Real Estate Forecast for 2010 Best of Times Worst of Times

During more than 22 years in real estate, I have seen the ebb and flow of the market from a Buyer’s Market to a Seller’s Market and back again. Recently, we have heard the bad economic news blaring from our televisions, radios and internet news sites. We have watched real estate values plummet, jobs disappear and banks and Wall Street nearly collapse. In more than 50 years on this planet, I have never seen worse economic times.

Yet, in this winter of despair, the spring of hope may be about to blossom.

During the next three months, the real estate industry will experience dynamics which have never before co-existed and those forces will cause a very strange coincidence:

The first quarter of 2010 will be the best time for buyers to buy and the best time for sellers to sell. Here’s why:

1. Why is it a great time to BUY?

a) Low prices. For buyers, home values are at an historic low, especially when you adjust for inflation. The prices of the homes are more affordable than they have been in decades, but just as important, the interest rate on a mortgage is about the same as home buyers paid in 1962.

b) Low interest rates. Interest rates are hovering around 5% per year right now, the lowest mortgage interest rates we have seen in decades. Recently the Federal Reserve has been using TARP money (Troubled Asset Relief Program) to buy up bank’s bad loans, thereby significantly mitigating the number of foreclosures dumped into the market at one time.

Without the TARP money, banks would have raised mortgage interest rates considerably to cover losses and future risk. But the TARP train is slowing to a stop; the Fed has already indicated it will cease buying up banks’ assets at the end of March, 2010.

c) Low “Cost to Purchase.” The combination of low prices AND low interest rates adds up to low “Cost to Purchase.” Cost to Purchase is the monthly payment to buy a home. Presently, you’d pay approximately 5% on a $100,000, 30-year fixed mortgage. In a year, you will pay interest of $5,000 and $1,444 on the mortgage principal – a monthly payment of $537. That’s right, you can buy a $100,000-plus home for $537 per month, not including taxes, insurance or down payment and closing costs!

d) Tax Credit to Home Purchasers. First-time home purchasers will receive a refundable tax credit for up to $8,000 (10% of the home’s purchase price) and current homeowners will receive a $6,500 tax credit (see limitations) if they reach an agreement prior to the end of April and close before June 30, 2010.

e) Limited Time Offer. The specter of interest rates spiking at the end of March, 2010 looms large on the economic horizon. When the Fed stops rescuing banks’ assets, the banks will raise mortgage interest rates, especially because there are millions of foreclosure properties still in the pipeline; many economists estimate as much as half of them have not yet hit the market! In effect, the Fed has already told us when interest rates will be going up – at the end of March.

f) Confluence of Events. Look carefully at the time line. 30 days before the tax credit runs out, interest rates will being going up. Historically, as interest rates start upward, buyers rush into the market to avoid losing the low interest rates. So, interest rates start upward and buyers rush the market, jumping into direct competition with those who have been shopping for months. April 2010 could be the most active month for real estate sales in all of 2010.

2. Should I wait to see if prices go down further?

a) “Price” vs. “Cost.” When you last purchased a car, do you remember the price you paid for it – exactly? Most people don’t remember the out-the-door invoice amount, with tax, title, license fees, warranties and options added. But most people know exactly the amount of the check they write out every month for the payment, right?

Most home buyers want to know they can afford their new home, that it will be manageable in their monthly budget. Yes, when it comes to shopping for a home, they look at the price, they negotiate for a lower price and, quite often, they lose their dream home because of a few thousand dollars.

But price is just one factor in the cost of purchasing a home; the interest rate is just as important.

Do you know that if home prices drop by 10% but interest rates go up one point, your monthly payment is almost the same? In fact, the lower- priced home will cost you more per month!! Don’t believe it? Check this out with your favorite lender:

1) Monthly payment on a $100,000, 30-yr. fixed-rate mortgage at 5% = $537

2) Monthly payment on a $90,000, 30-yr. fixed-rate mortgage at 6% = $539

Because of the impact of mortgage interest rates on the Cost to Purchase, it can be argued that, for most buyers, locking in a low interest rate before rates go up is more important than waiting to get the steal of the century.

Waiting for prices to gown down further will me more than offset by rising interest costs.

b) Competition for Home Inventory. It is highly unlikely that prices will drop before the end of April and it is very likely interest rates will spike upward after March. Buyers will recognize this dynamic in the marketplace and, in my view, the first quarter 2010 will be active. Buyers competing for the homes on the market may cause a temporary “bump” upward in prices. My recommendation is to get into the market early to have plenty of time to find the right home before competition heats up and interest rates start to climb.

3. Why will first quarter 2010 be the best time to SELL?

a) Prices have leveled off … for now. Values are not plummeting as in the past 18 months and buyer activity expected in the next 3 – 4 months will most likely support real estate values from further decline. That’s the good news.

The bad news is, there are millions of foreclosures in the pipeline that have not yet been dumped on the market. When will that happen? Nobody knows for sure but when the Fed stops buying up banks’ assets at the end of March, it can be expected that the banks will unload those assets onto the market.

b) Motivated buyers will be shopping for homes. Buyers motivated for all the reasons I listed above will be out in force, starting now. By the end of March, they will start to see interest rates climb and at the end of April, they will lose their opportunity to get a tax credit for buying a home.

c) After April, it’s anybody’s guess. Many economists are predicting that real estate values will drop as much as another 10%, albeit at a slower rate than what we have seen in the past 18 months.

4. Should I wait till values go back up?

Most economists agree that economic recovery will be slow. The market will not bounce back like it has in the past. Estimates are that, in order for real estate values to return to their 2006 peak, we will wait until 2023 – fourteen years from now. Some economists have warned that if sellers don’t sell by the end of the first quarter 2010, today’s values will not be seen again until at least 2014.

Is that great news for sellers? Of course not. From all indications, however, the first quarter of next year will be their best opportunity to get the most for their home over the next several years.

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Posted on Jun 7, 2010