The Current State of the U.S. Housing Market

The current market conditions have changed considerably throughout the United States. I was in Orlando, Florida last week, and in one of the country’s hottest markets of last year things have cooled down. Last year at this time there were 3,000 single family homes on the market. As of February 28th there were 12,000 single family homes available. The newer developments that I drove through had For-Sale signs all over. Investors were trying to sell or rent a strip of town homes and a number of homes were For-Sale in the neighborhood. What is causing the change? First, Interest rates have climbed higher. With a 1/2 percent rate increase a $250,000 home will cost the owner just over $100 more per month. $100 may not mean a lot to some people, but when you consider that many of the buyers spend close to their cap on financing it means they can’t the same home they would have bought a year ago. Another way of looking at it is if a buyer were going to buy a home last year for $250,000 and that was the most they could buy then this year they could only afford a $234,000 home.

Some major changes in loans are having a similar effect. Over the past few years buyers have been taking advantage of lower rates through Interest Only loans and Option Arms where they can choose to pay Interest Only on the loan. The low Prime-rate had made these loans extremely competitive usually 1% less and at times up to 2% different from the traditional 15-30 year fixed loans. With the rate being that low buyers often used the lower rate to be able to afford more expensive homes. Now the Fed has increased the short-term rate over a dozen times and the short term rates are at an unusual point where they not advantageous to a buyer in comparison to the traditional 15 and 30 year mortgages. A recent comparison had the Interest Only option being $15 less per month on $100,000 borrowed versus a standard principle and interest 30 year mortgage. Considering the paydown in the principle on the 30 year or 15 year loan a borrower is actually better off with the fixed principle and interest loan. Without the advatage of the Interest only loans buyers will be forced to buy less expensive homes, or offer less for the home that they want. I recently listed a beautiful duplex that was on the market last year for $369,000 with another agency. With the recent changes in interest rates we decided $315,000 would be more suitable pricing. After two weeks we have agreed to a selling price of $304,000. My seller needs to sell the property, and the buyers realize that they can only make the property cash-flow at this lower price. Not all properties will see this significant of a price decrease in all areas of the country, but there will be adjustments in most parts of the country.

Besides the current state of the United States economy which is great for big businees, but doesn’t seem to be great for the majority of its citizens financing programs seem to be drying-up. Two days ago a program that was lending buyers up to $13,000 (10k for the down payment and 3k for the closing costs) is no longer in place. A lot of this movement has to do with the number of foreclosures that are going on in the market. 2005 was had the highest number of foreclosures on record, and with the trends that I am seeing the number should be much higher in 2006. A large number of the people that have been purchasing homes with Interest only programs will be coming to the end of the low interest payments and the rates will be going up (interest only loans hold the low rate for a short period of 1-7 years after that the rates can climb rather quickly). This forces the borrower to make higher payments the percentage is determined by the short-term rates that have risen 12 times in the past year. Needless to say people that stretch themselves to get into the home are now scrambling to make higher payments. With the interest only programs losing their buying power and other lending programs simply disappearing first-time buyers are being forced to stay in the rental market. This is great news if you are a landlord!

Rental property owners have seen a huge exodus of renters to homeownership. Now that trend will come back into balance. I talk with a number of clients that are cautious in buying rental property. Right now may be one of the greatest opportunities to get into the market. Prices have fallen on rental property becuase of the lack of renters. Owners have been forced to give renters free rent, cable TV, Internet access and other costly concessions. There was a large influx of investors coming into the rental property business after 9/11, and a great number of them have taken a hit with the problems that have come from the loss of renters to homeownership. In Minneapolis, MN the homeownership rate has risen from 50% to 70% ,and the loss of all those renters has not only hurt the numbers but the quality of the renter pool.

As is the case with all other types of investing, it is best to buy when no one else wants to. In markets across the country people are getting out of the rental property business because of the discouraging past few years. Look to take advantage of the changes that will occur in homeownership. With it being more expensive to purchase a home, and the first-time homeowner programs evaporating the rental market will come back. In Florida prices have risen so much in the past few years that many of the “Snowbirds” that would have normally bought a condo or home to live in for the Winter months are now renting because of the affordability. Prices on rental property have risen in the past decade, but they have not kept pace with the prices of single-family homes. Everything goes in cycles, and the cycle is turning the corner. Rental property and Foreclosures will be an avenue to make money in Real Estate in the coming year. The keys as always are to buy it at the right price and location. So, keep in mind the changes to Interest rates and the available loan programs may be closing one opportunity, but at the same time another opportunity is opening up.

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