2010 Quarter 3 Summary
Sales Numbers Down Slightly: Is this a normal seasonal slowdown?Inventory Leveled Off: After rising all year, we leveled off this summer
Rates Drop Again!: 30-year fixed rates were mostly in the 4.25 – 4.5 % range, new historical lows.
Govt. Incentives: What’s going on behind the scenes?
Foreclosure Activity: New Filings up, resolutions/sales down, foreclosure process longer
2010 Quarter 3 Details
Sales Numbers: Sales volume has been slowly declining since June – this trend is in line with normal seasonal variations, but will we see a rebound in January 2011? Here are the numbers since January 2009:|
2009 January: February: March: April: May: June: July: August: September: October: November: December: |
1992 2110 2408 2406 2254 1999 1922 2037 2045 1792 1599 1220 |
2010 January: February: March: April: May: June: July: August: September: October: November: December: |
1534 1919 2009 2164 1699 1752 1693 1685 1518 1373 |
Inventory Leveled off: If you click on the above link, you'll get an excellent visual representation of the inventory vs sales numbers (aka supply vs demand). Inventory went up just a tad bit from June-July, but has clearly leveled off during the 3 months of Q3. If inventory was going up and sales were dropping, I would be very concerned about the market’s health at this time, but, if you view the chart, you'll see that October's numbers are showing that inventory is on the decline in the first month of Q4 (this is reassuring). As a reminder, the inventory is heavily weighted towards the luxury market, whereas entry-level property inventory remains fairly low due to continued healthy demand from investors and first-time buyers.
Rates Down again - Historical Lows!: Most 30-year fixed rates in Q3 fell in the 4.25 – 4.5% range. This is down about .5% over last quarter! These are the lowest home loan rates in recent history! Extremely low interest rates, in my opinion, are the single-most important financial reason to purchase a home right now and lock in on a 30-year fixed rate. I just reviewed a refinance from a client of mine at 3.875%!!!!
View a few historical charts on Home Loan Rates here:
30-year fixed rates from 1971-2006
30-year fixed rates from 2002-2010
I’m going to do a worksheet here to illustrate a point that I think many people are missing when they talk about financial reasons for NOT buying. I know a few people are thinking, “what if home prices drop another 5-10%?” Ok, my reply is, “what will happen if rates go back up over 5%”? I'm guessing that the change in rates will outpace, and, therefore, trump any change in home values in your cost to own. Yes, I am assuming that rates go back up sometime soon, so if you disagree with that assumption, then my recommendations based on this scenario won’t resonate with you. It is my belief that rates are artificially low (see below) and are based on a deflating economy. When QE2 brings inflation and govt incentives are removed, I expect to see higher rates. Here’s the numbers on a potential scenario:
Let’s take a 20% down conventional loan on a $500k home. That yields:
$400,000 loan being financed at 4.25%. Monthly payments* = $2488.59
Now let’s say there is a full 10% drop in this home’s value over a year, but rates go up to just 5.25%
Now, we have a $360,000 loan financed at 5.25%. Monthly payments* = $2456.68
* = Principal, Interest, Taxes at 1.25%
So, if we lost a full 10% in home value, but rates went from 4.25 to 5.25, these two items will cancel each other out with regards to your cost. What we do know, is that rates are near 4.25%. Prices may not go down & rates may stay constant, but my guess is that a buyer who is financing their purchase would be foolish to wait based on “financial reasons” if they are willing/able/ready to buy now (just my opinion and I could be wrong). The total amount amortized over 30 years will be the same, but they can pay it off sooner by starting now. Yes, if values go down significantly (over 10%) you will have a higher equity position by waiting, but what if rates go up to 6%? I'm pretty convinced rates will hit that mark and go over it in the next 3 years, but that is pure speculation and I don't have a magic crystal. What if home values don't go down, but rates go up? I think there is more risk involved with waiting to buy.
Government Incentives: All the tax credits are done, so what else is there? Well, Quantitative Easing Part 2 (QE2) is on the way…. Quantitative easing is a fancy word for when the Fed goes in and buys long-term securities from banks -- primarily 10-year Treasuries. The central bank creates money out of nothing (in the old days, we actually printed paper money to accomplish the same goal). The theory is that, by mopping up securities, banks will have so much cash that they will have to lend. This provides liquidity to the lending market and makes money available to potential buyers that need a loan.
Also, government supported agencies like FNMA (aka Fannie Mae) are backing over 90% of new home loans today. This is enabling war-torn & weary lenders to lend because the government is backing the loan and investors in the secondary market are happy to buy a US backed security (don't forget we still have the largest stash of gold in the world!). While I believe that the government is artificially keeping this market afloat to a certain extent, I also believe they will keep doing it, until the natural level of the market catches up. It appears to be an effort to keep the market from making large swings up and down, and only time will tell if the plan works.
Foreclosure Activity in CA: Looks like the progress we made in the first half of the year is regressing in Q3 – is this a seasonal adjustment? Bearing in mind that our inventories and filings are down compared to last year’s numbers, here are the Q3 stats:
1. Notice of Defaults were up about 10-15% over Q2
2. Foreclosure inventories up slightly, mostly due to increased Bank-owned inventories
3. Fewer bank cancellations/resolutions (i.e. short-sale or loan mod)
4. Fewer 3rd party/investor purchases at trustee auctions
5. Increased resolution timeframes
So it appears we are adding inventory currently. Is this a speed bump or a seasonal variation? I’m not sure, but if home values go down another 5-10%, we will definitely continue to see more distressed properties in the foreclosure process and they will become a majority in the market’s inventory. If low rates entice buyers to buy, I estimate these numbers to start going back down in Q1 of 2011. We'll see if there's a push towards resolutions in December from the banks wanting to close out the 2010 books.
Here's my top reference for quality foreclosure data: Foreclosure Radar
Summary & Expectations: Home loan rates are currently the lowest they have EVER been. This, along with govt. agencies buying/backing a majority of new loans & QE2 on the way, is helping keep the market afloat. Historically low rates provide a great long-term opportunity for buyers and those that are able to refinance (btw, my lender at BofA is doing no cost refis if you are interested). While inventory has come up all year and sales are low, this could just be due in part to seasonal variations. Considering how low rates are, though, I don’t think it is just a seasonal variation – these rates are too good for any somewhat motivated and intelligent buyer to pass up. Thus, I do believe that Q3 and the early half of Q4 will eventually show that we have corrected downwards a little (about 2-5% depending on your market). This is also based on current experiences with my own listings and those of my co-workers. My expectation for the near-term (enter standard disclaimer here) is that sales/inventory will remain slow/steady until January, which is normal for this time of year. At that time, everyone will realize home values dropped about 5% and, if rates remain low, we will see a large influx of buyer activity at that time, which will boost home values back up a little. That being said, I believe the best deals for buyers will be had in the next month or two while rates are extremely low and sellers are increasingly desperate.
Thank you for reading – here are a couple resources you might find useful:
Search All listed San Diego County Homes for sale - updated daily. Click "Map Search" at top of page for an interactive map.
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I welcome any feedback or thoughts you have for me. I also appreciate your referrals - if you know of anyone thinking of buying or selling real estate in San Diego, I would be happy to work with them.
Warmest regards,
Adam Pascu
Team 73 Degrees
Keller Williams Realty
858-761-1707