Is the First Time Home Buyer Credit Coming Back?

With the precipitous 27% drop in July housing sales, the first time home buyer credit is getting renewed interest from some heavy hitters in Washington, including Secretary of Housing and Urban Development Shaun Donovan, according to The Hill. Though admitting that just one month of numbers was too little data to say whether the credit will be revived…

“In an interview on CNN, Donovan said the administration is “concerned” about the path of the industry. He defended the Obama administration’s record on supporting the housing market, amid new signs that the market is struggling alongside the broader economy.

Donovan did not rule out a further homebuyer tax credit to support the market.”

While plenty of blogs out there are again predicting real estate Armageddon, personally, I don’t think that the huge drop in July sales really should have been ‘unexpected’ at all. But no one wants to read a meh headline like “Home sales drop as expected in July as would be normal following any artificial force on a market.” (OK, I’m sure editors would shorten that headline, should it ever exist.)

Think about all the second half 2010 first time home buyers who pulled forward so that they could close before June 30 to get their extra $8000. We essentially ‘used up’ the first time buyer segment for at least a few months, and probably the remainder of 2010. By the Spring 2011 market there will be a new crop of buyers. Unless Congress intervenes first, that is.

Note to Congress: Spring is NOT the time to have a first time buyer credit expire. It was a double whammy…end of the usual Spring market–giving a credit to buyers who were going to purchase those homes anyway–PLUS the expiration of the credit. Next time, make the credit active in the late Fall and through February so that buyers are buying up the old inventory and foreclosures that otherwise would be sitting.)

And here’s another tip…if you want to jumpstart home sales with a buyer credit, don’t start hinting around about it to the press…Secretary Donovan essentially just wiped out what few first time home buyers there currently are, who are now all going to wait to see if there’s another credit.

Stay tuned.


Northern Virginia Real Estate Market Update – The Good, The Bad, The Ugly

It’s tough to interpret the market today.

The Good: Inventory in Northern Virginia remained below the “balanced” mark of 6 months for the second month in a row, as sales increased. The PMI Mortgage Insurance Company has released its latest index which indicates ranks the liklihood of declining markets across the US. Our area got a score of 21.4 which, for you glass-half-empty folks, means there is a 21.4% chance that prices will be lower in two years. For the glass-half-full folks: they predict almost an 80% chance that prices in our area will rise over the next two years.

Even Loudoun County, which was hit significantly harder than close-in markets like Arlington and Alexandria, showed significant improvement, with the highest number of monthly sales since December 2005. Sterling Park, with the highest rate of foreclosures in Loudoun, had a year over year sales increase of 94%, and inventory across the County is down 25%!

Barron’s has noted that numbers may indicate we are nearing the bottom.

The Bad: Case-Schiller continued to report declines in our area: 1% decline this quarter, and 15% year over year. Predictions continue to roll in for slowed growth and an underperforming economy as consumer confidence and home prices slide.

The Ugly: Foreclosures remained high, though buying one is not for the feint of heart. Here is a good article to guide your expectations, and another with some tips on buying an REO property, and don’t forget to read my blog post series on foreclosure risks as well.

So should we believe the bad news or the good? The bottom line is that all of it is true! The decision to buy or sell a home is one that depends on your situation, timing, finances, and neighborhood. Don’t trust that decision to a single headline. Give me a call to discuss if it makes sense for you.


PMI Risk Index: 80% Chance of Rising Prices in Next Two Years

PMI Mortgage Insurance Co released its latest U.S. Market Risk Index, which ranks likelihood of declining prices for the nation’s 50 largest metropolitan statistical areas (MSAs). PMI Mortgage Insurance Co is one of the largest providers of PMI in the US, so you better believe they spend a good chunk of time studying the market, prices, and defaults.
The bad news is that the decline in national prices accelerated in the first quarter of 2008. The more interesting news for our area is that the Washington-Arlington-Alexandria MSA had a risk rank of just 3 (of 5) and risk index score of 21.4, down from 29.1 last year.

This risk index reflects the probability that prices will be lower in two years. So if you’re planning on waiting to buy because you think prices will drop, this report is estimating that there is a 1 in 5 chance that you will make out better if you wait two years; said another way, there is a 4 in 5 chance that prices will go up. This is no doubt tied to our area’s continuing low unemployment rate of 3.6%, the lowest of all 50 MSAs.

Buyers: 80% chance prices will go up…you might want to start your search soon.

