The Next Home Buyers: Ozzie & Harriet
As Americans cease looking at homes as ATMs, new buyers are better off taking a more traditional approach
It's an unsettling time to be shopping for a home. Home values have yet to stabilize in three-quarters of U.S. metropolitan areas. Alarm about so-called robo-signing of foreclosure paperwork has raised fundamental questions about who owns a property's title. And, while unlikely, two bipartisan commissions have suggested capping or killing the previously sacrosanct tax deductibility of mortgage interest.
As a result, home shoppers are being forced to accept a more traditional view of a real estate purchase: seeing their new home more as a savings account than as an investment. That represents a switch from how many owners thought during the go-go years of surging home prices and easy money, says Stan Humphries, chief economist of real estate information and listings website Zillow. "It's essentially a forced savings plan, putting aside a percentage of your income into a savings account that is a non-depreciating asset in typical times," he says.
Of course, that's not necessarily a bad thing. From the 1950s through the mid-1990s, home values appreciated 2 percent to 4 percent a year, on average, just beating the rate of inflation. The challenge is that Humphries also thinks home values won't bottom nationally until June 2011 at the earliest. Even when home values bottom out, Humphries expects an L-shaped bottom. His grim outlook is based on the fact that 23.2 percent of single-family homes across the U.S. had negative equity in the third quarter—which means high foreclosure rates will likely persist, while underlying demand for housing remains weaker due to high unemployment. The Obama Administration doesn't expect unemployment to return to a normal range, below 6 percent, until 2015, according to the Office of Management and Budget's mid-session review released in July.
FAREWELL TO THE FLIPPERS
Certainly, few now expect to sit on a property for a couple years and then get rich off the equity. Real estate agents complain that even record-low mortgage rates—which hit 4.07 percent on Nov. 9 for a 30-year fixed-rate loan, according to Zillow—won't budge many potential buyers, given the tough outlook for price appreciation. "If prices are falling, and rates are falling, and the news is more of the same, why would you buy a home right now?" says Alicia Trevino, a broker in Dallas.
Even some professional real estate "flippers," or the people who work with them to buy and rapidly sell property, are having second thoughts. "I tell clients, 'Don't buy this as an investment,'" says Sheldon F. Margolis, a real estate lawyer in Jersey City, N.J. "It will increase in value, but it will take a lot longer than it did in the past." Large inventories of unsold units have made it no longer possible to buy an apartment in a high-rise on Jersey City's high-priced waterfront in the construction stage and make a quick $30,000 to $50,000 by flipping it, he says. Similar new developments throughout the U.S. are sitting mostly empty, with values, in many cases, under water. That has left their developers stuck. Flippers are akin to day traders in the stock market—high risk, high return, but in a challenging market, most wind up losing money.
A few markets showed renewed life earlier this year, but mostly due to the federal first-time home buyer tax credit, which finally expired in September. First-time home buyers accounted for a record 50 percent of all home sales in a 2009 study from the National Association of Realtors, up from 47 percent the prior year. (The data go back as far as 1981.) Home values in five major California markets, including Los Angeles and San Francisco, turned negative again in the third quarter after climbing for five consecutive quarters, according to Zillow. Despite an average 3.6 percent year-over-year gain in single-family home prices nationally in the second quarter, prices fell in 70 percent of the 384 metro areas, and many markets experienced double-digit drops, compared with the 2009 second quarter, Fiserv-Case Shiller said in its November home price insights report. Fiserv-Case Shiller expects double-digit declines to continue until the end of the summer of 2011.
It's an unsettling time to be shopping for a home. Home values have yet to stabilize in three-quarters of U.S. metropolitan areas. Alarm about so-called robo-signing of foreclosure paperwork has raised fundamental questions about who owns a property's title. And, while unlikely, two bipartisan commissions have suggested capping or killing the previously sacrosanct tax deductibility of mortgage interest.
As a result, home shoppers are being forced to accept a more traditional view of a real estate purchase: seeing their new home more as a savings account than as an investment. That represents a switch from how many owners thought during the go-go years of surging home prices and easy money, says Stan Humphries, chief economist of real estate information and listings website Zillow. "It's essentially a forced savings plan, putting aside a percentage of your income into a savings account that is a non-depreciating asset in typical times," he says.
Of course, that's not necessarily a bad thing. From the 1950s through the mid-1990s, home values appreciated 2 percent to 4 percent a year, on average, just beating the rate of inflation. The challenge is that Humphries also thinks home values won't bottom nationally until June 2011 at the earliest. Even when home values bottom out, Humphries expects an L-shaped bottom. His grim outlook is based on the fact that 23.2 percent of single-family homes across the U.S. had negative equity in the third quarter—which means high foreclosure rates will likely persist, while underlying demand for housing remains weaker due to high unemployment. The Obama Administration doesn't expect unemployment to return to a normal range, below 6 percent, until 2015, according to the Office of Management and Budget's mid-session review released in July.
FAREWELL TO THE FLIPPERS
Certainly, few now expect to sit on a property for a couple years and then get rich off the equity. Real estate agents complain that even record-low mortgage rates—which hit 4.07 percent on Nov. 9 for a 30-year fixed-rate loan, according to Zillow—won't budge many potential buyers, given the tough outlook for price appreciation. "If prices are falling, and rates are falling, and the news is more of the same, why would you buy a home right now?" says Alicia Trevino, a broker in Dallas.
Even some professional real estate "flippers," or the people who work with them to buy and rapidly sell property, are having second thoughts. "I tell clients, 'Don't buy this as an investment,'" says Sheldon F. Margolis, a real estate lawyer in Jersey City, N.J. "It will increase in value, but it will take a lot longer than it did in the past." Large inventories of unsold units have made it no longer possible to buy an apartment in a high-rise on Jersey City's high-priced waterfront in the construction stage and make a quick $30,000 to $50,000 by flipping it, he says. Similar new developments throughout the U.S. are sitting mostly empty, with values, in many cases, under water. That has left their developers stuck. Flippers are akin to day traders in the stock market—high risk, high return, but in a challenging market, most wind up losing money.
A few markets showed renewed life earlier this year, but mostly due to the federal first-time home buyer tax credit, which finally expired in September. First-time home buyers accounted for a record 50 percent of all home sales in a 2009 study from the National Association of Realtors, up from 47 percent the prior year. (The data go back as far as 1981.) Home values in five major California markets, including Los Angeles and San Francisco, turned negative again in the third quarter after climbing for five consecutive quarters, according to Zillow. Despite an average 3.6 percent year-over-year gain in single-family home prices nationally in the second quarter, prices fell in 70 percent of the 384 metro areas, and many markets experienced double-digit drops, compared with the 2009 second quarter, Fiserv-Case Shiller said in its November home price insights report. Fiserv-Case Shiller expects double-digit declines to continue until the end of the summer of 2011.
AI
