Market Time Report: ‘Tis the Season to BUY

November 29, 2007

Now that the Thanksgiving leftovers have been depleted, we move on to the next holiday season, the absolute “best” time of the year to be a buyer. Unfortunately, consumers seem to look at only one factor in purchasing: price. If prices are trending down, they simply don’t want to purchase. The logic used is the same used in shopping. For example, if you were looking for a high definition flat panel television set, yet every day the news reports and newspapers detailed that the market for flat panel televisions was down and that prices would fall, you would be inclined to wait. HOWEVER, there are a lot of factors in buying a home which most consumers simply do not consider. Purchasing a home is far more complex than going down to the local electronic store and purchasing a television. In purchasing a home, a buyer should consider the following factors in addition to pricing trends: current interest rates, the number of choices in searching for a home, a gift from Uncle Sam in the form of a tax break and historical long term investment data for housing in Orange County. I have been accused of being biased because I am in the industry. I am sure the skeptic naturally questions buying right now, but that’s because they are looking at purchasing based solely upon the trend in pricing. There is also a segment of the market that is very vocal about the impending doom of real estate. Many have expectations of prices dropping by 20%, 30% or more. First, a large portion of the segment is fence sitting buyers rooting for the market to drop to a point where they can afford a larger home. The problem with that theory is that even with all of the pressure on price because of supply and demand, homeowners are simply reluctant to drop prices swiftly. There is stickiness to pricing that has been a character of the present market since it first slowed back at the beginning of 2006. Many think that bank foreclosures will drop the value in neighborhoods because bank owned homes are “deals.” As somebody who sold hundreds of bank owned foreclosures throughout the 1990’s, I must dispel this myth. Most banks will do whatever they can to achieve market value and they will hold firm on price. They are very aware of any the value of any home in their portfolio through a real estate broker and an appraisal (sometimes multiple appraisals). They will opt to rehabilitate a home by addressing all cosmetic repairs and necessary repairs with new carpet, new paint inside and out, replacing the roof, new fixtures, new faucets, new windows, etc. They will do whatever it takes so that the property shines inside and out. They are only willing to work with serious buyers. There are some ridiculously low prices on homes currently on the market, and they are ALL short sales. The price may be attractive, but the sale is “subject to lender approval.” Unfortunately, the price is not set by the lender; instead, the seller and buyer set the price in hopes to entice a borrower to write an offer in a slow market. Remember, lenders are not slouches and they are not willing to give away thousands of dollars so that a homeowner can get out from underneath a home. Instead, they will do their homework and obtain a broker’s, or multiple brokers’, opinion of value, and a certified appraisal, or even multiple appraisals. Remember, they want to recoup as much of their asset as possible. Many short sales are submitted and rejected. Buyers should look for listings with preapproved short sales where a reasonable sales price has already been established. Unfortunately, this is the exception and not the rule.

The talk around the coffee pot these days centers around the numbers of buyers who are comfortably perched on the fence waiting for the “best” time to buy. An economist at a conference last week aptly stated that “nobody is going to ring a bell at the bottom of the market.” Plus, these fence sitters are just factoring the pressure on pricing. So, let’s take a closer look at what most buyers are not considering in their decision to purchase:

RATES: Bernanke and the Federal Reserve may be looking to cut the discount rate again in December, and they may even cut it a couple more times in 2008. However, when you hear that the Federal Reserve has cut the discount rate, it does not affect the long term, 30-year fixed rates used to purchase a home, directly. The cut only has an immediate effect on short term rates like equity lines, credit card debt, etc. Interest rates can only go so low. Most economists agree that the current rates, now below 6%, are about as low as they will go. The new Federal Reserve, under the guidance of Bernanke, is not interested in keeping the discount rates at the current low level, either. The recent credit crisis has forced them to reverse course in their methodical increases since the beginning of 2006. Many are now pointing a finger at the old Federal Reserve, under the guidance of Alan Greenspan, for artificially stimulating demand in real estate by keeping rates at very low levels for several years. With rates at the current low levels, the general public is now accustomed to low rates. Many do not recall that rates were at 8% at the beginning of the 2000’s and they were at 10% at the beginning of the 1990’s. They have been much higher than that too. But, just as we became accustomed to low rates, when rates do rise, and they will rise, the general public will get used to an environment of increasing rates, just as we have with the price of gasoline. We may not like it, but there is very little we can do about it. If you bought a condo for the current detached median price, $650,000, with 20% down, at the current jumbo rate of approximately 6.5% (5.75% for conventional loans which are loan amounts less than $417,000), the mortgage payment would be $3,280. Even if values were to decline by 10%, bringing the $650,000 home to $585,000, if rates were to increase to 7.5% (7% for conventional loans or about 1 point higher than they are today), the payment would be $3,272, a savings of $8 per month. If rates were to increase to 8.5% (8% for conventional like they were at the beginning of this decade), that payment would rise to $3,599, or an extra $319 per month. If inflation was out of control and rates popped up to 10.5% (10% for conventional like they were at the beginning of 1990), the payment would be $4,281, $1,001 more every single month. As you can imagine, the higher the purchase price, the higher the loan amount, the greater the effect on the payment as interest rates rise.

