Wendy Brown

The Westerly Real Estate Market Report

The Good, the Bad and Reality

The Year 2008 In Review

The events of 2008 may live in memory for generations to come. Looking back we understand that the first headlines posing the question "When will the real estate bubble burst?" were just the first faint sparks of the firestorm that would follow. The subsequent implosion, however, was not just about the housing industry, but still, the real estate market got caught in the maelstrom. Maybe it's because bricks and mortar are easier to understand than the complex issues related to selling, packaging, re-selling and short-selling securities as well as the now infamous credit swaps and excess leverage. The news media needs to communicate something to a public who is listening, and homeowners listen. We all care about our homes.

In complex global markets, predicting the future is, at best, a roll of the dice. Forecasts that home heating oil would reach $5 and higher per gallon resulted in millions of Americans locking in the price of fuel in advance for $4 and above. The lucky ones who gambled are buying oil for half that amount. Who knew?

The Sky Did Not Fall

If the sky had fallen, no houses would be selling. In 2008, the number of sales of single family homes equaled 85 percent of 2007 numbers and the number of sales of condos equaled 99% of 2007 numbers.. The number of sales is one of three primary market indicators used to assess the market. The number of deposits and inventory levels are also important, and it is the interrelationship of these indicators that gives us the truest picture.

Closed sales measure the past, not the present. There can be three or more months between signing a purchase contract and the date of closing. A sale that closes in December could have been contracted in September or October and reflects the market place at that time. That's why it's important to watch the number of deposits. Historically, at least 70 percent of deposits actually close.

Here's a simple example of how the interrelationships of the indicators work using contrived numbers. In a particular community 1,000 homes are on the market and 150 close per month. Dividing the two indicators gives a supply time of 6.7 months (to sell the inventory down to zero). While markets normally do not sell down to zero in real estate, the supply times give a good picture of what the market is like. This example is oversimplified, since different price ranges in a given town perform differently with varying supply times.

As of December 31, 2008 there were 26 single-family and 9 condominium units under deposit with approximately 189 single-family homes and about 83 condominium units on the market in Westerly.

The actual average supply time of single family inventory as of December 31, 2008 is shown in this table:

While some supply times are higher than in the past, they do not indicate distress. Inventory levels decreased in the fourth quarter of 2008. Average marketing times have actually decreased. They are higher than two years ago, but again, the figures do not indicate anything alarming. It is also normal for marketing times to vary by the type, and more importantly, price level of the property.

Median Sales Price vs. Home Value

In general, median sale prices are lower in 2008 than 2007 (for single family homes $334,500 as of 12/31/08 compared to $350,000 as of 12/31/07...only a 4.4% decrease). There can be several reasons for this, including a shift in the price class and range of properties selling. Remember that the median price represents the mathematical middle of the sales prices for closed homes. It does not predict the value of any specific home.

If a particular community shows that the median price has either risen or fallen, it does not mean that all properties in that town have risen or fallen. The only way to assess true market value for any individual property is through a market analysis.

It's also important to note that short-term median home price adjustments are really suspect (while sometimes tempting to make). If a number of high-price homes sell in a particular community in November, that median price could swing noticeably. December sales might be mainly low-priced homes and swing the price back in the opposite direction.

The Glimmer of Hope for 2009

When the final 2008 data arrives, we expect new housing permits will be down from last year and in line with the drop in sales. That means there is no large excess of inventory on the market. Rhode Island builders did not over-build for speculation as builders in states such as Florida and Nevada did. Additionally, marketing times are not excessive. Properties priced where they should be in the current market are selling.

Mortgage rates can be volatile, but they are still at 25 to 30-year lows. Qualified buyers can still get mortgages. Subprime loans are gone (thankfully), but conventional as well as government insured loans, like FHA, are readily available. Lastly, we all expect any day now some type of economic stimulus package that will spark activity in the real estate market.

Consumer Confidence and Trust

Smatterings of Radio, TV and even print news stories are beginning to hint that it might be "a good time to buy." That's good news for the market, because the media has a strong influence over consumer confidence. We will continue to struggle through economic conditions that are less than ideal, but, this is a cycle and it will end as each cycle like this has done before. Expect our real estate market to be somewhat erratic until this happens, but as all of the factual data presented here shows, there is market activity out there.

For ongoing information regarding our real estate market subscribe to this blog or contact me directly at 401-348-8259 (home office) or by e-mail at wendyfbrown@cox.net.

Earlier this month I hazarded some predictions about the future of the real estate market. Time to hazard some predictions about mortgage rates.

Right now, rates are low, very low historically and the best advice to give anyone looking to purchase in the near future is get going and let the rates float...for now. As we get closer to spring, however, you might want to lock these attractive rates in.

Why? Well, the word "inflation" is being heard bandied about. With all the government programs being anticipated, inflation could start being a concern of the Fed. When inflation rears its ugly head, the Fed moves rather rapidly to remove liquidity by raising the Fed rates to try to control inflation. Right now the Fed is buying mortgage bonds and that has helped immeasureably to keep mortgage rates attractive. Should they stop (and they will), we could see significantly higher interest rates as soon as late spring, early summer. Add to it a number of other ingredients and we are most likely looking at higher mortgage rates sooner than we hoped.

So, with housing prices low, plenty of inventory still on the market and low interest rates, this is the time to buy. Period. If you are waiting for the housing prices to drop, just make an offer that takes into account how much more you think it will go down but take advantage of today's mortgage rates. Think the market may drop another 10%, then offer 10% below asking. The worst that can happen is that the seller says no. The best that can happen is that you are able to purchase the home you want at a price that you believe is the future price with financing at the lowest it has been in years.

