Time to Reality Check the Real Estate Market

OB Jacobi, President of Windermere Real Estate, provides a great overview of our current market:

Rarely does a day go by that I don’t get asked if this is a good time to buy and/or sell a home. Some people might think that my response is always an emphatic “YES!” because I work in real estate. But in truth, there is no right or wrong answer. Every person’s circumstances are unique, so in some cases the answer might be yes, but for others it might make more sense to wait. Allow me to explain.

The good news is that we’re finally coming out of the housing slump of the past five-plus years. Housing is a major driving factor of the U.S. economy, so regardless of whether or not one owns a home, a stronger housing market is good for everyone. For some would-be home sellers, this positive momentum, combined with a rise in home prices and buyer activity, is enough to compel them to list their home. And right now the statistics appear to be on their side.

According to the most recent findings from the National Association of REALTORS®, total housing inventory has fallen for the past several months, settling at just under two million existing homes on the market that are available to buyers. This represents about a four-month-supply of homes throughout the U.S. This is the lowest housing supply the nation has seen since May of 2005 – during the peak of the housing boom.

“Months supply” basically means that if existing homes were to continue selling at the current rate, the inventory of homes would be sold by that many months. A “normal” market usually has around six months of supply; therefore lower numbers mean a shortage of inventory. If demand is greater than supply, this often leads to competition amongst buyers – and rising prices – as we’ve seen in many markets throughout the Western U.S.

Here are the current inventory levels in key markets along the West Coast, all of which fall below six months of supply and report strong competition among buyers.
• Seattle: 1.4 months
• Portland: 4.2 months
• San Francisco: 1.8 months
• Las Vegas: 3.8 months
• Palm Springs: 2.5 months

The following graph demonstrates the downward trend in the overall U.S. month’s supply of homes which is currently at about 4.4 months:

So what does this mean for buyers and sellers? It means as long as inventory levels remain low, competition amongst buyers will remain high, and home prices should continue to steadily rise – albeit at a healthy rate – not like what we saw during the housing boom. As evidence of this, in the recent Home Price Expectation Survey, 105 leading housing analysts called for a 3.1 percent increase in home values by the end of 2013. And in a recent report by the National Association of REALTORS®, median home prices last quarter showed the strongest year-over-year increase in seven years.

Another thing that buyers and sellers need to keep their eye on is interest rates and their impact on affordability.

Interest rates have been at such historical lows for so long that it’s easy to take them for granted. But the truth is that several lending institutions, including Freddie Mac and the Mortgage Bankers Association, project that interest rates will rise from 3.4 to 4.4 percent by the end of 2013. A full point increase can have a significant impact on the amount of your mortgage over the long term.

I’ll explain:

Assuming a 30-year-mortgage at a 3.4 percent interest rate, a home valued at $360,000 in today’s market would have a monthly payment of $1,596.53. If prices rise by 3.1 percent and interest rates rise to 4.4 percent, as both have been predicted to do in the coming year, that same home would be worth $371,160 and have a monthly payment of $1,858.62 (see chart below). This is a difference of $262.09 per month – $3,145.08 annually – and $94,352.40 over the life of the loan. That’s not chump change.

With these types of projections, one might wonder why there isn’t a flood of homes coming on the market. The biggest concern I hear from many would-be sellers is that they’re going to lose money because their home is worth less today than when they bought it. A valid concern, to be sure, but not necessarily the case for many folks. Remember, you’re buying and selling in the same market conditions, so if your home has lost value in recent years, it is highly likely that the next home you buy has as well.

I recently spoke to a friend of mine who wanted to sell but was afraid of losing money. He bought his Seattle-area home back in 2002 for $275,000. Over the next five years the market boomed and by 2007 his home was worth about $430,000. During that time, homes in many areas around Seattle appreciated by over 55 percent. Then the housing market crashed – and with it so did home prices. In my friend’s mind he lost $155,000 and now he thinks he should wait to sell until he can gain all that loss back.

Today, my friend’s home is worth about $327,000 – a gain of $52,000 over what he paid in 2002. If experts are right about an annual gain of three percent in the coming years, he will have to wait 10 years before his home is worth what it was during the peak of the market in 2007. My advice to him? If it’s the right time to move and you can afford to do it, go for it, but don’t base your decision on numbers that were the result of an artificially inflated market.

