I am totally perplexed by the housing market these days. I find myself asking questions such as: Are prices still declining? Are inventories declining? When will values begin to rise? In essence: have we bottomed?
My suspicion is, despite popular demand, there is not a simple answer. I still think there are major discrepancies between different sectors of the market. Single-family homes inventories are declining but condominiums may not be. Luxury home values may decline more while the rest of the market may have leveled. There continues to be a huge difference between different areas. Mature markets will continue to behave more consistently than markets with hyper growth.
There are certainly some positive statistics, most notably sales of new homes rose nearly 10 percent in July. However, there is some conflicting data regarding the accuracy of those numbers. In addition, foreclosures have continued to rise, up nearly 7 percent in July. So again, what does this all mean?
Low interest rates and tax incentives to first-time homebuyers have helped fuel a limited recovery. I wouldn’t crack open the champagne bottles yet. We may be close to the bottom but a climb seems far off.
In general, I believe buying a home is a qualitative not quantitative decision - I think this is even truer today. In this market, one should not buy a home simply because they perceive a market low. You can still rent for a huge discount relative to a purchase. In addition, a purchase has significant transaction cost on both the acquisition and disposition.
Typically a good rule of thumb is if you know you will be in a home for less than 3 years, rent. If you will be somewhere over 3 years, buy. I would be more conservative today. The new rule: one should be confident they will be somewhere for more than 5 years before purchasing.
Yes, there seemingly are buying opportunities in the market. Yet, you should still be cautious.
The train is far from leaving the station.
Tags: economy, first time homebuyer, recovery, residential real estate
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You post surely was one of the highest points of my Saturday. I was on MSN searching for something totally unrelated when the title caught my attention. I’m glad I took the time to read your post! Feel free to comment on my blog at Singorama Review!
I’m out on a limb and calling it. The bottom in South Florida started in January, we’re in the middle of it now, and we should exit the bottom sometime between next spring and fall if current course holds.
I wrote this piece for Condo Vultures about the topic.
http://bit.ly/lP7O1
Obviously, there’s a lot of things going on in residential - it’s close to 90% of the overall RE market by volume and when you make a pronouncement about a market as a whole, there will always be sectors or locations that lag or outperform. The high end market is still shot right now, and has been bottomed for a while, and may never recover to previous activity levels but the low end market would experience an all out boom were someone to provide more liquidity for smaller home loans, bank statement income verification programs and Class B condominiums.
All that said, essentially, we’re at the bottom of the residential market right now.
Well, isn’t this the 64k question.
My market research (which has not taken into consideration the condo market) has found that, on the whole, there is a great dichotomy between those homes yielding conventional mortgages below the 417k mark and those yielding jumbo mortgages above the 417k mark.
Sales of homes in Miami-Dade have jumpstarted for those in the lower to middle market range as a a result of standardized lending which allows lenders to automatically and immediately sell off conventional mortgages to federally backed institutions like Fannie and Freddie.
(What this does to the government in the long run is irrelevant to how it currently effects the housing market.)
For those seeking to purchase a home that will yield a jumbo or super mortgage, i.e. one over the 417k mark, finding a lender willing to lend (regardless of your credit) for more than 70% LTV has been difficult, if not near impossible. The reason: the government will not guarantee purchase of these loans and …suprise, suprise…you cannot sell this mortgages on the private market because Wall Street isn’t buying mortgage backed securities.
This has shrunk the buyer’s pool — i.e. the demand — in what was a previously grossly expanded buying field. Supply and inventory are way up. No longer can a person purchase a million dollar home with 50k down. What has become required is a 300k down stroke to secure a mortgage on the home. This has certainly weeded out the pretenders and that is good for the long run, but it has also forced some qualified purchasers to wait a bit longer before they can amass and reasonably relinquish their own equity into a home.
Another heavy yoke around the jumbo market is that investors have sat on the sidelines as well. Putting 30% down on a home as a 3-5 year investment is probably unwise, as correctly pointed out in your post.
Also, 3 bedroom homes are not selling like they used to. When the market was good, you could buy a starter home, make some money and flip it in a few years, using the profits to get you into a more expensive home. Now, small families who might outgrow a smaller home are reticent to purchase one because they are fearful that they won’t be able to profitably sell (or sell it at all) once they outgrow it and are ready move into a larger house. The thought is better to rent for 3-4 years and buy the big house when ready, rather than get stuck in a small house you cannot sell.
Investors would be smarter to get into a conventional mortgage market by purchasing homes in the lower to mid market range that have a quicker turnover and smaller down payment investment at the outset.
Despite this, homes on Miami Beach, (more than) typically selling for amounts that yield jumbo mortgages have moved surprisingly swiftly this summer, which may be a result of the confluence of a few events: lower mortgage rates, the ease of certain lenders over the summer, typical rise of summer-time home sales.
The real evidence will most likely come this fall and into early 2010, when many housing credits offered by the government come to an end and where home sales are typically slower. I predict we will see more of a decline over the next 6 month period into mid-2010 in the jumbo mortage markets.
But, if lenders start to responsibly lend at 80 LTVs, we could see a pick up.
My analysis: It is a good time for investors and purchasers to buy in low to mid markets, but still time for a hold off in the higher end enclaves of Miami-Dade. It’s time for Lenders/Owners to drop their prices.