Thursday, April 10, 2014

REAL ESTATE TOPICS


Homebuyers face spring sticker shock


More potential buyers are out trolling the nation's neighborhoods for their dream homes. Unfortunately, they are finding little to look at and, even worse, they are finding higher prices than they expected.
"People quite frankly came out and got sticker shock because they're coming out to shop now, or they came out in January and February to shop, and they picked up the price sheet and saw, 'Wow that's way more than I thought' because home prices had gone up so much in 2013," said Brad Hunter, chief economist at Metrostudy.
Home prices are up 12.2 percent from a year ago, according to the latest February reading from CoreLogic. Meanwhile, wages are up just 2.1 percent from a year ago, according to Friday's report from the Bureau of Labor Statistics. Investors, laden with cash, are buying fewer homes this spring, which leaves regular, mortgage-dependent buyers to pick up the slack.
While home prices are still well off their peak of the housing boom in 2006, it still costs the average homebuyer considerably more to buy a home today than it did then.
That is because mortgage lenders require larger down payments and higher incomes to support the debt. Despite the fact that the rate on the 30-year fixed mortgage is slightly lower than it was in 2006, it is now a far more popular product in the market, because all those "creative" mortgage products of the past are either gone or illegal.
Just 65 percent of mortgage originations in 2006 were fixed rate, while more than 95 percent of them are today, according to Black Knight Financial Services. In 2006, a buyer could put no money down on a teaser-rate loan with a rate as low as 1 percent for the first year. No more.
Rising mortgage rates and costs, tighter credit conditions, higher home prices. Add it all up, and affordability shrinks.
In fact, more than half the homes currently on the market in seven major American metros are currently unaffordable for local residents, according to a Zillow analysis of incomes at the end of last year with respect to mortgage and home value data.*
Among the 35 largest metros nationwide, more than half of homes currently listed for sale in Miami (62.4 percent), Los Angeles (57.2 percent), San Diego (55.3 percent), San Francisco (55.2 percent), Denver (52.8 percent), San Jose, Calif. (50.9 percent) and Portland, Ore. (50.3 percent) are unaffordable by historical standards, according to Zillow.
"As affordability worsens, we're already beginning to see more of the kinds of worrisome trends we saw en masse during the years leading up to the housing crash. These include a greater reliance on non-traditional home financing, smaller down payments and a greater pressure to move further away from urban job centers in order to find affordable housing options," said Zillow's chief economist, Stan Humphries. "We're not in a bubble yet, but we're beginning to see the early signs of one in some areas."
Housing markets like Houston, Phoenix and Charlotte, N.C., are also showing affordability far weaker than the national average. Thirty-three percent of homes nationwide are considered unaffordable for the average local resident.
Home builders, who raised prices dramatically in the past year, are seeing the worst of it; they are reporting higher buyer traffic, but far less pull-through on sales than normal. Some are now offering incentives, like free upgrades in the home. It is tougher for them to lower prices now, because they are still faced with higher costs for land, labor and materials.
Despite weakening affordability, home price growth is still historically strong. That is because there is so little supply on the market for sale nationwide. Millions of homeowners are still underwater on their mortgages, and therefore unable to move. Other homeowners see prices rising and want to wait longer to see how high they go.
On top of that, home builders, while increasing housing starts, are still well below normal rates of construction. And then there is basic consumer confidence, which is not fully back to where it needs to be.
"I think buyers are extremely fickle, and what's weird about it is the market is in a funk on both sides, it's like trying to get pandas to mate at the zoo," said Glenn Kelman, CEO of Redfin, a tech-powered real estate brokerage. "Sellers feel like, 'I can rent it out. I've got a very low mortgage rate on this place, and when I sell the house I'm also giving up a 30-year mortgage on it at 3.5 percent.'"
Zillow determined affordability by analyzing the current percentage of an area's median income needed to afford the monthly mortgage payment on a median-priced home, and comparing it to the share of income needed to afford a median-priced home in the pre-bubble years between 1985 and 2000. If the share of monthly income currently needed to afford the median-priced home is greater than it was during the pre-bubble years, that home is considered unaffordable for typical buyers.
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