Real Estate is definitely local and all about supply and demand. When homeowners can see where the market has been along with 6 key factors, they will have a better understanding of what to expect as we finish out 2010 and move on into the next year.
According to the Federal Reserve Bank President William Dudley, it is most likely the U.S. will see growth at “an even slower rate when the third-quarter [2010] real gross domestic product (GDP) figures are released at the end of this month. We have ongoing sluggishness in two key sectors that have led past recoveries: consumer spending and housing.”
Triangle MLS September Market Statistics
The Triangle Multiple Listing Service, Inc. announced that the average sales price of homes located in Durham, Johnston, Orange and Wake counties was $239,400 during the third quarter of 2010. This was a 9 percent increase compared to third quarter 2009 sales.
Sales trends for September show a decrease over September 2009 and this is the continued impact resulting from the end of the federal home buyer’s tax credit program which expired in September. Closed sales for the entire region in September were down 24.9 percent as compared to 2009. The first half of this year showed sales had increased substantially over 2009, except for February. This was the positive impact the tax credit played in home sales. As a result, sales through September year-to-date remain ahead of the same period last year.
There are currently 13,791 active listings within the four main counties, an increase of 12 percent compared to inventory levels for this quarter last year. There are 2,589 new home listings, a decrease of 7 percent compared to third quarter 2009, and 11,202 re-sale listings, an increase of 17 percent compared to the same period 12 months ago.
Other figures for the quarter include 8,709 new listings entered into the system during the quarter, which represents a 9 percent decrease compared to new listings entered into the system during third quarter 2009.
The current supply of all housing within the four main counties is 11 months based upon closings this quarter, as compared to seven months for third quarter 2009.
Month of August
In order to be optimistic about the 2011 outlook on real estate re-sales, we need to watch several key factors:
1. local unemployment rate
2. inflation rate
3. mortgage industry lending practices
4. interest rate
5. new construction
6. foreclosures
Local Unemployment Rate
North Carolina Unemployment Stats for August 2010
Currently North Carolina’s unemployment rate as of August 2010 is 9.7%. This time last year our unemployment rate was 10.9%. February 2010 was our highest month of unemployment at 11.2%, since then it has slowly started to reduce.
Although the unemployment rate held steady, the number of those employed declined, indicating that some job seekers left the labor force, presumably because they were discouraged by dismal prospects for employment.
Employment stability and job growth are keys to a housing recovery and are needed to help boost the confidence of households that are considering buying a home.
Slow employment growth are forecasted for the remainder of the year as GDP continues to show some growth and businesses find that they can no longer depend on the productivity growth of their current workers to increase output.
Residential construction continues to hemorrhage jobs, albeit at a slower rate than a year ago. In July, 16,900 jobs were lost, down from 27,700 job cuts a year earlier and 81,700 in November 2008. The continued decline in residential construction employment is in line with slowing single-family housing starts, which have been down three months in a row, and July’s sharply falling housing completions as builders reduced their work pace to hold down expenses in the face of weak demand following the expiration of the home buyer tax credit.
Inflation
For the Federal Reserve to clamp down on inflation, they could raise the interest rates. The Fed would prefer to keep interest rates low to stimulate the economy until banks have had more time to recover.
Over the last 12 months, the Consumer Price Index (CPI) rose 1.4 percent. The index for all items less food and energy increased 1.0 percent. Higher prices for used cars and trucks (12.5 percent) and medical care (4.0 percent) contributed to the increase.
Mortgage Industry Lending Practices
The Federal Reserve’s third quarter Senior Loan Officer Opinion Survey on Bank Lending Practices reported some easing of credit standards for prime residential mortgages among large banks over the previous three months. This marks the first net easing in the survey in more than three years.
Large banks have eased their prime residential mortgage loan standards and terms, especially those banks affected by competitive pressures from other banks or from non-bank lenders. It has been reported that smaller lenders have tightened their lending standards on such loans.
The Fed’s third quarter survey is an indication that banks may be beginning to return to the more normal lending standards that prevailed in much of the 1990s and the first part of the 2000s.
Mortgage applications have generally been on the rise, with the four-week moving average for applications up in nine of the last 10 weeks. Mortgage purchase applications are also showing some improvement, with the four-week moving average up in three of the last four weeks. This increase in demand marks a reversal of the weakening of demand since last April.
Interest Rate
NAHB projects that mortgage rates will remain below 6% through 2010 and most of 2011. The low rate of inflation gives the Federal Reserve the room to maintain its expansionary monetary policy and to keep mortgage rates low.
The average rate for 30-year fixed-rate mortgages again decline by four basis points (.04%), finding fresh ground at 4.62%. FHA-backed loans are available at an average rate of 4.31%, but there isn’t much home-buying activity going on at the moment.
New Construction
As of October 20, 2010 there are 3,442 new construction homes for sale throughout the Triangle area.
Month of August
Home builders have had little to be optimistic about. This was reflected in the August NAHB/Wells Fargo Housing Market Index (HMI), which fell from an already low 14 to 13, its lowest level since a reading of 9 in March 2009. With little prospect of increased sales on the horizon, builders are reluctant to add to their inventory.
Single-family construction appears to be close to a bottom. Single-family building permits in July slipped slightly with a 1.2% decline. The South was flat with 215,000 single-family permits.
