Many news reports lately have hinted at an improving national real estate market, and things have definitely improved. Of course, real estate is a local thing, market challenges in another part of the country have little bearing on our market.
In fact, things have definitely improved here locally. Comparing October 2008 to October 2009 pending sales have increased 64% and closed sales are up 37%. Another number that’s nice to see is that the inventory of unsold homes is down to 6 ½ months down from the peak of 19.2 months back in January this year.
However, there are some storm clouds on the horizon. Take a look at this chart.
The chart shows the adjustable rate mortgages that have reset in the recent past, and those that are resetting in the coming few years. Fortunately, we’re through the big wave of subprime mortgage resets that was responsible for many of the difficulties in the market over the last year or two.
On the other hand, the next wave of mortgage resets is a whole different variety. The largest wave is a beast known as the Option Arm, called such because the borrower has four payment options when they send in their money every month. Two of the choices are usually never considered, those payments made consistently will pay off the mortgage in 15 or 30 years. The third choice only pays the interest, with no principle, and the last choice is actually a very small payment that causes the loan balance to increase every month. At some point, this choice is no longer available, people need to start paying the principle down and the minimum payment goes up dramatically.
The orange colored bars are Alt-A mortgages. These loans were made to people with good credit, but usually unverified income. This situation isn’t as dire if their loan adjusts into a low interest rate environment, but the rate is likely to continue adjusting on an annual basis, which were typical loan terms for that type of loan.
What does this mean? Well the nastiness really drops off right around Christmas of 2011 and into Groundhog day of 2012. So, we’re probably going to have downward pressure on prices into next year, with the reprieve we’re experiencing now benefitting from the home buyer tax credits and low mortgage rates. It seems unlikely the low rates and tax credits could go on forever (they won’t). My conclusion? If you’re thinking of selling, you should probably get started now, prices are unlikely to be any higher in two years. If you’re thinking of buying, the opportunities will probably last another couple years.
--- Ward Spears
