Waiting for the Bottom of the Real Estate Market?

RECESSION ENDS IN 2009 Many people have been telling me for years that the real estate market is turning around.  Newspapers and blogs have been enthusiastically predicted that the recession ended and everything was going to be alright.  I heard the real estate market had “turned around” in 2010, but the downward trend continued.  Now new data is coming forward.

Home Prices over the Last 10 YearsAll signs indicate that we are very likely skimming the bottom of the real estate bust, and things are just beginning to look up.  Nationally, many other locations were much harder hit than Massachusetts.  Prices and sales in the Boston area were not has hard hit as Central Massachusetts.  The towns in the Wachusett Region lost an average of 25% to 30% from 2006 to 2012.

October sales numbers jumped 21%, according to the Warren Group.  Meanwhile home prices spiked 4.4 percent, according to the Massachusetts Association of Realtors, which also released its October numbers. .  This is the most impressive jump in median prices since the end of the $8,000 home buyer credit in 2010.  Unfortunately, the Warren Group, which includes all sales in Massachusetts, not just Realtor assisted sales, has home prices staying essentially flat.

NEW CONSTRUCTION INVENTORY 112812The new construction starts are down dramatically, as you can see by this chart.  In 2000 there were 850,000 homes built, and by 2005 we reached an all-time high of almost 1,400,000.    Today, we are lucky to see 390,000 built and they cost more than the existing homes available.  The new energy and upgraded code requirements haveNew Construction Inventory added thousands of dollars to the cost of construction.  Material costs have really started to move up as well, which makes new construction more risky.  As you can see, the inventory for new homes for sale is down dramatically, at its lowest point since 1960.

Although the inventory is down in both new construction and existing homes for sale, the advice to buyers is to consider buying sooner rather than later.  It is only a matter of time before the prices do start to move up and the interest rates will unlikely be better.  Buy a home you love and settle in for the long haul as a wonderful place to live, not just an “investment”.

The elections are over, and if our politicians don’t push us over the “Fiscal Cliff“, I believe we will start the slow recovery of improved pricing and reasonable sales pace.  Sellers will need to listen careful to their Realtors when pricing their homes, but the low inventory will help move homes.  I saw the crash coming in 2005, but I never believed it would be a seven-year fall.

Have We Hit the Bottom with Home Prices?

My daughter, the economist, tells me was are in a New Economy.  I believe her, because we have suffered so many ups and downs with this recession and “recovery“, perhaps the only way to describe this is an New Economy.

According to the traditional economic parameters, the “recession” ended in June of 2009.  That was three years ago and no one I know believes the recession ended then for them.  In perfect “economic terms” that may seem true, but the lingering damage continues today.

It will not be possible to have a sustained recovery until the housing market, including new construction, is on solid ground.  We “cheer” when we read a report in the newspapers that tells us today “Pending Sales in June are up 29%”, but in the next breath, “Month to month pending home sales are DOWN 3%”.  The bad economic news about lack of  job growth, significant slow down in China, and the European financial meltdown continue to affect the sentiment and confidence in the US.

Serious financial minds believe our country is in a better place than the rest of the world, but we will continue to be affected by the global economy.  The Wall Street Journal makes a case that the housing bust is over, but they also acknowledge that “The biggest threat is a large shadow inventory of unsold homes, homes which owners won’t put on the market because they are underwater, homes that will be foreclosed eventually and homes owned by lenders.

We grasp at straws.  While it may be tempting to say home prices have bottomed out, HIS Global Insight’s Patrick Newport warns it is, “premature to do so.  The most likely scenario, in our view, is that home prices will zigzag over the coming months, rising during the selling season, slipping in the fall.”  He feels that home prices may start to move up cautiously in 2013.

Alternatively, if you want to refinance, the timing could not be better, and there is even help for folks with less equity than their mortgages.  Call us and we can help.  It is also a good time to buy, because interest rates have never been better, and we will get through this very difficult time.

