Sales of existing homes in September were up a whopping 11.3% from last year at this time, according to data released by the National Association of Realtors (NAR) this morning.
That’s significant, considering buyers were eligible for the $7000 first-time homebuyer credit until the end of September last year.
Remember? The tax credit allowed a first-time buyer to put just $7000 down on a $200,000 home purchase using an FHA loan, and then receive $7000 back from the government - essentially a no money down deal.
And even more enticing: a buyer of a $100,000 property could have put $3500 down and still be reimbursed the $7000! They could receive $3500 cash back from the government for buying a home with no money down.
The fact that this year’s sales were up 11% in September compared to last year, without the $7000 tax credit, is a very positive sign.
When we get October sales data next month, we will finally be able to compare apples to apples, since last October the tax credit was expired. We’ll have a better gauge of the real estate market with less government interference. It also shows how futile some of the government's attempts at getting real estate going again were.
Also of interest in NAR’s report: contract failures were double this month compared to this time last year. This tells us the demand is there, but financing is not. Not surprisingly, one of the main culprits is government interference again - this time regarding appraisal policies.
The new HVCC laws prohibit realtors and mortgage brokers from choosing their appraiser, and instead, are required to use a third party appraisal management company. While this was created to protect the consumer, in reality, the opposite is true. Now the consumer pays more for a less accurate appraisal.
Why? The appraisal management company acts as a middle man, and therefore takes half the appraisal fee. This makes it difficult for experienced appraisers to stay in business, so many closed up shop.
As a result, new and inexperienced appraisers willing to work for half the fee are being assigned to the job. Often they are sent out of town, driving hours to a location they don't know or understand.
Being new to the market, they don’t know a good neighborhood from a bad one, and are forced to rely on recent sales. When 30% of sales are from distressed property, the comparative values will often come in lower then market value.
Low pay also requires appraisers to get the job done in half the time, eliminating the time for proper research. Are they comparing a beat up house with a fully renovated one? Is one vandalized in a high crime area, while the other is in great shape in a good school district? They may not have the time, knowledge or resources to find out. This, of course, results in lower appraisals on higher-valued properties, and buyers are simply unwilling or unable to pay the difference in cash.
Even if the appraisals came in right, contracts might still get cancelled. Banks don't have a secondary market to sell off their loans to anymore, so they no longer have an unlimited supply of money to lend. This is one of the reasons qualified buyers are denied loans for no good reason. Many banks just don't have the capital.
That's why 30% of sales are going to cash buyers. Investors know that when financing is tight, prices decline. They can get the best deals with cash in today’s market, and refinance later.
Institutional lenders are getting into that game now, allocating some of the billions of dollars they’ve had sitting on the sidelines to pick up discounted properties.
The little guy is benefiting from low home prices too. 32% of buyers are purchasing a home for the first time. These folks are locking in a historically low interest rate (4.1%) with a fixed payment for 30 years on reduced home prices. This is a welcome relief to former renters who were watching their lease payments increase every year.
In fact, in many parts of the US, it costs much less to own than to rent. In these areas, new homeowners are increasing their monthly cash flow while paying down their mortgage. If they keep that up, someday they will join the ranks of comfortable retirees who own their homes free & clear.
Kathy Fettke is founder and CEO of www.RealWealthNetwork.com, a resource for new and experienced real estate buyers. Membership is free.