market within 90 days. Since then, the FHA says it has insured 21,000 loans that had exchanged hands within the previous 90 days. The loans are worth more than $3.6 billion and would not have qualified for financing before suspension. An analysis of these loans suggest they do not present a greater credit risk than other loans, which lent support to the suspension’s

extension.

The government sent a notice to banks in mid-January of 2011 in which it announced the extension of the waiver through the end of the year. According to FHA Commissioner David Stevens, the purpose of the extension was to accelerate the resale of REO properties in neighborhoods where there is a high rate of foreclosure. This will facilitate the purchase of homes that have recently been “flipped.” As a result, foreclosed properties will be moved off the market faster, reducing the amount of vacant homes in neighborhoods throughout the United States.

Limitations considered by the FHA consist of the following:

1. 20% Rule. If resale is higher than 20% of the original price, one must show proof of justified price. For example, if a $200,000 house is purchased and the resell price is $245,000, the house must undergo additional underwriting guidelines, which is considered a double appraisal.
2. Title Hold. No simultaneous closings are allowed when the seller holds a property. In other words, back-to-back, same-day closings to an FHA end-buyer is prohibited.
3. Short-term Funding. Investors must come up with short-term funding of the 30-to-60-day variety if their desire is to buy/fund and in order to sell to an FHA end-buyer.
4. Previous Flips. A property cannot show signs of prior flipping activity. If so, the FHA has the right to object.
5. Transactions at Arm’s Length. Transactions must show no identity of interest between the buyer and the seller or other parties that participate in the sale of a property.

Overall, this will help lower holding costs for investors/flippers allowing them to continue flipping more properties. In return, this will help bring more desirable homes to the market for first-time home buyers.

Source: Inman News, ReatlyTimes.com

Market Update

The housing market continues its gradual recovery without the aid of the tax credit. Sales are slower but growing. Although it will likely be uneven at times, slow growth is believed to be the trend moving forward. Interest rates hit a new historic low again, a major factor in helping keep mortgage payments incredibly affordable.

Extended periods of record low interest rates and further plans from the Federal Reserve Board to expedite recovery have some concerned about future inflation. One such investment guru, John Paulson, touted the benefits of owning real estate as a hedge against inflation on Forbes.com. “Your debt and interest payments get locked in at record lows, while the price of your home will rise … If you don’t own a home buy one … if you  own one home, buy another one, and if you own two homes, buy a third and lend your relatives the money to buy a home.”

This march back up continues to provide excellent opportunities: an ample selection of homes, affordable prices, and historically low interest rates. Experts anticipate both the economy and the housing market will continue their paths on the way to a complete recovery.

Home Sales

Home sales continued to rebound in September, increasing 10% compared to the previous month.  This builds on August’s gain of 7.6% that followed a large drop caused by the expiration of the federal tax credit in July. Sales are expected to gradually grow as the market moves toward recovery without government stimulus. The recent foreclosure moratorium has opened up opportunities for short sales. Although it could make the near-term “choppy at times,” industry experts expect the overall trend to continue growing slowly.

Home Price

After four months of prices remaining on par with year-ago levels, September showed a slight decline. Last September distressed properties were 29% of all home sales; this September that number rose to 35%. The larger proportion of distressed sales, which are typically discounted, helps to explain the decline. While these discounted sales provide opportunities for buyers, sellers look forward to the general trending upward of home price. 

Inventory

There are fewer homes on the market again in September, representing 10.7 months of inventory. While still at a relatively high level, months of inventory shrank by nearly a month in September from August’s 11.6 and nearly two months since the 12.5-month supply in July. This continues to represent an excellent opportunity for buyers and investors who have not yet taken advantage of the abundant opportunities of the market including record low rates, an ample but shrinking selection of homes, and highly affordable prices.

Affordability

Housing remains at near-record affordability levels, and prospective home buyers stand to benefit from the lowest mortgage rates in decades, as well as advantageous home prices. Housing is approximately 60% more affordable now than during the height of the market.

Source: National Association of Realtors

Interest Rates

Mortgage rates once again set new record lows in early October to 4.19% and remained below 4.3% throughout the month. These historically low rates contributed to real savings for buyers. Furthermore, the longer the buyer owns the home, the greater the savings they will realize. As economic activity gains momentum, rates will rise to keep inflation at an acceptable level.

Rates as of November 4 .

This Month’s Video

Topics For Home Owners, Buyers & Sellers

Prime Time to Buy

7 Reasons Why Now Is a Great Time to Buy a Home

Recent history has reframed some of what had long been taken for granted about buying a home. Namely, we’ve learned that even though buying a home remains one of the best and safest investments available, a home should not function as an ATM or a short-term speculation strategy. So, where does that leave us? A lot smarter, able to recognize an opportunity when we see one, and aware of the facts that point to now as the prime time to buy a home.

1. Home affordability is at an all-time high. The median mortgage payment on the median-priced home, as a percentage of the median household income, is lower than it’s been in a generation.
2. Mortgage rates are at rock bottom. It’s hard to imagine interest rates going much lower, and when they start to inch back upward, monthly payments and total loan costs will spike upward.
3. Home prices are back on the rise. After declining for 30 months, home prices are trending back upward. The time to get in the market is now.
4. Sellers are motivated. This means that buyers have the upper hand.  Sellers are fiercely competing among an excess of housing inventory, which often means buyers have untold choices and negotiating power.
5. Financing is readily available. Banks are back in the game and ready to lend to well-qualified buyers.
6. Owning vs. renting is increasingly favorable. Since 2009, the average principal and interest payment has fallen below the average rental rates, and the gap is now wider than it’s been in the past 22 years.
7. Homeownership is still at the core of the American Dream. Owning a home is critical to financial stability and wealth building. It’s a forced savings account, a place to live, and a fabulous tax deduction.

For more detail, check out Keller Williams Realty’s 7 Reasons Why Now Is a Great Time to Buy a Home! and The Wall Street Journal’s 10 Reasons to Buy a Home.

Sources: The Wall Street Journal, Inman News, KW Research