Real Estate Info for Salt Lake & Davis County

....when you come across stories like this. I understand this post has nothing to do with real estate, but it is important enough that I thought our network of nearly 200,000 people should receive a heads up.  This medal of honor recipient (he was nominated for three) passed away.  May you rest in peace soldier and thank you for your many sacrifices.

 

A number of agents and I were discussing the fact that buyer activity (as measured by under contract activity) seemed to have gone on a hiatus recently. Several theories were discussed including the front loading of activity into the first trimester of the year due to the home buyer tax credit; the increase in number of multiple family households due to job losses in the current economy;even the flood of inventory thanks to short sales and foreclosures. My contribution to the mix was the article put forth by many news outlets a few weeks ago that highlighted the fact that over a quarter of all consumers now have credit scores below 600. That’s right, over 40 million consumers have a sub-600 credit score (as reported by FICO).

Now, combine that bit of information with the current minimum FICO score of 580 to qualify for FHA’s 3.5% down payment program  (the down payment requirement increases to 10% for a FICO score of 579 or less) and the reduction of allowable seller concessions from 6% of the purchase price to 3% and you have a recipe for a reduction in buyer demand in the market. Now, tighter credit requirements are something we all knew was taking place in the market (didn’t have to be a rocket scientist to figure that one out). But, tighter credit processes combined with an increasing number of FICO score challenged consumers (with the ranks growing each day the recovery doesn’t take hold) means there are fewer and fewer buyers capable of buying in what is otherwise a wonderful buyer’s market here in Davis and Salt Lake Counties.

Now the good news for sellers (for the glass half full folks), buyers who are pre-approved (not just pre-qualified) and have their financing in place are like gold and should you get an offer from one, don’t let them get away!!! You have a shrinking pool of consumers capable of buying your home, best not let one who is capable walk. Be creative in your counter offers, be flexible in your showing schedule, keep your house in “show mode” as much as possible. Those buyers are out there and, as sellers, you want them to know you would really like them to take an interest in you (errr, your property).

Another buyer group sellers should be anxious to see in this type of environment is buyers with money to put down. Having a down payment opens a whole world of financing options and thus flexibility on the part of the buyer (not as much flexibility as 2-3 years ago, but a good amount relatively speaking).

Now for you buyers out there….take the hint. Get pre-approved, not just pre-qualified. Have your financing ready to go on short notice, flex your down payment muscles in any offer you present (perhaps as larger earnest money deposits) and get aggressive. Listing agents know your value so encourage them to promote you to their client with well structured, aggressive offers which highlight your strength: the ability to close quickly in a slow market.

I find many buyers downplaying their strength thinking there is some negotiating advantage to holding your “cards close to your chest.” Not today. With ever lengthening days on market, sellers will figuratively salivate if you come in showing your purchasing strength right at the beginning.

So, what on the surface appears to be negative news (OK, it ain’t great) doesn’t mean there isn’t a silver lining for both buyers and sellers in the details.

As many of my clients and friends know, I am a data geek. So be prepared for what is about to follow (and for those of you with insomnia – I may have found your cure).

There was an article/analysis done by Dhaval Joshi, chief strategist for London based hedge fund RAB Capital. I found it referenced in Barry Ritholtz’s blog article on July 15. WARNING: lots of data to digest in the linked article. Granted, I am generally suspect of data analysis put forth by hedge funds (there always seems to be an ulterior motive) but in this case, the data appears to be well thought out and dissected from several different perspectives.

Here is a quick summary, it is Joshi’s perspective that the US housing market has approximately $4 Trillion of excess mortgage debt (which represents 30% of current GDP). His article goes on to make the case through statistical and graphical analysis of historic trends in the housing market. For those of you interested in the macro operation of our housing system, I highly encourage you to give it a read.

The analysis addresses several factors we all agree are present in the current market, excess inventory, negative equity in a large portion of the current housing stock, escalating default rates, etc. Midway through the report, however, there was some data I found quite interesting for the potential impact it could have on our ongoing market. Joshi covers the issues of why homeowners default on their mortgages, more specifically the current trend toward “strategic defaults."

Joshi references a recent Federal Reserve analysis that found the cause of strategic defaults vary considerably based on a particular event. In the Fed’s analysis (as reported by Joshi), if a homeowner is considering a strategic default on the basis on negative equity alone, the average borrower doesn’t walk away until the property is really upside down (average negative equity of 62%). However, the report noted that borrower’s will strategically default much sooner ("much, much earlier" was the language in the report) should interest rates increase. The report noted higher interest rates were even more significant in triggering defaults than higher unemployment (in the case of borrowers with negative equity).

The reason this caught my eye is the impact this could have should the Fed decide to adjust interest rates as the economy begins to recover as a hedge toward managing inflationary pressures. Talk about being caught between a rock and a hard place!! Inflation can wreak havoc on our economy (as seen in the late 70’s and early 80’s) but at the same time, increasing interest rates to combat that economic dirge could cause a steep increase in the number of strategic defaults. So, anyone want to be on the Federal Reserve’s Board of Governors when that decision has to be made?

I bet I got your attention with that headline!  The housing market of the last 24 months highlights a concept I have tried to explain to all of my buyer clients over the last several years (yes well before the current meltdown). It is a simple concept but one which I have been derided for by other members of my industry. The concept of which I speak, primary residences are not investments but rather lifestyle choices (oh, the horror, the heresy).

