July Dip In Sales Is the End of the Wave

I recently wrote about the ‘wave’ of sales that was created by the federal first-time home buyer tax credit that ended April 30th. The last day in April was the last day homes could go under contract but they had to ‘close escrow’ by the end of June. Although this closing deadline has subsequently been extended, many buyers under contract made sure that their sales closed in June, leaving a shortfall in the normal number of sales that would have closed in July. Unfortunately there was almost nothing said about this phenomenon in the press, leaving everyone to speculate that sales had taken a nose dive. In fact, sales have been down somewhat since the tax credit expired in April, but low interest rates have kept buyers interested and volume at reasonable levels. One way we track current volume is by measuring new ‘pending’ sales – homes that have gone into escrow in the last 30 days. This number has remained pretty stable over the last several months, with no dip in July. When the press does not investigate the underlying cause(s) of volume drops, and simply reports the number in a way to sell newspapers or ad space, they create potential problems in the market place. Buyers are nervous, even though this is one of the best times to buy a home in years, and can cause them to put their plans ‘on hold’ or even drop out of escrow. This behavior by the media will not be going away anytime soon, but it is frustrating that they don’t do more to look into root causes.

Can San Diego County Stay Ahead of the Pack?

While many national news agencies are focusing on a ‘double-dip’ recession, along with a double-dip housing slump, San Diego County continues to show consistent improvement in many areas of economic development. While San Diego could still pull away from the pack and recover sooner than the rest of the country, it could also follow the rest of the nation on a precarious ride teetering between a growth economy and a slumping economy. There are some signs that San Diego could indeed lead the country out of the recession. It was recently reported that the San Diego area is now the number one military city in terms of payroll – over $13 billion per year, $1.5 billion more than last year and overtaking Norfolk VA in the number one spot.  The biotech industry, one of the fuels in San Diego’s now diverse economic landscape, had an increase in employment last year, and over 300 new start-up companies came to life in 2009 – a 13% increase over 2008. The Index of Leading Economic Indicators for San Diego, published by USD, recently reported its 16th straight month of gains, with consumer confidence and help wanted advertising driving the gain. That doesn’t really sound like the national media’s take on the nation as a whole. San Diego also fared well in a report published last week showing it had the 3rd lowest drop in residential real estate sales of all of the large metropolitan areas for July (versus July last year). And real estate prices continued to rise, year over year, in San Diego County. Historically San Diego County has emerged housing slumps ahead of the rest of the country. Perhaps this time we’ll be an overall economic leader as well.

Home Buyer Tax Credit – Did It Work?

Analysts are now predicting that the final price tag for the Home Buyer Tax Credit that started in 2008 under President Bush and extended and broadened under President Obama will cost the taxpayers about $16 Billion.  Did it work and was it worth it?  Many say yes as the money went directly back to tax payers and any economic stimulus is best used by letting tax payers benefit from it.  And it would have and did create additional dollars into the hands of REALTORS, mortgage lenders, title companies, appraisers and other industry participants.  The additional demand for homes during this period, it is assumed, helped keep home prices steady, as in San Diego County, or helped keep them from falling faster in other parts of the country.  But did it really affect overall volume?  This remains to be seen as the year plays out.  Did the tax credit bring new buyers into the market or did it merely get people off the fence that would have purchased a home anyway, to buy earlier?  We’ll likely need the rest of the year to figure that one out, if it’s possible to ever really know.  The fact is that continued value in home prices now and historically low interest rates should keep demand buoyant in the foreseeable future.  This Fall could be the real barometer as seasonal volume slows, since the tax credit expired on April 30^th, just prior to the traditionally stronger summer volume months.  We did see some significant change in volume after the first round of tax credits expired on November 31, 2009.  Volume dropped by about 20% over the December through February period from the year earlier period, sparking some comments that this credit simply created more excitement, but not more volume.

