The Perfect Storm
Spring is here.
I know it sounds silly coming to you on a rainy day in early February when it's 35 degrees outside and "wintery mix" is the weekend forecast, but the real estate market is on strange footing these days.
Here's A Fact:
Spring has sprung in the real estate market.
And the next 3 months are the best opportunity to get your home sold in over a year.
Several factors are creating a "perfect storm" for sellers in the current market.
I'll do my best to explain...
Wikipedia defines a "Perfect Storm" as an "expression that describes an event where a rare combination of circumstances will aggravate a situation drastically."
It's also a movie starring George Clooney as the captain of an ill-fated fishing boat.
But the perfect storm I'm talking about is a good one. No sinking ships here.
And if you play your cards right ... you'll be sitting comfortably at a closing table with your home sold in 4 (or fewer) months.
So ... what "circumstances" are "aggravating" the real estate market right now?
Here are four of them...
Circumstance #1: $8000 1st Time Buyer Tax Credit
The springtime spurt in home buying comes early this year as buyers scramble to meet an April 30 tax credit deadline. The spring buying season typically takes off in late March and runs through summer into August. But buyers who want to claim this year's tax credit — up to $8,000 for first-time buyers and up to $6,500 for repeat buyers — must have signed purchase contracts by April 30. And they have to complete the deal by June 30.
Let me say that again ... buyers who want $8000 in free government money need to have a house under contract by April 30th, 2010.
So ... what's in it for you?
More buyers looking at and, we hope, buying your home sooner rather than later.
My prediction: the market will heat up over the next 30 days and first time buyer should be out in droves to take advantage of this incentive between now and April 30th, 2010. In turn, the market will slow moving through the rest of the year.
Expires: 84 Days and counting
Circumstance #2: Low Interest Rates
Right now, interest rates for a qualified borrower with a 720 credit score and a 3.5% down payment can get an interest rate as low as 4.75%. One a $300,000 purchase that's a P+I (principle+interest) payment of $1,510. Wow! Good for your buyer. The question is how much longer can rates like this last?
About a year ago, the Federal Reserve announced a $1.25 Trillion mortgage rate subsidy by purchasing mortgage-backed securities in the open market, through March, 2010. Right before the subsidy, mortgage rates were at or above 6%. The subsidy, known as Bernanke’s "nuclear option", uses an extraordinary monetary stimulus to keep mortgage rates artificially low.
Before this program began, real market rates were around 6.25%
Why should you care?
Interest rates have a direct impact on the "affordability" factor of your home.
Low interest rates mean more buyers can afford to buy your home.
And that's good.
My prediction: As the Federal Reserve quits buying mortgage backed securities - mortgage rates increase to 6%. And it won't take long for them to get there.
Expires: April to June 2010
Circumstance #3: Financing
First time home buyers getting an FHA loan from HUD need to buy before it gets harder to get a loan.
Last week, Housing and Urban Development (HUD) announced they are making changes to the FHA loan program.
Change # 1: Increasing required mortgage insurance on each loan. Right now it’s at 1.75% of the loan amount. This "rolls" into the loan and the buyer pays for it each month over the life of the loan. This will increase on April 1st to 2.25%. The goal is to help rebuild their insurance reserves after massive losses with mortgage defaults.
Change # 2: Increasing the required credit score. Starting May 1st, buyers need a FICO score of 580 or better to qualify for the 3.5% down payment program. Once in effect, this pushes many buyers out of the market all together.
Change # 3: Reducing the allowable seller contributions from 6% to 3%. This is the most significant change and impacts everyone getting a loan. For cash strapped home buyers having you (seller) contribute toward their closing costs is a must. Soon buyers will only be able to accept 3% (or $3000 dollars) towards closing costs or pre-paid items. Not good. Buyers want to have a home under contract before this happens. You want to sell your home before this happens.
Are you confused yet?
Don't be. It's not as complicated as I've made it.
At root … these changes are a bad for buyers and, as a result, a bad for sellers.
It's in your interest to try to sell before it becomes too hard for a buyer to finance your home.
My prediction: As these changes take effect, the number of buyers meeting FHA financing guidelines will decrease significantly. This makes it harder to sell homes. Period.
Expires: April 1st & May 1st
Circumstance #4: Low Prices
Let's face it ... the last couple years have been brutal for our homes' value. In some local areas prices have decreased as much as 40% and overall sales volume, 60%. The good news for you and, more importantly, your buyer is prices are at (or near) bottom. In fact, most leading economists say prices bottomed back in 2009 with little to no movement either way in the last few months.
Why should you care that "most economists" think your home is now worth the least amount it's been worth in 4 years? Because your buyers are listening, that's why.
Buyers have been waiting for the proverbial "bottom" for too long. Now that it's here (according to most economists) it's time for them to act.
My Prediction: foreclosures will continue to be a problem through 2010 and prices will remain low and likely stabilize late 2010 into early 2011. I expect to see some appreciation in local Intown neighborhoods starting spring 2011.
Expires: late 2010/early 2011
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