This topic is constantly debated on the mass media channels. Despite the efforts of the Obama Administration, we are not at the bottom of the housing market slump yet. We have seen some shortening of the Days on Market for homes in many areas. However, I feel that this is largely due to the $8000 tax credit for first time home buyers. The fundamentals of the economy just are NOT there to support a decrease in days on market. You don’t see long term inventory shrinking when Unemployment has nearly doubled all across the country. The only reason inventory has shrunk is most people are not trying to sell their home unless they are in either a distressed situation or they are moving out of the area. What used to be caused by a “credit problem” has now turned into a very real employment problem.
Going forward, we have many factors still fighting against a recovery in the housing market.
1) High Unemployment
2) Decrease in available credit
3) Tighter credit standards for individuals and businesses
4) More foreclosures coming
5) Lower demand for home purchases due to the expiration of the tax credit.
The First Time Home Buyer Tax Credit is increasing sales of lower priced homes in many areas. Why the lower priced homes? Because that is where first time home buyers are able to spend their money. Especially if they are young and at the start of their careers. The other force driving this is uncertainty of the job market. If a first time home buyer is looking for a home and being smart about their purchase, they are going to buy something they are sure they can afford, plus the banks are going to look more closely at their income and require a minimum of 3% down (On an FHA loan, more on a non-FHA). The only no-money down financing available to homeowners is the RD loan (Rural Development) which is administered by the USDA. Well, let me qualify that statement, you could get a no-money down, 100% financing home from a savvy real estate investor that is offering this in his/her own programs.
Folks that already have their own homes are not interested in selling right now unless they have to because it’s very unlikely they will ever get what they have invested in the home. The only way someone is going to get more than what they paid is if they have been there for 10 years or more. Why? Because, that is where home prices have fallen to in many areas, not all areas, but many many areas throughout the U.S.
As some unscientific prooof of this idea, I have tenants that just moved out of one of my homes a couple of weeks ago. They had been looking for a home to purchase for well over a year after moving here from out of state. They complained several times that they just could not find anything that was going to work for them. Most of the homes they were looking at were run down to some degree, an indication of a very distressed market. They did not want to go in and have to dump a lot of time and money on their next home. They were willing to spend money on a home they didn’t need to do any work to but they couldn’t find a home in good shape for their price range. The median price range in my neck of the woods is around $200,000. They were looking in the $300,000-$350,000 range. The people that own those priced homes are mostly sitting tight because they know that with all of the foreclosures everywhere, they will not get what they need from their home to be able to close without losing a bunch of money.
If you are a Real Estate investor, you need to seriously consider this when purchasing a home for investment purposes. My recommendation is to only go back for comparable sales a maximum of 6 months. Don’t complain about an appraisal that has only gone back 6 months.
I would even look at prices of homes selling up to 12 months ago just to see if they were lower then, because I think we are artificially high right now in some areas and if prices have risen since last winter, we are going to see some dipping back down again. Yes, that’s right, I said it. We are artificially high in some areas of the U.S. even though the market is down across the country. The reason I believe we are artificially high is because the $8000 Tax Credit is creating artificial demand, or it is just pulling demand forward that normally may have waited until next year to purchase.
How could we possibly be high in some areas? Because, we have not seen the peak of foreclosures yet. The government and the Mortgage Bankers Association are urging ‘Workout plans” such as forbearance agreements and loan modification instead of Short sales and foreclosures. Why would they do that? My theory is, this is one last attempt to grab more money from their customers before statistics catch up and they lose their home anyway. Do you know what the percentage of successful forbearance and loan workouts have been historically? They are rather low. Here is the general problem. You have a stressed home owner that is trying to get back in the good graces with their lender. The lender says, “sure, we’ll work with you. Your payments will increase while you catch up your loan.” Homeowner, “Great, I can do that” but they are really thinking “Wow, I’m already behind, how am I going to afford a larger payment?”
This is especially true now with unemployment numbers where they are right now. At close to 10% unemployment in many areas, many people are taking jobs with lower pay just to get back to work. How is that person supposed to afford a HIGHER payment?
Buckle up everyone, we are not done with this roller coaster.
We still have many adjustable rate mortgages that will start adjusting upwards over the next 2 years. That will put a further strain on the housing market.
See thie Smart Money article for further discussion.
http://www.smartmoney.com/personal-finance/real-estate/Why-Loan-Modifications-Often-Do-not-Work/#
Technorati Tags: First Time Home Buyer Tax Credit, forbearance, Foreclosure, Home prices, short sales
