REAL ESTATE NEWS...Housing Outlook, 2016

Prices in most cities are rising moderately, but tight supply is holding back buyers and sellers.

Ron Berg

Justin Abbott bought a condo in downtown Omaha before he sold his suburban home

After more than a decade of head-snapping ups and downs, the housing market has settled into a steadier, less-spectacular groove. In 2015, home prices nationally rose 4%, following a 6.4% hike in 2014, according to Clear Capital, a provider of real estate data and analysis. Kiplinger forecasts that home prices will moderate even more in 2016, rising 3%—at the low end of the historical range.

Home values rose in 236 of the 276 cities tracked by Clear Capital. In most parts of the U.S., prices are still regaining ground lost in the bust; they remain nearly 19% below their peak, on average. Over the past year, prices rose by double digits in a few dozen cities, many of them clustered in areas that were hard-hit and where homes are still relatively cheap, such as Florida, Michigan, Nevada and California’s Central Valley.

Among larger cities with the biggest gains, Miami (up 10.1%) and Seattle (10.6%) have benefited from sales to international investors. Prices in Dallas (up 10%), Denver (12%) and Pittsburgh (11.5%) never really bubbled up nor tanked, and now they benefit from strong economies. Home prices in the cities of coastal California are taking a breather after run-ups that have made homes there less affordable.

At the bottom of the rankings, prices in a few dozen cities fell over the past year. These are mostly smaller cities located in the Northeast, the industrial Midwest and the South. In Nevada, New Jersey and New York, banks are finally pushing through foreclosures that had been dammed up either by legislation or by judicial process, and that dampened home prices.

Speed bumps in supply

Sales of existing homes rose by nearly 9% in September over September 2014, to 5.6 million, says the National Association of Realtors (NAR). That’s the second-fastest pace since early 2007. Chief economist Lawrence Yun says the trend represents the release of pent-up demand by homeowners who have regained enough equity to sell and trade up. But when you combine that with homeowners who might move but are stuck because they don’t have enough equity, plus a notable lack of newly built homes, you have a shortfall of homes for sale.

That tight supply is the speed bump for many home buyers, as well as for sellers who want to trade up. Nationwide, inventory has hovered at about five months’ supply (the time it would take to sell the current number of homes for sale at the current pace), which is considered equally favorable for buyers and sellers. But inventory in many cities is much lower and strongly favors sellers.

Homeowners who want to sell and have enough equity to cover the transaction costs face a chicken-and-egg situation: They won’t list their home until they’ve found their next home, and they can’t do that until there are more houses for sale. New construction will help break the stalemate but not anytime soon. A lack of buildable lots, skilled labor and construction loans have held builders back.

Many homeowners don't have enough equity to move up, and that’s adding to the scarcity of homes, especially at the entry level. Meanwhile, as the economy has improved, members of the millennial generation are moving out on their own in greater numbers. They want to buy, but many aren’t ready yet. Burdened by student debt and high rents, they’re struggling to save for a down payment and qualify for a mortgage.

The number of people who owe more on their mortgage than their home is worth is slowly decreasing. Nearly 13% of homes with a mortgage are underwater by at least 25%, according to RealtyTrac. Distressed sales fell to just 7% of total sales in September, says the NAR.

More than half of homeowners with a mortgage have at least 20% equity, and the vast majority are staying put. Many homeowners are using wealth from their home to remodel. Contractors have reported rising activity over the past few years, and more often than not, a backlog of projects.

Ron Berg

Pam and Chris Lucas of Nashville, Tenn.

Sellers need a strategy

Once a cow town, Omaha today is a transportation hub and home to Warren Buffett’s Berkshire Hathaway, insurance companies and one of the largest toll-free-call centers in the country. With low unemployment and affordable homes, buyers are eager to make a move. Sellers should be sitting pretty, but the market is deceptively challenging for them. With just two months’ supply recently, sellers who want to trade up confront that chicken-and-egg scenario: They can’t sell until they find a home they can move to. Plus, sales in Omaha have slowed.

