Hornung: A windshield-view of the market
Lane Hornung, president and co-founder of 8z Real Estate.
Lane Hornung, being a statistical guy, typically likes to look at real estate statistics on a year-over-year basis, rather than by consecutive months.
After all, month-to-month data can be influenced by seasonal impacts, regardless of any other factors impacting the market, so a year-over-year perspective typically provides a better apples-apples comparison of where the market is standing.
But this fall it’s a different story.
Hornung, president and co-founder of Boulder-based COhomefinder.com in a conversation last week, said that because of the tax-credits that were the catalyst for home sales earlier this year, as well as in the fall of 2009, it makes more sense at this point of time to look at home sales activity on a month-to-month basis. The tax credits, which provided up to $8,000 for qualified first-time home buyers, initially were going to expire at the end of November 2009. But Congress extended them to April 30 of this year, in addition to expanding it to include up to a $6,500 for some current owners.
Counter-seasonal
While home sales typically fall off in the autumn, this year was a bit of a different story because of the influence of the tax credits, which front-loaded much of the activity to the first few months of 2010.
“Using month-to-month under contracts is really the leading indicator,” at this time, Hornung said, during his monthly conversation with InsideRealEstateNews.
In October, there were 3,706 homes placed under contract in the Denver area, a 1.7 percent increase from the 3,645 in September. By contrast, October’s contracts closed were down 24.5 percent from the 4,910 in October 2009. Hornung noted in October 2009, many prospective buyers were afraid that Congress would not extend the credits, so they pushed to buy homes in case the credits expired on Nov. 30, 2009, as had planned. Congress first approved the tax credits in 2008 and then extended and expanded them in 2009. On Nov. 5, 2009, Congress changed the expiration date to have homes under contract by April 30, 2010, in order to qualify for the tax credits. This year, it extended the closings of those homes to Sept. 30, to give buyers more time to complete the transactions.
Closings, showed a similar pattern last month. Closings are typically correlated to contracts signed at least 30 to 60 days before the house actually sells. There were 2,842 closings in the Denver area in October, 3.9 percent down from the 2,948 in September, but a whopping 28.2 percent drop from the 3,958 in October 2009.
So were the tax-credits a good idea?
Hornung said that is a political decision, not a real estate question.
Hornung, Yun on the same page
That said, Hornung noted that the purpose of the tax credits was to spur sales at a time when the overall housing market was slumping, and it achieved that goal. (The next day, Lawrence Yun, the chief economist for the National Association of Realtors, told almost 800 Realtors and other real estate officials attending his presentation at the Ramada Plaza & Conference Center in Northglenn, the same thing.)
“It’s easy to look back with 20-20 hindsight and say we would have been better off without the tax credits,” Hornung said, if they truly only “accelerated sales to the beginning of the year and provided an unneeded subsidy to people who would have bought in any case, as critics charge.
“But I’m not smart enough to know what would have happened if we did not have the credits,” added Hornung, who has an engineering degree from Stanford University and a MBA in finance from the University of Colorado at Boulder.
Looking forward, not backward
In any case, the tax credits were the reality.
“I concern myself with what you can see through the windshield, rather than in the rear-view mirror,” Hornung said.
Overall, he said, the market will continue to bounce around on the bottom. As he noted in a conversation with InsideRealEstateNew in October, the overall housing market is trading in a very narrow range, with 2 percent up and down. Much like buying a stock, over a long-period of a time it won’t make that much difference what price you paid, over a period of time. When buyers in today’s market look back, “over a period of time, and by that I mean, years, not months, and you even out for the ups and downs, it will look like a big, old flat bottom,” Hornung said.
That said, by buying right on a specific property, one can vastly out-perform the market, he noted.
Buying at the low-end was the smart thing to do, as interest from investors and bargain-hunting first-time buyers have driven up those prices, not only in the Denver area, but in other parts of the state, too. “I was just speaking with our broker in Greeley, and he said there is a shortage of inventory in the sub-$60,000 price range,” Hornung said. Greeley, overall, is not as pricey as the Denver area housing market. Greeley homes priced at less than $60,000 would be analogous to the dirth of homes in the $100,000 or $150,000 range in the Denver metropolitan statistical area.
Most recently, well-heeled buyer are finding deals in the housing stratosphere.
“Smoking deals”
One October metric that did out-perform on a year-over-year basis, was closings of homes priced at $1 million or more. Sales were up 26 percent from October 2009.
“There are some smoking deals at the high-end,” Hornung said. “You can get some incredibly high-end houses for some very good prices.”
Part of the reason is that jumbo mortgage money is extremely low and more available.
“I don’t think the high-end buyer is quite as sensitive to interest rates as other buyers are,” Hornung said. “I think a lot of times it has more to do with their stock portfolios than interest rates. If they’re stocks are doing well, and they feel richer, they’re probably more likely to feel comfortable moving up to a bigger, more expensive home. But on the margin, sure, the interest rates make a difference. Not all of the people buying $1 million-plus homes last month were cash buyers. And some of this jumbo money was not even available a year earlier, so that makes a difference.”
What is a growing trend, is that people are not buying the biggest home they could quality for at the high end.
“We are seeing people who could get financing for a $1.5 million home, are buying a $900,000 home instead,” Hornung said. “They’re often being even more conservative by making a bigger down payment. In some cases, they don’t even have to go into jumbo-land,” because their loan balances are low enough to get a conventional loan instead. Many buyers, he notes, who could afford to pay cash, are still putting mortgages on homes, because money is so cheap.
Rates rising
Mortgage money, however, while still very low by historical standards, is not quite at the historic lows around 4.25 percent for a 30-year, fixed-rate loan.
Experts had been warning consumers that these super-low rates could not last forever, and people who did not take advantage of them, would miss a window of opportunity. “People have become accustomed to incredibly low rates. Partly, because everyone was saying in the spring that rates were going to tick up, but instead they went down, so understandably, people are saying: “Yeah, I’ve heard that before.”
But the truth is, Hornung said, rates had fallen so low, they didn’t have much room to go even lower. “They fell so low, that that the odds were much greater than they would rise than fall. There is no place to fall.”
While the initial increase in rates may get some people off the fence, what it also means that it erodes buying power of consumers, he said.
“A rule of thumb is that if they want to keep the same payment, a 50-basis point in interest rates is going to equate to a 5 percentage point loss in buying power,” Hornung said. “If you were going to buy a $300,000 home, now you might need to buy a $285,000 home, if you want to keep your payments down. So using history as a guide, you are going to lose some purchasing power with higher rates.”
Market out of the wood?
As far as looking through the windshield of the housing market, instead of the rear-view mirror, Hornung noted that he recently attended a presentation by nationally known housing expert Steve Harney.
He said that Harney noted that housing is a cyclical business, and while the market may appear as if it will bounce around on the bottom for another year or 18 months, the truth is, “we are already out of it. We are already on the on the other side of the cycle. The die has been cast. I’m not sure I completely agree, but I thought it was interesting.”
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