Perhaps *bipolar* best describes the current homebuyer market. There are two separate forces pulling it in opposite directions, and experts aren't yet sure which path the market will take. On one hand, sales and prices are rising (ever so slightly), indicating recovery. On the other hand, so are repossessions, which most obviously do not. And then there are the millions of foreclosures that need to be sold but haven't yet been listed, the so-called "shadow inventory" that could derail a real recovery, if they flood the market. The prognosis is negative in the short run but turning positive in 2011. Home prices have been steadier in recent months, recently experiencing their first year-over-year rise in more than three years. Still, there are some strong negatives dragging on the market.
1. Bank repossessions are on track to surpass a million homes in 2010. But at least foreclosure filings fell in April, the first time since RealtyTrac began reporting.
2. More than a quarter of borrowers are "underwater," meaning they owe more than their homes are worth.
3. "Strategic defaults" -- where underwater homeowners walkway even when they can still afford to pay*accounted for 34% of all foreclosures in July, according to DataQuick.
But there is one factor that has experts really worried: homes that are ready to be sold, but haven't been put on the market. Right now, there could be more than 4.5 million homes in "shadow inventory," according to a recent report by Barclays Capital. This so-called shadow inventory is a recent phenomenon. In the past, inventory was either tight or it wasn't. But now, with home prices so low and so many foreclosures on the market, both homeowners and banks have been waiting to put properties on the market. But as more sellers put their homes up for sale, supplies increase, which depresses prices again.
Still, the fall-off in home values, that took the median price of a house down almost 30% since 2006, looks to be in its final stages in most places. Three-quarters of the nation's 384 metropolitan areas will see prices down less than 5% a year from now, according to projections from Fiserv and Moody's Economy.com; 10% seem poised for modest increases. In this environment lie new challenges and opportunities for homebuyers, sellers, owners, and investors. Whether one is a buyer or a seller it would behoove one to understand the key trends affecting this shifting market.
1. Distressed properties will keep prices under pressure.
For a while last year it might have seemed as if the long-awaited housing recovery was just about here. Home prices stopped falling in spring, and have stayed fairly stable since, according to the Case-Shiller housing index. Sales rose from their recessionary lows, and inventories came down from their highs. But the pickup turned out to be short-lived. In May & June existing home sales ebbed, while new home sales fell off a cliff in May and rebounded in June. In July, sales of existing homes plummeted further and inventories are now at 12 months. Economists predict that the national median price for a single-family home will dip another 5% to 10% before finally bottoming by year-end or early 2011. Much of this is attributable to the glut of distressed properties spilling onto the market. More than 3 million homes are expected to get foreclosure notices this year, according to RealtyTrac, a foreclosure listing website, as job losses strain with their mortgage payments.
In addition, one in every four homeowners with a mortgage now owes more on that loan than the house is worth. A growing number of these owners are making a strategic decision to default, 18% of delinquent borrowers were purposely behind, according to a recent study by Experian: they're choosing to walk away rather than pour money into a home that will take years to regain its value. Meanwhile, short sales*where a lender agrees to let a homeowner sell for less than he owes*are also expected to spike, reports Moody's Economy.com. Contributing to the jump is a streamlined approval process and a new government program that gives servicers financial incentives to arrange short sales instead of foreclosing on a troubled property.
If you*re hoping to sell your house this year, don't try to compete with repossessed properties on price. Instead, play up your advantages: a home in move-in condition (get your house inspected and do the repairs before you list it) and the possibility of a quick deal. To reassure prospective buyers that they're not getting a lemon, toss in a one-year home warranty that will pay to fix problems like a broken furnace or hot-water heater. Cost: about $350.
2. Big homes are lagging small ones in the recovery.
The market for larger, more expensive homes is hurting. The inventory of homes for sale priced at $750,000 to $1 million is now 20 months, vs. 12+ months for homes in the $100,000 to $250,000 range, the National Association of Realtors reports. Many people don't feel comfortable making a large financial commitment these days, and fewer can meet stricter standards for the jumbo loans often needed to buy these homes. Shifting tastes are also a factor.
In response to dwindling demand for bigger residences, the median size of a new home shrank to 2,100 square feet in 2009, down from 2,300 three years ago, the National Association of Home Builders says. Size typically dips in a recession, but it is believed that this time the trend will stick beyond the recovery.
Trade-up buyers who want bigger houses will find the best deals this year. The big question is when to make your move. If you can, hold off in anticipation of further price drops, since the high end of the market will be especially hard hit. Whenever you make your move, base your bid on comparable sales over the prior 60 days rather than the home's list price. Coming in 5% to 10% lower than the comps is a smart starting point.
If you plan to sell a big house, try to unload your property quickly before prices dip further. Setting the right price at the outset is key: If you go too high, many buyers won't even look, knowing you'll probably have to go lower later. One price reduction is okay, but when you start to see multiple reductions, it raises a red flag.
You may be able to expedite a sale with aggressive pricing, i.e., listing your home for slightly below what comparable homes have sold for in the past couple of months. Another ploy to attract more traffic: Offer a larger cut*say, 3.5% vs. 3%--to the buyer's agent. True, you'll pay a little more in total commissions. But that's preferable to having to lower your price by 5% to 10% later if your house doesn't sell.
As for smaller homes, investors and first-time buyers will have a tougher time finding deals. Homes in good locations are getting multiple bids and are often selling above the listing price. So if you find a house you love, don't bid less than similar homes that have sold for in the past two months. You can find the median difference between listing and sales prices in your area at zillow.com under Market Reports.
3. Financing for condos, second homes, and jumbos is tougher.
To qualify for a new mortgage at the lowest rates, the requirements are a bit more onerous. Ideally, borrowers will need 10% down or 10% equity in their home and a credit score of 720 or higher; one*s mortgage, insurance, and property taxes shouldn't exceed 31% of one*s gross income and no more than 41 - 45% can go to paying debts of any kind. Exceptions: Borrowers need only 3.5% down for an FHA loan, and can refinance with less than 10% equity through the HARP program.
The standards are even more rigorous for anyone buying a condo or a vacation or investment home, or who will need a jumbo. Many banks will approve a condo loan only if the building is at least 70% occupied by owners, which is often problematic for new construction. Meanwhile, jumbo borrowers and investors must often put 30% to 35% down. These loans are seen as riskier, consequently the underwriting guidelines are more stringent.
NOTE: Don't shop for a new home without being pre-qualified for financing. You don't want to find your dream home only to discover you don't have enough cash for the down payment the bank requires or closing costs. A necessary first step is to contact a mortgage broker regarding financing because they represent between 10 to 30 different lenders and they will know which programs you are likely to qualify for and which lender is more apt to approve borrowers with particular financial issues. If you are declined by one lender they can shop you to another, whereas if you are turned down by a bank or credit union you will have to start the application process all over again with each new lender. Also, brokers have access to wholesale rates that are most often better than the retail rates of national banks. Plus, most realtors won't even work with you unless they're sure you'll qualify for financing.
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