The residential market is still experiencing a massive hangover from the foreclosure inventory and peoples' confidence with the job market and the economy in general. I believe this is an excellent time to buy, even if you believe there is another 5-10% drop coming in prices. Locking in today's historically low interest rates could save you more money over the life of your mortgage than hanging on for a small drop in price.
For example, suppose a house price is $312,500 and your 80% mortgage is $250,000. Say you expect a further 10% drop in prices over the next 12 months, while interest rates rise by 1% on a 30 Year mortgage. The interest rate increase will cost you an additional $56,000, while the 10% drop in house price will only save you $31,250. Buyers should take advantage of these historically low interest rates while they can. If you are looking for a referral to an excellent residential mortgage broker or real estate agent, I would be happy to refer you to a trusted professional.
The National Association of Realtors (NAR) have reported that sales of existing homes have dropped by 9.6% in February from a month earlier. If you consider most homes closing in January would have had their offers made in November & December, then this percentage drop in the February numbers is hardly surprising given the severe winter weather experienced through most of January when offers on homes closing in February would have been made.
The national median sales price of a home is now at $156,100. This is the lowest the median sales price has been since February 2002, and it is also down 25.9% from the January 2007 level. The Housing Affordability Index for January was at 194.1, which is at its highest level since the index was formed in 1971. The higher the number, the more affordable housing is. The Index measures affordability by taking the median family income against the median priced single family home and assuming a down-payment of 20%.
There are two major obstacles to seeing a significant improvement in housing prices, first is the job market, and second is access to mortgages. The job market has not shown any major signs of improvement yet although the percentage unemployed has dropped a little. How this number gets tallied is questionable and what it leaves out, namely people so disillusioned they no longer seek work, is also questionable. While unemployment is high this also causes a lack of confidence with those currently employed who fear for their own job security. Once this confidence returns it should see buyers return to the market in force.
Access to mortgage financing is also proving difficult for a lot of people. The crazy subprime products such as "stated loans" or "liar loans" with 100% financing are gone. However there are now some good FHA programs financing as high as 97%, although the FHA underwriting process can be long and difficult to qualify for. The more conventional loan programs are increasing their credit score thresholds and down-payment requirements. While seeing normal underwriting standards return to the marketplace is welcomed, there is anecdotal evidence of people with good credit, good income, and requesting modest mortgages being turned down. Lender appetite for risk may have gone too conservative as a reaction to the subprime meltdown.
Once we see a meaningful recovery in the economy, job growth, worker confidence, and consequently a return of consumer confidence, coupled with lenders getting more active in the mortgage market, I believe it will unleash pent up demand for housing. We are in the fifth year of this housing down cycle, the longest in history, and new home production has been depressed since 2007 creating a deficit of new home production by historical averages. There is a glut of foreclosed units to clear but this will not take long once the buyers that have remained on the sidelines return to the market. See my Residential Outlook 2011, click here.