In a dramatic indication that demand is weak and builders have entered into a holding pattern, new single-family units completed fell a steep 27.5% in July, the largest monthly decline on record going back to 1968. The rate of new construction is so low that there is barely any net growth in the U.S. housing stock these days.
New home completion rate in June reflected the push to meet the settlement date deadline at the end of the month (since extended to September) for the now expired home buyer tax credit. Now needing to complete fewer homes to keep up with weaker contract demands, builders are slowing completions to hold down the costs of installing relatively expensive finishing touches.
One reason why so little housing is being built is that many existing homes stand vacant. We estimate that there are roughly 3 million vacant housing units more than usual. And more vacancies are added daily as the foreclosure process moves homes from families to mortgage lenders. This stock of vacant homes will shrink when fewer are foreclosed upon and more of these homes are sold or rented out.
Foreclosures
As of October 20, 2010 there are currently 471 foreclosures in the Triangle MLS.
In the year 2011 there are four more waves of adjustable rate mortgages (ARMs) whose interest rates are set to adjust upwards from their low teaser rates. They are the ten year ARMs from 2001, the seven year ARMs from 2004, the five year ARMs from 2006, and a few three year ARMs from 2008. This will be in addition to the four waves of arms that reset in the year 2010 and many other types of creative financing better known today as toxic mortgages. As these loans all go delinquent and sell as foreclosed homes it will continuously pull down the value of real estate no matter what.
80 percent of Alt-A Pay Option Arm homeowners make only the minimum payment. That is all they can afford (if they can even afford that). The time bomb is negative amortization or “deferred interest”, a situation in which a borrower is paying less interest than what is actually being charged for a mortgage loan. The unpaid interest is added to the loan’s principal. At some point, the loan must start to amortize over its remaining term. Typically, negatively amortizing loans have scheduled dates when the payments are recalculated, so that the loan will amortize over its remaining term. The time bomb goes off when the loan is re-set.
Fitch Ratings released a wide-ranging look at option ARMs over the next 36 months. The bottom line is that most outstanding Negative Amoritization Mortgages won’t get out of 2011 alive due to the loan re-setting. Fitch also estimated that the potential average payment increase on the re-set loans to be 63 percent, representing on average an additional $1,053 due each month.
Homeowners can contact their lender to try and renegotiate their mortgage terms to avoid problems when their adjustable rate loan re-sets. Unfortunately not all lenders will work with the borrowers. When a homeowner owes more than what their house is worth whether they are delinquent or not, they are choosing to walk away from the house and give the keys back to the bank.
There’s two ways homeowners are giving back their house. The first example, a homeowner who owes $250,000 or more on their house in a neighborhood where all the homes are now worth $200,000 or less purchases a similar or an even better home at the cheaper price, and then lets the bank foreclose on the one they owed $250,000. With good credit, they can purchase the cheaper house before becoming delinquent on their current house. While they live in the second house, they can re-establish their credit.
Second, if they don’t qualify for the mortgage to purchase the second home, they will find a place to rent, let their current house get foreclosed on, and after they rebuild credit in about two years or less, they will purchase a new house at the discounted price. Where renting had once been seen as throwing money out the window, it can now be viewed as a wash or even an investment, for example, $1000 a month in rent for two years comes to $24,000, however by swapping property, they may be able to save upwards of a $100,000 depending on how much prices decline in their area.
Is Consumer Sentiment Improving?
After dropping sharply in July, the University of Michigan’s consumer sentiment index improved a bit in August’s preliminary reading, rising from 67.8 to 69.6. Also, there was a modest rise in the percentage of consumers who believe that now is a good time to buy a house — from 75% to 76% — a return to the June number and its highest reading since March.
The most common reasons cited for favorable home buying conditions were low prices (63%) and low interest rates (44%).
If renters have worked on rebuilding their credit, they are in a good position to take advantage of lower home prices. However, renters will only take advantage of the market if they feel the economy will support their investment. This increase in buyers will help to unlock our grid-lock on the re-sale market.
Supply and Demand
With all this information about what has been happening in the Raleigh Real Estate market, we can make take an educated guess at how our market will respond in 2011.
Demand
Even with the economy advancing at a snail’s pace and consumer confidence rebounding hesitantly, most potential home buyers remain on the sidelines despite low interest rates and affordable house prices. Impediments to home sales include a weak job market and continued uncertainty regarding the future path of home prices and interest rates.
The decline in house values over the past couple of years has reduced the amount of equity that owners have in their homes, making it difficult for people to come up with the funds needed to “trade-up” and move into better homes.
Supply
Rising possible foreclosures coming onto the market, vacant homes, unsold new construction all effect the re-sale real estate market. Over the next year, you might see some legislation from the government to assist homeowners faceing foreclosure with ARM mortgages. The slow-down of new construction being built and vacant houses either being rented or sold at a discount will relieve our overabundance of inventory.
The good news
Real estate will once again become affordable, which is key to keeping the American dream from becoming the American nightmare it is today. It will be great to once again see people purchase homes that won’t emotionally or financially drain them and their families. People will again be able to afford homes that are large enough to accommodate the size of their families, save for their futures, and start putting money away for retirement again.