I look at investments as being things I don't have to water, paint, replace roofs, fix sprinklers, and a whole host of other items which fall on the expense/maintenance side of the ledger (just an FYI – new paint or carpet is not a capital improvement, it an expected maintenance item). Now for those of you in my industry who will immediately respond “but what about income property/rental property?” we are in full agreement: income-producing items are investments. The key word there is income (as in ongoing consistent income). Since a primary residence does not generate ongoing income (and no I don't wish to get into the theoretical discussion on investment economics), I place a personal residence in the category of lifestyle choice.

What do I mean by lifestyle choice? Very simply, it is the ability to conduct oneself on a day-to-day basis as they see fit within the confines of where they live. Want to knock out a wall? Go for it. Want to paint the living room purple? Go for it. Want to plant and cultivate an herbal garden? Go for it. No need to check with the landlord. You own it so feel free to be creative (within the confines of zoning laws, of course).

Don't like the rendition of Led Zeppelin you hear from the apartment next to you as they play Rock Band? Home ownership could be for you. Don't like that the tenant in the apartment above you decided to take tap dancing lessons as an exercise regimen? Home ownership could be for you.

However, if your only reason for owning a home is a tax credit or a mistaken belief that you can simply sell this asset for a 50% profit in three years - perhaps you may not be an ideal candidate for home ownership (at least in terms of facing major disappointments at some point). Also, if you're going to only live in the property for one or two years before relocating or a job change, once again home ownership might not be the ideal choice. By the same token, if you value the lifestyle that home ownership provides, then even a short-term living situation may warrant owning a home.

As I talk with buyers, I always ask why they are considering purchasing a home. The range of responses one receives to that question is very instructive. The responses are invaluable to me as I advise my clients as to potential property “fits.” After some initial back-and-forth and a variety of different property types, my clients invariably come to appreciate the value of choosing based on their preferred lifestyle (one within their means of course) as opposed to what might make the best “investment.” All of a sudden, the way buyers look at properties takes on a different objective. I have also found as I follow up with my clients, those that truly did select a home based on their lifestyle focus, they tend to be happier with their purchase over time.

Now, should that lifestyle purchase happen to appreciate in value over the course of their ownership, that's a great bonus but should not be the primary motivator.

 

Well believe it or not, we've already reached the half way point for 2010 (seems like it was just snowing a few weeks ago -- oh, that's right, IT WAS). As I do at the end of each calendar quarter, I completed the current review of market activity in Farmington through the second quarter of this year.

Now that the first time home buyer tax credit has expired (although the June 30 deadline to close was extended recently by Congress to September 30 for properties put under contract by April 30), we can see the actual impact the tax credit had on market activity.

Year to date closed sales are up over 42% from the same period a year ago (thanks again, tax credit) but average and median sales prices declined nearly 11% and 8% respectively year to date. So, although unit sales increased, the majority of the increase is occurring in the lower price ranges thereby driving down average sale prices. This isn't surprising given the current economic conditions we face in Davis County. Now, that said, average sale prices for the month of June did increase slightly over the June average from 2009. It will be interesting to see if this is an aberration or a potential signal of possible price stabilization. It is important, however, not to read too much into a single month's activity but it was nice to see nonetheless (it should be noted median sale prices did show a small decline in June year over year).

Overall, inventory levels remain elevated with nine months of inventory currently available (six months inventory on hand is generally considered a neutral market). So, the buyer's market continues. Farmington is not unique in this regard as we see similar trend lines throughout Davis County. There will likely not be significant change in these trend lines until the macro economic factors impacting our market (e.g. unemployment, declining household income levels, restrictive credit markets, etc) begin to show signs of improvement.

Another data metric I track is "under contract"activity. This is simply a count of the properties which go under contract in any given time period. A property goes under contract when a buyer and seller agree to the terms of a sale but the transaction has yet to close escrow (that process can take anywhere from two weeks to two months to complete and sometimes even longer). I like this data point because it more accurately depicts when buyers are actually making offers on properties and therefore is a good indicator of actual buyer demand at a point in time. This is where you can really see the impact of the tax credit on buyer behavior this year. In March and April, 830 properties went under contract (before the tax credit expired on April 30). In May and June only 471 properties went under contract: more than a 43% decrease in buyer activity immediately following the expiration of the tax credit (who says government programs don't spur activity?). Even with the significant impact of the tax credit on housing sales early in the year, overall under contract activity is only up 5% year over year (and last year under contract activity was down 41% from the peak in 2006).

Returning briefly to the topic of interest rates (and understanding I am not a mortgage professional, I do not play one on TV and I haven't stayed at a Holiday Inn Express recently).  I have clients who are waiting for rates to drop even further. I try to explain that it will be difficult for rates to decline further given the current Federal Reserve discount rate at 0.75% (it reached a low point of 0.50% a few months ago) and a Fed Funds rate in the 0% - 0.25% range. You can't get much closer to zero. As the economy improves, the Federal Reserve may well use its interest rate policy to keep inflationary pressures under control. Given the housing market is a lagging indicator of economic recovery, it is likely interest rates will begin adjusting before housing prices begin to reflect the recovery (even then most analysts project relative flat housing prices for the foreseeable future). Interest rates, more so than home prices themselves, have a significant impact on buyers' purchasing power. This is because most home purchasers utilize significant leverage (borrowing 85%, 90% or even 100% of the purchase price) and interest rates impact highly leveraged transactions. I did a blog post on this very topic just a short time ago.

Overall, it appears the market has begun the stabilization process. Time will tell if this is the proverbial "bottom" everyone keeps talking about.

If you have any questions on any of this information, please don't hesitate to contact me by phone, text, email, blog comment, or carrier pigeon.