Pleasanton Weekly

Real Estate - April 16, 2010

Is housing market confidence improving?

Growing optimism can best be seen in consumers' actions

by David Walden

We have had some good economic news in the past month.

The news has included positive jobs growth, increased consumer spending and increased consumer confidence. Each number, while positive, still reminds us that we have a long way to go.

If we look at the markets you would think we are free and clear from recession and bad news. Oil prices, the stock market and rates have all moved up significantly. On the other hand, if we look at the recovery statistics, we are far from free and clear. A few hundred thousand jobs do not make up for eight million in losses.

Yes, consumer confidence is up. The Conference Board, a New York-based research group, said its Consumer Confidence index rose to 52.5 in March from 46.0 in February. However, a reading of 90.0 is supposed to describe a stable economy and 100.0 a growing economy.

If the numbers are still dismal, why are the markets celebrating? For one, we are climbing out of such a large hole, any move in the right direction feels good.

This quote from CNN/Money seems to give us a second explanation: It's a growing optimism that can best be seen in consumers' actions, not their answers to various polls.

"If you look at what they're saying, they're still very nervous," said Mark Zandi, chief economist at Moody's Economy.com. "But if you look at what they're doing, they're more convinced that things have turned the corner."

Consumer spending is improving at a faster pace than many had expected at this stage in the recovery. We have said this time and time again. This is a crisis of confidence and this malaise does not end until confidence returns. Even if this is the beginning of the cycle, any evidence of a bolder consumer is going to be good news. Despite this theory, it is still possible that the markets are getting ahead of themselves with regard to the recent gains we have seen. Expect some pull-backs along the way.

The Markets

Rates rose again in the past week to their highest levels since August of last year. Freddie Mac announced that for the week ending April 8, 30-year fixed rates averaged 5.21 percent, up from 5.08 percent the week before. The average for 15-year fixed also rose to 4.52 percent. Adjustables increased as well with the average for one-year adjustables rising to 4.14 percent and five-year adjustables increasing to 4.25 percent. A year ago 30-year fixed rates were at 4.87 percent.

"Once again, rates on home loans followed bond yields higher amid a positive March employment report," said Frank Nothaft, Freddie Mac vice president and chief economist. "The economy added 162,000 jobs, which was the largest monthly gain over the past three years. In addition, revisions raised the January and February figures by a combined 61,000 workers. Excluding government employees, private payrolls rose for the third consecutive month and were the strongest increase since May 2007.

Following its extension in early November of last year, the homebuyer tax credit is showing some impact on housing market activity. Pending existing home sales jumped 8.2 percent in February, well above the market consensus and represented the second largest increase since records began in 2001, the National Association of Realtors reported. Homebuyers must enter a housing contract by April 30 and close by June 30 in order to receive the tax credit."

Sales of homes priced above $750,000 are starting to pick up after being frozen at a very low level last year. For most of last year, first time homebuyers were driving sales and they were focused "almost exclusively" on foreclosed properties and other bargains priced under $250,000, according to Walter Moloney, economics spokesman for the National Association of Realtors.

"Beginning in October for the first time we started seeing increases in other sales categories," Maloney said. "Sales of homes priced from $750,000 to $1 million jumped 40 percent in January from a year ago, yet accounted for only 1.3 percent of total sales. Over 70 percent of sales in January involved properties priced under $250,000.

Sales in all price classes rose in January.

Despite this movement in the top tier, foreclosure and short sales are expected to remain at a very high level. Last year, distressed sales comprised 36 percent of existing home sales. In a normal market, distressed sales make up 15 percent of sales.

"Maybe it will come down to 33 percent this year," said NAR chief economist Lawrence Yun. "By historical standards, we have never seen anything like this before."

Real estate investors are back, according to the National Association of Realtors and other market observers. Investors made more than 17 percent of home purchases in January, with 26 percent of all sales transacted in cash.

"We bottomed out in 2008, and in late 2009, prices stabilized and investors have returned," says Mark Fleming, chief economist at research firm First American CoreLogic. "It's a different type of investor going after foreclosed properties and expecting to hold on for longer time frames."

These buyers believe that the only direction housing values can go is up, because it costs more to build than it does to buy. Leonard Baron, a real estate professor at San Diego State University, said. "It's because prices have dropped so much and rents really haven't. The deals were unbelievable."

Despite the challenges facing the housing market, 65 percent of Americans would still prefer to own a home rather than rent, according to a Fannie Mae national housing survey. In addition, 43 percent of respondents cite safety as a key reason to buy, while 33 percent are motivated to buy because they perceive schools to be better in neighborhoods where most homes are owned by their residents.

The survey results released Tuesday show that both buyers and renters are more cautious than they used to be. About 23 percent of renters say they will buy a home, but later than they once hoped. A full 70 percent said they believe buying a home continues to be one of the safest investments available. This compares to 74 percent who think putting money into a bank account is safe. Only 17 percent believe buying stocks is a safe investment. Also, 60 percent believe that it will be harder for them to get a loan to purchase a home than it was for their parents.

Editor's note: David Walden is a Certified Mortgage & Divorce Planner with Diversified Mortgage Group in Pleasanton.

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