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A Tale of Two Markets It was the best of times; it was the worst of times…so starts the classic novel. It sounds like Dickens could have been writing about the real estate market. The national press would have you believe it is the worst of times. And in some markets, things do seem bleak: • West Palm Beach, Florida has seen the number of sales decrease by 45% over the past two years. Average sales price has decreased 4.5 % over the past year. 1&2 • Las Vegas, Nevada has seen a 55% decrease in the number of sales in the past two years and a 5% decrease in average sales price in the past year. 1&2 • Detroit, Michigan has seen the number of sales drop by /3 over the past two years. Thirty percent of listings are vacant, and 40% of the houses that sell are owned by the bank that foreclosed. 1&2 How does this compare to our market? In the area covered by Trend MLS3, there has been a 8% decrease in the number of sales over the past two years. Yet various indices report that average sales price for the Philadelphia Market Service Area (MSA) is either stable or experiencing moderate increases. 2&3 The increase in inventory of houses for sale is leveling off and there are fewer houses coming on the market as compared to last year. Remember, inventory and average sales price data vary in each sub-market, so it is important to talk with your Prudential Fox & Roach sales associate about the specifics of your exact area. Why is there such a difference between our market and the others I’ve mentioned? Each has its own set of circumstances that we do not have here: Appreciation Rates In West Palm Beach, appreciation over the past five years was 00.27%!2 That pace could not possibly be sustained. As a result, affordability has become a major issue and prices are dropping to reignite demand. Scarcity of Land and Speculator Purchases Las Vegas is surrounded by vacant land. Many developers and builders, sensing the real estate boom, built a seemingly unending supply of new houses without really thinking of demand. As a result, there is now a tremendous supply of new homes on the market forcing builders to lower prices to move inventory. By comparison, our market area is more fully developed and has a low supply of vacant land. A long and cumbersome development approval process further reduces the supply of new homes. Las Vegas has also had a significant share of homes purchased by short-term speculators during the boom. This has added to the oversupply of houses as they try to recoup their investment. Diversity of Local Economy and Industry When one thinks of Detroit, the capital of the American auto industry comes to mind. The Detroit real estate market is so dependent on this industry that it is suffering as a result of American auto makers’ significant decline. In contrast, our area has a diverse economic base, with multiple industries and a growing economy. Income is rising and jobs are being added. Where is the market going? In 2006, I predicted that, barring any unforeseen events, our local market would begin to improve by the end of 2007. There was an unforeseen event: the credit market changes brought on by the breakdown of the sub-prime and Alt-A segments of the mortgage industry. As a result, overall credit standards have risen and the availability of some products has become limited. This has created a temporary decrease in the pool of buyers able to obtain financing. Most significantly, the national press has created a lack of buyer confidence. By using statistics from areas like West Palm Beach, Las Vegas, and Detroit to describe the nation’s real estate market, they have convinced many buyers that the sky is falling. It will take some time for them to regain confidence in the local market. Fortunately, some of our local and national press has begun to look at the facts and report a more objective view of our specific market. In September the Philadelphia Inquirer’s front page boasted that "The region’s housing market is healthy despite national troubles."4 In October, the New YorkTimes Sunday Business section called for Gloomsayers to look up and said, "Newspapers (which often sell on fear, not on fact) talk frequently of a mortgage freeze. owever, for all but the least qualified buyers, mortgage money is plentiful."5 It is too soon after the August credit market changes to make accurate predictions about our future real estate market. After several years of an unsustainable overheated market, we are in the middle of a market correction. Since our market did not suffer the excesses of other areas of the country like those I have mentioned, our correction will be mild with a smaller drop in the number of sales and stable prices. The most likely scenario is for the Philadelphia MSA to fluctuate around its current levels at or near the bottom of the market until winter of 2008 or spring of 2009. There are many positive signs for our market: • The mortgage market is improving. • The Federal Reserve is lowering interest rates. • The increase in housing inventory is stabilizing. • Homes are becoming more affordable as prices rise at a reduced rate, interest rates decline, and incomes grow. • The economy, jobs and income are growing. • Demographics (baby boomers, echo boomers, and immigration trends) point to a healthy long-term demand for housing. These important elements and an improving consumer attitude towards real estate will create a healthy, normalized real estate market. The Tale of Our Market While our market may not be experiencing "the best of times," they are far from the worst! In any time of change it is easy to become pessimistic yet it is important to put events into perspective. In hindsight, times of hesitation often turn out to have been times of opportunity. Buying or selling a home is a major financial and lifestyle decision that is best made because of immediate family needs and long-term investment considerations. The reality is that home prices in our market have increased steadily over the past 25 years.2 It is extremely unlikely that this trend will change over the next 25 years.  