Picked up an interesting article regarding the housing rebound that I wanted to share. See this link: http://blogs.wsj.com/economics/2013/09/16/four-factors-to-watch-in-housings-rebound/
New Housing Bubble Coming?
Are we entering another real estate market “bubble?” Some folks I talk to believe that prices have risen too quickly and that it will all come crashing down again. Recent history will tell us that no one knows what the future holds in this regard. Pricing in the market is one factor for consideration, but the strength of the market is determined by much more. Not only can our politicians make new laws with unintended results, but major catastrophic or world economic events can affect the US real estate market. Here are some facts to help you decide where we are in the real estate cycle.
While prices have risen dramatically over the last year, they are nowhere near the highest prices that were seen just prior to the downturn. Many areas have seen 20%+ appreciation over the last year which is driven by demand. I don’t expect us to see appreciation continue at that rate over the next year because of several factors but it will be a while before we see equilibrium between supply and demand.
ALL loans available today require documentation of a buyer’s ability to repay the loan. Lenders require much more information from buyers today before approving a loan. Long gone are the stated income loans (aka: liar loans) that allowed buyers to merely pull numbers out of a hat to qualify for a home loan (of course, that doesn’t mean they won’t come back). When I was VP of Sales for Lennar’s Northern California Division, I can’t tell you how many times buyers made loan applications with our “in-house” lender and were declined; only to have the buyer return with a stated income loan approval from another lender. Hmmm, let me see; did their income go up in just few short days? The point is that loans originated today are more sound and more likely to be repaid than in the past.
Most local market areas have 1.5- 2.0 month’s supply of inventory of homes for sale. A market in equilibrium between supply and demand will have 3-6 months of inventory available at any time. In other words, if there were no additional homes placed on the market for sale, it would take 3-6 months to sell everything that was currently available. We are seeing a trend toward equilibrium but we are still in a seller’s market and it will likely be several months before supply and demand are equal.
Short sales and foreclosures as a percentage of total sales are way down. These sales tend to sell at lower prices. So one reason that median price has increased is merely because there are fewer short and foreclosure sales in the market. In addition, this demonstrates that the market is building real strength.
Interest rates are up 1% or more since the beginning of the summer. This will tend to push home sales toward equilibrium in a seller’s market. Rates will likely creep up over the next 12 months, however, it is expected that rates will stay relatively low compared to historic highs.
While short and foreclosures sales are down, traditional sales are up. Why? Because the price increases we have seen in the market allow homeowners to sell their homes without credit impairment and in some cases, actually making a few bucks along the way. And most of these sellers will be new buyers in the market.
While there are many external factors that can affect the stability and strength of the real estate market, there is no evidence, at this time, that would lead us to believe we are in a “bubble” or even close to being there. As more inventory comes into the market, the rate of home price appreciation is slowing yet demand is still strong. Barring unforeseen circumstances, there is every reason to believe that we are headed toward a more stable market with reasonable price appreciation and inventory. In other words, we are heading in the direction of equilibrium, not of another crash.
Better Homes and Gardens Real Estate
**2371 homes available for sale in July 2013 vs 2019 in June 2013 (up 17.4%) and 1686 in July 2012 (homes for sale up 40.6% year over year).
**1559 pending sales closed escrow in July 2013 , vs 1510 from June 2013 (up 3.2%) and 1661 in July 2012 (down 6.1%).
**Average days on market for July 2013 were 26, vs 23 for June 2013, and 60 for August 2012.
**Months of inventory – 1.5 months of inventory in July 2013 vs 1.3 in June 2013 (up 15.4%) and 1.0 in July 2012 (up 50%).
**930 homes available for sale in July 2013 vs 795 in June 2013 (up 17%) and 784 in July 2012 (up 18.6% year over year).
**565 pending sales closed escrow in July 2013 vs June 2013 of 578 (down 2.2%) and July 2012 of 507 (up 11.4%).
**Average days on market for July 2013 were 28 vs 30 for June 2013 and 61 for August 2012.
**Months of Inventory – 1.6 in July 2013 vs 1.4 June 2013 (up 14.3%), and 1.5 in July 2012 (up 6.7%).
WHAT DOES THIS MEAN? Inventory of available homes is up substantially as more sellers are able to now sell and avoid a short sale or foreclosure. However, many of these new listings are overpriced in the market which will trend to longer days on market. Sellers (and some real estate agents for that matter) have not recognized that the market has experienced a shift starting in June of this year. With prices increasing every month through the first half of the year, it did not take long for the market to catch up to an overpriced listing. This is no longer the case.
