Tax Deal Lifts Home Sales but Price Pressures Loom
The Wall Street Kournal
By James R. Hagerty
April 22, 2010
Tax credits sparked a big jump in home sales last month, as first-time buyers took advantage of low prices and interest rates.
But the longer-term housing outlook remains clouded, with a large inventory of foreclosed homes expected to hit the market later this year.
The Wall Street Journal's latest quarterly survey of housing-market conditions in 28 major metro areas found that inventories of homes for sale, as well as the number of distressed borrowers, remain very high in many metro areas. That portends more downward pressure on prices from bank foreclosures.
Though tax credits are providing a temporary boost, "we're still in a very fragile housing market," said Ivy Zelman, chief executive of Zelman & Associates, a research firm, who doesn't expect a full recovery before 2013.
Sales of single-family homes and condominiums hit a seasonally adjusted annual rate of 5.35 million in March, the National Association of Realtors reported Thursday. That compares with a 5.01 million rate in February and was up 16% from the depressed March 2009 rate of 4.61 million.
The Journal survey found that Miami, Orlando and Tampa, Fla., Las Vegas, Phoenix and Atlanta have some of the highest concentrations of distressed borrowers at risk of losing their homes. Nearly 28% of homeowners with mortgages are at least 30 days late on payments in the Miami area, more than double the national average of 12.2%, according to LPS Applied Analytics. That rate stands at about 24% in Orlando and Las Vegas.
The supply of homes already on the market is well above the national average in Charlotte, N.C., Jacksonville, Fla., Nashville, Tenn., Chicago and Philadelphia. In Charlotte, where bank cutbacks have increased unemployment, there are enough homes on the market to last 17 months at the average sales pace of the past year. That compares with 15 months in Jacksonville, 13 in the Long Island suburbs of New York and 11 in the New Jersey suburbs. A market generally is considered balanced when the supply is around six months.
Among metro areas with relatively low rates of delinquent borrowers and for-sale inventories: Boston, Denver, Dallas, Houston, Minneapolis, San Francisco and Washington, D.C.
The median price for home resales in March was $170,700, up 0.4% from a year earlier, the Realtors reported. A price index produced by the Federal Housing Finance Agency in February was down 3.4% from a year earlier, the agency said. Realtors say prices for middle-class homes in the types of neighborhoods that attract investors and first-time buyers are flat or rising slightly, while higher-end home prices generally continue to fall.
For now, real estate agents have a compelling pitch: Prices have fallen an average of about 30% across the country since peaking in 2006; mortgage rates are near their lowest levels in four decades; and many people who sign a contract to buy a home by April 30 can qualify for federal tax credits worth up to $8,000. "Now is the time to do something," said Bill Wilkerson, an agent at ZipRealty in Phoenix.
One of Mr. Wilkerson's customers, Rebecca Ahlschwede, last week offered about $200,000 for a three-bedroom foreclosed home with a pool in Scottsdale, Ariz. Ms. Ahlschwede, a 31-year-old neurology technician who currently rents, said the $8,000 tax credit she hopes to receive would be "a huge bonus."
The tax credit appears to be giving more of a boost to previously occupied homes than to new construction, as first-time buyers favor the short commutes of older neighborhoods. Ms. Zelman said the rise in sales of new homes appeared more moderate than many builders had hoped.
The rush to qualify for the credit will end after the April 30 deadline for signed contracts, though the resulting boost to completed home sales will continue to help monthly reports through June.
Those tax credits likely pulled forward sales that otherwise would have occurred later in the year. Partly as a result, "I think we're going to have a pretty soft second half" of 2010 for housing sales, said John Burns, a real estate consultant in Irvine, Calif.
Bank efforts to work out lower loan payments for some borrowers have delayed millions of foreclosures, but those who don't qualify are now increasingly losing their homes.
Moody's Economy.com predicts that 1.9 million homes will be lost to foreclosures or related defaults this year and another 1.1 million in 2011. That compares with two million last year and 600,000 in normal times.
Unemployment remains high and is unlikely to improve much soon, some economists say. Mark Zandi, chief economist at Moody's Economy.com, expects the unemployment rate to be 10.2% at year's end, up from 9.7% in March. At the end of 2011, he sees a still hefty 8.6% rate.
Credit conditions, already tight, will get tighter in at least one respect. Around a third of home sales in recent months have been financed by loans insured by the Federal Housing Administration, which allows down payments as low as 3.5%. But now, the FHA is tightening its terms somewhat.
By early summer, the FHA plans to reduce the maximum amount a seller can contribute to the buyer's closing costs—such as loan-origination, legal and appraisal fees—to 3% of the home price from 6%. That means buyers will have to save more to meet closing costs. Mr. Burns said a survey of builders by his firm found they expected the FHA change to eliminate as many as 15% of potential buyers.
Many economists expect rates on standard 30-year fixed-rate mortgages to rise at least moderately from the recent level of 5% to 5.25%. Mr. Zandi expects a rate of about 5.7% by year's end.
Despite these worries, Jacelyn Botti, who heads residential sales for seven mid-Atlantic and Northeastern states for Weichert Realtors, said that home-sales contracts signed by the firm's customers in March were up about 26% from a year earlier in that area, and April was on track for another gain of more than 20%. She said the tax credit and lower prices were driving buyers. Prices on lower-end homes are trending up in some areas, Ms. Botti said.
Newland Communities, a San Diego-based company that plans and develops communities in 14 states, says 761 homes sold in those communities in the first quarter, up 28% from a year earlier. Robert McLeod, chief executive officer of Newland, said Austin, Houston and San Diego were among the stronger markets for the company. He thinks recovering consumer confidence is helping sales. "It's all about job growth," Mr. McLeod said.
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