It goes without saying that nobody wants to sell at the bottom of the market, yet at the same time, everybody wants to buy at the bottom. Obviously these two scenarios can’t exist at the same time, but I hope the information in this blog shows there are definitely opportunities to be had by both buyers and sellers that are worth considering.

Six Reasons Housing Inventory Keeps Declining

Home sales in December dropped by 1% from November, the National Association of Realtors reported on Tuesday, but still stood nearly 13% above the levels of one year ago. That means home sales have risen from the year-ago month for 18 straight months.

For 2012 as a whole, sales were up 9% to 4.65 million units, the highest annual total since 2007.

Prices, meanwhile, are picking up because the number of homes for sale continues to drop despite the sales volume gains. The number of homes for sale fell to 1.82 million at the end of 2012, an 8.5% drop from November and a 21.6% decline from one year earlier, the Realtors’ group said on Tuesday.

Here’s a breakdown of why inventory has continued to drop this year:

Many homeowners are underwater: More than 10 million homeowners owe more on their mortgage than their homes are worth, according to CoreLogic Inc. That pencils out to around 22% of homeowners with a mortgage, or 15% of all homeowners (since not every homeowner has a mortgage). Underwater owners aren’t likely to sell unless they need to move due to changing life (marriage, divorce) or financial circumstances, and they’ll take a hit on their credit for pursuing a short sale, where the bank allows the home to sell for less than the amount owed. Data from CoreLogic show that inventory has been the most constrained in housing markets where there’s the largest concentration of underwater borrowers.

Others don’t have enough equity to “trade up”: Another 10 million homeowners have less than 20% equity in their current residence, meaning they can’t easily “trade up” to their next house. Traditionally, homeowners have relied on home equity to make the down payment on their next home, and to pay their real-estate agent to sell their current home and buy their next one. These “under-equitied” homeowners—meaning they don’t have enough equity to make a move to a more expensive home—have added to the drag on inventory.

Everyone wants to buy at the bottom, but few want to sell: Even those people who do have plenty of home equity are likely reluctant to sell if they think prices will be higher tomorrow. Would you sell your largest asset today if you thought it might be worth 5% more next year? This helps explain why markets such as Denver and Dallas, which didn’t have huge housing bubbles and thus had smaller shares of underwater borrowers, have also seen double-digit inventory declines.

More purchases from investors of all stripes: From the big institutional investors that have been grabbing all the headlines, to the mom-and-pop landlords that have traditionally played a much larger role renting out homes, investors have increasingly bought homes that can be rented out rather than flipped and resold for quick profits. This is further keeping inventory off the market in two ways: homes that are bought at courthouse foreclosure auctions never show up on multiple-listing services when they’re initially sold. They’re also held out of the for-sale pool because they’re being rented out.

Banks have been slower at foreclosing: Banks and other companies that process delinquent mortgages have had trouble proving that they’ve followed state law in taking title to homes ever since the “robo-signing” scandal surfaced in late 2010, and they’ve also had to meet a host of new state and federal rules governing loan modifications and foreclosures from settlements spawned by the robo-scandal. Banks have also become better about approving short sales and loan modifications, which has curbed the flow of foreclosed properties onto the market.

Builders have been putting up fewer homes: Housing starts were severely depressed from 2009 through 2011 and have only recently rebounded off of those low levels. Consequently, there’s been much less new home inventory being added to the market at a time when demand (boosted by increases in household formation) is picking up. If more homes are held off the market—for any of the five reasons above—you can bet that builders will move in to fill the void.

Many of these factors that have been dragging down inventory aren’t signs of “normal” or “healthy” housing markets—but then, we probably haven’t had a normal market for around a decade now. If anything, declining inventory shows that normal supply-and-demand dynamics are returning, which is an important step towards putting a floor under home prices and giving markets time to get back to health.

~Nick Timiraos, Wall St journal

NW MLS brokers report nearly $20 billion in sales

Northwest MLS brokers report nearly $20 billion in sales for 2012, outgaining prior year by $3.2 billion

Members of Northwest Multiple Listing Service tallied 64,624 closed sales of single family homes and condominiums during 2012, improving on 2011’s volume by 8,332 transactions for a gain of nearly 15 percent.