However, demand still outpaces supply and homes priced correctly in the market and that lack any substantial flaws will sell in a reasonable period of time. 3-6 months of inventory is considered to be a “normal market” where supply and demand are in equilibrium. Remember that closed escrows in any given month became pending sales (in most cases) 30-60 days prior. July closing statistics include homes that became pending sales in May and June. Average days on the market is trending higher as more homes are listed on the market for prices not supported by demand. The summer months are typically slower sales months as people take vacations and prepare to get their kids back in school. Some of these statistics are likely attributable to the seasonal summer slowdown. Activity in September and October of this year will help us understand how much of the market shift will continue and how much was merely affected by seasonal factors.
Frequently we see conflicting reports in the news about the real estate market. Part of that may be due to the area being reported on; national, state or local. I just read a article stating that California home sales were the highest in July since May 2012. I would expect this given that we have seen increased inventory in the market over the last few months. The buyers in the market who have not been able to purchase a home until now are finally getting a break with more homes on the market and prices stabilizing.
To see the detailed charts for this information and more please visit our website. CLICK HERE!
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Here’s a good video for 1st time home buyers or those who may be thinking of buying a home in the near future. Lending practices have changed.d
As recent as a month ago, it was still possible for a home buyer to purchase a home with an interest rate of between 3% and 3.5%. Today, rates are generally floating around 4.5% or higher. In the big picture of housing interest rates, 4.5% is still an excellent rate, but we’ve all been spoiled in recent years and this change does impact the housing market. Let’s take a look at how this rise in interest rates is affecting the purchasing power of potential homebuyers in the marketplace by way of an example.
Let’s say that a buyer is qualified to purchase a home priced up to $400,000, assume that the buyer is putting 10% down and then look at payments under two interest rate scenarios as follows:
Purchase Price: $400,000
10% Downpayment: $ 40,000
90% Loan Amount: $360,000
Monthly Principle & Interest Payments
At an interest rate of 3.5% : $1617
At an interest rate of 4.5%: $1824
Increase in Monthly Payment: $ 207
Assuming that $360,000 was the maximum loan amount that our buyer could qualify for at 3.5% with a payment of $1617, what is the new price that our homebuyer can now afford? The new maximum loan amount based on a payment of $1617 and an interest rate of 4.5% is $319,133. With 10% down, the buyer’s maximum price is now $354,592 or $45,408 less in price.
Is it reasonable to think this will affect demand on the housing market? IT SURE IS! Our homebuyer’s purchasing power just went down by more than 11% with a 1% increase in interest rate. Whatever risk concerns have been in the past about price declines in the market, a 1% increase in rate overshadows to a great deal any decline in market price.
Will prices continue to increase at the rate we seen over the last several months. I’m seeing a change in the market now with prices leveling off through the summer. While it’s reasonable to assume we will see prices continue to rise, I don’t believe we will see the rate of appreciation continue at the fevered pace of the last year. Will interest rates be higher than 4.5% by June of 2014. Who knows? I have talked to several lenders and they are at odds with each other on this point. Any potential buyer or seller should at least be prepared for the potential of higher rates over the next year.
If you are looking to buy a home in today’s market and have been pre-approved on a home loan through a lender, it’s a good idea to huddle back up with that lender to determine if you need to adjust your considerations on price, square footage and potential location.
If you are a homeowner thinking of placing your home on the market, it is important to understand the impact of rising interest rates, buyer’s purchasing power and negative impacts on demand. Bottom line: Price your home appropriately and rely on the advice of a Real Estate Agent you trust who will provide you the facts about pricing and marketing your home.
Through May, the market has continued at its feverish pace, both in number of sales as well as price increases. Inventory continues to be very low, prices continued to rise and interest rates remained low. However, there are some indications that the market may be slowing a bit and heading in the direction of stabilization between supply and demand.
The End of the Spring Selling Season
Typically, the spring selling season peaks in May as the school year nears its close. Then there is gradual slowing through the summer. August tends to be one of the slowest months of the year as parents and kids get settled and ready for the school year to begin. Home buyers with children want to have a home selected in early summer so they can lock in the schools their children will attend in the fall. I expect we will see demand taper off a bit through the summer.
Buyers Priced out of Markets
Price increases are forcing buyers out of the market, or at a minimum, to reduce their requirements on a home to keep within a range of affordability. In some areas, average home prices have increased by 20% to almost 40% (in lower priced areas) over the last year. For example, in the neighborhood I live in at Whitney Ranch, it was possible to buy a home in the $400’s one year ago. Now, that’s just about impossible with the exception of a smaller home, or homes that have inherent issues or are in poor condition. As buyers are pushed out of areas, it will slow the rate of price increases.
