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Is Today’s Housing Market a False Market?

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Could today’s housing market be a false market?

True or FalseBetween 2006 and the end of 2008, the market in the Washington, DC metro area and most of the US was horrible. But then 2009 rolled around and the market did an abrupt 180. Rates and points started falling. Inventory started plummeting. Buyer demand increased. And prices started rising.

Today, the market is insane. Buyers are fighting 5, 10, 15+ other offers when bidding on properties. Even being the highest offer doesn’t mean anything anymore because people are submitting all cash/non-contingent offers – even on properties priced above $700K. Prices in the Washington, DC area (and others) have risen 5, 10 even 20+ percent.

This makes little sense to me. The general economy is crap. Banks are still going belly up left and right. Foreclosure filings are hitting new records monthly. Unemployment is at a 26 year high.  Hyper inflation is just dying to come out of the bag. All the signs still point to a troubled economy and market.

So what’s behind such market conditions?

Supply

Inventory plummeted for a variety of reasons – one of the biggest being that banks are not putting the homes they have on their books up for sale on the open market. Rumors have it that over 70 percent of the properties that have been foreclosed on are not on the market (yet) and that it’s being done on purpose. I thought that a while back and had and off-the-record conversation about this with someone who confirmed my suspicions.

What’s a possible reason for banks holding on to these properties and not selling them on the open market?

Here’s one…if they keep them off the market, they help inventory stay down and prices go up (as we’ve already seen in 2009). If prices go up in general, so do all the properties they have on their books. Voila! Instant money/profit for the banks!

Another possible reason…banks getting into the real estate business. Based on conventional thinking, those who hold the listings hold the power (and money). I don’t necessarily agree with this notion, but we all know that banks typically base their decisions on conventional thinking so it probably makes sense to them.

If banks end up holding the majority of real estate inventory in the country, imagine how much power they think they will have. In an economy based on profits and earnings, the idea of that much power and money is pretty attractive and makes you go, “hmm…”

Demand

Yes, prices being low has gotten a lot of buyers off the fence and into the market thanks to greater affordability. And yes, low rates have helped. But there have been a lot of artificial factors such as the $8000 first-time home buyer federal tax credit.

So what happens when these programs go away one day?

The artificial demand that the programs created will go away as well. And we all know what a drop in demand does to the housing market and values.

Mortgage Rates

Speaking of low rates, can anyone give me a good (and real) reason that rates are this low? Rates are supposed to a reflection of the level of risk in the marketplace. Not sure about you, but “risk” is a word synonymous with today’s market and economy on almost every level.

IMHO, one main reason that rates are still low is because the government has been buying up MBS’s left and right and bailing out banks. But the money they’ve been using was borrowed from you and I and the money will eventually run out (or the dollar will be worth 5 cents). Btw…don’t forget that we have to pay all that money back – with interest 🙂

The government has effectively kept rates artificially low by placing the risk on them, but the risk they’ve taken on will ultimately come out and be passed on to consumers. Isn’t that just delaying the inevitable? Or is there some grand-master plan that passes the risk on to some really cool aliens that we’re playing Hold ‘Em with at Area 51 right now?

What’s the “real” deal?!

Am I totally off base (aside from the alien comment) or is there a legitimate reason the market is the way it is? Is it sustainable? Is it just a temporary blip up before prices plateau or go back down as some are predicting? Are banks trying to get into the real estate business?

So many questions yet, so few “real” answers that go beyond the first layer of the onion.

Danilo Bogdanovic is a Real Estate Consultant/REALTOR(R) in Northern Virginia and author/owner of LoudounScene.com and LoudounForeclosures.com. Danilo serves on various committees with the Dulles Area Association of REALTORS(R) and the Virginia Association of REALTORS(R).

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15 Comments

15 Comments

  1. bficker

    October 24, 2009 at 8:15 pm

    Great post. I’m tired of seeing people in my area (Phoenix) get excited because the monthly median sales price is up 3 months in a row. Really? You’re excited that $ per square foot is up $.10? Because it’s still down $20 per square foot from last year. This market still has a long way to go, especially if you are over $150k (in Phoenix, that’s spendy)

    I might be mistaken, but I don’t believe that banks can hold on to foreclosed homes for too long. I remember reading that they are only allowed to own real estate where they do business (their office buildings and such). The foreclosed would be considered non-performing assets and would have less money to lend (which is how they make their money). What I believe is happening here is Phoenix is that they are delaying the foreclosures until they HAVE to take it back. I’ve talked with people owing over a half million and not making a payment in over a year. They got initial letter when they missed their first payment, but nothing since. Maybe they can be reported differently if they are not actually foreclosed on?

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  9. Joe Loomer

    October 25, 2009 at 8:40 am

    Danilo,

    I think you hit the nail on the head with the premise of banks not allowing foreclosures to go on the market.