Sellers: Hold on a little longer…your odds are improving.


Housing Bill: Senate Amendments Create Buying Incentives

The senate started piling on amendments to a proposed housing bill that, if passed, would add some interesting incentives to buy. Of particular note is a proposed $7000 tax credit (not a deduction–a credit!) to anyone buying a foreclosed home (see my post: “I want to buy a foreclosure.”) A credit that size would indeed compensate for some of the risks involved in buying a bank owned property (see beginning of series here.)

For people in a 30ish% marginal percent tax bracket, a $7000 credit is equivalent to about $23,000 of income tax-free–that is 23,333* 30% tax rate = $7000 in your pocket!

Not interested in a foreclosure? That’s okay–Senator Ben Cardin wants to give a temporary $7000 credit to all first time home buyers--similar to the measure that has spurred a lot of first time buyers in DC for years–as well. (TBD on whether first time buyers who purchase a foreclosure get $14,000.)

We’ll have to keep an eye on this to see if it passes through as-is, but if I were on the fence about buying, $7000 is a nice chunk of change for the government to chip in.

Update 04/08/08: The House plan is proposing an $8000 first time buyer credit, and is good for the next 12 months. The credit would need to be repaid after 15 years. Stay tuned — this is destined for committee before being passed. So far, this is just a bill, not a law...remember the classic ditty: I’m just a bill…

Read more: Figure out your marginal tax rate, that is, the tax paid on the last dollar earned.

Read more: Risk of buying a foreclosure series starts here.

Read more: Tax Tips for Homebuyers

Read more: Local Classes for First Time Homebuyers


What is the State of The Housing Market? (Multiple Choice)

What is the State of the Housing Market? Please choose the best answer.

A. Looks like the start of a recovery. NAR Q3 2007 Report indicates roughly half of US markets show an increase in median home prices.

B. About flat, plus or minus 1%…OFHEO reports Home Prices down 0.4% in Q3 2007

C. We have years of decline ahead of us…start keeping cash–strike that, better make it Euros–in your mattress, folks! Case Shiller reports “The Sky is Falling, The Sky is Falling!” (Ok, that wasn’t really a headline attributed to them, but that’s basically the message in all of their press releases…pick which ever press release you want.)

Ok, pencils down. You all get a gold star. No matter which one you choose, you’re correct. Why? It comes down to the methodology.

The National Association of REALTORS® statistics captures the median value of home transactions that come from all of the Multiple Listing Services nationwide. They cover all home sales at all price points, and release data in a relatively timely manner.

OFHEO, the government agency that works with Fannie Mae and Freddie Mac, also releases its quarterly analyses. They cover 287 markets, but because they are primarily concerned with the conforming loan market, the track only resales that meet that criteria (until recently, loans under $417,000. See my post on Conforming Loan Limits.) It also includes refinancings, which arguably have more generous appraisals. FYI, OFHEO does typically include an attempt at reconciling their numbers to Case Shiller. Because CS is a privately owned index, the exact methodology is impossible to duplicate.)

Case-Shiller, which is probably the most widely quoted analysis, covers only 20 US markets BUT includes ALL price points and loan types—exotics, sub-prime, and limited documentation. Of course the 20 metro areas covered are very large ones, which typically have more expensive homes (anyone ever compare a 4BR colonial on an acre in North Arlington to a 4BR colonial on an acre in Cleveland?) It excludes 13 states completely and has limited information on 29 others—so incomplete or missing data from 42 states! It also weights transactions—a $700,000 home gets weighted twice as heavily in their index as a $350,000 home. But isn’t a 10% decline a 10% decline, regardless of the baseline? Apparently not.

Dramatic headlines sell papers–remember all the 2004-2005 headlines screaming Buy! Buy, Before You’re Priced Out Forever! Doesn’t sound like a great idea in hindsight, does it?) While I’m definitely not saying that those in the industry can’t spin stats better than a Maytag, I did find this little tidbit from the NAR pretty interesting:

“Another factor that rarely gets attention is that Dr. Shiller, a Yale professor, has a side business in Chicago. His index is used at the Chicago Mercantile Exchange for hedging housing futures values. The more hedging of bets that occur, the more profits go into Dr. Shiller’s bank account. And more hedging of the bets will take place if people believe there will be a crash in housing values. So naturally he has a financial incentive to “scare” the market.”

