“It is literally true that you can succeed best and quickest by helping others to succeed.” – Napoleon Hill
HOUSING PRICES WILL CONTINUE TO TUMBLE
We have written several blogs recently quoting numerous sources saying now is the time to buy a home. We agree that now is definitely the time to buy. This is NOT because we are calling the bottom for real estate PRICES. What we have said is that the COST of purchasing a home is probably near a bottom or has hit the bottom.
The difference is that COST is determined by two components: the price of the home and the expenses associated with mortgaging that home. As we have put forth in several posts, we believe that the expense of obtaining a mortgage will increase as the year goes on.
We also believe strongly that, in most parts of the country, prices will continue to soften. Here are the reasons why:
Existing Months’ Supply of Inventory Is Still Too High
A balanced market (where prices are stable) can handle 5-6 months worth of active inventory. Anything less than 5 months constitutes a seller’s market as there are not enough houses to meet buyer demand. This usually results in price appreciation. Anything more than 6 months constitutes a buyer’s market as there are not enough buyers for the number of houses on the market. This usually results in price depreciation.
Currently, as per the National Association of Realtors (NAR), there is a 9.2 month supply of inventory. This alone would put downward pressure on prices.
Distressed Property Inventory Is About to Enter Market
There are over over 4 million homes that have the potential to become a distressed property sale (foreclosure or short sale) over the next few years. A percentage of these properties are set to enter the market before year’s end. No one knows exactly how many will come to market in each region but the common belief is that the number will be substantial.
These properties will sell at a discount thereby attracting a portion of buyers in the market. After they close, they can also be used in an appraisal to help establish values of other homes which sell in the area. A short sale sells for approximately 90% of it’s non-distressed value. A foreclosure sells for approximately 65% of full value.
The inventory of homes currently for sale added to the inventory of distressed properties about to come to market will far exceed demand for the next twelve months. When there is less demand for any item then there is supply of that item, prices fall. Check with a local real estate professional to see how this may impact the value of your home over the next year.
RENTERS ARE NEXT VICTIMS OF THE HOUSING MARKET
Stephan Metelica, a 24-year old charter pilot, shares a two-bedroom apartment with a friend in Chicago’s Lincoln Park neighborhood. The duo split the $1,525 monthly rent, but they were surprised this month when their landlord lease came up for renewal and their landlord asked for a 5 percent increase, to $1,600.
“I was pretty upset about it,” Metelica says of what would amount to nearly $40 more per month per person. “I thought a 5 percent increase was ridiculous.”
Renters, long happy to sidestep the drama homeowners have suffered in the roller-coaster housing market, are now facing their downside of the real estate market’s correction. With apartment and rental housing construction halved in recent years and a wave of former homeowners competing for apartment space with “echo boomers” and other renters, conditions have suddenly ripened for landlords to raise the rent.
Last year the rental market quietly shifted from a tenants’ market to what is now decidedly a landlord’s market, said Chris Herbert, research director at Harvard’s Joint Center for Housing Studies. The supply of properties is tightening and vacancy rates are dropping, so landlords have been emboldened to raise the rent.
Nationally, rents are expected to rise 5 percent this year and another 5 percent in 2012, according to Greg Willett, vice president of research and analysis at MPF Research in Carrollton, Texas. The trend is not expected to moderate until 2013, when new multifamily housing construction adds to supply and the housing market stabilizes enough to attract new buyers.
“In California, landlords have to file a 60-day notice if they plan to raise rents by more than 10 percent,” Herbert says. “And in some markets, we’re once again seeing them issue those notices.”
Of course all rental markets are local, and the trend is more pronounced in the San Francisco Bay area, for example, than in Southern California where rents are little changed.
In its annual State of the Nation’s Housing report released last week, the Harvard center said rising rents and the rising cost of owning a home are forcing Americans across all income levels to pay a higher proportion of their income for housing. As of 2009, more than 19 million households paid more than half their incomes for housing, including more than 10 million renters, according to the study. Households in the $45,000 to $60,000 income range have faced a particularly sharp increase in the housing cost burden over the past decade.
Considering that the government-sponsored mortgage buyers Fannie Mae and Freddie Mac are facing potential reforms that could tighten lending standards, and that there’s still a heavy supply of homes for sale, some say renters may not be swayed to move into the ownership market for many years – especially if many new renters tend to be younger.
Most first-time buyers are in their early 30s, according to data from the National Association of Realtors. Metelica, the 24-year old renter, says he’ll probably be at least 29 before he thinks about buying. That means he, and others in his age range, may suffer through a few rent increases before they move to ownership.
To hear landlords discuss the marketplace, the good times have returned.
National apartment operators have adjusted their 2011 forecasts in recent weeks, citing a strong market that is allowing above-average rent increases. Avalonbay Communities, which owns 187 apartment buildings in ten states and Washington, D.C., said this month that rental revenue is expected to increase from 5 to 5.75 percent this year, up from a prior estimate of 4 to 5.5 percent.
“At this point we don’t anticipate a recovery in for-sale housing until at least 2013,” Michael Schall, president and chief executive officer of Essex Property Trust, stated in an earnings conference call last month. “We are now confident that the apartment supply and demand equation is tipping toward housing shortage and thus both rents and occupancies are improving.”
Tammy Kotula, spokeswoman for Apartments.com, an online guide to apartments, urges renters to negotiate with landlords, or if they know they’re staying awhile, get a multiyear lease that allows tenants to lock in a low rent.
“You can definitely talk to your landlord and ask to negotiate,” she says. “A two-year lease is a pretty popular option.”
Just don’t expect keeping your rent down to be the cake walk it once was.
IS THE ECONOMY WORSE THAN WE THINK?
We are presented with conflicting data almost daily about the “health” of the economy. And I am no economist, but I believe that I do possess some common sense.
So, here’s what I have been thinking. It is obvious that millions of people are NOT paying their mortgage, rightly or wrongly, for their own reasons:
- They can’t because of a job loss, death, disability or something outside of their control.
- They won’t because it makes poor financial sense as their house is underwater.
My question is that with so many people NOT paying their mortgage, how can there be an economic recovery of any fashion? And then it hits me, people who used to spend thousands of dollars every month on their housing are spending that money now on food, clothing, vacations, gasoline, cars and alike. With the lag time between the moment of not making a mortgage payment to eviction being as long as two years, it seems logical to me that the reported economic numbers have to be inflated.
As foreclosures and short sales continue and people transition from non-paying homeowners to renters, millions of consumers will start having a housing expense again which will leave them less cash every month to buy other things. The result will be a slowing economy.
If you are a home seller, I think it means continued lower sales prices for at least the next 18 months. Price aggressively and get top dollar now!
If you are a home buyer, most of the recent data points to higher prices of everyday goods (largely because of higher energy prices), and that leads to inflation. Inflation is combated by the Federal Reserve with higher interest rates. So buy now, while the monthly carrying COST of a home is at near all time lows. Lower home prices sound good, but higher interest rates will nullify that benefit.
I have learned that “Common Sense Is Not Common Practice”. Today, I wanted to share some common sense conclusions, to push you to make it part of your practice.