Well, we're officially well into the spring/summer selling season and things are really heating up in our local markets - but how long can you expect this trend to continue? That's the trillion dollar question!
Looking back at May we had great news for California as existing-home sales are up 80% over last year. Locally we saw the median home price for Santa Clara County increase 9% to $475,000 as sales in the higher end homes have finally started to kick in (click here for current Santa Clara County housing stats). I guess when a qualified buyer realizes they can get a million dollar home for around $800k they feel it's a deal they just can't pass up. But then again, how many higher-end buyers are still out there that have the ability to make 30% down payments, especially when money is hard to come by these days.
To sustain an increase sales volume in the higher-end housing markets, we need to see the jumbo loan market (loan amounts above $729k) open up with some more aggressive financing, i.e. allowing higher loan-to-value ratios and less down payment - then we can expect the higher-end market to really rebound as it has already stopped falling.
On the lower-end of the housing market, home sales are still being dominated by foreclosures and short sales, with bank owned homes making up the majority of sold homes. In fact, there is such a demand for bank owned foreclosures that you can almost always expect a bidding war to break out, especially in the Santa Teresa, Blossom Valley, Cambrian, and South San Jose areas of Santa Clara County.
But is this trend going to continue? And what about that large pool of foreclosures that is ready to flood the markets, how will that affect home prices? Well, from an insider’s point of view demand has definitely been stimulated by the first time homebuyer tax incentives and historically low interest rates. First time homebuyers are now comprising approximately 40-45% of the housing market.
According to the National Association of Realtors (NAR), first time homebuyers represented over 455,000 home sales purchased nation wide this past first quarter and these are most likely only the first wave as housing affordability conditions are at record high levels. NAR expects for the trend to continue and even realize a measurable increase in home sales during the second half of the year leading to further price stabilization in most areas (especially in Santa Clara County as we have already been experiences a stabilization).
It may seem that the government's plan to increase home sales is really starting to become noticeable and even NAR’s own forecast is calling for a continued increase in home sales nationwide, but whether or not our local housing push can last through the summer has become questionable. Recent economic developments have lead to increases in mortgage interest rates and there are still a large number of buyers sitting on the fence unsure of whether or not it is a good time to buy.
It seems that the rest of the world has started to question the Fed's bail-out plan of issuing an unthinkable amount of new government debt...I guess overseas investors don't like the idea of financing old debts with new debts, and this has lead to a massive sell off of US treasuries further resulting in increased mortgage rates.
And if mortgage interest rates continue their current climb (last week we saw rates reported by Freddie Mac’s Mortgage Market Survey at a 7 month high) we could notice a negative impact on home sales. We have already seen a decline in overall loan application volume due to the higher rates, and housing affordability is sure to suffer along with it, but according to NAR higher interest rates are not a major determining factor when it comes to home purchases.
Beyond interest rates, mortgage programs as a whole are harder to qualify for, most requiring larger down payments of at least 10%. And if the lender calls for mortgage insurance there are additional underwriting overlays that can disqualify a majority of loan applicants – such as higher credit scores, lower debt-to-income ratios, and higher reserve requirements.
Overall, the current lending environment is not really conducive of a housing recovery other than the low interest rates that WERE present over the past few months. But, if these programs start to loosen as expected heading into the second half of the year, I believe that we will surely see another noticeable wave of homebuyers flood the market.
So what’s with that huge pool of foreclosure properties that the banks are holding onto? (Well, I had to keep the best for last – I wouldn’t want you to miss everything we have already covered).
It seems that the word on the street these days is that buyers should wait for the next wave of foreclosures to hit the market before they spin their wheels getting caught in bidding wars on the current inventory of REO’s. Well, it may be true that there are bidding wars breaking out over these bank owned foreclosures, but don’t expect to see a massive volume of homes hit the market anytime soon. And the best deals may not be those often overpriced bank owned foreclosures, we are seeing the best deals being purchased by those few brave buyers willing to patiently wait for a short sale to close.
Some important points to consider for anyone watching the housing market - even if banks had a large inventory of foreclosed homes they wouldn’t unleash them on the market all the same time, it seems that they have learned a thing or two from 2007 and 2008, if they control the inventory they can artificially control the demand for housing. Plus, it just takes banks a lot longer to put these foreclosures back on the market once they are repossessed. Prior to 2007 banks could relist a foreclosure in as little as a month, now it can take as long as 6 months – banks are just so busy with staying on top of new business (refinance and purchase loan applications), corporate consolidations and re-organizations (Bank of America and Countrywide, Wells Fargo and Wachovia, Chase Bank and Washington Mutual), and just keeping on top of all of Fannie Mae and Freddie Mac’s mortgage guideline changes – surely marketing foreclosures is important but just how fast can you squeeze a watermelon through a garden hose?
Other factors contributing to the hold up is a longer foreclosure process brought about by state legislatures in an attempt to force banks to try every possible solution of keeping homeowner’s in their homes before they can be foreclosed. Additionally, state legislatures have extended mandatory moratoriums stopping active foreclosures and extending the required notice times before banks can repossess these homes. Furthermore, many lenders including Fannie Mae and Freddie Mac have begun a renter’s program aimed at keeping the foreclosed homeowner in their property as a renter with the ability to repurchase the home at a later date.
Not to mention that the short sale and loan modification processes has become more efficient. Lead by government policy, Making Home Affordable and Hope Now Alliance, lenders have the resources and the procedures in place to maximize their home retention efforts for those homeowners falling into default and for those homeowners unable to keep their homes, the ability to turn short sales around much faster. The banks have realized that they would rather avoid the high cost of foreclosing on a property than pay for the necessary repairs that many distressed properties require before they are even in a condition that can be marketed for sale, and once repaired then require additional maintenance costs. To read an article written this past January discussing such a pool of foreclosure properties please follow the link – Flood of Foreclosures: It’s worse than you think.
Final Thoughts: In my opinion, those buyers who are waiting for the best deal will be those that missed out on the lowest prices available in Silicon Valley real estate over the past decade. Remember, when purchasing a home for a primary residence one should not look at the purchase as an investment, rather one should focus on long-term appreciation, tax shelter incentives, advantages of owning over renting, and overall pride of homeownership.
