July is Sizzling!

There aren't many holiday times for real estate agents.  People tend to buy real estate when they have time, and that is often when the rest of their lives are slow.  For us, that can mean writing a contract on the hood of a car on Mother's Day, or in a kitchen on Christmas Eve.

Usually, though, we can count on the fact that, once the rush to buy and close in the spring and early summer is over, mostly by June 30th, there will be a break that can last until Labor Day.  Except for vacation-area properties, most homes are not as likely to be sold, or even shown, in the dog days of summer.  Few people choose to list their homes then, either, maybe because they'd rather be at the beach than getting property ready to show.

But not this year!  We're well into the dog days of summer, and we're cranking along at full speed still.  In my opinion, we are still catching up from the time we lost to storms, particularly the Blizzard of 2013 in February.  Closings were slow in March and April, and we're still scrambling to finish what would ordinarily have been the spring market.  And, as anyone who has been outside in the past month knows, it's not spring anymore!

What does this mean for buyers and sellers?  Sellers should reconsider holding off until Labor Day to list, and many people are doing just that.  New listings are surprisingly robust for summer. Buyers should not give in to the impulse to procrastinate.  Mortgage rates have already gone up 15%.  Prices are up in almost every part of the country, and are starting to climb on the lower end of the market here.  Don't make the mistake that so many people do, and spend your summer next year wishing that you'd bought now!

A New Problem

I've written before about how many sales are now for cash.  It's ironic, because mortgage rates are still really  low; however, it's hard enough for most people to get a mortgage, both because of credit issues and because of the paperwork requirements and timing, that many are choosing to go the cash route.  Some of those people may go back and refinance later, but they are showing up at the closing table with cash.  56% of our sales in the first four months of the year were for cash!  And that's true around the country, although in some places,  it's due to multiple bids on insufficient inventory, leading to cash offers as a tactic to secure the property by nervous buyers.

 We never thought we'd say this, but the change in closing dates has brought challenges that we couldn't imagine.  One of those is that personal checks, given by buyers as deposits on sales, don't always have time to clear our escrow accounts before the closings.  The big rush to close has been exacerbated, both for weather reasons (a slow start to the selling season and the need to close during the summer), and because many more people are choosing to cut out contingencies as a bargaining chip, so they have fewer things to do before they close.  Also, there are lots of investors, who are buying at what they perceive to be bargain prices, and who may be planning to renovate anyway.

That's what we love about real estate--there's a new set of challenges in every kind of market!

Buyer's Remorse

For some reason, buyers have been pulling out of contracts more than they ever did in the past.  Most of us track business through signed contracts, figuring that the number of signed contracts that do not close stays relatively close to the same percentage year in and year out, so we don't feel that we have to adjust for sales that do not close, since they don't change year over year comparisons. For the past couple of years, however, that hasn't been the case--nationally, contracts that don't result in closed sales have doubled or tripled.  For a long time, we all thought that was the fault of banks and, through them, appraisers.

 While banks are always popular to blame for most things, it appears that there may be something else at work.  Even though we are now at a point in the real estate market where units are increasing and mortgage rates have started to rise, buyers still seem to feel that they have unlimited time and unlimited choice, so they dither.  Each time something new comes on the horizon, they go off to see it, even when they have already signed a contract for something else.  Instead of the principle of cognitive dissonance, which says that your mind will convince you that you've done the right thing when you make a choice and it is done, they now seem to deal with buyer's remorse by revisiting the choice again and again.  Is this a generational issue, since first-time homebuyers, who dominate the current market, have older relatives coming in and advising them before their purchases are finalized?  Or is this the result of a world where no one thinks that his or her decisions are final?  We'll find out when the economy improves more, since there won't be as much distraction with other choices drying up.  In the meantime, our advice to sellers is age old:  Don't count your chickens before they hatch.

Rent or Buy Decisions Now

The New York Times recently had a real estate section cover story about how both sales prices and rental rates were out of sight for many areas of NYC.  There didn't seem to be a good choice for someone looking to move to make.  Here, we see things as being different.  Rentals in our region are increasingly scarce.  New Haven has the lowest apartment vacancy rate in the country.  In addition, we haven't seen the wave of foreclosures that people think may be coming in our state.  If or when it does, that will mean that large numbers of people will go from being owners to being renters, for at least the seven years that they will need to wait before they can borrow again.  Where are they all going to go?

On the other side of the equation, prices for homes are low.  Very low.  And so are mortgage rates.  That makes it a good time to buy, if you believe that prices are going to rise.  In that regard, we got some help from a Trulia article, albeit a backhanded compliment.  Greater New Haven was listed among the ten cities where the number of people looking to move out most exceeds the number of people looking to move in.  It also predicted that prices would go down a couple of percent by the third quarter of this year.  BUT, it went on to say that price increases would average 5.3% per year through 2016, meaning that someone who buys a home and plans to hold onto it for five years, whether living in it or renting it out, will be likely to get quite a bit more for it when he or she goes to sell.