Last year’s completed sales included 55,699 single family homes and 8,925 condominiums. Together, these sales were valued at more than $19.9 billion, which compares to the previous year’s total of around $16.7 billion (up nearly 19.6 percent).

Median prices area-wide increased by $10,000 (about 4.3 percent), rising from $235,000 to $245,000, although not all areas reported gains. Mason, Snohomish and King counties reported the healthiest jumps.

Prices on single family homes rose, while condo prices fell. The median price for single family homes that sold last year was $255,000 across the 21 counties, improving on the previous year by 8.5 percent. King County claimed the highest median prices for single family homes ($365,000), while the most affordably priced homes – based on 2012 median prices — were located in Pacific County ($111,000).

Condo prices declined about 2.7 percent, with the area-wide median price falling from $180,000 in 2011 to $175,200 for last year’s sales.

Inventory also shrunk from 2011 levels year as a result of stronger sales and fewer new listings. Over the course of the year, brokers added 10,071 fewer new listings to the Northwest MLS database when compared to 2011 for a drop of 9.9 percent.

In its annual statistical summary report for its 20,000-plus brokers, the multiple listing service examined various indicators of activity. Among the findings:
• Single family homes accounted for about 86 percent of the sales volume as measured by units, and nearly 90 percent of the dollar volume.
• About 40 percent of last year’s sales were for homes in King County.
• About half the homes that sold last year (48.8 percent) had 3 bedrooms, while more than three-fourths of condos (77 percent) had 2 or fewer bedrooms.
• Last year’s sales included 7,710 newly built single family homes and 930 newly built condominiums. Of this new construction component, new condos fetched a higher price ($331,888) than newly built single family homes, which had a median sales price of $299,950.
• Northwest MLS brokers reported 1,254 sales with prices of $1 million or more, including 1,116 single family homes and 138 condominiums. More than half the top-end homes were located in Eastside communities, including Bellevue, Kirkland, Mercer Island and Sammamish.
• The highest priced single family home in the MLS system that sold last year was on Mercer Island (with a selling price of $21.625 million), while the most expensive condo ($4.25 million) was a penthouse in a downtown Seattle high-rise.
• Northwest MLS members reported 93,778 pending sales (mutually accepted offers) during 2012. That marked an increase of about 15.6 percent from 2011 when members logged 81,109 pending sales. (Note: Not all pending sales become closed transactions. Failed home inspections, mortgage loan rejections, low appraisals and contract contingencies are among many factors that cause transactions to be cancelled.)
• The pace of sales as measured by “months supply” (an estimate of how long it would take for all inventory of active listings to sell at the current pace assuming no new inventory is added) showed a system-wide total of 3.15 months, which compares to a figure of 5.02 months for 2011. Based on this barometer, both King and Snohomish counties averaged less than two months of supply during 2012. (Analysts consider a supply of 3-to-6 months to be a balanced market, meaning the market favors neither buyers nor sellers.)
~NW Multiple Listing Service

2013 Mortgage Rate Forecast

Interest rate forecast
You may have heard that low mortgage rates won’t last forever. But they should be around in 2013.

The rate on the 30-year fixed mortgage is expected to remain below 4 percent through the first half of the year, according to the latest finance forecast by the Mortgage Bankers Association. As rates gradually increase, the 30-year may reach 4.4 percent by year’s end, according to the MBA.

Rate movement in 2012
The 30-year fixed-rate mortgage averaged 3.88 percent in 2012. While borrowers may not find rates at such low levels in 2013, mortgage rates will remain extremely attractive for refinancers and homebuyers as long as the Federal Reserve continues to pour billions of dollars into the mortgage bond market every month.

What’s a consumer to do?
Borrowers who qualify and are ready to secure a mortgage today should get moving soon, because other costs associated with getting a mortgage are expected to rise in coming months. That’s especially true for borrowers with small down payments.
“(Federal Housing Administration) fees are getting higher and higher, and I don’t see that stopping,” says Cameron Findlay, chief economist at Discover Home Loans. ~ Polyana da Costa, Bankrate.com