Buyers on fence till market turns up

In trying to solve today’s economic woes, we hear the word “confidence” thrown around a lot. Americans today simply lack confidence, and thus are unwilling to make major purchases, especially real estate. And if home values could just turn around, much of the economic confidence the nation needs so desperately might be restored, or so the thinking goes. I guess that is why I am constantly bombarded today by the following questions. I have included my best guess at answers.

Q. Where are we today in the housing market? Are there any indications that the housing stimulus plan is working?

A. It’s extremely difficult to say where we are until we get somewhere down the road and can look back. We know that residential real estate probably has lost between 10 and 15 percent of its value on average, but that is a national figure and this is a very local problem. We know that the sand states (CA FL AZ NV) have suffered the worst, due to rampant speculation. At the same time, home values in the rust belt have been hit hard by the changing economy. Other areas have seen less of a drop in sales and value, including Georgia. According to the most recent “all transactions” data from the Office of Federal Housing Enterprise Oversight, the average home in metro Atlanta dropped in value during 2008 approximately 3.82 percent. Of course, some areas have been hit much harder, some neighborhoods seem to have suffered less. The full report is at ofheo.gov under “Home Price Index,” and it makes for heavy reading. We know that buyers are being extremely cautions about buying anything right now, and that there is a crisis in confidence as much as anything else. We know that interest rates are as low as they have been in 30 years, and yet buyers are still sitting on the fence, waiting for both “the bottom” and some good economic news.

So, is the plan working?

It’s too soon to tell. Only just now are we seeing mortgage companies begin to set up the apparatus to accept applications for the refinancings and modifications called for in the stimulus plan. Trying to get a large mortgage company to change direction is like trying to stop a cruise ship — it just takes time. The next 60 days will be important. As we see past-due borrowers start having new and more pleasant alternatives, there should be a corresponding drop in new actual foreclosures. Likewise, as lenders begin offering qualified borrowers new lower refinancing rates, there should be a slip in foreclosure volume. Yes, that is a measurable number, but it will take time for the result of the stimulus programs to trickle down to the courthouse steps. If we eventually see a dramatic drop in foreclosure filings, that will be a very encouraging sign.

We recently saw an unexpected jump in new home starts of 22 percent. Is that a good sign?

Prior sales were so low that a jump of 22 percent was almost meaningless. It may have represented simply an increase of funds that banks were willing to loan to builders rather than an actual increase in residential purchases.

What about existing home sales?

Existing home sales are still extremely sluggish, due to confidence issues and “fence sitting.” Lets face it, the demand market is in the tank. People are taking a wait and see attitude.

Have we seen home prices bottom out?

We won’t know until 3 to 6 months from now, but my guess is that we are bumping along the bottom right now. Prices are getting low enough for some investors to snap up bargains, and that is providing some support for a price floor. A friend of mine bought an ugly bank-owned house in Clayton County last week for $20,001 cash. Within 30 days, it will shine like a new penny. Every purchase and rehab like that is significant, because it removes an obstacle to recovery for that particular neighborhood.

So, what would help jump-start the housing market?

Two of the keys to recovery are stemming the flow of foreclosures and mopping up the excess inventory of bank owned homes. Once that occurs, the market can begin to recover, but not before. First, offer a $15,000 federal tax credit to anyone who purchases a foreclosed house from a bank and quickly fixes it up to minimum community standards. And do not limit this to owner-occupants. Owner occupants won’t buy awful houses like these, but investors can and will. Second, the president should direct FANNIE MAE to make more loans available to well-qualified investors and owner occupants who buy foreclosed properties in targeted areas and make specific improvements. Current FNMA limits make it almost impossible for investors to obtain long term financing. Instead, we should be encouraging the purchase of these houses. Finally, offer a $25,000 tax exclusion for anyone who buys a foreclosed house, rehabs it to community standards, then sells it to an owner-occupant in the next 24 months. People would be fighting to make offers to banks, and prices would rise almost immediately. These proposals would generate immediate activity in the part of the real estate market no one has addressed — the bank owned homes that are poisoning our well. Please feel free to share your thoughts and ideas with me at the address below.

John Adams is a broker and investor. For more real estate information or to make a comment, visit Money 99. Find previous articles by John Adams and more home buying advice on the ajchomefinder mortgage center.