Declines for Inflated Home Markets?
Tom Stratton, a 26-year-old Purdue University PhD candidate, thinks the market as a whole has probably stabilized but wonders whether price declines are in store for markets where values are still inflated compared with local incomes. Stratton is especially interested in Berkeley, Calif., where he'd like to start his academic career. The median home value in Berkeley in July was $665,000, down just 4% from a year earlier, according to Zillow.com. And the median income for a family in 2007 was $93,297, according to the U.S. Census.
"You have families out here making $150,000 a year but can you really afford an $800,000 home on that salary?" Stratton asked.
Existing residents can afford to live in pricey markets such as Berkeley because many of them bought houses decades ago before property taxes and home values reached stratospheric levels. Once longtime residents leave (a likelihood if unemployment rises), prices could take a dive. Berkeley has the advantage of being home to the University of California; college jobs have been relatively recession-resistant. Real estate consultant John Burns said the worst-hit markets have already fallen back to 2002-2003 prices. The other high-priced markets could follow.
Baby Boomers' Influence on Prices
Wes Dumey, a 31-year-old software engineer in Tampa with a graduate degree in economics, wonders how the aging baby boomers will determine future housing trends. Dumey's parents, now in their late 50s, recently told him they'd likely leave their three-bedroom home and find a smaller condo when they retire. Dumey questions whether younger buyers will step in to fill the large homes the boomers vacate.
"From my personal experience, there's no way I would buy a large house like that," Dumey said, "when you factor in insurance, property taxes, utilities, and—if you look at the state of Florida—you can have a $400 or $500 electric bill for air-conditioning a house for 10 months out of the year."
Burns expects that homes smaller than 3,000 square feet will be in greater demand in the future. So-called echo boomers prefer urban digs to suburban sprawl and they prize energy efficiency, not only because it's good for the environment, but because it's cost-efficient.
"Baby boomers are going to be interested in downsizing because smaller homes are easier to maintain," Burns said. "Generation Y is much more interested in urban environments and not spending their time on the freeway."
10 Questions Answered
1. Is this the bottom of the housing market?
The housing market appears to be bottoming, with home sales and prices rising, though from very low levels. Many economists say that the worst might be behind us, but the market could bounce around at the bottom for years before rising again. Some analysts are even warning about serious troubles ahead. Mortgage defaults are rising, and prices could plummet if too many foreclosed homes are dumped on the market at the same time. Millions of so-called pay-option adjustable-rate mortgages (ARMs) could also default in the next few years, adding to the problem.
2. If you have a less-than-perfect credit score, how hard is it to get a mortgage these days? And what interest rate are you likely to pay?
Getting a mortgage isn't as easy as it was during the housing boom, but that's not necessarily a bad thing. Lenders reserve the best rates for borrowers with at least a 720 FICO score. But it's possible, with a score in the 600s, to secure a mortgage at a higher interest rate as long as the borrower has an otherwise solid portfolio. It helps to be buying in a neighborhood where prices have been relatively stable. Lenders are not eager to write loans for condos in South Florida or Las Vegas, said Keith Gumbinger, vice-president of mortgage and loan information publisher HSH.com.
3. What exactly is the government doing to help struggling homeowners stay in their homes?
The Obama Administration's $75 billion Making Home Affordable program, announced last February, got off to a slow start but has since helped 500,000 borrowers modify loan terms to include more affordable monthly payments. The government is providing incentives to loan servicers who lower borrowers' monthly payments to 31% of their gross earnings.
4. Will the real estate market fall off a cliff if the $8,000 tax credit is allowed to expire at the end of November?
The credit has given a boost to home sales, but it doesn't account for all the improvement. The National Association of Realtors and the National Association of Home Builders are lobbying hard to convince the public and Congress that the housing market is doomed unless the credit is not only extended but expanded to include all buyers. But there's evidence the housing market has hidden strength. The tiered Case-Shiller price index shows improvement not just in the lowest-priced homes impacted by the tax credit but even in higher-price categories.
5. If you are facing foreclosure, do you have other options?
The foreclosure process is not only long and painful, it could damage a homeowner's credit score so badly that it won't recover for years. A better option, as long as the lender agrees, is a so-called deed-in-lieu of foreclosure, which means that the borrower gives up the property and the bank gives up the right to recover any more money after the transaction is complete. The damage to a borrower's credit score is slightly less severe and the bank might even agree to let the borrower remain in the house as a tenant until the house is sold. A short sale is an even better option but requires cooperation from the lender. The bank must agree to let the house be sold for less than what is owed and forgive the difference.
6. Are lenders still waiting until borrowers are well behind on their payments before offering to modify the loan?
Under pressure from the Obama Administration, lenders have added workers to work out lower payments for struggling borrowers. But customers still complain that banks won't help unless a loan is seriously delinquent. The backlog of cases is so large that loan servicers have little time to work on preventing defaults. Lenders find that one way to be certain the borrowers they're helping are really tapped out is to focus on mortgages that are at least nine months delinquent, said Guy Cecala, chief executive officer of Inside Mortgage Finance.
7. Home prices have already plunged in Miami, Phoenix, Las Vegas and other former bubble markets. But what about other cities where prices soared during the boom but haven't fallen much since? Could they be next?
It's hard to imagine prices dropping much more in Nevada, Arizona, or South Florida because they've already fallen so far. But some economists are starting to wonder about other markets such as New York City, where home prices are way out of line with local incomes. Real estate consultant John Burns said the worst-hit markets have already fallen back to 2002-2003 prices. The other markets will probably follow, especially with unemployment rising.
8. Which direction are interest rates likely to move in the next year?
The Federal Reserve launched a program to buy $1.45 trillion of mortgage securities this year, and it has helped to keep interest rates at—or near—historically low levels. But the money should be used up by the first quarter of next year. Interest rates are then likely to rise, possibly drifting up a full percentage point by the end of the year, said Guy Cecala, chief executive officer of Inside Mortgage Finance.
9. Why are home builders building new homes when they can't sell their old ones?
The supply of unsold new homes, which has been dropping for 28 straight months, now represents 7.3 months at August's sales pace (a two-year low). The inventory levels are falling because new home sales have been outpacing new construction. Now, builders are getting more active. But David Crowe, chief economist for the National Association of Home Builders, said they're concentrating on projects for first-time buyers rather than more expensive homes favored during the housing boom.
10. Which is considered the better investment, a new home or an existing home?
Builders have discounted prices so much that the premium for a new home in some markets has nearly disappeared. New homes that went up during the housing boom were large and packed with amenities that are rarely found in older homes. Assuming a new home and a used home are about the same size and are in the same location, a new home is probably the better investment (assuming that it's well built).
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