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They say any publicity is good publicity, but that hasn’t been true with some of the things being said about the real estate market. Do any of the following sound familiar? Real estate market freezes. How to survive the real estate market bust. Stocks break records while housing is in a freefall. Sub-prime tsunami hits home. It’s a wonder any houses sold at all! Yet 2006 was the third best year for residential housing sales on record. Perhaps the headlines should have read: Home appreciation remains steady. Philadelphia area prices rise above national average. Delaware Valley home prices continue to rise throughout 2006. Home sales remain strong despite decrease after record-breaking years. Tighter lending criteria will lead to a healthier housing market. So where do we find the common sense in the midst of all the sensationalism? Let’s start by looking at the facts. Housing Prices: Despite the negativity of the press, housing prices continue to rise in the vast majority of communities throughout the United States. In May, the Office of Federal Housing Enterprise Oversight (OFHEO)1 reported national average appreciation of 5.9% for 2006. Prices in our area continue to rise. In the Philadelphia Metropolitan Service Area (MSA), prices rose 6.74% in 2006.1 Our local multiple listing service TREND2 concurs, reporting a 2.1% price increase for January through April of 2007 over the same period of 2006. Though this is not a repeat of the double-digit appreciation rate of the past few years, it does reflect the continuation of a sustainable, healthy housing market. Economists at the National Association of Realtors®3 predict the continuation of this positive trend. Frequently Asked Questions If prices are still going up, then why do so many houses need price reductions before they sell? A decrease in a property’s list price does not indicate a decrease in value. Whenever the real estate market shifts from being a true sellers’ market to a more balanced or buyers’ market, it takes time for sellers to accept this reality. Many continue to list their properties as if the double-digit appreciation rates of several years ago were still occurring. As a result, these properties are over-priced. As sellers begin to become more educated to the reality of the market, they will adjust their list prices downward and they will sell. But the actual selling prices may not be below any previous comparable sale prices. The dollar amount of the gap between original list price and eventual sales price is not depreciation, but wishful thinking. Is it possible to under-price a house? Many sellers recognize the need to price their house realistically, yet are afraid they will not achieve maximum value if the list price is too low. Houses that are priced competitively, are in excellent condition, and staged for showings tend to attract the attention of multiple buyers. Our experience has shown that when this occurs, interested buyers will compete to buy the house, and their offer prices will reflect its true market value. Is it a good time to sell a house? Even though the number of unit sales is down, houses continue to sell at a brisk pace. In 2006, an average of 238 homes sold each day in the Prudential Fox & Roach service area2. Listing inventory and time on market have increased, and buyers do have more choices and less pressure to make an immediate decision. Yet serious buyers will gravitate to quality, and houses priced realistically and in excellent condition will sell at a good price in a reasonable amount of time. For move-up buyers wishing to sell their present home and buy a larger one, this market offers the double benefit. By realizing the previous appreciation gained on the current property and enefiting from the reduced appreciation rates on the more expensive property, they can take advantage of both sides of this market. Is it a good time to buy a house? The best time to buy a home is when individual or family needs and circumstances indicate a change. Right now, there is a greater selection of homes from which to choose, less pressure to make a decision, the opportunity to obtain better terms and historically low interest rates. Buyers who wait until the market improves will lose many of these benefits and will likely pay a higher price and higher interest rate. What about affordability? Concerns about affordability are legitimate, but will decrease as time goes on. NAR’s affordability index is currently 114.9, which means that a family earning a median income has 14.9% more income than needed to qualify for a loan on a median-priced home. In the past five years, housing prices have gone up an average of 14% a year in the Philadelphia MSA. According to NAR, recent wage growth of 4% has been the highest in nearly a decade. As appreciation slows to a more reasonable level and incomes continue to rise, more people will be able to afford their desired housing options. Housing Sales: It is true that fewer sales took place in 2006 than in the previous year. NAR reports that, nationally, the number of existing home sales decreased by 8.5%. Locally, TREND reports a decrease of 8.9% in our market area. But taken in context, these decreases