And if you do decide to buy, how do you decide what to offer?
This post is an aggregate of the local, regional, and national information that is currently available (mid-November 2009) to buyers. It comes six weeks into the Fourth Quarter of 2009. It quite possibly tells a buyer (and seller) everything they might need to know ()....And if it doesn't, there will surely be additional material posted in comments.
This post began in response to a query by a reader who says s/he is about to buy, in the comments after a post about the extension of the Homebuyers Tax Credit.
To recap, the buyer is looking in Western Albemarle County, desiring something close in to the City of C'ville, about 2500 sq ft, 4 bedrooms, 2.5-3 baths. The buyer has been watching the market and believes purchase prices have dropped 15-20% in the past year, and that there is not much further "flexibility" (ie, declines) coming in that particular area; additionally, rents seem to be holding steady in the area where buyer wants to be.
Q: So why should the buyer wait?
Answer #1: The buyer shouldn't wait. As we noted in the comments, they have compelling reasons to buy: they want to settle, and they want control over their environment. They seem to have come up with a numbers scenario (downpayment, morgate math) with which they can live. And if the buyer is going to buy right now in the half million range, they are obviously secure in their employment. They have saved a large downpayment, in addition to a year's worth of living expenses in the event of illness or job loss. Additionally, the buyer must have enough financial "cushion" so that if the house drops in value, they can weather the loss of equity. And part of the "weathering" would come from the fact that they plan to stay put for at least seven years. (What would make the value drop further? A rise in foreclosures at that price point due to Option ARM resetting, or a sudden onslaught of those waiting to sell putting their houses on the market, or an increase in unemployment...to name a few). So if all these elements are in place, sure, why not? Why not buy?
Answer #2: The buyer should wait for several reasons:
A. Because of what "Crunching Numbers" says in the comments: To rent will be $1850 per month, while to buy will be $3250 per month. UPDATE: but is this math accurate? See how Crunching Numbers gets to these figures here, and then read the original commenter's disagreement with the numbers in the Comments section following this post. The rent versus own numbers are much closer in terms of what the original commenter considers monthly expenses.
B. Additionally, there are many unknowns in the housing market right now--locally, regionally, nationally. And if a buyer doesn't negotiate a prescient deal now, there's lots of financial chaos that could ensue. (For a proposal on how to make an offer on a house, see Salvatore's comment after this post.) (And if you want yr blood to go cold, read around here.)
It's the knowns, and the unknowns, to which the rest of this post will be devoted--things that would make some buyers wait. It's these local topics:
1. Appreciation
2. Wages v. Home Prices
3. Sales
4. Unemployment
5. Foreclosures
All leading to
6. "Recovery"
Before getting to the list, however, a few things to keep in mind:
The "bad news":
1. The Federal Housing Administration now has about 40% of the housing market, from about 2% a few years ago. It now guarantees one in five loans for single family homes, and its cash reserves are below what Congress mandates. Bailout? No: Treasury. In announcing this debacle the other day, Housing and Urban Development Secretary Shaun Donovan said "We are in an exremely volatile period...We are in uncharted territory." (Read more here.)
2. Mortgage rates for 30 yr fixed are below 5%...but mortgage applications are at a nine year low.
3. Foreclosure filings were beyond 300,000 for the 8th straight month in October.
4. More than 2.4 million homes are expected to be lost to foreclosure in 2010.
5. Making Home Affordable, the mortgage mod program, has not actually helped 4 million homeowners avoid foreclosure, as per original projections.
6. Fannie and Freddie are due for more losses. That is, the taxpayers are.
7. National Unemployment is at 10.2%, and a shocking 17.5% when including underemployed individuals, those who have stopped looking, those whose hours and wages have been cut, etc.
8. Shadow Inventory, estimated at 7 Million Homes. Mortgage guru Howard Glaser, via Realty Check:
What I am most worried about is March and April of next year. What happens to a housing market that seems like it is finding its footing at that point? Because several things will happen simultaneously: You've got the option ARM resets beginning to kick in, you have the home buyer tax credit expiring, maybe for real that time, and you have the Federal Reserve maybe running out of money to buy mortgage-backed securities. If we add on top of that, banks beginning to release some of this inventory ,which they have been holding on to for a long time, those three items are potentially very destabilizing to the marketplace. So I'm concerned. I think buckle your seatbelts for Spring of next year.
9. Housing in VA won't regain its values until 2023.
The "Good News":
1. The Homebuyer Tax Credit has been extended/expanded, and is in place until April 30, 2010.
2. The Federal Reserve has extended its purchase of Mortgage-Backed Securities through March, 2010, which should effectively keep mortgage rates around 5%.
Now, to the list. Everything that comes below tells the Buyer one thing: The Asking Price is a starting point. And usually a high starting point. The Offer needs to take all of the following info into consideration. Starting at 10% below asking, and making further deductions--and as frequent commenter Downtownenvy says, The best tool for negotiating in this market is your feet.
1. APPRECIATION
Area Appreciation
Anybody who has lived in the area for more than a couple of years has seen housing prices, and asking prices, skyrocket; only recently have both begun falling. The real data?
