Existing Homes Sales Volume in West Continue Decline, Will Home Prices Hold?

Today, the NAR released it’s existing home sales data and again the West is down in sales volume… in fact, we are down 14.4% off last year. That’s a pretty big number as indicated by the chart. To the delight of many (homeowners) home prices have remind fairly stable.

According to the charted data it would appear that the sharp volume decrease may be over and we may possibly see an increase as the peak sales months approach.

Will home prices continue to hold or will they also follow the existing home sales trend. If inventory continues to build and mortgage rates stay the same or increase, I suspect that home prices will also begin to flatten and eventually maybe even fall.

One thing that is concerning is the tightening of mortgage lending guidelines from lenders and Wall Street on the ever popular “pay option arms” as these creative mortgages have fueled the jump in prices.

What do you think will happen?

Data: NAR Existing Home Sales

California Luxury Real Estate Values UP in 2005

Yesterday, Inman news reported a story based on First Republic Prestige Home Index. According to the report, Luxury real estate values rose to an all-time high in Los Angeles, San Diego and San Francisco in 2005 but slowed significantly in the 4th quarter.

Here are some highlights regarding average prices:

San Diego: $2.09 million
San Francisco Bay area: 2.88 million
Los Angeles: 2.3 million

It will be important to keep on eye on the high end market as often times it is a leading indicator of the rest of the real estate market.

Zillow Offers Free Property Estimates... How Accurate are They?

I have posted some interesting information regarding the new Zillow website that offers free property value estimates. Although AVM(Automated Valuation Models) have been around for some time, this is the first time that they have been made available to the public. Many people have viewed their property estimate and are not sure how accurate the results are... so I did a test and charted the results.

Real Estate... Cooling or Bubble... I'll look in the rearview mirror.

Today in the U.S.News & World Report there was an article regarding Robert Toll. You may have heard the name if you following real estate... Toll Brothers one of the leading new home builders in the country.

There is alot of debate regarding the real estate markets and each as their merits but I try to stick the facts when interpreting information. Here is something that is sure.. for the second time in recent months, Toll Brothers as cut it forecast for new-home construction in 2006.

Another fact..."Toll reported that the dollar value of its newly signed contracts in the first quarter fell by 21 percent versus the same period last year." according to USNews.

That looks like a pretty solid cooling trend... does it mean there is a bubble or just cooling... only time will tell. What I do know for sure is that the rear view mirror is always clearer than the windshield.

Pending Home Sales Index.... Charted for Your Viewing Pleasure

Yesterday, I posted a chart of the relationship between the Pending Home Sales Index and Mortgage rates. I thought you would be interested to see the how the West is doing vs. other areas of the country. Bucking the cooling trend is the South, which may be due to the high demand, low supply real estate market conditions created by hurricane Katrina. The Northeast has a small bump up for which I have no explanations but welcome any theories. From this point on, I will be updating this chart as the NAR releases it's new PHSI figures. Get it directly by subscribing to my RSS feed or add this blog to your del.icio.us

West Coast Pending Home Sales Index Down 11.8 %... Maybe Due to Increasing Mortgage Rates?

Today the National Association of REALTORS released their Pending Home Sales Index data. The data indicated a very visible cooling trend as the index was down 8.1% from the month before and down 11.8% from the year before. Having watched mortgage rates climb over the last 6 months of the year, I thought it would be interesting to show you the inverse relationship between mortgage rates and the real estate market.

This relationship is quite simple to understand: The lower the mortgage rates, the more money can be borrowed therefore pushing up home prices... as mortgage rates increase borrowers can borrower less, therefore pushing prices down.

Here is a chart I quickly prepared graphing this relationship. The Pending Home Sales Index data covers the "West" which includes California and the average 30 year mortgage rate information is directly from Freddie Mac.

Many analyst think that we need a substantial jump in mortgage rates to approximately 7.5% before there is an impact on housing prices but frankly, I always thought it was less from my 14 year experience in real estate. Especially now as the average home price is north of $500,000.

A .5% mortgage increase on a $400,000 loan increases payments by $166.00 a month... which decreases the loan amount qualified by about $28,000 assuming approximately a 6% mortgage rate.

So in the real world... a homebuyer is qualified by his mortgage lender for $500,000. This home buyer then goes out to look at homes with his REALTOR and they BEGIN their house hunting at $500,000 (although this is the maximum they are qualified for) instead of a lower amount and working their way up.

A month or two later they fall in love with a property that is $525,000 vs. the $500,000 that they were qualified for. In this time, mortgage rates went up .5%, so now the maximum they qualify for is $475,000. There is a $50,000 difference that needs to be made up, so the mortgage lender must use "creative" financing. Options like an interest only loan, stated income, or the ever popular pic-a-payment option to make up the difference (this is an entire different topic that I will touch on another time) home buyer still gets their home but they may be stretching it.

Now assume that they are unable to get this "creative" financing and now they need to look at homes in the $475,000 price range. Not fun. As now, they never find anything they like because they already looked at homes in the $525-$550 range and they must either down size (look at a smaller home or condo) or look in less expensive / desirable area. This is very frustrating for most homebuyers. So what's the usual solution... they wait to buy.

This is what I believe maybe the reason why the pending home sales are decreasing fairly dramatically and I'm sure you will soon see home prices follow suite and also start decreasing, especially if mortgage rates stay at current levels or higher and mortgage banks begin tightening mortgage underwriting guidelines.

If you have any thoughts or questions, please do not hesitate to post as your "real world" input is greatly appreciated by both other readers and me.

Data Sources: NAR & Freddie Mac.
Chart by: Jessie Beaudoin, California Real Estate Center