were modest. Low inventory, higher list prices and higher sales prices aligned to create an unprecedented and unsustainable volume of housing sales in 2004 and 2005. If we were not comparing the 2006 numbers to those record-breaking years, sales would have been considered quite robust. We are currently in the middle of a long-term cyclical market correction. The decrease in the number of homes sold bottomed out in the last quarter of 2006 and so far in 2007, it has diminished from -8.9% to -6%. A market upturn is predicted in the last quarter of 2007 with unit sales expected to grow by +3.6% in 2008. When this happens, it is likely to result in less inventory, higher prices and higher interest rates. While one can never absolutely identify the bottom of any market, I believe that we are at the bottom of this cycle and that now is a good time to buy a home. The Delaware Valley/Greater Philadelphia Metropolitan area encompasses many local submarkets. As David Lereah, former Chief Economist for the National Association of Realtors® says, "Whatever the national trends are with regard to real estate – whether they are booming or busting – what really matters are market conditions and influences in your neighborhood, town or city."4 Please consult with your Prudential Fox & Roach sales associate for trends in your specific locale. For the majority of consumers, owning a home is the greatest financial investment they will ever make. Over the years, increased equity and appreciation result in maximum returns. Yet it is so much more than that. It is security and shelter, a place to raise families. Whether short or long term, it is a place to put down roots and be a part of a community. Our houses give us access to a lifestyle that expresses who we are and where we want to be. Owning a house is the ultimate symbol of the best that our country has to offer. The Sub-prime Tsunami: Riptide or Ripple? Just what is the sub-prime tsunami and is it affecting our real estate market? First, we need to separate the term sub-prime from Alternate A (Alt-A) loans. The industry refers to both of these types of loans as sub-prime, but there is really a difference. Sub-prime loans have always been available to borrowers whose credit is less than optimal. Lenders of sub-prime loans know they are taking a greater risk in order to achieve greater returns. Borrowers agree to pay higher interest rates in order to obtain financing. With sub-prime loans, borrow information is verified. Investors are able to make informed decisions and loan defaults and foreclosures are kept to a minimum. The press has grouped Alt-A loans into sub-prime category, but they are really not the same. Alt-A mortgages are really conventional loans with added features such as no-income verification or a lower initial interest rate that can dramatically increase during the life of the loan. The intense level of activity in the real estate market in 2004 and 2005 led Wall Street investors and others with no understanding of the consequences of mortgage defaults and foreclosures to see an opportunity to cash in. They created companies that lent money indiscriminately, lowering credit standards, raising qualifying ratios, and accepting no verification of income and assets. As a result, the number of loan defaults and foreclosures increased. Many of these newly formed companies have since folded. Areas like coastal California and Florida, and Las Vegas, Nevada will feel the biggest impact of the Alt-A debacle, but it will only have a marginal effect on our local real estate market. In the Philadelphia-Camden-Wilmington metro area, the percentage of sub-prime loans rose from 9.6% to 19% in 20053. This is well below the national average of 14% to 28%. As lenders tighten their loan qualification standards, NAR predicts that 10% of buyers who would like to take advantage of sub-prime financing will need to delay their home purchase until they save money, increase their income and/or improve their credit rating. Sources: 1. The Office of Federal Housing Enterprise Oversight, News Release March 1, 2007. OFHEO’s mission is to promote housing and a strong national housing finance system by ensuring the safety and soundness of Fannie Mae and Freddie Mac. 2. TREND Economic and Market Watch Report, First Quarter 2007. TREND is the Multiple Listing Service (MLS) for more than 32,000 Realtors across the Philadelphia metropolitan area. TREND’s 13-county primary service area includes Kent and New Castle counties in Delaware; Burlington, Camden, Gloucester, Mercer and Salem counties in New Jersey; and Berks, Bucks, Chester, Delaware, Montgomery and Philadelphia counties in Pennsylvania. 3. National Association of REALTORS® Economic Monitor, April 2007. 4. Lehreah, David. All Real Estate is Local. Doubleday, New York, New York 2007. An Independently Owned and Operated Member of the Prudential Real Estate Affiliates, Inc A Message from Lawrence F.Flick, IV Chairman and Chief Executive Officer Prudential Fox & Roach, Realtors® and The Trident Group Brought to you by, Debbie Kiotis & Lynn Ray of The Kiotis Ray Team Prudential Fox & Roach Realtors® Debbie Direct: 610-889-5571 / Lynn Direct: 610-889-3656
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