Interest Rates Expected to Continue Rise

Excerpted from May 26 Washington Post: Rates on 30-year mortgages jumped to their highest level in seven months as prospects diminished for Federal Reserve rate cuts any time soon, reflecting concerns in financial markets that inflation worries will keep the Fed from cutting rates in coming months.

Frank Nothaft, Chief Economist at Freddie Mac, said he was looking for a gradual rise in mortgage rates the rest of the year...and looked for housing to stage a recovery beginning at the end of this year, with a modest increase in both sales and home construction in 2008.

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30 year fixed rates now average 6.37% nationwide. Let's keep this in perspective though. Take a look at the long term average rates:

Source: Long & Foster

Information deemed reliable but not guaranteed.

So, in the big picture, rates are still extraordinarily low. Let's use a real life example: take a $500,000 loan (more than the average condo in Arlington, but we'll use it because it's a nice round number). A borrower with a 30 year fixed rate loan of 6.35% has a Principal & Interest (P&I) payment of $3,111/month. Let's say rates continue to go up--at 6.45% that same loan has a P&I of $3,144, a difference of $33. Of course $33/month adds up over time, but if that $33 is make-or-break in your budget, then you should NOT be buying a house in that price range anyway. If rates go all the way to 7%, then we're talking $215/month, so that gets to be a bit more significant in the monthly budgeting process. I guess what I'm saying is to not panic when you read rates are slowly going up...a small tick in prices should not impact your go/no-go decision in a home purchase, and if it does, then you need to be looking in a lower price range.

Sub Prime Meltdown: The Middle of the End?

Several weeks ago I posted about Fannie Mae and Freddie Mac programs to help borrowers who are in risk of defaulting, or have already defaulted, on their sub-prime loans. By now, everyone has read of the "melt down" fueled by 2/28 and 3/27 adjustable rate loans that offered very low teaser rates back i n 2004-2005, and are due to begin resetting this year. The issue is that lenders approved borrowers based on those low initial payments and now that the payment will be going up--often very dramatically--borrowers who either didn't understand the resets, or just aren't good at budgeting, are in serious trouble.

Now Congress may be stepping in as well, in the form of a "stealth bailout" via the FHA. The Federal Housing Authority has many loan programs aimed at helping first time buyers, but the loans came with some serious drawbacks: heightened inspection requirements, mortgage insurance, and most importantly in this area, a relatively low maximum borrowing cap. With prices so high in this area, FHA loans just weren't a good deal for most borrowers. Congress is currently considering an FHA overhaul package that would, among other things, raise the cap, and lower the down payment requirement, all while providing 30 year fixed rates that are about 3% below the going sub-prime rate. Obviously FHA is expecting to see a surge in applications. Of course there will be snags as this bill makes it through the convoluted process, but if it comes through relatively intact, this could be the "middle" of the end of the "meltdown."

Builder Permit Drop: If this is bad, then what counts as GOOD?

Real estate articles in the Post often drive me batty. Take an article in today's paper with this headline:

"Builders' Permit Requests Tumble; Drop Seen as Bad Sign for Housing"

The article goes on to describe that permits for future construction dropped by the largest amount in 17 years, and that this is yet another indicator that the five-year boom ended last year. Really? Duh. Anyone who has looked around their neighborhoods at the For Sale signs in the last year can see that. What I think they missed in this article is that rather than this being a BAD sign for housing, this is actually a GOOD sign. Maybe even a GREAT one. It means that the builders recognize that the pace of building was unsustainable, and that inventory flooded the market. Permits is obviously a leading indicator of deliveries, so now we can expect a drop in deliveries later this year and into next. How can anyone argue that fewer houses being delivered is a BAD thing in this market? It means the market will be coming back into a more reasonable balance between available inventory and buyers. But, as we all know, bad news sells papers, so any available statistic gets spun as "bad news." I'd be willing to bet that if permits went UP, then the headline would have been something like "Builder Permits Increase; Flood of Inventory Expected to Worsen Housing Market's Woes"

Once again, I have to advise that if you're looking to buy a home (not an investment property--that's a whole other post), then you have to look at your individual situation, talk to a Realtor, and run the numbers yourself. Don't let the press--which is certainly a LAGGING indicator--overly influence your decisions.

A Tale of Two Markets

Here's a little tidbid that you won't see in the headlines: April's Days on Market statistic dropped 20% from March's stat! What exactly does that mean? 'Days on Market' is a measure of how long the "average" house was on the market before it sold. So if we take all of the houses that settled in April, on average each was on the market for 82 days. Why is this significant? Because for the 3 months prior it was over 100 days.



In April 2006 the DOM average was 54. In April 2005? 15. Clearly buyers still have a much more comfortable window in which to make their purchase decision. But they have 3 weeks less this month than they did last month. What's going on? Let's take a look at the distribution of DOM for April in more detail.



What we see here is that half -- HALF!--of listings are selling in under 30 days. Who are these 'lucky' sellers? Sellers who are in a good location, at a competitive price, have a house that shows well, and have wide market exposure. Another 19% who have some but not all of those things going for them sell in the 2nd month. So 3 out of every 4 sold homes sell in under 60 days. Not so bad for sellers! The message? There are plenty of buyers out there for the right properties.

At the other end of the bar graph, we still have those dog properties dragging the average down. Slowly but surely they are dropping--whether because the sellers finally came to their senses and dropped the price, or whether they're just expiring unsold, I can't say.

How do you make sure you're one of those sellers at the left end of the graph? Hire an agent who is realistic about pricing, who helps you make the changes to your home to showcase it in the best possible light, and most importantly one who will spend the time and money necessary to market the property correctly. If you or someone you know is thinking of selling, please contact me to discuss how I can help you get your home sold more quickly.

Data Source: MRIS. All data believed to be accurate but not guaranteed.

Arlington Condos - the "Crash"

I'm often asked about the Arlington condo market, with all the development going on and this being a slower market--when will it "bottom out"?













The data's a little confusing. Take a look at the monthly average sales price graph above. You can't make heads or tails of it, let alone find any trend.

But let's 'smooth out' the data by turning it into a rolling 3 month average.

Now, that's more like it!

Just to clarify what we're looking at, this is a rolling 3 month average sales price for Arlington condos. For example, the April 2007 data point represents the average sales price (excluding any seller subsidy, but let's save that for another post) for the period February 1 - April 30.

Now we can clearly see the trend since mid 2006. But wait a minute...hasn't the press been reporting that condo sales have been dropping like a stone since the peak in June 2005? What's that peak in December 2006? Oh, and for reference, the "peak" condo price in June 2005 was $387,687 (yes, that's about $20,000 less than today's price!)

Despite that uptick late last year, the average price has dropped about $35,000, or just under 10%, since December 2006. But April did indeed tick up a bit...stay tuned.

So what's going on here? A few things, I believe. First, the popular press is not reporting on the right statistics, first of all. Are there fewer sales? YES! But prices for the most part remain high. Why? The flippers have become landlords to ride this out, so supply dropped a bit. People who didn't have to sell decided to wait it out as well and supply dropped a bit more. There are about 20% fewer listings today than a year ago:

And the local economy, as I've mentioned before, draws people to the area, so demand has helped maintain that equilibrium price. So, we have demand stable (at worst) to growing, and supply stable (at best) to shrinking. Is April's uptick in average sales price just the normal spring "bounce"? Or the start of a trend?

Data Source: MRIS. Data deemed reliable but not guaranteed.