Will Home Prices Continue to Fall in 2012?

Will we find prices dropping in 2012?  Everyone is looking for the upside in this housing market, but this blog brings some bad news on the appraisal front.

Appraisers look at comparable sold properties to draw an analysis of value.  Many lending institutions have rules which require the properties to be sold within the last 6 months and be within a reasonable distance to the subject property.   The appraisers would typically look at similar homes which sold through an arms length transaction.  The KCM Blog shows us a different spin.

KCM Blog

Many of our readers ask us if appraisers use distressed properties (short sales and foreclosures) as comparables when doing an appraisal on non-distressed properties. We have posted on this issue on several occasions (examples: here and here). Last month, the Appraisal Institute issued a paper on the subject. In the paper, the Institute explained that:

Foreclosures and short sales can provide important information for appraisers, who develop valuations based on market data and market forces.”

On whether an appraiser should use distressed properties as comparables, the Institute was very direct (all items in bold were shown as bold in the original paper):

“An appraiser should not ignore foreclosure sales and short sales if consideration of such sales is necessary to develop a credible value opinion.”

And they explained the possible differences between short sales and foreclosures:

A short sale … might have involved atypical seller motivations and so might not be an ideal comp…

A sale of a bank-owned property might have involved typical motivations, so the fact that it was a foreclosed property would not render it ineligible as a comp.”

Bottom Line

Some will argue that distressed properties should not be used when appraising non-distressed properties. However, there is no longer any doubt that they will be.

What Kind of Real Estate Forecast Can We Make for 2012?

The National Bureau of Economic Research, a group of independent economists, had declared that the recession ended in June of 2009.  RECESSION ENDS IN 2009The Bureau took more than a year to decide that we started the recession in December of 2007 and decided in the summer of 2010 that the recession ended in June 2009.  This recession has been the longest and deepest recession the country ever experienced. 

Many people know that we are now undergoing the longest, slowest, most painful recovery the country has ever experienced.  Now in January 2012, two and a half years after the recession “ended”, we are seeing hopeful signs of life in some areas of the economic picture.  MA UNEMPLOYMENT 1991 TO 2011The unemployment rate in Massachusetts has fallen to its lowest level in a long time to 7.3%.  Some industries are beginning to experience growth and we can only hope they continue to hire and create new jobs.

One area we continue to struggle with is housing.  The actual loss of wealth for so many people in this country is staggering.  The California Association of Realtors has released its real estate forecast for 2012. 

It is interesting to see that in 2005 they sold 625,000 homes and in 2007  that number dropped to 346,900—a 55% drop in the number of sales.  The median price of homes in 2005 was $522,700, but by 2011 the median prices have dropped to $291,000—a 56% drop in value.   All real estate is local, but some parts of California, Nevada, and Florida have experienced over 75% loss in value.

Massachusetts, and particularly Boston, has fared much better than many of the states.  Trulia has come out with its top five places slated for a quicker recovery:  Austin, Houston, San Jose, Boston, (and in particular Cambridge, Newton, Framingham, and Worcester) and Rochester, NY.  Austin and Houston have seen jobs and new construction get a jump-start.  San Jose and Boston areas are home to the technology belt with lots of smart, well-educated people, and Rochester  has had stable prices and economy throughout the downturn.  The take away is that highly educated, tech-savvy cities may push through the recovery quicker than other parts of the country.

Realtors have not been able to see the bottoming of prices yet,  but I expect this year will be it.   Once we have hit the bottom, it will be a slow climb back up, but there truly is light at the end of the tunnel.  I first saw the warning signs of trouble in 2005, and after 6 years of serious turmoil,  I believe we are past the worst.