The First Time Home Buyer Tax Credit Spikes the Market

The big story lately has been the tax credit for first time homebuyers. In October the National Association of Realtors recorded an unprecedented ninth consecutive month of increases in the number of signed contracts. Although these are not closed sales, and some deals can fall through, signed contracts are a good indicator of where the housing market is headed. October NAR’s Pending Home Sales Index rose 3.7% to 114.1 from 110 in October from September’s sales. But the index is 31.8% higher than a year ago, when it was 86.6. That’s the biggest year-over-year gain in the history of the index. The tax credit has unleashed a pent-up demand from a large pool of financially qualified renters and many agree that it’s more than bringing forward sales that would have happened anyway. With some home price stability, along with historically low interest rates, and the $8000 tax incentive, these savvy renters have jumped into the market and have made a big impact on sales volume. The tax credit had been due to expire on December 1st 2009, so many of these buyers had been timing their purchase to close escrow prior to that date. The tax credit has now been extended and broadened to include move-up buyers as well. We may see a dip in activity over December and January, with another nice wave of volume hitting in late winter and early spring. Typically it takes several months for buying decisions to materialize. This next surge could take slightly longer given that move-up buyers will need to sell their existing homes as they move-up to their next home.

Another positive outcome of this spike in sales is the decrease in available home inventory in San Diego County. Detached home inventory has more than halved in the past year, which has contributed to price stability and in some cases, multiple offers on attractively priced homes. This news is muted somewhat by the huge increase in entry-level home sales and the relative stagnation of the luxury market. Where the under $300k market was virtually non-existent in 2007, for the past two years it has dominated the October sales numbers for detached homes. Probably the biggest opportunity over the foreseeable future is for those homeowners looking to move up to the luxury market. There is a relatively good sales market for low or medium priced homes and an extremely soft market in the luxury category, where buyers can dictate the terms and benefit from the move-up tax credit. This will put move up buyers in luxury homes at the bottom of the luxury market and help them enjoy the relatively larger appreciation gains on the way back up.

Watch Out for a Mortgage Rate Spike This Spring

A little talked about shift in a Federal Reserve policy could have a negative effect on interest rates in the spring of 2010. For the past year the Federal Reserve’s aggressive $1.25-trillion purchase program of mortgage-backed securities has artificially pushed interest rates down. Without this government purchase initiative, mortgages would have to float on the open market, which many economists predict would have at least a 1% increase from their current levels. And the Federal Reserve has indicated that it intends to wind down its purchase program by the end of the first quarter of 2010. Many consider the Feds exit from this market the biggest risk for banks and the housing market for the next six months. Historically 30-year conforming loans level off at about .25% below Jumbo mortgages, which are currently just under 6.0%. With 30-year conforming loans just under 5.0%, this would indicate a correction will be forthcoming when this buying spree finishes up, of .75% to 1.0%, bring 30-year conforming rates to around 6.0%. This represents about a 10% reduction in the buyer purchasing power. Another risk factor for interest rates are the ongoing deficit spending the government is involved with and paying for existing debt; the pressure on the dollar and a likely improvement in the economy forcing inflation up, this is an ideal time to lock a loan for purchase or refinancing.

Foreclosures Are Spiking: Will They Hit The Market Anytime Soon?

Nationwide for July there were more than 360,000 properties with foreclosure filings — including default notices, scheduled auctions and bank repossessions — an increase of 7% from June and 32% from July 2008. This is part of the continued ‘next wave’ of foreclosure activity that includes the re-set of option ARM loans and the predicted continued poor performance of prime loans where the borrower is losing a job. This is the third time in the last five months that a new record for this activity has been set. The big question is: will these properties actually be foreclosed and be sold on the open market? Many lenders (with the state legislatures helping as well) have been holding off on letting these homes loose on the market, with hopes of modifying these loans to keep the homeowners in their homes. This is the ‘moratorium’ on foreclosures that everyone has been talking about. The loan modification programs, which are a valiant effort to reduce payments for struggling homeowners, have not fared very well over the longer term with over 50% not keeping up with their new lower payments. A recent spate of articles on the subject showed that the largest institutions had done very little to promote and successfully modify troubled loans – some as low as a 5% modification rate. This is giving the Obama administration some leverage to pressure the banks and states to continue the moratorium beyond the recently publicized September 1st release date. While there is a lot of pain, inflicted on both homeowners and housing prices, most real estate professionals feel it’s better to take the pain now and get these homes on the market than to have this drag on for years, especially if interest rates could go up as the overall market recovers. A combination of higher rates and foreclosures still trickling on to the market could spell flat home or lower home prices for years.

