Evidence is growing that home prices are cycling over the top and the shift from a seller’s market to a buyer’s market is beginning. Remember, though, that this shift is a very slow process. One does not go to bed with a hot seller’s market and wake up in the morning with a full-blown buyer’s market.
Of course the bubbleheads are still predicting a horrendous crash in home prices even as the facts before them indicate otherwise. We’re seeing a gradual slowdown in price appreciation with modest declines in some overheated markets. No, chicken little, the sky is not falling. It’s just clouding over, and getting ready to rain on speculators who came late to the party.
The first signs of s shift to a buyer’s market are usually seen at the high end of the price scale, and this time around is no exception to the rule. In the Chicago metro area, the time on market for single family homes under $500,000 is 46 days, while for homes above $500,000 the time on market averages 80 days.
Chicago area Realtor Valdy Biernacki reports that “We are, without a doubt, seeing a shift from a four or five year seller’s market to a buyer’s market. Inventory is increasing and fewer buyers are coming to market.”
According to a recent study by Richard DeKaser, chief economist at National City Corp., a Cleveland bank holding company, markets overvalued by 20% or more account for about one fifth of the nation’s housing stock. DeKaser examined 25 years of data for 99 metro areas across the country, and found that eight of the ten most overvalued markets were in California.
Defaults may be low right now, but just wait…
Currently defaults in many overheated markets remain at or even below their historic baselines. But the overwhelming preponderance of high risk loans being made right now indicates a potential financial time bomb. For example, Ryan Singer, an economist with the San Diego Regional Chamber of commerce says that over 80% of mortgages in the county have in recent months, been ARMs and that half of those were interest only loans.
The Mortgage Bankers’ Association says that another reason defaults are still low is simply because most of these “creative” loans are quite new.
But payment shock from conversion to full amortization isn’t the only nasty surprise waiting for over-leveraged homeowners. This October, the minimum payment on credit card balances will double, thanks to a rule change in 2003 by the Office of the Comptroller of the Currency.
Instead of a 2% minimum payment, they’ll be paying 4% and considering the level of credit card debt across the country, that’s not chump change. And, about 40% of credit card holders do make the minimum payment, an indication that there isn’t a lot of surplus cash flow in those households. It wouldn’t take much to upset their financial situations.
Thus, we may see homeowners forced into default by being overloaded with non-mortgage debt, as well as being squeezed by the slow but steady increase in their house payment as the Fed continues to tighten short-term credit to fight off inflation.
What does this mean for the foreclosure investor?
First of all, it looks as though sales volume is remaining strong even as prices level off or decline somewhat. There are buyers out there; they’re just getting choosier, and the frenzy of recent years is abating.
Make sure your pencil is good and sharp when you calculate your best offer to a troubled homeowner. Local values will become more important. Look for the scruffiest (but fixable) house in an excellent neighborhood, rather than a fine house in a scruffy neighborhood.
The days of quick flips with no improvements made to the house, may be coming to an end. Now is the time to make sure you buy at least 30% below market. This is our expertise and where we can help you. (Read how in this months Marketing Mania).
Weed your lists with great care. Our rule of never counting on future appreciation is more important now than ever. In other words, don’t speculate; calculate! Study your local market and keep track of trends and changes. (Read “How is Your Real Estate Market Doing” here.)
Remember that you lock in your profit when you BUY the property. Selling it just realizes the profit you already knew you had. To paraphrase an old Air Force saying, straighten up and buy right!