The new economic reality may be something we have to get used to, because this complete recovery may be many years in the making.  Some people, like seniors, who have done everything right, have had their planned retirement future smashed by the dramatic loss of wealth.  We are already seeing not only seniors, but young college graduates moving back to the family home.  This may be the new reality for now as we all adjust to the slow recovery.  But I am looking forward to 2012 as our turn around year.  What do you think?

More Foreclosures Coming

Realty Trac is reporting today that foreclosures continue to drag the price of homes down and with more coming, they will be a glut on the market by increasing inventory.  The increase in the foreclosure process for Boston, Cambridge, and Quincy is pretty substantial at 67%.

New Wave of Foreclosures

The Realty Trac Map demonstrates the most serious regions of the country.   The Boston area has not been as hard hit as many regions of the country.  Even though Boston may have a 67% increase in new foreclosures, it means an additional 1340, while Southern California is expecting an additional 4300 new foreclosures. 

Total Foreclosure Starts for the Third Quarter of 2011

Many people are thinking it is a good idea to take their homes off the market for the holidays, but given these statistics, nothing could be further from the truth.  The spring market may simple produce an increase in inventory.   

The good news is that Fannie Mae and Freddie Mac have learned their lesson about foreclosed homes they own.   They will winterize the properties, but they do not turn off the heat.  The damage that can be done to homes due to lack of heat can be costly.   The lack of air flow and changing moisture levels cause damage to the walls, wood flooring, and woodwork, and the potential for mold can be increased.  

Serious buyers are still looking for the right home.  Sellers, keep your home on the market.  Take advantage of the low-interest rates and the moderate inventory now.

An 80% Decline in New Construction?

When will the government realize that supporting new construction is a necessity for a complete recovery of the economyJobs are important, and new construction creates jobs in many fields. Instead of supporting the building and real estate businesses, the congress seems to be putting up road blocks to the recovery of this industries.

The National Association of Home Builders Assistant Vice President, Robert Dietz, testified before the Senate Finance Committee last week that the decline in home construction has been historic and unprecedented.

The building industry has had an 80 percent decline since the peak seen in 2006 in single family new construction. Just let that begin to sink in….80% decline in an industry which creates 1,000’s of jobs!! New Construction Jobs Plumbers, plumbing supply companies, electricians, electrical supply companies, truck drivers, gravel companies, back hoe drivers, foundation forms people, concrete companies and drivers, framers, finish carpenters, roofers, lumber yards, masons, painters, carpet installers, carpet stores and manufacturers, kitchen designers, appliance stores and manufacturers, bull dozer drivers who spread loan and landscape people who put in lawns, nurseries who provide shrubs, and many more.  Then we can talk about the Realtors who sell the new homes, mortgage  loan officers who finance the houses, title companies who research the title, insurance companies who insure the property secretaries who prepare closing documents, and lawyers who close the transactions.  There are approximately 80 people who touch a traditional real estate transaction, and that number is greatly multiplied for a new construction sale.  When the reports for unemployment talk about a 9.1% rate, remember the real number is more like 18%, because many of the people in the building and real estate industry are self-employed and they don’t show up on the unemployment numbers.

The rate for building single family homes is now 353,000 homes per year as opposed to the 1.8 million in 2006.  Based on these numbers we will soon see a serious shortage of homes.  We are also seeing a troubling turn of events with many people loosing their homes to short sales and foreclosures and having to move in with family.  We are seeing many young people graduating from college with no job prospects, and they are moving back home with mom and dad.

This will be causing a future shortage of homes and when the economy finally recovers, we could be in for some difficult times.  This may put pressure on prices of homes, because there will not be enough houses to meet the demand.   Building is one of our core home-grown industries, and we must bring some stability to the builders.

Congressmen in Washington have been threatening to eliminate the mortgage interest deduction, to end federal support for the mortgage industry through Fannie Mae and Freddie Mac backed financing, and to require a minimum 20 percent down payment on home loans.  The FHA mortgages already require an additional charge for insurance, making it more difficult and costly for buyers to get financing.  These steps are being proposed by a government that says it is trying to get the economy on the road to recovery, and many of these proposals are counterproductive.

