Roger Ewing's Blog

The real estate market in Southern California continues to be in a state of transition.

By Roger Ewing

While local home sales activity has improved during the past six months, the market cannot be considered to be in full recovery, at least not yet.

What does this mean to you as a potential buyer or seller?

Following is a summary of the issues you will want to consider when making your real estate investment decisions.

First, The “Not So Good” News.

1.  The US Treasury is scheduled to stop purchasing mortgage backed securities in March of 2010.  This effort on the part of the federal government has been a major contributor to the low interest rates we have enjoyed.  When this program ends, interest rates will rise.  Experts have estimated that home mortgage rates may rise as much as 1/2%-1%.

2.  The government has been offering first time home buyers a tax credit of $8,000 to stimulate buying activity.  This credit will no longer be available after April 30, 2010.  Ending this program may result in a slight increase in the inventory of unsold homes.  More importantly, the end of this popular program may create some negative press which may further depress buyer’s lack of urgency.

3.  The 12.4% unemployment rate in California represents the highest rate in over a quarter century. Some economists believe the true “hidden unemployment” rate may be as high as 18% or 20%.

Naturally, people who are concerned about their job stability are reluctant to buy homes.  Unemployment must be addressed to ensure the fledgling economic recovery is sustainable.

4.  A potential surge of bank owned properties may come to market in 2010, resulting in an increase in the number of homes for sale, thereby depressing the home pricing structure.  “Given what we see in terms of the number of distressed properties that are in the pipeline, we do expect that foreclosures will mount…” said Celia Chen, senior director of Moody’s Economy.com.

5.  Lenders are tightening qualifying guidelines.  The conforming lenders such as Fannie Mae, Freddie Mac and FHA are all making it more difficult for buyers to obtain financing.  The resulting lack of qualified buyers will potentially result in weaker buyer demand.

Jumbo mortgages, home loans above the conforming $729,750 loan limit, are difficult to obtain because a secondary mortgage market has failed to replace the mortgage backed securities market that existed prior to the economic meltdown.

But Wait, Now The “Good” News.

1.  Home sales are improving while the median sales price is rising.   This is true even though the rate of appreciation is slow and labored.  It will take an extended amount of time for prices to rebound to their previous highs.  According to statistics produced by Case Schiller, in the last recession it took nearly ten years for prices to fully recover to previous highs.

2.  First-time Buyer Housing Affordability Index, measures the percentage of households that can afford to purchase an entry-level home in California. The index stood at 64%  in the third quarter of 2009 compared with 55% in 2008. Recent decreases in home prices and mortgage rates have brought affordability into better alignment with income levels of typical California households.

3.  The Obama administration’s $75-billion program to help troubled borrowers hold on to their homes appears to be keeping more California families out of foreclosure, but the relief may be temporary. At the end of September, 2009, about 1 in 4 homeowners with mortgages was underwater.

4.  The residential real estate market is responsible for over 20% of the annual Gross Domestic Product.  Without a solid recovery in housing, our economy will not be able to sustain a lasting recovery.  Housing is a key ingredient to financial stability and the federal government must support housing to ensure the recovery continues.

Summary

Potential home buyers and sellers are navigating treacherous water. Real estate is extremely dependent upon low interest rates and high employment.  These two important forces are competing with one another.

As the year progresses, we can expect home mortgage rates to rise. Given the depth of the economic recession we should not be optimistic about employment making a strong comeback this calendar year.

BUYERS, Consider acting now to lock in the lowest interest rate possible before the end of the first quarter of 2010.  A 1% increase in interest on a $700,000 mortgage will result in approximately $70,000 in additional interest over ten years. The question a buyer should ask themselves is this.  “Should I risk paying a higher interest rate on my future mortgage, while I wait for prices to decrease further”?

SELLERS, Consider the real possibility that prices may erode further as a result of higher inventories of homes for sale and the availability of fewer qualified buyers.  Increasing interest rates may affect the ability of buyers to qualify for larger mortgages, resulting in downward pressure on prices.

As always, prior to making your home buying and selling decisions, consult with your tax advisor to ensure your decisions are knowledgeable and well planned.  Then consult with a qualified Realtor to assist you in executing your home investment strategy.