CHOICES: The beauty of a buyers market is the vast number of choices in the marketplace. Gone are the days where buyers had to overbid on homes only to settle on their fourth choice. Instead, buyers have a plethora of homes to choose from in order to isolate the best fit for their family. That’s a luxury that buyers were begging for just two years ago. Buyers should not fall into the trap of waiting for the market bottom. Bottom watchers end up entering the market when demand is on the rise and run the risk of settling on their second or third choice.

TAX BREAK: Many forget to consider the huge gift from Uncle Sam, a wonderful yearly tax write off of interest and taxes, a huge savings for homeowners.

LONG TERM INVESTMENT: Markets move in cycles. We are currently experiencing a buyers market. Historically, we have had many sellers markets and many buyers markets. But, the fact remains that homes in Orange County have ALWAYS beat the prior record height after EVERY cyclical downturn. Another fact is that Orange County is running out of land in which to build additional homes. People aspire to live here because of the weather, the beaches, the recreation, and the great lifestyle. Movies and television shows feature Orange County as their backdrop. Why? It is simple, Orange County sells.

Many homeowners are opting to pull their homes off the market, which is evident in the current active inventory reading. The active inventory has continued its descent, falling by 464 homes in the past two weeks to 16,769 homes. Over the past four weeks, the active inventory has dropped 685 homes. Demand, the number of homes placed into escrow within the prior month, decreased by 52 homes to 1,243 new escrows. The market time increased slightly to 13.49 months from 13.31 months two weeks ago. The small drop in demand and small increase in Market Time can most likely be attributed to the long Thanksgiving weekend. Last year at this time there were an additional 672 escrows within the prior month, the active inventory was at 13,572, or 3,197 fewer homes, and market time was at 7.09 months. Two years ago, there were 8,671 fewer homes on the market, 1,166 more escrows within the prior month, and the market time was at 3.36 months.

Currently, short sales and foreclosures in Orange County account for 21% of the active inventory and 26% of all escrows opened within the prior month. Of all the short sales and foreclosures currently on the market, 63% are below $500,000, up from 62% two weeks ago and 59% four weeks ago. 93% of all short sales and foreclosures currently on the market are below $750,000, unchanged over the past four weeks. 35.3% of the all homes under $500,000 are either a short sale or a foreclosure. For the 1,758 detached homes in Orange County priced below $500,000, 50% are either a short sale or a foreclosure.

The disparity between the detached home market and condominiums has returned to normal for this time of year (it took a brief hiatus because of the financial crunch). Market time for detached homes is now at 12.92 homes versus 14.46 months for condominiums.

What can we expect for the remainder of the year and the beginning of 2008? The year is almost complete, but we can expect much of the same demand while the active inventory continues its decline to the 15,000 home mark. With demand around the same level and the inventory dropping, market time will improve slightly. We can expect demand to pick up after the first few weeks of the New Year and continuing to pick up through the Spring market. Demand will be between 15 to 20% less compared to 2007, but will be much higher than its current level. With many homeowners anticipating the Spring market, many will mistakenly place their home on the market with the expectation of the ability to sell fast. However, with the inventory starting at 15,000 homes, it will quickly blossom to the 20,000 home mark. More short sales and foreclosures will be placed on the market to compete with traditional sellers.

What if you are a seller, how should you respond to the market? First, if a seller has a home valued below $2 million, a majority of the market, do not wait for the Spring to sell. In a buyers market, if you have to sell, sell early and price your home according to the market value right out of the gate. Do not risk chasing the market down in value. It is also extremely important to heed the following warning: do NOT place your home on the market unless you absolutely, unmistakably MUST sell NOW. The only exception to this rule is the high end, homes above the $2 million mark. Now more than ever, sellers must rely on an experienced, tuned-in real estate expert to guide them. Price is important, but it is not always the answer. Sometimes, there just is no demand for a given period of time. Patience is very crucial for success. Price is becoming increasingly difficult to determine because of so many short sales with artificially low prices that may entice a buyer but will never be accepted by a lender. Thus, there is a lot of homework and preparation necessary to establish price. It is still imperative to price a home at or slightly below the last comparable sale or escrow, but a drastic drop is not necessary. Stay in close contact with all changes in the marketplace. Keep in mind, with so many choices, the better the condition, the higher the probability in procuring an offer. So, address all cosmetic repairs, just as lenders are apt to do in today’s market. Don’t be afraid to replace worn carpet and paint scuffed walls, If a roof is leaking, fix it or replace it. It can take months to sell a home; BUT, the home should ALWAYS be in showing condition. You will never know when the buyer of your home is going to come through and you want your home to show its absolute best.
Steven ThomasRE/MAX Real Estate Services
President"Outstanding Agents! Outstanding Results!"



If you are considering buying or selling a home in South Orange County, call on the experts! Dianna and Brian McGarvin 949-370-2652 or visit our website at http://www.pierbowl.com/.