Realty Insider Blog

“Is now a good time to buy?” is the question that everyone asks these days. Well, the simple answer is that it is a better time to buy than to sell.

When everyone else wants to buy, it is generally a sellers market. Last year buyers were on the sidelines watching where the market was going (it went down.) These days it is a stare-down between buyers and sellers with sellers feeling they have given “the greedy buyers enough.” Conversely, the buyers want the “greedy sellers” to come down more...

So, what to do? To gauge the market lets look at one neighborhood where I specialize: The Gates of Mclean. Looking at the Dalton 1br/1ba condominium unit with 1 garage spot, the average sales prices were as follows:

2003: $252,450
2004: $289,700
2005: $330,800
2006: $292,000

(Numbers are from a quick MLS search where sq footage was given for the unit. The above does not account for seller concessions.)

We are basically back to 2004 levels if we compare apples to apples. So, about a 10% depreciation as opposed to the 15-20% appreciation seen in previous years.

Now this is for a condominium in Tysons Corner. Arguably one of the more desirable locations in the area. Single families and condominiums in places further out (like Brambelton) has taken a bigger hit. You can now get a large like-new single family there for under $600,000.

So, what to make of this? I would say that if a buyer that can get a home in the current market at a 10% discount from the peak and with a 3% seller concession heor she is getting a great price.

Will the prices go down? Will they go up? Will they be flat for the next 5 years? Nobody knows. If anyone did they would either be selling or buying like crazy – and I have seen neither.

My advice?

1) Don’t try to time the market.
2) Buy when you have a need for a new home.
3) Buy the size you need in the best location you can afford.
4) Qualify using payments for a 30 year fixed. Then take out a 30 year fixed with a 10 year I/O or whatever you are comfortable with.
5) If you stay long enough you will make money in real estate. The long term average is about 5% appreciation per year (adjusted for inflation.)
6) Thinking too much about what way the market will go will get you nowhere and result in analysis-paralysis.

and most importantly

7) I can almost guarantee that you will miss the bottom of the market. By the time you realize you missed it and get over your frustration we’ll be right back at the top again!

8) Find the home you love, sit down in your couch with a meal made in your new kitchen and then watch Babel on the 42" inch plasma you bought with the seller concessions you got! Much better than sitting around worrying!

A study conducted by Countrywide Home loans found that 43 percent of women felt they did not spend enough time shopping from a home before buying one, while 23 percent of men said the search took too long.

In other areas, men and women generally agree that they could do some things to improve the home buying experience, including:

• 25 percent wish they had saved more money for the downpayment and closing costs.
• 25 percent wish they knew more about the process.
• 22 percent wish they had purchased a new home.
• 21 percent said they would have purchased in a different neighborhood.

(from The Real Estate Professional, March/April 2007)

The media is having a heyday these days with the supposed sub prime meltdown. Apparently the avalanche we will see will cause the US economy to enter into a recession, the stock market to crash and the real estate market to, well, crash. Oh, and Fannie Mae will default and require a massive government intervention to save the stability of the financial markets and retirement funds for all of us... The world is about to come to an end!

Yawn!!! It baffles me why people act surprised - I mean, the name has "sub" before the "prime", indicating that these were less than ideal candidates for a loan. Hence, a slowdown in the housing market would likely lead to an increase in defaults (see below for explanation.)

For those not familiar with the different types of loans: a sub prime loan is generally for borrowers with bad credit, limited income and savings, high debt or a combination of those. Other factors play in as well, all making it harder for someone to qualify for a "regular" loan. 

With the market slowdown, the ability to refinance out of a costly loan diminishes.  Also, the backup plan many relied on over the last few years ("if I cannot pay the mortgage, I will just sell it") is not available as transaction cost and prepayment penalties will require almost anyone that purchased over the last 3 years to bring money to closing (most sub prime borrowers finance 100% of their purchase.)

Ten years ago housing advocates screamed about only the wealthy and privileged being able to participate and benefit from the housing boom. As a result, an unlimited number of loan programs became available to allow people with low income, low credit and no savings. These days, these very same people scream about predatory lending and are asking the government to help the people trapped by these horrible loans.

This is America - you have the right to get yourself in trouble. If that is by maxing out all the credit cards you have or by buying a home you cannot afford the payments on, that is mostly your bad. With great freedom comes great responsibility.  Just because you can buy a double cheeseburger for $1 and eat them all day long won't make McDonalds responsible for you eating yourself to death! (hmm, I believe someone tried to claim that...)

It is tough to draw a line between extending credit to less than ideal credit candidates and denying those same people the chance of homeownership and building wealth. Extending credit (albeit costly to the borrower) to people willing to take the chance is, after allis said and done, one way to make sure that not only the rich and "established" get richer.

A sub prime loan may be more susceptible to predatory lending though and some oversight is necessary. A typical sub prime borrower is a first time homebuyer often with less education or knowledge about finance. That, coupled with many loan officers not really knowing what they are offering, results in borrowers getting stuck with loans they really don't understand or can afford.

With the number of sub prime defaults on the rise, lenders have been tightening up on the requirements for sub prime loans. However, banks have also gotten a lot smarter about how they get rid of properties in default. Instead of auctioning them off at a discount, a foreclosed home now often is sold through real estate agents like any other resale and mostly fetch close to the market price. Also, the number of sub prime loans in relation to the total number of mortgages in the country is very small.