Like many other Americans, I was enthralled by the inaugural speech today and delighted we have at our country's helm someone who understands the importance of confidence. Thank you, President Obama, for ushering in a new era where drama, fear mongering and deception have no place.

The housing industry accounts for one-fifth of this country's jobs and the health of the housing industry has a great deal to do with the overall health of our economy. It is, therefore, important that the problems of the housing industry be addressed in a meaningful way...and quickly.

There are several proposals being tossed around but here are my thoughts:

The $7500 tax credit available to first time homebuyers should be available in the form of down payment assistance. I believe that it should be repaid...that's part of being a responsible borrower, citizen and homeowner.

A moratorium on foreclosures of owner occupied homes should continue for another few months. During that time, the mortgage companies be mandated to enter into serious negotiations for loan modification...extend the term of the loan, lower the interest payment, add unpaid payments to the end of the term of the loan...whatever helps keep someone in their home. If the consumer does not take this opportunity to initiate a loan modification within thirty days after being notified of the possibility, then the mortgage lender should be able to proceed to foreclose. If the mortgage lender will not consider loan modifications, they should be penalized in some meaningful way. The goal is to keep people in their homes if at all possible. This will help individuals, neighborhoods and whole communities...and ultimately the country as a whole. The lenders would gain by helping to stabilize the markets and, ultimately, seeing their loans collateralized in a meaningful way. Not without pain for all involved, but, a reasonable alternative to the continued rampant foreclosures.

Continue to maintain downward pressure on mortgage interest rates. This will help more people entering the market for the first time...and help with reasonable loan modifications for those who are facing foreclosure.

Underwriters need to get some understandable, uniform guidelines in place! This grid of "add ons" to interest based on several points difference on the borrowers credit score is not helping the consumers. With all the desire for there to be transparency in the borrowing process, this is only muddying the waters. Perhaps I'm naive, but part of the problem with loose credit is that the people who shouldn't borrow to buy a home could. Now many who should be able to borrow to buy a home can't. Let's get back to some reasonable guidelines...not too loose, not too tight.

At this moment in time, consumer confidence in the economy, the administration, government as a whole is starting to peek out from behind the bushes and consider returning. It's a fragile thing, confidence, and it is encumbent upon all of us in the housing industry...agents, mortgage people, builders, etc...to be worthy of that growing confidence by being forthright, unselfish, knowledgeable and fair.

Recently an article came out in one of the e-mailed real estate publications with the headline "housing markets will roar back in 2009". Now, I'm a glass half full kind of person, but even Pollyanna herself would have had trouble buying into that level of optimism. The article based the assumption of rapid recovery on the decline of foreclosures in December as compared to October...with no mention of the fact that there was a moratorium put on foreclosures in December! Of course there were fewer foreclosures...because they were prohibited for many lenders. Oh and don't look for the foreclosures to go up substantially in January as Fannie Mae has extended the moratorium on foreclosures and evictions through the end of January with Freddie Mac soon to follow.

The article also predicted droves of buyers coming into the market with the subsequent absorption of the inventory and even predicted that prices would move up. I have not yet been trampled by the stampede. There has been a slight uptick of activity, but that has long been predicted as a by product of improved confidence with a new administration. Droves? Roar? No, more like a trickle and a whisper.

My crystal ball is cracked and I'm the first to admit it. Did I see the rapid decline in the real estate markets (and the general economy)? No, but I'm in good company. Many if not most of the "experts" did not foresee the extent of economic turmoil that we are currently facing. However, realistically I think we have a ways to go before we start the long, slow climb out of the trough of this real estate cycle.

My reasons for erring on the side of conservatism have to do with 1)the current and predicted job losses, 2)the still tight credit markets and 3)the paralysis brought on by uncertainty in the general health of our economy. And, probably more importantly, I'm looking at incredible bargains that are on the market and they aren't being snapped up! Usually the end of the downturn is signalled by the appearance of the vultures...savvy investors ready to grab up real bargains. When those real bargains (e.g. properties on the market for their value in 2002...or earlier!) sit on the market, I have to conclude that we are not at the end yet.

My prediction (and remember, my crystal ball is cracked) is that we will not see the beginning of the recovery of the housing market until the end of 2009...and full recovery will take another couple of years thereafter.

Yesterday I had the pleasure to meet with an earnest young couple who, upon reading a book on how to accumulate wealth in real estate, wanted to know what properties would be available to "lock and reassign". They said that phrase quite a few times and were seriously wondering what they could tie up and double escrow. It fell to me to give them the bad news.

In a declining market, there are bargains, but don't look for a quick flip. Think about it. We have too much inventory, declining numbers of sales and trouble for many getting financing. This is not the market to get into looking for a no money down deal! If foreclosed properties and short sales are selling, what would make anyone want to buy a deal from someone else? The deals are there. There are bargains everywhere for the picking. But short term investing in real estate is best done in an appreciating market...not a declining market.

This couple did not own their own home yet. The single best real estate investment still is one's own home...what with the tax benefits, not to mention the emotional benefits. My goal was to get them on a path to their first home first. And teach them the realities of real estate investments for the future.

Right now cash is king...there are plenty of bargains available for investors whether they are looking to rehab or walk in. REO properties are selling for pennies on the dollar (sales prices often hover around 50% of loan balance at time of foreclosre) and below market for surrounding normal sales.

Bottom line...real estate is a great long term investment particularly now but it's imperative that the investor has eyes wide open and a game plan before jumping in.