Seven Tips for Navigating the Short Sale Process

Short SaleThere are many reasons why people decide to sell their homes during these troubled times, and it is even more difficult when that home has lost significant equity.    If you find yourself in this position. there are some important points to know about the short sale process.

Here are seven tips for navigating the short-sale process.

1. Know who you owe

A short sale has to be approved by any company that has a mortgage or lien against your home. That includes your first, second, or even third mortgage lender, your home equity line lender; your homeowners or condominium association; and any contractors who’ve placed a lien on your home. Make a list and start talking to everyone early in the process. Ask what documents they’ll need from you.

2. Pick your short sale team

You’ll need to work with a team of short sale experts, including a real estate agent, real estate attorney, and your accountant. Look for agents and attorneys who advertise themselves as short sale experts.  There are special training classes and certifications for Realtors, such as Loss Mitigation Certified, and you should look for experienced and well-trained Realtors.  Interview at least three, and listen carefully for signs that they understand the complexities of the short sale process.

Agents should explain how they’ll arrive at a suggested price for your home. Ask them to show you a sample short-sale package or for an example of a prior short-sale success.

The attorney is a very important member of the short sale team, and you must choose an attorney who has successfully closed a number of properties.  You might ask for referrals to check with his clients about their experiences.

3. Get your documents ready

Gather the paperwork your creditors and mortgage lenders asked to see, like your listing agreement and a hardship letter explaining why you need to do a short sale. You’ll also need proof of what you earn and what you owe as well as copies of your federal income tax returns for the past two years.

4. Expect delays

Despite a federal rule saying banks participating in the federal government’s Making Home Affordable loan modification program must respond to short-sale offers within 10 days, it may take weeks or months for your lender to decide whether to allow you to sell your home in a short sale—and even longer if you must negotiate with more than one lender or lienholder.

Your lender and lienholders don’t have to agree to your proposed short sale. They can reject your terms or make a counter offer, which can create further delays.

5. Anticipate demands

Discuss with your short-sale team how you should respond to common short-sale demands from lenders. For example, are you willing to sign a promissory note agreeing to pay outstanding amounts after the sale is complete?

6. Know the tax implications

Any unpaid amount of your mortgage “forgiven” by your lender through a short sale may be considered income to you under federalForeclosures tax rules. Ask your attorney or accountant whether you qualify to exclude that amount as income on your tax returns under the Mortgage Forgiveness Debt Relief Act and Debt Cancellation Act. Also ask if you’ll be required to report amounts “forgiven” by other lienholders, if applicable.

7. Consider how the short sale will affect your credit and what you must pay

Ask whether your lender will report the short sale to credit-reporting agencies. Having a portion of your debt forgiven may negatively affect your credit score, but a short sale typically damages your score far less than a foreclosure or bankruptcy.  A short sale also puts you in control of the process.  A foreclosure make take years to complete and the bank is in control of this time frame.  Two home I knew about Repair your creditpersonally took over four years to finish the foreclosure process because the bank continued to make mistakes.  When you finish a short sale, you will be able to start to repair your credit immediately, and then you will be able to buy another home in a reasonable amount of time.

Ask you lawyer whether you’ll be responsible for paying back the lenders’ loss. If the lender says it will forgive any losses on the sale of your home, get that promise in writing.

When you are ready to evaluate whether a short sale is the right decision for you, contact several Realtors and begin to ask which one can give you the best guidelines.  Put the agony of this financial situation behind you.

Too Big to Fail?

Our country is still “in recovery” and the real estate market and new construction industry are still waiting to see the signs of recovery.  This video offers an interesting take on the too big to fail theory.  Are we better off today or not?  What do you think?

The recently proposed Qualified Residential Mortgage rule, requiring 20 percent down payments, has spurred more in-depth studies on its potential effects.  This will definitely affect the real estate recovery.

