By Robert Freedman
Realtor Magazine
January 2009
For 2009 NAR is predicting a modest improvement in home sales and an increase in national average prices from last year. Even so, for many practitioners, the year ahead will be challenging, with the economy in recession for at least the first half of the year and continuing uncertainty in mortgage markets. But why not take a glass-half-full approach to your business?
To succeed in this environment, you need to turn the tough facts about the economy to your favor by identifying your market opportunities and painting a compelling picture for your customers about why now is the time to get into the market either as a seller or a buyer.
To help you chart your course for the year, we've linked together NAR's forecast for the economy and housing for the year with insight from veteran practitioners on how to leverage today's conditions for maximum sales.
HOME SALES
After falling for two years in a row, sales of existing homes are expected to edge up 6 percent in 2009 to 5.3 million. Even with an increase in unemployment, improved affordability is the reason. NAR's affordability index jumped to 131 at the end of 2008, up 17 percent from 112 in 2007. It's expected to hover around a still-high 128 in 2009. The index means households earning the national median income have 131 percent of the income needed to buy the national median-priced house.
Meanwhile, new-home sales, already off more than 50 percent from their peak of 1 million in the third quarter of 2006, are expected to continue dropping, to about 413,000 in 2009.
Prices have dropped nationally about 12 percent from their peak in 2006, from a national median of $221,900 to $198,600. In some of the markets that were hottest during the boom, prices have dropped even more, as much as 30 percent in Los Angeles and 24 percent in Las Vegas. The drop has made life tough for sellers with little equity in their homes: Some 40 percent of sales in the third quarter of 2008 were distressed sales, either short sales or foreclosures, according to NAR data. For 2009, prices are expected to turn a corner. OUTLOOK: SALES ON THE RISE
WHAT YOU CAN DO
1. Target areas with stable sales. In most major metropolitan areas, MLS data is likely to show that neighborhoods close to job centers in the urban core have had steady sales throughout the downturn with far less price impact than other areas. That's the case in the Washington, D.C. metro area, says David Howell, GRI, broker at McEnearney Associates in McLean, Va. Likewise, markets close to New York were running inventories of only two to four months in mid-2008, half the levels seen in outlying areas, says Jeffrey Otteau, president of Otteau Valuation Group in East Brunswick, N.J. Otteau says prices have eased only 5 percent in those close-in neighborhoods, compared with 20 percent elsewhere.
2. Target areas with fast-falling prices. Bargain hunters will be attracted to big price drops. Howell has already seen it happening. In outlying areas of his market, where prices are off 40 percent from their peak, sellers were seeing multiple offers in fall 2008, and he expects the trend to continue through 2009. The downside: Almost all sellers are taking losses.
3. Emphasize the positive. By showing that people buy in even the toughest markets, you can ease buyers' and sellers' concerns. Howell likes to point to 1981, when interest rates reached 18.5 percent. In that market, he says, some 32,000 homes were sold in his area. In the three weeks following passage of the $700 billion Wall Street rescue package, 3,600 houses sold in Howell's market, he says.
4. Communicate sales to consumers. Newsletters, e-newsletters, and "just sold" postcards are common ways to let prospects know that sales are happening even in today's slow market. But another tried-and-true method that isn't often deployed today is good old-fashioned door hangers. Alicia Trevino, ABR®, of Alicia Trevino, REALTORS®, in Mesquite, Texas, swears by them, saying they're an extremely cost-effective way to let households in your area know that homes are, in fact, selling. Since she's one of the few in her area using the hangers, "people get the perception I'm the only one out there selling," she said in November at the 2008 REALTORS® Conference & Expo in Orlando, Fla.
FOR-SALE INVENTORY
Inventories of homes for sale around the country expanded during the housing slowdown, reaching a 10.6 months' supply in 2007, almost twice the 5.5 months' supply considered balanced by historical standards. Inventories started easing in 2008, falling to 9.9 months in the third quarter.
Looking to 2009, new housing starts—which peaked at 2.2 million units in 2005—will continue to head down, NAR says. That's not good for builders, but it's good for inventories. On the other hand, delinquencies and foreclosures are projected to rise in 2009, putting more distressed housing on the market and keeping downward pressure on prices.
Expect a national average of 8.8 months' supply in 2009 based on market trends in late 2008. To help spur sales—in addition to pushing for an interest-rate buy down—NAR is asking Congress to eliminate the repayment requirement in the home buyer tax credit, enacted in 2008, and to make the tax credit open to all buyers, not just those who haven't been home owners in at least three years.
One development in late 2008 that was expected to help boost demand is the decision by the Federal Reserve to buy mortgage-backed securities on the secondary market. The move was expected to lower mortgage interest rates which will help return inventory to balanced conditions.
OUTLOOK: INVENTORY INCHING DOWN
WHAT YOU CAN DO
1. Use monthly listing price to sales price comparisons. In some areas, with month-to-month comparisons, you can begin to show sellers that the market's going up, says John Tuccillo, president of John Tuccillo and Associates, Inc., a real estate consultancy. Year-to-year comparisons won't be as effective.
