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Summer 2011 Housing Market Update
A better-than-expected unemployment report last Friday (9.1 percent in July, down from 9.2) was a welcome bright spot, but there are so many variables affecting the housing market right now that experts are scrambling to make predictions. Here's what we do know.
Current housing market trends:
Fewer people are defaulting on home loans.
The default rate on first mortgages in June was 2.02 percent, a 20 percent decrease from the last quarter of 2010. The default rate on second mortgages was 1.40 percent, also down from May. We've seen five months of dropping default rates this year.
U.S. pending home sales are up.
The number of homes under contract rose 2.4 percent from May to June nationwide, and was up nearly 20 percent compared to a year ago, according to NAR (the National Association of Realtors).
Nationwide, sales are down but prices are rising.
Single family homes: The median sales price of a pre-owned single family home in the U.S. in June was $184,500, 6 percent higher than a year earlier. Month-to-month sales volume was relatively unchanged, and was down 7.4 percent compared to June 2010.
Condos and co-ops: Pre-owned condominiums and co-ops showed the trend more clearly: June sales volume was down 7 percent month-to-month and 18 percent lower than a year earlier, but the median price rose to $182,300, up 1.8 percent from June 2010.
June also had an unusually high contract cancellation rate of 16 percent. Experts believe this was partially due to debt ceiling jitters. The norm for contracts on pre-owned homes is under 10 percent.
Sales volume and price trends vary widely.
Here are NAR's June 2011 numbers for pre-owned houses and condos by region:
West:
- Sales down 1.7 percent since May, down 2.6 percent since last June.
- Median price up 9.5 percent since last June, to $240,400.
South:
- Sales up .5 percent since May, down 5.6 percent since last June.
- Median price down .1 percent since last June, to $159,100.
Midwest:
- Sales up 1 percent since May, down 14 percent since last June.
- Median price down 5.3 percent since last June, to $147,700.
Northeast:
- Sales down 5.2 percent since May, down 17 percent since last June.
- Median price up 3.1 percent since last June, to $261,000.
California has "close to a monopoly on recovery," according to David Blitzer of the Case-Shiller blog (here's the link to his article comparing recoveries in 20 U.S. cities). San Francisco led the way in May, posting cumulative 14.2% price gains compared to recent lows. On the opposite end of the spectrum are Detroit, where auto industry woes hinder recovery, and the usual suspects: Miami, Las Vegas, and Phoenix. Home prices in Las Vegas have dropped over 59 percent since mid-2006.
Thirty-one percent of buyers in June were first-time buyers, 19 percent were investors, and 50 percent were repeat buyers. Around one-third of transactions were all-cash, and one-third of homes sold were distressed properties.
The Washington Post recently ran an article (linked to below) explaining why more previous non-investors are now buying second homes: "More people turning nest egg into a home."
Here are three important housing market topics that I'll be keeping you posted on in future newsletters: Is the mortgage interest tax deduction going away? Probably not, but it might change. Around one-third of U.S. taxpayers deduct mortgage interest paid on first and second homes, to the tune of around $100 billion a year in uncollected tax revenue. With Congress in crisis mode, it's not surprising to see this much-loved tax break being reevaluated.
Here are some potential changes being discussed:
- Reducing the qualifying loan amount from $1 million to $500,000, and eliminating the deduction for home equity loans (currently capped at $100,000) and second homes.
- Turning the deduction into a tax credit and making it available to any homeowner who pays mortgage interest. This would decrease the benefit for most people who currently use the deduction, but would also open it up to lower-income filers who do not typically itemize expenses.
- Not allowing taxpayers to use it in the two highest tax brackets. This essentially turns it into a 28% tax deduction for those homeowners, and would have little effect on people with annual incomes of under $250,000.
- Phasing out the deduction entirely over a period of years.
A common argument against the mortgage interest deduction is that it benefits high-income households disproportionately; however, depending on who's talking, "high-income" means anything from over $75,000 to over $200,000 a year. Fact: Around two-thirds of homeowners who take the deduction earn less than $100,000 a year, according to the National Association of Realtors. Did you know? The mortgage interest deduction has been around since 1913. Will interest rates stay low? Rates dropped to the low 4 percent range for a 30-year fixed home loan after the stock market took a hit last week. When stocks go down interest rates tend to do so as well, so that market is an important variable to watch.
Keep an eye on the U.S. national credit rating in months to come. Standard & Poor's downgraded it from AAA to AA+ on Friday, which could increase borrowing costs for the government. If so, rates for consumer credit, including home loans, would probably also go up.
Many experts agree that rates would probably not rise drastically, and might not stay up if there is not a sustained sell-off of U.S. Treasury notes in response to the downgrade.
Will it become more difficult to get a home loan? It might. There's talk of reducing the loan amount limits on conforming loans in October, which would primarily affect areas where average home values are high.
More importantly, the Dodd-Frank Qualified Residential Mortgage (QRM) law could make home loans much more expensive for buyers who put less than 20 percent down.
An estimated one-third of home buyers in 2010 would have been knocked out of the market by the proposed QRM guidelines, which is why the legislation is already creating a political firestorm. I'll be keeping you updated on these issues as they develop. Do you have questions about any of this information? Please call me, or just click 'Reply' to this email. I'll be happy to give you my take on our local real estate market, or provide you with any other real estate advice that you may need.
(What the lawyers make us say: The information in this newsletter is deemed reliable but not guaranteed. Please always consult a qualified expert before making decisions based on this content. Nothing in this article is meant to be taken as expert legal, financial, or medical advice.)
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