Despite the economic troubles Americans have experienced, it is clear that a majority of people still believe in home ownership and the desire for home ownership as part of the “American Dream” is still consider a goal many people work toward.  Achieving that dream will be increasingly difficult for buyers if our government  requires  a 20 percent down payment.  That is why Realtors® are strongly urging regulators to go back to the drawing board on the proposed rule and find a better solution.

Strong Rebound in October Pending Housing

The National Association of REALTORS® reports that pending home sales jumped in October, showing the first positive uptrend since bottoming in June, when the tax credit expired.

Sold Homes

The PENDING HOME SALES INDEX, which is based on contracts signed but not yet closed, rose 10.4 % in October, but they were 20.5% below a year ago, when the tax cuts were first set to expire. . In the Northeast, the index jumped 19.6 & in October, but was 27.3 % below a year ago.

Lawrence Yun, NAR’s chief economist, says homebuyers are taking advantage of strong affordability conditions and expects home sales to continue to rise. That is the good news.

Although the housing market is in the recovery phase, we have a long way to go to have secure stabiliation.  Banks need to cooperate with a more commen sense approach to the very stringent lending requirements they have implemented since the mortgage meltdown.

Mortgage Application

We now have some consumer concerns regarding the mortgage interest deduction, an important component in housing affordability,” Yun said. “Preliminary results of a new survey show nearly three out of four home owners and two out of three renters consider the mortgage interest deduction to be extremely or very important to them.  Home owners already pay between 80% and 90% of all federal income taxes and additional tax burden would hurt them and the economic recovery, so we have a reasonable hope that it will not be changed.”

Making Sense Out of the Current Homeowner Debate

Who do we believe? Time magazine’s Making a Case Against Homeownership or Wall Street Journal’s 10 Reasons to Buy a Home?

TIME magazine has declared it is time to “Rethink Homeownership” because the housing market continues to be troubled.   Making the Case Against Homeownership is an opportunity for TIME to sell more magazines, because people are hungry for answers and the public is hearing many conflicting things.   When the media sensationalizes the reporting to “make headlines”, it forfeits its objective journalistic position in hopes for attention and the opportunity to sell magazines.

The economy is in flux and one week we read it is on the mend and we have been in recovery for 18 months.   The next week we are told that there will be a double dip in the housing market and the stock market is going to be in trouble again.   The intractable job market continues to be a serious area of concern.

The Boston job market seems to be making some progress in recovery, because that unemployment rate is 8% compared to the US rate of 9.5%.   Unfortunately, the unemployment rate in Worcester is 9.6% and in Springfield it is 9.8%, both over the national rate of 9.5%.   Review the data in my Housing Trends Newsletter about other locations in the state.   This presents a very confusing picture.

The Wall St. Journal is taking a stand against the doom and gloom that has pervaded the news lately. Their article – 10 Reasons to Buy a Home – points out why now is a very good time to purchase.   Owning your own home is still the American Dream for many people.   Low prices, good inventory, and great interest rates are just a few points that make the case to buy now, not later.   But it is also important to buy a house to really make it your home, not your investment portfolio.   A home is where you plant roots, enjoy your family, and participate in your community.   We must not look at the home as a place to refinance to pull money out to pay bills, buy luxuries, or take trips.

The recent Case Shiller Report released on August 31, 2010, notes that nationally home prices dropped 29% from a high in 2006.   The good news is that instead of treading at the 2001 price level, which we saw happening in Central Massachusetts in 2009, we are now approaching the fall 2003 price range in some parts of the country.   Stability in the housing market is important to creating stability throughout the economic markets. We may have a long way to go, but the Time article is reminiscent of the Chicken Little days of “The sky is falling, the sky is falling.”    It is not healthy to believe the gloom and doom.   As my mother always said, “This too shall pass.”  Better days are ahead.