The Federal Housing Finance Administration (FHFA, formerly the OFHEO, Office of Federal Housing Enterprise Oversight), compiles data on pricing in a purchase-only, seasonally adjusted index. For existing single family (detached) homes in the Charlottesville Metropolitan Statistical area (Cville, Albemarle, Greene, Fluvanna, Nelson):
Five year appreciation: 2005-2009 Q2: 33.70%. The Rank is 168 of 296, -3.58 for 1 year, -2.56 for the quarter. This is the "slow down." See pdf. But the bigger jumps come earlier. Data to 2007 shows:
The 10 year appreciation ending in 2007 in the Charlottesville MSA was 135%. Charlottesville ranked 64th. See
here. Note that for the 10 year appreciation, most of the states ranked higher than Cville are all "Big Bubble" states--California, Florida, Arizona, New York, Maryland/DC.
The five year appreciation (2003-2007) in the Charlottesville Area was 69.22%. Charlottesville ranked
74th. See
here.
For FHFA quarterly percentage increases, go
here. Maps of Metropolitan Statistical Areas
here.
The logical responses to these numbers are HUH? and WHY? Bubble, and "protected market." To put the bubble years in context, let's look at
NATIONAL APPRECIATION
Throughout the recorded history of home sales, which is about a Century, property appreciation has been startlingly consistent, averaging about 1% per year, plus 1-2% for inflation. In Bubble periods, it's a whole other ball'o'wax...until it isn't.
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The chart in its original is here; the updated version (above) is from The Big Picture.
2. WAGES V. HOME PRICES
The average wage in the Greater Charlottesville Area is $42,588:
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Historically, the prudent buyer would spend no more than 2.5x annual wages on a home. The Charlottesville MSA is one of the most expensive areas of the state, where buyers have spent nearly 6x income for a house. The following graph is from the Virginia Housing Development Authority:
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The orange bar is where we are now.
Median and Average Prices for Sold Single Family Homes in the Charlottesville MSA:
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According to the VHDA,
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Red line = Cville. Earned wages and housing prices don't have a realistic relation to each other in this market.
3. SALES
Is it any wonder that with the fairly low median wages combined with high appreciation and the end of "easy" mortgage products, area sales are at a decade low?
The graph below is from August 2009; in September and October there were stronger sales than seasonally expected, as the $8k homebuyer tax cred was slated to expire November 30.
"May be near bottom," as the graphic says, is hopeful speculation on the part of the VHDA. Sales have picked up in other parts of Virginia due to mass foreclosures which caused rapidly falling prices and made housing more "affordable" than during bubble years.
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Another graph, this time for all of Central Virginia, t
hrough the end of 3rd Quarter 2009, September 30. Data from CAAR, graph from a reader.
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When things do sell, they're at the lower price point. As an example, 69% of all single family (detached) home sales in the City of Cville this year have been under $350K:
Via Nest Realty.
There's been a significant lack of move-up buyers, and higher-priced homes are selling very slowly. "Higher priced" as in above $500K; and above $1M in this area? Fuggedaboutit.
TOTAL SALES through the 3rd Quarter in 2009 as compared to 2008, via Nest Realty Group. The Group decided to include
Louisa in these stats, hence the "E" for extended.
(Louisa is not part of the Metropolitan Statistical Area.)
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Lastly, the
Charlottesville Area Association of Realtors publication of
total sales numbers for the 3rd Quarter in 2009 and previous years. "Total sales" include single family detached houses, townhouses, condominiums. Again, notice that areas outside of the Metropolitan Statistical Area are included: Louisa County, Orange County, Greater Augusta (Augusta County, Cities of Waynesboro and Staunton):
Albemarle County sales down 50% from 2005 peak
Charlottesville sales down 48% from 2006 peak
Fluvanna sales down 63% from 2005 peak
Greene sales down 45% from 2005 peak
Louisa sales down 36% from 2005 peak
Nelson sales down 71% from 2005 peak
Orange sales down 55% from 2005 peak
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WHICH, of course, brings up the question: IF SALES ARE SO SLOW, WHY AREN'T PRICES ADJUSTING MORE QUICKLY?
THIS is the quarter million dollar (half million dollar, million dollar) question, isn't it?
4. UNEMPLOYMENT
Local Unemployment has doubled in the past year. It is currently at a 20 year high. UVA has a wage and hiring freeze. The troubles are not necessarily over. Private business growth has ended, and jobs are declining.
And evidence of this is everywhere you look, in the form of commercial real estate signs "For Sale," and "For Lease."
NGIC and DIA are bringing jobs to the area--but they're already spoken for. In the future, the employees may require goods and services that create new jobs: but this growth will be slow, over the next few quarters/years.
The latest round of cuts? Postal Employees face the axe.
5. FORECLOSURES
Add the following foreclosures numbers for the Charlottesville Area, and the result is 676. The total sales for same period YTD for the Cville MSA are 1559...676 is 43% of 1559....
So nearly half of what was sold was replaced by something that will once again come on the market...and at a lower price.
Add this to the inventory from sellers who are "waiting out the market" to list? Buyer's market continues....
And there will be trouble from Alt-A loans:
The VHDA presentation opens with the following slide, but we'll close with it:
But what does "recovery" mean? A return to pre-bubble prices? A drop in asking prices? A return to the historic metric of price-to-2.5xwage ratio? Sales levels that don't keep declining? A halt in foreclosures? A point of view that understands that a house is not an "investment" primarily, not a profit machine or an ATM or HELOC, but a place of comfort for an individual or family?
Related Reading
Virginia Housing Development Authority Forecast Link
Lack of Move-Up Buyers in Charlottesville/Albemarle
Median Prices Charlottesville Albemarle Area 2001-2009
Higher Priced Homes Sell At Snail's Pace
Graphs Showing Declining Sales 2003-2009
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