    In the most densely populated county in my area – Richmond – there are 478 foreclosures, according to RealtyTrac. Only sixty of these homes are “listed.”

    On 31 December of 2008, a full 400 properties expired in our MLS, bringing our inventory down to just over 4,200 listings (all properties). To date, the active properties mark has remained in the low 4,300s (from a high in the low 4,800s in July of ’08).

    We are not, however, in your situation. Sellers are not getting multiple offers, appreciation remains flat (small pockets have depreciated), and a home in mint condition still takes over 100 days to sell. Only three months of this year have beaten 2008’s figures, and we remain down 48% on 2006’s totals (the best year ever in this area).

    I anticipate rates will creep higher, but foreclosures will only be dripped on to the market for an extended period (three years?).

    Navy Chief, Navy Pride

  10. Bruce Lemieux

    October 25, 2009 at 9:48 am

    Danilo – Even though we’re both in the metro DC area, the real estate markets in Montgomery County MD and Northern VA have quite a few differences. Here’s my take on what’s happening here.

    Bidding Wars — With very, very few exceptions, we’re only seeing bidding wars for entry-level homes. Transaction volume for homes under $400K (esp for homes under $300K) has been on fire this year — volume two times higher than last year for some months. The drivers: low home prices, low interest rates. When a bank lists a single family home on the market in the $200s or $300s, there’s fierce competition from buyers and investors. For homes $400K to $800K (depending on the area) the market is more balanced. Over $800K and higher, demand starts to fall off the cliff in most areas.

    Prices — prices haven’t increased in all price ranges. The tide isn’t rising all boats here. We’re still seeing values go down for the higher end of the market.

    Supply — total inventory here has gone down every single month this year – down 30% so far this year. Why? We typically have a big move-up market which adds inventory and drives demand. Now, only the brave and hyper-motivated are moving-up. People are only selling if: 1 – distress/foreclosure, 2 – divorce, 3 – retirement, 4 – relocation, 5 – moveups. Move-ups are typically #1 here. Right now, if you don’t have to sell, you’re staying put. I don’t worry about a “flood” of new foreclosures. Distress inventory here is down 33% this year. Add more REOs – buyers are ready to jump on bargains.

    $8K Tax Credit – I don’t believe it’s having a tangible impact here. The $8K credit is a bug on the windshield of the locomotive of low prices + low mortgage rates. Let it expire IMO.

    Unemployment – The metro DC area as the lowest unemployment of any large metro area in the U.S. Lots of diversified white color and government jobs. Yes, retail and construction has been hit, but these jobs don’t drive our housing market. We’re fortunate. You can’t sell homes if people don’t have job.

    Mortgage Rates. The fed has pulled out the stops to keep interest rates at historic lows to encourage borrowing. They’re pulling a lot of levers that I don’t understand. I do worry about future higher rates once the hangover of deficit spending kicks in. Will this start in 2010? I don’t know. I believe our market is very sensitive to rates, so rising rates would be noticed immediately in lower transaction volume.

    The bottom line. You ask ‘what’s the real deal’? Our market — like most markets — is really choppy. To make sense of it, you must understand what’s going on by *location* and *price range*. We have both raging seller’s markets and strong buyer markets, so stay away from generalizations.

  11. John Foreman

    October 25, 2009 at 10:06 am

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  12. BHG Real Estate

    October 26, 2009 at 6:06 pm

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  14. liona

    November 5, 2009 at 10:22 pm

    This is a great article. Bravo! Based on the economy, even the best area like DC will not hold up. Housing is location specific to some level. If everything goes to crapper, there will be no government money to offer government jobs. Today a bill passed $8000 credit to first time home buyer and about $6000 to sellers until 4/30/2010. What’s gonna happen is the first time home buyer will run out, flippers will run out of buyers to sell the houses to, more debt will be added on middle income people, government prints more money, money becomes worthless. Hyperinflation comes, no jobs, anywhere, period.

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Economic News

Is the real estate industry endorsing Carson’s nomination to HUD?

(BUSINESS NEWS) Ben Carson’s initial appointment to HUD was controversial given his lack of experience in housing, but what is the pulse now?

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NAR strongly backs Dr. Carson’s nomination

When President-Elect Donald Trump put forth Dr. Ben Carson’s name as the nominee for Secretary of Housing and Urban Development, NAR President William E. Brown said, “While we’ve made great strides in recent years, far more can be done to put the dream of homeownership in reach for more Americans.”

At the time of nomination, the National Association of Realtors (the largest trade organization in the nation) offered a positive tone regarding Dr. Carson and said the industry looks forward to working with him. But does that hold true today?

The confirmation hearings yesterday were far less controversial than one would expect, especially in light of how many initially reacted to his nomination. Given his lack of experience in housing, questions seemed to often center around protecting the LGBT community and veterans, both of which he pledged to support.

