Real Estate News

Now that the federal tax credit program for home buyers has expired everyone seems to want to know how the market has been affected. It appears that as an outside influence the tax credit program created significant momentum. Enough momentum that buyers continue to take advantage of low prices and interest rates.

Despite the federal government withdrawing from the mortgage backed securities market, mortgage rates remain very low, at least for now. And although we think prices have become fairly stable, at least in the low to moderate price ranges, they aren’t expected to move upward for some time. Therefore, the buyer’s market continues.

There is no doubt that the tax credit program pulled some sales forward. But fears that buying activity may drop precipitously after May 1 were unfounded.

A recent Gallup Poll indicates that 72% of all Americans think now is the right time to buy. Further, a Move Inc. survey says that 17% of potential homebuyers plan to buy an investment property in the near future. These are both very good signs that consumer confidence, as it relates to housing, is getting stronger.

The classic definition of what a home was worth has always been “what a reasonable buyer will pay a reasonable seller”. That’s because, historically, most real estate transactions have involved people acting without duress. But today, in a market plagued by foreclosures, bank-owned properties, strategic defaults, and short sales, much of the reasonableness has vanished and duress reigns supreme.

Consider the following appraisal dilemmas:
1. If a reasonable buyer and seller come to terms on the price of a home, but at the same time there are other available properties at lower prices, what’s the home really worth?
2. If a bank lists a property they own (via a foreclosure) at 10% below market value to get a quick sale, is that a reasonable representation of a neighborhood’s true value?
3. Can a short sale be used as a comparable given the fact that the seller isn’t receiving any money from the sale and may be motivated differently than a traditional seller?

Further, SE Michigan has been declared a “declining value market”, requiring that appraisers reduce indicated values by five percent. That sometimes results in buyers and sellers agreeing to reduce legitimately negotiated contract sales prices. The resulting reduced sales prices are subsequently used in future appraisals, also subject to the five percent reduction rule. The “declining market” label thus becomes a self-fulfilling prophecy.

Add into the mix the proliferation of “Sales Concessions” whereby a seller agrees to pay some or all of the closing costs for the buyer. How should that impact an appraisal? If a seller says he will pay $20,000 in closing costs for the buyer on a $320,000 sale price, is he really saying he thinks the house is worth $300,000? Or, has the market compelled him to offer this inducement to the buyer to get his house chosen from all the other $320,000 homes?
When you recognize the challenges facing appraisers today, it’s easy to understand why the “meeting of the minds” between a buyer and seller is sometimes only the first “meeting of the minds”, necessary to consummate a transaction. However, the fact remains that without a compelling asking price, there may be no offer to negotiate in the first place.

To continue the momentum created by government programs over the last several months, we must be dedicated to listing homes at a price that buyers will truly find compelling.

Sellers must understand that, although our market has been fairly robust over the past two quarters, there is a risk for a market slowdown in the wake of the expiring federal tax credit program.

According to Zillow’s Chief Economist, Stan Humphries, “The remaining correction in home values we’ll see in the first half of this year is a function of market fundamentals, such as the increasing flow of foreclosures, high levels of inventory in the market and a probable decrease in demand as the impact of the tax credit wanes and mortgage rates rise.”

Even though our inventory levels have been reduced by half over the past three years, the number of active listings available in our market is still twice that which is considered “healthy”. By preparing absorption rate analysis for your sellers, it will become very clear that there remains considerable competing inventory.

Our market is no longer in a free fall and we believe that we are “bouncing along the bottom”, at least in low to moderate price ranges. The luxury markets continue to feel price compression. In either case, aggressive pricing remains a key element necessary to create a sale. Market Statistics

In summary, regardless of the price range, sellers must continue to place a compelling list price on their homes to become successful sellers.

Our clients continue to ask, “When will the market recover?” Most often, what is meant by this question is, “When will home prices begin to rise again?”
The ensuing discussion usually centers on the notion that the real estate market will ultimately stabilize when massive job losses cease. Prices can only begin to trend upward after new jobs are created. New jobs equal lower unemployment, which results in higher consumer confidence which, in turn, yields more sales activity.

If this analysis holds water, and I believe it does, then the 25th annual U of M Oakland County Economic Report released last week provides some clarity. Job losses in 2009 were the most devastating of the past decade. Oakland County lost more jobs in 2009 than in the prior five years combined!