The Bad and the Ugly

There have been some positive signs lately in the real estate market. And, being an optimist at heart, I probably tend to focus on those pieces of news. (Let's face it, it's easier to get up and do this every day if I'm optimistic!)

But I don't want to be an unthinking cheerleader for the industry. The news is truly mixed right now and I want to highlight a couple of pieces today that give you the other side of the picture.

Bloomberg has a piece today on the latest mortgage delinquence/foreclosure numbers. To say the numbers aren't pretty is to put a little too good a spin on it. The delinquency rate and the numbe of loans entering foreclosure are both the highest since 1972. And, these are not sub-prime loans. We're talking about the loans any lender, in any market, would have thought were good. These are foreclosures occurring because of a combination of a terrible economy and the huge decrease in the value of the homes. If you lose your job and your house is worth half of what it was 5 years ago; even if you put 20% down, there's a good chance you've got a problem. If you have to sell quickly there may not be buyers at a price that gives you even enough to pay off your mortgage. Foreclosures continue to drive prices down and they continue to come onto the market at an alarming rate. Even locally, whether you're talking Prince William, Fauquier or Culpeper counties, the foreclosures are a continuing problem.

Meanwhile, the Wall Street Journal (subscription required) takes a look at whether a home is even a good long term investment. The article is not exactly an encouragement to buy instead of rent.

Here's the heart of their argument:

Yet look at the numbers. Since 1987, when the Case-Shiller index of 10 major cities begins, it's risen from an index value of 63 to 151. Annual return: Just 4.1% a year. During that period, according to the Bureau of Labor Statistics, consumer prices rose by 3% a year. Net result: Home prices produced a real return of just 1.15% a year over inflation over that time.

Critics may point out that the analysis is unfair -- after all, it starts counting near the peak of the 1980s housing boom. Fair enough. Look at the performance since, say, early 1994, when home prices were near a historic trough. Surely someone who bought then has made a bundle.

Not necessarily. Since then the ten-city index has risen from a value of 76 to 151. Annual return: 4.7%. Inflation over that period: 2.5%. That's still only a real return of 2.2% a year above inflation.

They go on to add that a home could cost you an additional 2% in things like property taxes, insurance, repairs, maintenance, etc.

I'm not saying I agree with their analysis. They admit that focusing on these 10 cities is not necessarily a representative sample. But I do think that not everyone should own a home and that it's important to think it through carefully before you buy, especially now.

National Price Declines Don't Tell the Whole Story

The nationwide numbers out today show that, year over year, home prices continue to decline. That decline was over 18% nationally. Because everyone hears national numbers, rather than local, the tendency is to assume that whatever you're hearing is also the situation locally.

Year over year, our numbers look worse than the national average. The latest numbers available from the local multiple listing service show year over year price declines between 23-32%. But that's only one piece of the picture.

If you're buying a foreclosed home or possibly even a short sale, you may not feel the pricing power you were led to believe you'd have. You see, all the buyers are looking in the same price range. So, even if there are 25% fewer buyers than there were a couple of years ago, if they're all looking at properties, say, on the western end of Prince William County under $350K there is little or no buyer leverage.

So, the pricing picture is considerably more complicated than what you hear in the national press. I'm not blaming them. You can't write a coherent article about prices everywhere! Just be aware that the picture here is a little more nuanced.

The other piece of information in the home price report was that prices nationwide are now at 2002 levels. I suspect we're not quite that low yet. But I haven't yet had an opportunity to do an analysis. I am seeing people who've been in their homes five years or more still under water.

And, if you're wondering when we bounce back up, this Bloomberg article wasn't particularly optimistic:

 “There are very few V-shaped recoveries in the history of real estate, and this one is likely to be even slower because of the size of the bubble,” said Robert Shiller, the Yale University professor who, with economist Karl Case, created home price indexes in the 1980s now used by Standard & Poor’s.

In short, don't expect any rebound in prices soon. I believe from a price perspective we'll bounce along the bottom for quite some time, perhaps a couple of years before we begin very slow appreciation.