In fact, Dr. Carson said the Fair Housing Act is “one of the best pieces of legislation we’ve ever had in this country,” promising to issue a “world-class plan” for housing upon his confirmation…

>>>>>Click to continue reading…<<<<<

#CarsonHUD

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Job openings hit 14-year high, signaling economic improvement

The volume of job openings is improving, but not across all industries. The overall economy is improving, but not evenly across all career paths.

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Job openings hit a high point

To understand the overall business climate, the U.S. Labor Department studies employment, today releasing data specific to job vacancies. According to the department’s Job Openings and Labor Turnover Survey (JOLT) for April, job openings rose to 5.38 million, the highest seen since December 2000, and a significant jump from March’s 5.11 million vacancies. Although a lagging indicator, it shows strength in the labor market.

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The Labor Department reports that the number of hires in April fell to 5 million, which indicates a weak point in the strong report, and although the volume remains near recent highs, this indicates a talent gap and highlights the number of people who have left the labor market and given up on looking for a job.

Good news, bad news, depending on your profession

That said, another recent Department report notes that employers added 221,000 jobs in April and 280,000 in May, but the additions are not evenly spread across industries. Construction jobs rose in April, but dipped in professional and business services, hospitality, trade, and transportation utilities. In other words, white collar jobs are down, blue collar jobs are up, which is good or bad news depending on your profession.

Additionally, the volume of people quitting their jobs was 2.7 million in April compared to the seven-year high of 2.8 million in March. Economists follow this number as a metric for gauging employee confidence in finding their next job.

What’s next

If you’re in the market for a job, there are an increasing number of openings, so your chance of getting hired is improving, but there is a caveat – not all industries are enjoying improvement.

If you’re hiring talent, you’ll still get endless resumes, but there appears to be a growing talent gap for non-labor jobs, so you’re not alone in struggling to find the right candidate.

Economists suspect the jobs market will continue to improve as a whole, but this data does not pertain to every industry.

#JobOpenings

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Gas prices are down, so are gas taxes about to go up?

Do low gas prices mean higher gas taxes are on the way? Budgeting for 2015 just got a bit more complicated, if some politicians have their way.

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Gas taxes and your bottom line

Many industries rely heavily on time in their vehicle, not just truck drivers and delivery trucks. Sales professionals hop in their vehicles throughout the day, as do many other types of professionals (service providers like plumbers, and so forth). For that reason, gas prices and taxes are a relevant line item that must be budgeted for 2015, but with politicians making the rounds to push for higher gas taxes, budgeting becomes more complicated.

Gas prices are down roughly 50 cents per gallon compared to a year ago, which some analysts say have contributed to more money in consumers’ pockets. Some believe that this will improve holiday sales, but others believe the timing is just right to increase federal taxes on gas. The current tax on gas is 18.40 cents per gallon, and on diesel are 24.40 cents per gallon.

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Supporters and opponents are polar opposites

Supporters argue as follows: gas prices are low, so it won’t hurt to increase federal gas taxes, in fact, those funds must go toward improving our infrastructure, which in the long run, saves Americans money because smoother roads mean better gas mileage and less congestion.

Gas taxes have long been a polarizing concept, and despite lowered gas prices, the controversial nature of the taxes have not diminished.

While some are pushing for complete abolition of federal gas taxes, others, like former Pennsylvania Governor, Ed Rendell (D) tell CNBC, “Say that cost the average driver $130 a year. They would get a return on that investment” in safer roads and increased quality of life, he added.

The Washington Post‘s Chris Mooney points out that federal gas taxes have been “stuck” at 18 cents for over 20 years, last raised when gas was barely a dollar a gallon and that the tax must increase not only to improve the infrastructure, but to “green” our behavior, and help our nation find tax reform compromise.

Is a gas tax politically plausible?

Mooney writes, “So, this is not an argument that a gas tax raise is politically plausible — any more than a economically efficient tax on carbon would be. It’s merely a suggestion that — ignoring politics — it might be a pretty good idea.”

Rendell noted, “The World Economic Forum, 10 years ago, rated us the best infrastructure in the world,” adding that we “need to do something for our infrastructure, not in a one or two year period, but over a decade.”

Others would note that this rating has not crumbled in just a few years, that despite many bridges and roads in need of repair, our infrastructure is still superior to even the most civilized nations.

Regardless of the reasons, most believe that Congress won’t touch this issue with a ten-foot pole, especially leading up to another Presidential campaign season starting next year.

“I think it’s too toxic and continues to be too toxic,” Steve LaTourette (the former Republican congressman best known for his close friendship with his fellow Ohioan, Speaker John Boehner) tells The Atlantic. “I see no political will to get this done.”

Whether the time is fortuitous or not, and regardless of the positive side effects, many point to a fear of voters’ retaliation against any politician siding with a gas hike, so this matter going any further than the proposal stage is unlikely.

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