Short Sales Will Be Around For Awhile

Short sales or short pays are where the owner owes more on the property than its market value plus sales costs.  Current estimates nationally are that about 25% of all homes are worth less than the amount owed on them.  And the current ‘active’ listings market in San Diego County is very consistent with that number.  Of the 9,867 single family properties currently listed for sale, 2,154 or 21.8% are listed as short sales.  Most analysts agree that this trend will likely be around for quite awhile as it will take years for many properties to recoup the value needed to cover the loan amounts.  Short sales do have a negative impact on the seller’s credit rating, although not nearly as bad as a foreclosure.  Some banks are even allowing sellers who have not missed a payment to short sell their homes and in this case, the credit impact is minimal.  There are three conditions necessary for a short sale to be considered by a lender.  Those are 1) a verifiable financial hardship like a loss of job, reduction in pay, divorce etc. 2) that this hardship has created a situation where the owner cannot maintain paying their bills and 3) there are no other assets that can be sold to pay the short fall.  For more information, please give us a call. Steve is a Certified Distressed Property Expert (CDPE) and can explain this in more detail.  If you have any friends or family that might need some advice on short sales, please have them call us.  Tax advice  will need to be provided by an attorney or a CPA.

Home Price Stability May Be Temporary

The inventory of homes for sale has been unusually low for the last three months, creating a situation where prices have stabilized in San Diego County and have even increased.  Unfortunately this may be a temporary situation caused by a moratorium on releasing foreclosures into the market.  This moratorium was mandated by President Obama and helped by Governor Schwarzenegger’s similar effort, to give banks time to help troubled homeowners re-work or modify their loans to keep them in their homes.  This effort has had mixed results, with some analysts estimating that up to 80% of loan modifications will end in a foreclosure within two years.  This has created a large back-log of foreclosures that have been building up over the last six months.  The foreclosures, once released, will represent a cross section of price points (meaning from entry-level condos up to multi-million dollar properties), which could mean a further slide in home prices across the board.  The low-end may see the smallest impact as many believe that prices for entry-level condos and detached homes is at the bottom.   Other price points, particularly million dollar homes, could see an accelerated price slide.  It will likely create a super buying opportunity as well, with a lot of homes to choose from and interest rates at historically low levels.          

Two Distinct Markets in San Diego County

There are really two markets in San Diego County. One market is homes below $1M and the other are luxury homes above $1M. According to the Sandicor Multiple Listing Service data, there are 3 months of inventory for homes below $1M and 28 months of inventory for homes above $1M. The low end of the market has been very hot, with a lot of the sales activity coming in the under $300,000 level. Entry-level homes, particularly in the Hwy 78 corridor, have bottomed out in terms of price (at least in the short-term). Most entry-level homes are getting multiple offers on themwith investors and first time home buyers snapping up deals that they haven’t seen for many years. Prices in general are where they were back in 2002 – 2003, with affordability rates at 38%. This means the percentage of people with an average income that can afford a 30-year fixed mortgage of the median home value for the area. This number was down to 8% at the peak of the market. Incidentally, that was one of the numbers that many analysts pointed to when they predicted that the market increases that occurred several years ago were unsustainable.

On the other side of the market, luxury homes are getting very little attention by buyers. The consensus is that home values in this market will creep down for the next 6-12 months until the economy and the stock market show more resilience. The home buyers that are in the market for these types of homes are feeling pretty ‘poor’ right now. They have lost literally trillions on the stock market in the last year, as well as an equally large amount in home values (and other property assets). In addition, loans are harder to qualify for at this level. It is generally agreed that the credit markets are still pretty tight for high-end homes. Where in years past these buyers might have qualified for large loans using a ‘stated income’ type loan product (this is where you don’t have to prove income through a W2 or a tax return) but you have other assets to support your wealth claim. The self-employed used this type of loan regularly, as their tax strategy and tax returns were set up to show low income. These loans are almost non-existent unless you have millions in provable assets. Another issue affecting this market is appraising a home once it’s under contract. There have been so few homes sold recently in this category there are few good comparable properties. And at the very high end, there have been almost zero sold, and banks are very conservative right now on appraised value. Cash buyers are more common in this arena, but there are not enough of them out there to make a big difference in the market right now, particularly with values still going down.