That’s the market Justin Abbott, 44, faced when he listed his suburban Omaha home for sale with NP Dodge Real Estate in September. Divorced and without kids, he was tired of suburban living. But before he listed his home, Abbott found a two-bedroom, one-bath, loft-style condo in a former warehouse in the Old Market neighborhood of downtown Omaha. That eliminated hustling to find something to buy after he had a sale contract.

Abbott had bought his ranch-style house—with three bedrooms, two baths and a great view—in the fall of 2011 for $254,000. He listed it for $278,000 and received four offers within the first week. But this was no bidding war: Three of the offers were full price, but each one asked for concessions. Omahans are “a little too conservative to get frantic,” says Mike Riedmann, president of residential real estate at NP Dodge. Abbott accepted an offer that asked for a modest contribution to closing costs but no contingency for sale.

The sellers of the condo Abbott bought had their own challenges. Since originally listing the condo for sale in 2012, they had reduced the price six times. When Abbott saw it, the sellers were asking $333,000. He offered $316,000 and a quick close. They accepted immediately.

Nothing sells a house quicker in any market than presenting it in move-in condition, says Riedmann. Most buyers don’t have the desire or time for do-it-yourself projects, and they typically overestimate the cost of work when they ask sellers for price concessions. If your home needs paint or new carpet, get it done before your first open house. It also pays to price your home right the first time. Your agent should help you do that based on recent comparable sales. Buyers are too smart to make unrealistic offers on overvalued homes, Riedmann says.

Buyers sing the blues

Nashville may be known as Music City, but that’s not the only act in town. Its economy has diversified, the population is growing, and people are moving there without a job, expecting they will get one. But if they want to buy a home, they may have to scramble. In September, home prices rose at a 7.3% clip from the year before. In August and September, Nashville had the largest year-over-year increase in sales of the 66 cities followed by the Redfin Housing Market Tracker. With just three months’ supply, the market feels “frantic” for buyers, says Alexander Brandau, a local agent with Keller Williams Realty.

Pam Lucas, 37, and her husband, Chris, 38, were living in a suburb of Columbia, S.C., when Pam received a job offer from a veterinary practice in Nashville, their hometown. Chris is able to work anywhere with a computer and an airport, so Pam took the offer. Because the housing market is hot in Nashville but not in Columbia, they decided to buy first and sell later.

In September, Pam began doggedly searching online listings. The couple set their sights on a three-bedroom, two-and-a-half-bath Victorian in East Nashville, a desirable older neighborhood, but they lost that first choice to other buyers. After seeing a succession of other homes they didn’t fall in love with, they decided to reconsider a home they had previously rejected. When they saw it, they discovered the pictures hadn’t done it justice and made an offer. The sellers were asking $589,900. The Lucases bid $550,000 and included a preapproval letter and a contingency for a home inspection. When the sellers countered at $580,000, the Lucases quickly accepted it to beat an offer from another buyer.

There was one glitch: Because the Lucases planned to move before Pam began her new job, they lacked the two paychecks required to qualify for the mortgage they needed. After putting down 20% and taking out a conforming jumbo mortgage of $425,500 with a 30-year fixed interest rate of 4.25%, they were more than $30,000 short, which they covered with an unsecured loan with a rate of 5.3%. They haven’t decided what to do with their South Carolina home. They don’t think they can get the price they want for it now, so they may rent it out.

In a fast-paced market with limited supply, get your ducks in a row before you shop. See how much house you can really afford by getting preapproved for a mortgage from a local lender that sellers’ agents value for reliability and responsiveness; the preapproval letter will assure sellers that you will qualify for the financing you need to close the deal.

If you see a home you want, make your best offer first. If you make a lowball offer in a multiple-offer situation, the seller may not give you time to make a higher bid. You could include an escalator clause to increase your offer automatically by a certain amount over a competitor’s, but sellers prefer knowing how high you’re willing to go the first time around. Tell your agent what you’re willing to offer other than your offering price. For example, the sellers may want to close quickly or rent the home from you after closing while they look for their next one.

Protect yourself with contingencies for financing, an appraisal, a home inspection or the sale of a previous home. Assure sellers that you’ll use an inspection to identify major issues, not demand a multitude of small repairs. And expect the unexpected. The Lucases’ mover canceled on moving day because of the “1,000 year” rainstorm and flooding in Columbia. The couple rented a truck and moved their stuff themselves.