Rising Interest Rates
Interest rates have been creeping up over the last several weeks and are about ¾% -1% higher than a few months ago. An interest rate of 4% compared to 3%, on a $350,000 mortgage equates to approximately $196 more in monthly payments. This is squeezing buyers and forcing some out of the market and others to reduce their sales price. Some areas of Roseville, Rocklin and greater Sacramento are now off the table for buyers due to increases in prices and loan rates. This will put pressure against rising home prices.
Increasing Inventory Likely
As prices have risen, there are fewer underwater homes. As a result, more homeowners can sell their homes without the need to resort to a short sale. This is and will cause more homes to be listed for sale to increase inventory and to trend the market toward stabilization.
While lowest priced homes in specific areas are still pulling multiple offers, the number of those offers is declining as well as the amount of offer price over list price. Frequently only one or two offers are received compared to double digit offers earlier this year. Through the remainder of the summer I expect to see a trend toward fewer multiple offer situations and longer days on the market to sell a home.
What Does This Mean?
Combine all of this and I believe it is likely we will see a trend toward stabilization which includes a slower pace of price increases, fewer buyers in the market, more homes being listed for sale and longer days on market. It is unlikely that we will continue to see annualized price appreciation of 20% and more. Don’t get me wrong here. I believe we will continue through the remainder of the year in a “seller’s market.” Market equilibrium between buyers and sellers is when there is 3-6 months worth of available inventory (homes for sale). It’s difficult to know when this will happen. But, we’re headed in that direction!
See the charts below for home sale activity through May of 2013 for both Placer and Sacramento Counties. If you would like more information regarding your specific area of interest, my contact information is at the bottom of this email.
If you are interested in data by specific areas, see this link to our website: Steve and Linette Market Trends Reports
Have a great Summer!
Median home prices in the Sacramento metropolitan area continue to rise at a brisk rate; on average 20% over the last 12 months. If you are interested in seeing what’s happening in your area, read on.
How long will prices continue to rise at this pace? Who knows? But one thing for sure is this…. It may be a good time to buy a home, but for many it’s a difficult and arduous process.
For sellers waiting to put their home on the market to maximize profit or reduce losses after the market crash, timing the market is usually determined in hind sight.
Keep this in mind if you are thinking about putting your home on the market in the near future……
- As interest rates rise, buyer’s purchasing power goes down.
- As prices rise, more homes will be placed for sale on the market. This will lead to increased inventory and will help to stabilize price and slow appreciation. In addition, the number of homeowners who owe more than the worth of their property is decreasing, allowing them to market their homes and avoid a short sale which will further increase inventory.
- The typical selling season runs from February – May/June. After June, people settle down and tend to focus on vacations and preparing their kids for school. August tends to be one of the slowest months of the year for home sales.
To see what’s happening with median price in your neighborhood CLICK HERE.
If you would like more specific information about home prices in your area, shoot me a quick email.
Real Estate Professional – 20+ years in home sales
Better Homes and Gardens Real Estate
I’m frequently asked by friends and clients, how much monthly payments are affected by changes in the interest rate. Here’s a quick summary based on a $150,000 loan amount. Click Here!
Marginal income tax rates won’t increase, and most tax relief provisions continue for most taxpayers with modified adjusted gross income under $200,000 for individuals, or $250,000 for married couples filing jointly.
The alternative minimum tax (“AMT”) exemption now adjusts for inflation. This is good news for many middle-income taxpayers.
Interest received from qualifying municipal bonds remains free of federal income taxes and dividends continue to be taxed at capital gains rates, not as ordinary income.
BUT, there is some less-than-good-news that comes with the new tax laws. To read the full article from Fidelity.com, CLICK HERE!
The Federal Government extended the Mortgage Debt Forgiveness Relief Act which, for the most part, protects a homeowner selling a home for less than what is owed on the loan (short sale) from paying taxes on the difference as taxable income. To see the law as it was originally created, CLICK HERE.
In addition, here’s an article from the Huffington Post that provides information on the Federal Extension- CLICK HERE!
California had a similar law which expired at the end of 2012. The California State legislature is considering an extension as well. If the California law is extended, it is likely (but not guaranteed) that it will become retroactive to January 1, 2013. Here is the California law that expired the end of 2012: CLICK HERE!