2. Convince sellers to price realistically. Three data samples—the sales price, the proximity to original price, and the time on market—paint a compelling portrait of the market and could convince sellers to price right. "In our market [Northern Virginia], homes that sold in the first week sold at 99.7 percent of the list price," says Howell. "Those that took four months or longer sold at 88 percent of list price."
3. Don't work with high-pricing sellers. They might be willing to wait, but are you? Buyers won't bother looking at overpriced listings, "and when the market comes back, their home will look shopworn," says Tuccillo.
4. Show buyers appraised value vs. sales price. The appraised value will be higher than the sales price in hard-hit markets, so buyers can see how the home's value might rebound in the coming years, says James Coleman, ABR®, CRS®, a sales associate with ERA Brokers Consolidated in St. George, Utah.
5. Days on market, despite inaccuracies, is a valuable statistic. Sales associates dismiss days on market because it's easily manipulated in the MLS, but it's accurate enough to give sellers a sense of market direction, says Tuccillo.
6. If a house doesn't show at its best, don't bother. Sellers must be willing to spruce up their house so that it shows favorably compared to the competition. Otherwise it won't move, says Howell.
MORTGAGE FINANCING
Fixed-rate loans are projected to stay at a comfortable 6.4 percent in 2009. However, the general economic downturn makes these normally favorable levels inadequate for spurring the kind of activity needed to trigger big reductions in inventories, says NAR Chief Economist Lawrence Yun.
Recognizing the need to keep credit flowing after the freeze in 2008, the Federal Reserve embarked on an aggressive lowering of its target overnight rate, dropping it by more than 150 percent from 5 percent in 2007 to 2.1 percent at the close of 2008. Despite that accommodating policy, the actual rates available to consumers remained largely unchanged. The average rate for a 30-year fixed mortgage eased only marginally in 2008, from 6.3 percent to 6.1 percent.
Why aren't rates falling? The federal government's massive bailout of Wall Street triggered large-scale purchases of bank credit debt at the expense of mortgage-backed securities. That's why NAR is championing federal intervention to lower interest rates. The association favors using a portion of the $700 billion in rescue funds for an interest-rate buydown.
In a meeting with NAR in late November, the U.S. Treasury Department was receptive to the idea, and NAR will be championing legislation to make that possible in early 2009. In the meantime, the availability of financing remained constrained, with lenders keeping standards tight.
They're approving mortgage applications only from borrowers with a 680 credit score or higher who are willing to put at least 10 percent down for conventional mortgages—a high hurdle for first-time buyers with no equity to draw on and for move-up buyers who've seen their equity depleted.
OUTLOOK: RATES STAYING PUT
WHAT YOU CAN DO
1. Send your clients to FHA lenders. Borrowers with less than stellar credit can get government-backed financing. Processing is just as quick today as it is in the conventional market, and borrowers can put down as little as 3.5 percent. "You can get an FHA loan approved in two weeks," says Gary Ansley, a sales associate with Long & Foster Real Estate in Alexandria, Va. The same holds true for loans backed by the U.S. Department of Veterans Affairs. The downside: the FHA's mortgage-insurance premium, a 1.5 percent fee up front plus a monthly payment of one-half of one percent of the loan amount. Current tax law, though, allows borrowers to deduct FHA, VA, and private mortgage insurance.
2. Identify state and local agencies as a source of seconds. For borrowers who qualify (there might be income thresholds or geographic limitations), public sources provide secondary financing at below-market interest rates. This money is cheap because it comes from proceeds of tax-exempt bond issues. The downside: There can be resale restrictions and processing can be slow.
3. Encourage applications with community banks. These banks sidestepped much of the fallout from the Wall Street debt meltdown and have the local knowledge to be more flexible in their underwriting. "You still need good credit, and they can be expensive," but they can also be a lot more responsive than national banks, says Tuccillo.
4. Put credit unions on clients' radar screens. If your clients belong to a credit union, they may find it an accommodating source of funds. Interest rates are typically less than those at conventional sources, and credit unions tend to hold their own loans, so borrowers don't run into red tape when they're dealing with loan staff.
5. Take advantage of the tax credit. The first-time home buyer tax credit enables buyers who haven't owned a home for at least three years to take a credit against their 2009 tax return if they buy a house as their primary residence, but they have to act soon because the program ends July 1. The credit amount is 10 percent of the home price up to a maximum $7,500. Income limits are $75,000 for individuals and $150,000 for households, though some buyers earning above those limits can get a smaller credit. The credit must be paid back over 15 years, so it acts like a zero-interest loan. NAR is seeking to extend the end date, expand the credit to include all buyers, and have the repayment requirement eliminated.
For complete article, including graphics please visit
http://www.realtor.org/rmonews_and_commentary/articles/2009/0901_residentialoutlook2009
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