If you're looking for a ray of sunshine, one analyst on CNBC suggested yesterday that we could fix the housing problem any time we wanted by increasing the number of immigrants.

HUD Rethinks

The HUD announcement that it would allow the $8000 first time homebuyer tax credit to be used for a downpayment didn't last out the week. All mention of it was pulled from HUD's home page.

Apparently the program as orginally discussed looked too much like the down payment gift programs that were essentially eliminated last year because of the higher foreclosure rates associated with those programs.

NAR (National Association of REALTORS) says HUD is retooling the program and that there will still be a way to do this.

Stay tuned to this space for updates.

Cash for Down Payment

Last week Shaun Donovan, Secretary of HUD, announced that the Obama administration is coming out with a plan to allow buyers to use the $8000 tax credit up front, as a down payment. The plan will apparently be to utilize FHA to monetize this credit.

Basically lenders that provide FHA loans will be allowed to show an $8000 down payment at settlement, coming from the tax credit. Full details are not yet available, but presumably there will be additional paperwork to sign at settlement acknowledging the source of this financing and waiving the right to the tax credit in the future.

We don't know all the details yet. There may be eligibility restrictions that aren't immediately obvious.

And, of course, some of you will still prefer to have the $8000 tax credit. This appears to be an option. You should be able to take the credit now as a down payment or use it as originally intended for a tax credit on your 2009 income taxes.

More details should be available this week.

April Market Numbers

April results are in and for the first time in quite awhile we're seeing a small uptick in inventory in most counties. It's not large enough to be a concern at this point. In fact, given that we're in the busy spring/summer season, it's surprisingly small.

In Culpeper there are currently 494 homes for sale. That's still less than we had in January. And it's a huge improvement over the 800+ homes for sale there a year ago. Sales remain strong with 62 homes sold as opposed to 48 last year at this time.

Fauquier remains flatter. Inventory also rose slightly here. There are 569 homes for sale here now as opposed to 556 a month ago. And we're still much better off than April of 2008 when there were 764 homes for sale. But sales aren't much better than a year ago. 54 homes sold in Fauquier County in April. 49 were sold in this period a year ago.

Prince William was the exception to the increase in inventory. It continues to shrink there; good news for sellers, not good news for first time home buyers. There are 2944 homes for sale in Prince William county, roughly half of what was for sale there a year ago at 5880. Sales decreased very slightly month over month: 741 this month vs 750 last month. But homes are still selling much faster than they were a year ago when only 639 sold in April.

Rappahannock County showed a very large jump, from a percentage point of view. There are now 89 homes for sale here vs 76 last month. 27 new properties came on the market, a lot for this small county. That's the highest number of new listings coming on the market in one month in the last four years. But the number of contracts written also jumped to 5 even though sales fell to 2 last month. Large jumps in inventory in Rappahannock previously have resulted in a subsequent withdrawal of many of those listings as people tested the market and then changed their mind about selling. We'll see if the same scenario plays out this time around.

Overall, the market appears to continue to recovery. The only worry here is the seemingly unending stream of foreclosures coming on the market. Between foreclosures and short sales there appears to be no likelihood (except in Prince William) of price increases any time soon.

The Fees Must Go!

The Seattle Times has an article about a recent court decision declaring brokerage admin fees illegal.

It's about time! These are impossible to justify to clients, particularly sellers who are already paying thousands of dollars in commissions.

It is "nickel and diming" our clients and it's shameful.

If you wonder why the real estate industry has such a poor reputation, here's another reason why.

And, to the argument from brokerages that they can't be profitable without these fees...then clearly there's something wrong with the business model.

But I've been saying that for some time now!

Facing the Mortgage Crisis

Radio station WAMU (88.5) did a week long series of special programming last week entitled "Facing the Mortgage Crisis". I think the series was misnamed. It should have been called "Facing the Financial Crisis" as it covered a much wider array of information than just what's been going on in the housing industry. (Perhaps it's their nod to where it all started!)

You can listen to all the programs at their web site, as well as join in discussions on how all this is affecting you.

It's good stuff and well worth your time. I especially appreciated the replays of the "This American Life" series on the financial crisis. It's some of the best financial journalism out there.