With that in mind, I don't believe the current level of defaults will have any significant influence on housing prices. I believe prices will remain flat this year and possibly next. After that we should see a return to a 3-5% yearly appreciation.

NVAR has released the February 2007 Home Sales Statistics. Market seems to be pretty flat year over year. However, the average days on market did increase quite a bit.

(Table source is NVAR - http://www.nvar.com/market/marketdetail.lasso?articleno=nvarn100431

Making a quick buck flipping homes may seem easy on TV, but in real life things get more complicated. The Washington Post recently ran a story (Link to Article) about a young couple that purchased a home in NW DC - needless to say they got more things to fix than they bargained for.

Anyways, I often get inquiries from buyers looking for a good fixer upper. They do exist, and there are people making a decent living in the slow market we are in. Locating these properties at a good price is getting harder and harder with the prevalence of programs like "Flip That House."

My main issue with "Flip that House" is that is creates an unrealistic profit expectation and downplays the amount of work and effort actually involved. The story typically goes something like this:

Jill and Joe bought a fixer upper at $500,000. They spent 4 weeks and $50,000 to update/change the kitchen, living/dining, master bathroom, master bedroom and the outside. They then get an "appraisal" from a real estate agent, usually at about $700,000 or so. As they love to stress in the program, the potential profit is $150,000 in this case! Wow, sounds great. 4 weeks of work = $150,000 potential profit!!!

Well, there are numerous problems with the story:

1) Real Estate agents are not usually appraisers. An appraiser is unlikely to value the improvements of the home at much more than the actual cost of the improvements. An appraisal at $200,000 extra for some bathroom and kitchen upgrades that costs $50,000 is very unlikely – appraisers usually are very good at what they do.

2) The potential profit does not account for any additional and likely expenses (for the example above):
Initial settlement cost: $10,000
Carrying Cost I: $5,000 (construction)
Carrying Cost II: $10,000 (60 days to sell)
Agent Commission: $35,000 (assuming avg 5%)
Closing Cost: $7,000

So, that reduces the "potential profit" from $150,000 to $83,000. We then have to subtract the short term federal and state capital gains tax. Would be 25% federal + 5% state (VA), so we are left with $58,100 potential profit (flippers are unlikely to be able to use a 1031 exchange.)

3) It is unlikely that the flippers will get the asking price in most markets these days. Even if they do I suspect most lenders will be weary of an appreciation of 40% over a month and with just cosmetic improvements. That $58,100 profit will diminish very quickly with a carrying cost of $5,000.

So what is my point? Flipping homes is a risky business and the transaction and carrying cost will in most cases make it very hard to make a profit by just doing cosmetic repairs. Adding bathrooms and expanding a home does add value and can make you money. But, unless you are some kind of contractor with the right skills, contacts and equipment you will be unlikely to make enough money for it to be worth the risk.

For the average homebuyer wanting to make money, serial flipping every two years and fixing the home up while living in it will have the best chance of success.

The rapid appreciation over the last years made many ordinary people with minimal skills into “flipping geniuses.” With the market appreciating 20-30% per year, pretty much anyone with access to credit would make money. We are now back to basics where you must add real value to make real money.

There are compassionate professionals on “Flip that House” that goes into a challenged neighborhood and truly does a remarkable job on horrendous homes. They have a community connection and help working class people get into wonderful and affordable homes.

Spring is here and so are the yearly tax assessments. According to the Washington Post assessment values are down slightly this year. Not a surprise as I have seen more and more homes selling for below their assessed tax value.

In Loudoun County, the average assessed value of a single-family home dropped 7.1 percent. Preliminary estimates show a 4 percent drop in Prince William County. Arlington County housing values are down eight-tenths of a percent, and Alexandria's average fell about 3 percent. Fairfax County was about three-tenths of 1 percent. (Washington Post)

The tax value is used as one factor when determining your property taxes. The other part of the equation is the tax rate. With increasing tax assessments, the tax rate has been reduced from $1.23 in 2002 to just 89 cents last year in Fairfax County. It seems that the rate will remain the same this year – so for most people the property taxes should remain the same or be down sligtly.

In case you didn’t know - the tax assessed value has little or no effect on the resale value of your home. That being said, I do have people coming up to me (usually at parties) claiming they have found some secret formula to calculate a likely sales price based on the tax assessed value. There are also realtors in the current market that use the tax assessed value as an argument for a reduction for their buyer clients (“I will not have my clients pay above the tax assessed value”.) And then there is the person that called me up to tell me how they had just increased the value of their home by appealing their too-low tax assessment…

The tax assessed value is typically done by a mass estimating process. In general, there isn’t a tax person coming out to your specific house to look at what features and upgrades you have. For more information on how it is done, just go to the Fairfax County website at http://www.fairfaxcounty.gov/dta/FAQ_Determine_Correct.htm

If you believe your assessed value is above what you can currently sell your home for, you can appeal the assessment. Support your argument with similar sales in your neighborhood and/or by looking at the assessed value of similar homes in your area. If you live in Fairfax County you can search online at http://icare.fairfaxcounty.gov/Main/Home.aspx for recent sales and assessment values.