It is impossible to predict the bottom of any market. As our real estate market begins its inevitable upswing, pent-up demand for housing will cause a decrease in the selection of homes for sale and flexibility of terms, and higher interest rates. Our current environment presents an unusually good opportunity for buyers with good credit and an adequate down payment to take advantage of a larger selection of homes for sale with less pressure to make quick decisions. Sellers who are realistic about value and whose homes are in good condition will obtain a good price in a reasonable amount of time. For the majority of us, homeownership is so much more than a financial investment. That our homes provide us with financial security is a bonus. It is our life circumstances rather than financial analysts that determine when it is right to buy or sell a home. Home is where we put down roots, raise our families, and become members of a greater community. Our homes provide the setting where we celebrate our best of times. It gives us shelter through the worst of times. This is why homeownership is such a great part of the American Dream. Who can ask for more than that? Sincerely, Lawrence F. Flick, IV Chairman and Chief Executive Officer Prudential Fox & Roach, Realtors® Sources1. The Vision Group October 2007 Meeting, Detroit, Michigan 2. Office of ousing Enterprise Oversight (OFHEO), August 30, 2007 3. Trend Multiple Listing Service covers Northern Delaware, Central and Southern New Jersey and Southeastern Pennsylvania 4. Philadelphia Inquirer: "What Is Your ome Worth?" by Alan J. Heavens September 23, 2007 5. New York Times: "The Gloomsayers Should Look Up" by Ben Stein. October 2 , 2007 6. The National Association of Realtors® 7. Empirically estimated by Kevin C. Gillen, PhD, The Wharton School of the University of Pennsylvania from OFHEO and hallwatch.com data Parallel Lines — The Return to a "Normal" Mortgage Market Gerry Griesse, President, The Trident Group There are several parallels found between the return to a normal real estate market and the return to a normal mortgage market. Parallel #1 — Consumers are returning to a name they can trust Throughout the real estate boom of 2004 and 2005, new mortgage companies emerged. Many were Wall Street firms that did not understand the inherent risks of this type of lending. They focused on loans that required no documentation of income and assets (Alt-A loans), and offered mortgage brokers high risk adjustable rate mortgage (ARM) programs including 2/28 and option payment ARMs. As these loans began resetting in 2006, the mortgage delinquency rate increased causing concern for investors of securities backed by mortgage instruments. Uncertainty about valuation of these securities brought on the credit crunch of August 2007. This caused a number of national mortgage lenders to cease operations, leaving many buyers at the settlement table with no funds to close. As a result, the choice of a reputable mortgage company has once again become critical to consumers. Parallel #2 — The return to a "normal" market Now that the mortgage market has had time to settle down and investors are becoming more comfortable with valuation, the mortgage market has returned to a normal phase:• Financing options are plentiful for buyers with good credit and some money down. • The "smoke and mirrors" loans of no income or asset verification have disappeared. • For first-time homebuyers and buyers with less-than-perfect credit, FHA loans are once again the program of choice. FHA had lost significant market share to the sub-prime and Alt-A mortgage programs but its market share is growing and expected to continue substantially over the next two years.6 • There has been a return to traditional underwriting standards which includes full documentation and longer lead times for loan approvals and closings. Parallel #3—The national picture versus our market The national press takes the statistics from areas of the country most affected by foreclosures and attributes them to the nation. The same reasons causing the decline of real estate markets Larry described are contributing to the increased foreclosure ratios in those areas: • Affordability issues in the coastal areas of California and Florida caused many buyers to seek out ARMs with the lowest initial payment possible in order to purchase a home. Now that these rates have adjusted upwards, they cannot meet their payment obligations. • Investors and speculators who bought properties with no money down and have no vested interest in holding them once the payments adjusted upwards have contributed to foreclosure rates in areas like Las Vegas, Nevada. • Areas like Detroit, Michigan that rely on one industry have high unemployment when that industry begins to fail. Sadly, families who cannot sell their homes for a price to pay off their mortgage are in the position of not being able to meet their monthly mortgage payment. The Prudential Fox & Roach and The Trident Group market area does not have these issues, and foreclosure rates have remained stable. Parallel #4— It’s a great time to get a mortgage Mortgage rates are at historic lows, close to where they were in 1972.6 In fact, long term rates are now below what they were this time last year. After the initial credit crunch, the rate differential for mortgages above $4 7,000 did have a significant rise but it has since been reduced by almost 50% and is still trending downwards.6 As our local economy and incomes continue to grow, and consumers overcome the psychological barriers created by the press, demand for housing will grow resulting in higher interest rates, less selection and less favorable negotiating terms for buyers. Those who wait for the bottom of any market usually find they missed it on the way up. Housing is no exception. If your life circumstances dictate a move, find a name you can trust and get pre-approved for a mortgage now. Don’t let this opportunity pass you by. A Message from Lawrence F. Flick, IV, Chairman and Chief Executive Officer Prudential Fox & Roach, Realtors® 1VEMBER 28, 2007
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