There are many answers all combining to put the real estate market in a tailspin. In our particular area (Delaware County, Pa a suburb 20 minutes from Philadelphia) the market slowed down in the fall of 2006. It has not recovered yet and every realtor in our office is crossing their fingers and repeating the mantra " things will pick up in the spring" lol. Here are mine and my wife's observations (we work as a team out of our office.)
The home prices in our area skyrockted like the rest of the country the last five years for several reasons.
1.Everyone was caught up in the "I have to have a bigger and better home" or first time buyers wanting to own instead of rent syndrome. This increased the number of buyers and the supply and demand theory kicked in driving up prices across the board. Existing homes were unable to handle the volume of buyers so developers rushed into the breech building new construction homes with all the amenities clients could possibly want. This in turn created a shortage of building materials that drove their prices up and was passed on the the buyers. Most new construction contracts have a clause in them stating that the price may go up before construction is complete.
2. Investors on Wall Street poured money into treasury bonds and mutual funds that invest in real estate mortgages increasing the pool of money available. Since the number of buyers increased the banks and mortgage companies saw a potential for profit and increased their media drive to supply mortgages at some of the lowest interest rates in years. The old rules for lending went out the window in their rush to be competitive and first time buyers and returning clients with less than steller credit were accepted with all kinds of new mortgages including 100% financing, teaser rates on adjustable mortgages, interest only loans and a whole variety of packages that just seemed to good to turn down.
3.When we go out on a listing presentation to sign up a seller and suggest a price to the seller their expectations are sometimes unrealistic and they would like to see a price $5000 higher than the last home on their street because they believe their home is much nicer than their neighbors or they have made personal choices on improvements that they would like to pass on to the buyers. Even after presenting them with the hard facts on paper it dosen't change their mind and sadly if you want a chance at getting that home on the market the agent has to cave in knowing it is priced too high. If the agent holds the line on the suggested price he loses the contract because the next agent coming in is going to say "how much? I can get you more than that!" It is a nasty cycle that feeds on itself. The odd thing is that the last five years 75% of the time the buyers actually paid the higher price because they were caught up in the frenzy of owning a home and multiple bids were common on the nicer homes. On a multiple bid situation there is alway a low bid, an asking price bid, one a little higher and one that just seems to blow everyone else out of the water. The seller naturally wants the highest bid taken and that feeds into the cycle also driving the price up.
The Real Estate Slowdown - Cause & Effect
Now to the slowdown covering the causes, effects and possible future.
1. Inflated prices on homes occuring over the last 5 years from an influx of buyers has slowed and coupled with the traditional slow winter sales period in the Havertown, Delaware County , Chester, Montgomery, & Bucks county areas of real estate has everyones attention in the business wondering why it has not picked up this spring as it has in the past. Since all of the media attention has been focused on a housing bubble and when, not if it will break, both sellers and buyers are hesitant to jump in. Sellers fear they will not get top dollar so hesitate on putting their homes on the market. Buyers are fearfull they will buy in at the top end and see their investment shrink.
2. With the recent Sub-Prime Mortgage Lender Fiasco the mortgage companies investors have dried up and their stock has plummeted so they cannot take on new loans of risky clients. Clients that took adjustable loans with a low teaser rate are ready to refinance but may run into problems with it if their credit is not steller. That means foreclosures are up across the country driving prices down since the mortgage lender is looking for a quick sale and will undercut market prices to get it done. First time buyers with shaky credit will not be able to get all of the financing they would like so might be shut out of the market. This shrinks the available buyer pool in some areas making it harder to sell homes on the market. These first time buyers will need to put down the traditional 10% and one client told us his lender wants 20% down to get a good rate on their mortgage. This will shock the first time buyers as they are used to the media coverage of 100% financing, low rates, etc., they see commonly advertised. They may have to stay in the rental market longer since most buyers want a low mortgage rate regardless of their credit and refuse to take on a note with high interest. We have had clients in the past who wanted to buy and had a mortgage pre-approval for 100% financing and a gift letter from family members covering the settlement charges. This practice will continue in the mid and high range markets because most buyers in that market have better credit or higher income but the more moderately priced homes will be affected and mortgage companies might not allow this practice in that market. So some estimates have the buyer pool being reduced by as much as 20% that will add to the problem. The National Association Of Realtors on the other hand reports February Existing Home Sales are the strongest since last April which I find hard to believe. In our real estate office in Havertown Pa. it sure dosen't look like it.
3.Talking with realtors they all seem to agree the market is in a slowdown. Agents who were doing only listings the last few years and not getting involved with buyers because it takes a lot more work to find a buyer a home than to list a home and let the other realtors bring the buyers to you are now going out looking for buyers because the listings are down dramatically. This in turn will hurt the less established realtors and force some to leave the business if it is a prolonged downturn adding to economy woes as the workforce has to adjust to other means of income. Any prolonged slump in housing will trickle down to building materials, tradesman, construction, home supply centers, retailers etc. and add to the uneasiness of the economy and this will steamroll with dire results. Housing has been one of the stalwarts of the economy the last five years and has driven the markets to new highs. Some economists predict a recession if all of the above things happen. March 27. 2007 the markets dropped 70 points and one of the reason was a weak housing report. The nations largest new home builder reported profits down 73% in the last quarter of 2006 as opposed to a year ago.
This is a work in progress and I will add content as I can and welcome all exchanges of information on real estate
