Home Sales Reports Making You Sea-Sick?
Wednesday, December 30, 2009 at 9:03AM
According to the November Existing-Home Sales Report, we saw a month-over-month 7.4% increase in sales. That is great news for anyone with a stake in our current real estate market. The numbers show that our market is gaining some momentum and that 2010 looks to be off to a stronger start than 2009 was.
Then, the New Construction Report was released the very next day, showing sales month-over-month had decreased by a whopping 11.3%. Hmmm. The conflicting numbers and information left me to question and further examine the numbers from the prior day's report.
How is it that two housing reports released last week came up with such divergent data? At first glance, last weeks reports left me with the feeling of being stranded on a boat, in the middle of the Pacific, not knowing if I can in fact see land or not. First was the National Association of Realtors Existing-Home Sales Report which was followed by the U.S. Census Bureau's New Construction Report. One report is showing the real estate market gaining strength and the other is showing the opposite. At first glance it is difficult to make good sense of them or have any faith in the numbers.
How is it that one report could show signs of a stronger real estate market while the 2nd report is showing further weakening? How does a person make sense of this seemingly conflicting information? Don't believe the headlines! Take the time to read the reports, understand the numbers and where they come from.
First off, the numbers in the The Existing-Home Sales Report were for the number of resale homes that closed during the month of November. The New Construction Report quantifies the number of new construction homes that did not close during the month of November but entered into contract that month. So, as we can see, we are not actually comparing apples to apples in the reports.
It's also important to consider that all November home sales (resale and new construction) had an outside force which impacted the data due to the $8,000 First-Time Buyer Tax Credit.
I'm sure you recall that the Tax Credit was set to expire on November 30, 2009, which meant that the houses being purchased needed to close by that date to be eligible for the credit. Most experts were certain that the federal government would not extend the Tax Credit, but they did. This resulted in home buyers making their purchase decision with the deadline of November 30th in mind.
If the home buyer went into contract on a new construction home, even during the month of October, it was likely that they would not be able to get closed in time to reap the benefits of the Tax Credit and lose out on $8000. As we got closer to the expiration of the credit, more and more buyers viewed a resale home as their only option.
Resulting in: Increase in the existing home sales numbers and decreasing numbers in new construction sales, explaining the differences in the two reports. What did we learn from the reports? Two things: First, the numbers representing existing home sales were not truly as strong as the report suggests and the numbers representing new construction sales were not as weak. It was the outside force of the expected to expire Tax Credit that created the divergence and not the true and natural buyer demand.
It also prompts us to examine the power of the Tax Credit. The next question to be considered is what will happen to the housing market when the Tax Credit extension expires on April 30th? Is there going to be another decline across the board similar to what we saw with the new construction market last November? Traditionally, real estate experts will tell you that late spring and summer are thought of as the best times to put a home on the market because buyer demand builds steadily through spring. But this year, experts predict that the selling boom, which normally starts in spring, will hit at a different time than it has in the past due to the expiration of the tax credit and a predicted increase in mortgage interest rates. Sellers with flexibility should market their homes earlier in the year rather than waiting for the traditional spring / summer months.
Some suggest that with the possible lower demand for home purchasing in late spring it may cause home prices to slightly decline once more, making it a better time to buy. I believe the exact opposite. Once you factor in the increase in interest rates expected to hit during Q2 (from a current of 5.0% to around 6.0%) the cost of waiting will far out weigh any potential minimal savings due to a decrease in demand. A 1% increase in interest rate on a 30 year mortgage loan of $300,000 equates to an increased cost of $188 per month. In other words, at a rate of 5.0% one could have a home loan for $300,000 with a payment of $1610 per month. If the rate increases to 6.0% then a $300,000 home loan would cost $1798 per month. If a home buyer could only afford a mortgage payment of $1610 a month then they would need to reduce the amount of borrowed money at the rate of 6.0% to $268,500 vs. the $300,000 at 5.0%. As interest rates go up you will either pay more per month or have to purchase a lesser home to get the same payment. Do the math and make your own decision but I know that if I were planning to buy I would make sure to act sooner rather than later.
Reader Comments (3)
Michelle,
You are the best! I appreciate that we can always look to you for clarity and the truth. My new home is great and closing happened because YOU went above and beyond. Thank you for all your hard work.
Jason F.
Hi Jason,
I truly enjoyed helping you and am so glad that everything came together. I am very lucky to have a career that enables me to help people. I wish you many great memories in your new home!
Take Care,
Michelle Coolidge
Oh! This is perfect! Thanks for putting to rest severalsome
confusion I have heard on this recently.