Is 2012 the Year the Real Estate Market Turns the Corner?

Probably not, but at least we can say the worst is behind us. It will not be until 2014 before we see a broad based recovery. When I say recovery, I’m referring to appreciation of 1 or 2 percent per year.

The era of 5-10 percent annual gains in real estate are over. The long-term lingering effects of the bursting real estate bubble, changes in demographics, and the shifting views on homeownership will all contribute to market values that, at best, will slowly plod upward. Are there deals to be had in real estate? Will some markets outperform the overall market? Yes to both questions, but for the vast majority, reducing your principal balance will be a better way to build home equity than waiting for values to go up.

RATES ARE LOWER

Before getting into an update on the real estate market, how about some good news? Mortgage rates have dipped below the prior all time lows reached late in 2010, and are now the lowest since FHLMC started tracking rates in 1971. Buyers are starting to take advantage of this once in a lifetime opportunity, but if you’re a homeowner that hasn’t refinanced yet, the question of qualification or enough home equity is probably holding you back.

The qualification issue is pretty straightforward; if you have decent credit with verifiable qualifying income, you will qualify for a loan. For many, the equity hurdle is the toughest one. Most values in the Puget Sound region have dropped by more than 20 percent from the 2007 peak and some have dropped by as much as 40 percent.

FNMA and FHLMC have announced changes to the Home Affordable Refinance Program (HARP) to help some over the equity hurdle. Starting in March, the agencies are removing the loan to value caps that had prevented many from being able to refinance. In other words, it’s possible you could be in a negative equity position and still qualify for a refinance. Also, the agencies are reducing some of the fees they charge on HARP loans. Check out my blog posting on HARP 2.0 for details on the changes.

THE REAL ESTATE SCOOP

On the surface, with mortgage rates at all time lows, falling inventories, and steadily increasing demand one would believe that values are primed to move higher. I’m not referring to nominal changes in sales and listing activity either.

In King County, total listings are down more than 25 percent from last December and pending sales are up nearly 20 percent. In Snohomish County, listings are down nearly 30 percent and sales are up about the same amount.  With the supply of properties down to about three to five months in most markets, you would think we’ve turned the corner.

So, what’s the problem? Distressed sales, also known as bank-owned properties and short sales, are the culprit. In the last year, distressed sales as a percentage of total sales have increased from 23 percent to 30 percent, and these properties are selling for much less than their non-distressed counterparts.

You’re probably thinking there must be some end to the supply of these properties so we can get back to a normal market of willing buyers and sellers, but the end is not really in sight. Based on the current pace of sales of distressed properties in our state, it will take nearly four years to work through the inventory of properties that have mortgages that are at least 90 days delinquent. I wouldn’t expect to see a dramatic change in the volume of these types of properties either because the banks and HUD will slowly release foreclosed properties so they don’t further depress the market.

One other factor that is impacting the market is the significant number of homeowners that don’t want to sell, or can’t sell. These owners would normally represent a pretty significant percentage of the market.  They would normally buy up, downsize, or make lateral moves, but since their equity has taken a significant hit, if not disappeared completely, they have decided to stay put. For the foreseeable future, the buyer’s market will be dominated by investors and first-time buyers, two groups that are willing and able to take advantage of the great deals and low rates.

Do I think it will take four years before we’re on the upswing? Probably not. Our regional economy seems to be in good shape, the echo-boomers are hitting the homeownership phase of their lives, and the Puget Sound region, as one of the best places to live in the country, is still attracting companies and people to our fine state. Don’t count on big price gains when we finally do turn the corner, but principal reduction through normal amortization coupled with modest appreciation may give you some equity to play with over the next few years.

Steve Bozick is a licensed mortgage loan originator in Redmond, license number MLO 91676