Monday, January 11, 2010

Real Estate Market Update, January 2010

I attended a market update seminar recently given by Bill Gray of the Arizona School of Real Estate and Business. It is always a real pleasure to hear Bill speak, and if you ever have the chance, go! Here are some excerpts from what he brought up:

Numbers recently released by a department of Arizona State University show that the market for less expensive homes continues to be strong, while the luxury market is poor. The conventional loan limit is around $417,000 while the FHA limit is around $350,000 so this defines the cutoff point.

Further, most sales are FHA or cash. It looks like around 40% of the market is investors, buying at the auction. Most of the rest is FHA (the new subprime).

So what are the rumblings? Some bad news for FHA buyers, maybe. There is talk of a 5% down requirement, and the mortgage insurance is likely to double, from 1.5% to 3%. Further, there is talk of a minimum credit score for FHA in the 620-640 area. None of this is written in stone, so don't panic yet.

For those of you who are not licensees, you might not think that residential real estate brokerage is a low margin business, but it is. The only people doing really well are the few agents who have high volume -- agents listing 100 bank owned properties at a time, for example. So the news that the State is broke and looking for new tax revenues is bad for us -- they want to add a state income tax on services. This includes real estate commissions, carpet cleaning, lawyer fees, you name it. The action of implementing this tax, in my opinion, will be a net loss in revenue.

2010 may be a year for more market declines for another reason: at some point, the "shadow inventory" of lender-owned homes has to come to the market. They will likely be released slowly, but the supply is so large that it is likely to strongly impact home prices.

Finally, interest rates are likely to start rising at some point. Personally, I'm thinking that treasury rates will rise because no one will want to buy them anymore. When this happens, rates will rise and fewer homes will sell. More downward pressure.

It is interesting to note that on the NAR website where they show the pricing and sales trends in major metro areas, they show Detroit as "NA". It was recently reported that the median home price in Detroit was around $7,500. I personally think that you can make data show anything you want -- and the NAR has a vested interest in showing better news. The Detroit info will skew the numbers for the rest of the country -- so leave it out!

Apartments are still suffering, if looking at the eviction notices means anything. When times are bad, apartments don't like to evict people, so they will tolerate late rent payments. When the market is good, it is easy to get another renter, so late payers get evicted. People can afford to rent single family homes right now -- because prices are low. So why rent an apartment?
You can also watch all the webinars about how to buy apartment complexes cheaply. Amazing!

My take on 2010? I think we will see falling asset prices, including real estate, and especially things like gold and oil. I think the dollar will strengthen. Right now there are people having gold parties -- someone organizes it, and you sell your gold earrings and such at the parties for cash. When something is THAT popular, it is probably at a price inflection point, or near it. I'm bearish on gold.


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