So what’s a buyer to do? Whom to believe? First, understand the methodology and if one matches up with your situation, pay closer attention to that one. Are you in one CS’s 20 markets and looking to use a no doc loan for a $600K home? CS may be the better measure for you. Are you looking to buy below $417,000? OFHEO may be a better report for you. Want the broadest measure possible? Use NAR. I find that with statistics, perception is reality, and no one calls a market bottom until it’s months behind us, and in the meantime, life goes on. If you’re buying a home, as opposed to an investment property, then do what’s best for you, pick a time that works with your life, plan to stay there at least 3-5 years, and buy only what you can afford.

Read more: See my post from last year on Yes, the Market is Down 7% AND up 1%

Read more: from one of my favorite mortgage blogs on spin in the mortgage industry headlines: How Ignoring Adjectives Can Improve Your Understanding of Mortgages

Read more in the Carnival of Real Estate, which included this post. They make the extremely important observation that all real estate is local, so national trends don’t mean very much in the first place! Read my posts making similar points here and here. This one is also interesting to look at the very different foreclosure stats, even from county to county, in our area.

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WSJ: "Beyond Auctions" Article on Buying Foreclosures

There’s a fantastic article today online in the WSJ: “Beyond Auctions: Ways to Buy Foreclosed Homes.”

It explains why there are actually very few bargains to be had in foreclosure auctions, and why buyers (especially first time buyers) need to instead focus on bank owned property (REO). There’s a good list of do’s and don’ts too. It goes on to say–and I find this to be true–that “Some of the banks will sit [on a property] until they hit their target number — they may get 20, 30, 40 offers before they’re ready to take one….Potential buyers should…put in a realistic bid. You can’t expect to bid 50% of the asking price and hope to get it.”

Of course there are tons of foreclosures in the Northern Virginia area as a whole, but painting the entire area with one brush stroke can be dangerous. Take a closer look at the foreclosure stats below.

On the bottom, you can see where Washington, DC, falls compared to other major metropolitan areas. But even that average (about 88 per 10,000 homes) is misleading…Looking at the top part of the chart, I’ve broken it out by county. You can easily see that DC, Arlington, and Alexandria are a very different market than PG, Stafford, Loudoun, and PW. Are there parts of Arlington that have more foreclosures? Of course. But the moral of the story is to make your decisions based on your specific situation–where you want to live, what type of property you want, etc….and not by a perceived “bargains” of price or availability. You may be surprised at the details behind those “opportunities.”

Read more: Blog Post – “I want to buy a foreclosure.”

Data Source: GMU Center for Regional Analysis


2008 Regional Outlook: "Fundamentals Sound"

George Mason University has updated their 2008 Outlook for the Washington, DC, metro area. It’s fairly consistent with previous presentations (perhaps slightly more positive, in my opinion.) Here are the key findings:

  • Local job market continues to be very strong, with Washington, DC, having the lowest unemployment rate of the largest 15 job markets (US average = 4.4%, DC = 3.1%.) (See slide 5.) As I have commented here before, the job market is a great indicator of the housing market to come—people go where the jobs are, and they need a place to live. Because this area doesn’t have particularly high vacancy rates in rentals, that translates into pressure on rents (thus providing an incentive for renters to buy), or more demand for homes.
  • This area has significantly fewer foreclosures (as measured per 10,000 units) than most large metropolitan areas in Florida, California, and the rust belt. DC (22), Arlington (27), and Alexandria (34) have the fewest foreclosures of any local county. (See slide 13) Think about those numbers for a minute. For every 10,000 homes in the District, just 22 are in foreclosure. This is consistent with other posts I’ve made about this area having two different markets—close in neighborhoods versus outlying suburbs.
  • Days on market has increased significantly. (However, this can easily be misinterpreted—see my post on “Some Sellers Get It—And Get It In 30 Days!” Total units sold have declined (duh). Total active listings have increased (again, duh.)
  • Percentage change in inventories has slowed dramatically and is consistent with 2003 levels. (See slide 23). We still have quite a backlog to work through, but at least for now it doesn’t appear to be getting any worse.
  • Outlook: “Fundamentals are sound, 2008 will be moderately better than 2007.” (And by “better,” of course, they mean better for sellers.) “Housing prices will be flat until at least Spring & will be a mixed story across the region—some jurisdictions will be negative and others showing increases.”

So in summary, all real estate is local, and the DC market is, all things considered, not a bad place to be right now.

(If you found this interesting, see my related post: When will the DC real estate market turnaround?)