That seems to me to make the rent versus buy decision pretty simple around here.  It's the time to buy.

Thinking of Waiting for Spring?

At this time of year, we often hear people say that they are putting their searches for property on hold until the spring. While we understand the appeal of taking an item off the To Do list at this busy season, I want to point out the possible consequences.

Savvy buyers don't talk about the price of the property, they talk about the monthly payment. Current mortgage rates are so low that the cost of risking an increase in rates almost surely outstrips the risk that you might buy now and have prices decline slightly before they rise again. The low rates also trump any idea that you have to bargain for the last nickel. Take the deal, lock in the rate, and gloat later.

Many consumers are acutely aware of the aspects of this housing market that favor buyers. They therefore think that, regardless of what a property is listed for, they should offer 20% less. They seem to believe that sellers are desparate, and that they need to bottom fish in order to purchase now. Since only the well-priced properties in good condition are selling, it's not even really true, as I have pointed out before, that there are so many things to choose from that such a strategy can succeed.

Let me remind any such people that this market is not a zero-sum game. Both the sellers and the buyers can win. The sellers can sell and repurchase at the current lower prices, with the lower interest rates. The buyers can buy and also take advantage of these rates. Everyone can walk away better off. This is an unusual time in that respect. If you figure out what the monthly payment will be, you may discover that it makes far more sense to buy and move than to wait.

Finally Some Helpful Press

There was a wonderful article in the Wall Street Journal this week, that actually listed ten reasons TO buy a home. As you can tell by the title, we have come to expect that every article will result in calls from clients who have decided not to go forward with a purchase. Therefore, we were thrilled to get some help from the WSJ.

You would not be surprised by most of the reasons, because you've heard them all before. There were a couple of arguments that were particularly good, however, in the way that they were phrased. One was the perennial issue of whether a buyer should buy before the market hits bottom. All real estate professionals know the answer to that--you cannot predict the bottom, so you should just get somewhere near it and not worry. The article, however, quoted a talking head as saying two years ago that prices had to fall another 17% to reach where they should be, and that the Case-Shiller Index in those two years showed prices down 18%. That's pretty close to the bottom.

The other points I really liked were really variations of the same theme---you get a better home when you buy. That's because better properties get sold and worse properties get rented, but it's also true because you can't (or won't) personalize a rental the way you can or would your own place. It's a version of what I've been saying--that you have to like where you live--but it gives some concrete reasons as to why buying does a better job of providing that.

Low mortgage rates, big inventory, fewer taxes, long-term growth--all of these ideas were listed as well. Let's hope that some of you take the plunge after reading the paper!

Second Quarter Results

We just released second quarter statistics from the Greater New Haven region, which showed a major uptick from the same quarter of last year. Of course, the homebuyer tax credit was expiring, so there was a rush to close units while that was still in place. Also, however bad the economy still is, there is some national sense that things are better than in 2009, and the base of comparison was therefore low.

Within the region, Guilford and Woodbridge had the highest prices, with Madison coming in third. Prices generally went down from the second quarter of last year to the first quarter of this year, and then climbed in the second quarter of this year. Unit sales went up more sharply, rising 20% from last year's second quarter through this year at the same time.

It would be interesting to know how many of the sales were from properties which have been on the market for a long time, languishing at high prices, where a price reduction sparked an offer. Anecdotally, we know that many of the stories we hear involve sellers who are finally putting things on where they will sell. They are helped in their efforts by mortgage rates, which are so low that they allow for buyers to feel that they are getting a good deal, based on monthly payments. A recent article in a national paper suggested that buyers are trading up as a way to lock in cheap money. Let's hope so!

Mortgage Rates are Going Up

Newspaper articles over the weekend made it clear what we already knew--mortgage rates are going up. Policies are changing, and banks can only make money by passing some of the charges along. As their ability to make money with fees is curtailed by governmental regulations, it's inevitable that the result will be higher rates.

Banks make money in at least three ways on mortgages. First, they collect fees when the loans are made. This is where the recent oversight by the Feds has led to restrictions on fees of every kind. Secondly, they make income from the servicing of loans; i.e., fees for handling the monthly payments. When a bank sells off loans in the secondary market, either to reduce risk or to preserve capital, it loses those servicing fees. Lastly, they make money from interest on the loan itself. If the first two sources of funds are curtailed in some way, it stands to reason that the banks would need to raise interest rates.

Although we have read a great deal lately about Washington's displeasure with banks and bankers, it does't seem reasonable to expect them to make loans that don't make a profit. After all, they are for-profit entities (and we want them to be, since we don't want to have to keep bailing them out!). In addition, someone has to pay for all the oversight being done; it takes time and employees to answer all the questions and fill out all the forms required by the government. There is a great deal more of that lately, and the costs of compliance have risen.

Therefore, we should all understand that money lost from one source of income must be made up for somewhere else. If we lower credit card rates and fees, or checking account fees, or late fees, something other fee or cost will have to go up. This time, it's mortgage rates.