New Home Sales Drop

New home monthly sales dropped to their lowest level since September of 2001 according to Greg Paquin of the Gregory Report who makes a career of keeping track of new home sales data for builders. The month of November is historically a slower sales month but according to Greg, the 368 new home sales in November were the lowest for any November since 1997. So what’s up with that?

Cancellations accounted for the slower closing rate. More people would be able to buy if they could only sell their home first. They can’t, because of the price that they and their agent place on the home that they need to sell. Any home will sell in any market if priced correctly but unrealistic expectations of sellers, who would be new home buyers, has resulted in a 40 percent cancellation ratio.

Builders are not in a panic but I predict some serious price adjustments or concessions, especially in Lincoln, Elk Grove, Natomas and West Sac where the average price of a new home is $523,000. I also expect to see a much slower pace for new construction during 2006 and maybe 2007. The Capital Region will still be a good area for new home builders but their profit margins will be less than the previous four years.

Enjoy your weekend. Vicki and I will be preparing for the arrival of seven family members for the holidays.

Feds hike rates

The National Association of Realtors just announced that 2005 will be the fifth year in a row for record housing sales and that 2006 will be another good year. Yet, other news suggests that housing could be pulled down by rising interest rates and renewed fears that inflation might not quite be under control.
The Federal Reserve raised short-term interest rates for the 13th time suggesting that chief Alan Greenspan plans on turning over the reins of Federal monetary policy to his successor Ben Bernanke with inflation as much under control as possible.
"Core inflation has stayed relatively low in recent months and longer-term inflation expectations remain contained," stated the Fed. "Some further measured policy firming is likely to be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance." It added that "the Committee will respond to changes in economic prospects as needed to foster these objectives."
After 18 months of rate hikes, which impact short term rates such as credit cards or home equity lines of credit immediately and long-term interest rates eventually, the housing market is still in excellent shape, and might even afford new opportunities to homebuyers. The reason? Long-term interest rates don't move in tandem with short-term rates. Long-term rates are tied to treasury bonds, which could lower yields in an inflation-controlled environment. Mortgage interest rates would follow.
Experts, such as David Lereah, chief economist for the NAR, expect the 30-year fixed-rate mortgage to trend up modestly but stay well within historic norms of 6.5 percent through the second half of 2006.
The NAR expects the gross domestic product to grow 3.7 percent for 2005 and 4.1 percent for 2006, with a rise in employment. Housing prices will continue to rise but not at the double digit clip of the last few years. While the average California home price rose over 20 percent to $535,000 in 2005, they are anticipated to rise another 6 percent this next year. Will they, if interest rates increase and fewer buyers are able to afford the average priced home?

What's in and what's out

The majority of full-time real estate agents hear a lot of feedback every day all year from homebuyers as they visit potential resale and new construction homes. They wonder why builders, developers and home-sellers add finishes or upgrades that say "cheap" or "soon-to-be-out-of-date," in addition to owners who think the laminate wood-grained kitchen cabinets look fine.
Old stand-bys like solid oak hardwood floors might not be on the design edge, but quality and durability out sell trendy any day in residential real estate. After a year of property showings in 2005 and requests from consumers, I've complied a list of home runs and strike-outs for those looking to sell to homebuyers in 2006.
What's In
• Smaller square footage homes. After years of sprawl, new construction buyers want less space with better finishes.
• Quality kitchen cabinets. With the kitchen/great room the center of family living, buyers today are looking at furniture style cabinets.
• Bamboo wood floors. It could over-take maple as the favorite light-colored wood flooring in 2006.
• Wall space for flat screen TV's. Specify power and cable boxes close to locations where homebuyers want to place the latest in visual technology. The popular location for installation in new construction is over the fireplace.
• Multiple and high-powered phone lines. With modems, DSL, wi-fi moving into mainstream use, tech-savvy homebuyers want "wired" homes.
• Separate shower stalls and bathtubs in master bathrooms. The growing divide among "soakers" and "showerers" is increasing. Not having one of each in a master bath could squelch a purchase.
• Built-in home stereo systems are a must-have for many audiophiles. Wireless hasn't quite made the pre-wired audio system home obsolete, at least not in 2006.
• Balconies and decks wider than 3 feet. Homebuyers want usable outdoor space. Big enough for a bistro table and chairs and a couple of pots for container gardening.
• RV parking. Northern California is a recreational Mecca.
• Ranch or one level homes. The baby-boomers are discovering their utility in droves.
• Second Homes. The baby-boomers are also keeping this market segment strong. Demand for second homes was still on the upside in 2005, but if primary home demand weakens, the second home market will historically follow.
• Seller give-backs. With a more balanced market, requests by buyers to pay closing costs have increased, and most sellers are paying them.
What's Out
• The real estate bubble. It's a correction with a soft decline in prices.
• Ebony-stained hardwood floors. You're better off tearing it out than trying to sand the ebony out to refinish.
• Single-rod closets. Buyers want the most storage in the least amount of space. Organizers accomplish this.
• Dark rooms with small windows. Natural light can over-rule a lot of other problems in a home.
• Wallpaper. Buyers never have the same taste as decorators. Take it down (carefully) and paint.
• Builder grade light fixtures and interior fixtures used outside. The right fixtures say quality to buyers.
• Mid-century awnings on exterior windows and doors. Buyers want to let the sun shine in.
• Mirrored backsplash's in kitchens and everywhere else. Mirrored walls and ceilings say 1980's hedonism.
• Commitment (strong, bold trendy) colors. They look great in magazines, but as one buyer said to me "I don't live in a magazine."
• Gas grills that need their own tank. Buyers prefer the gas piped from the house so they don't have to replace tanks.
• Dropped ceilings. It might have updated a bungalow in the 1950's, but buyers want as much vertical space as possible.
• Flipping. Increasing inventories of unsold homes is increasing, signaling weakening demand by all buyers. If you are holding properties to flip, prepare to place them on market after the holidays.
On the Way Out
• Stainless steel appliances. Word-of-mouth says the cleaning requirements aren't for everyone.
• Laminate flooring that looks like hardwood. Not only can buyers tell it's not wood, the noise it makes with high-heel shoes is the deal killer during property showings.

Weekly Interest Rates

Freddie Mac last week released the results of its Primary Mortgage Market Survey in which the 30-year fixed-rate mortgage (FRM) averaged 6.32 percent, with an average 0.6 point, for the week ending December 8, 2005, up from the previous week’s average of 6.26 percent. Last year at this time, the 30-year FRM averaged 5.71 percent.
The average for the 15-year FRM this week is 5.87 percent, with an average 0.6 point, up from last week when it also averaged 5.81 percent. A year ago, the 15-year FRM averaged 5.14 percent
Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) averaged 5.78 percent this week, with an average 0.7 point, up slightly from last week when it averaged 5.76 percent.
One-year Treasury-indexed ARMs averaged 5.16 percent this week, with an average 0.8 point, unchanged from last week when it averaged 5.16 percent. At this time last year, the one-year ARM averaged 4.15 percent.
“Looking back at 2005, 30-year fixed rate mortgage rates averaged just about the same as they have for the last two years," said Frank Nothaft, Freddie Mac vice president and chief economist. “Since the 30-year fixed rate is the most popular mortgage product by far, these low rates helped the housing market set records for home sales and new construction over the last three years."
“Looking ahead, as mortgage rates rise housing activity will ease somewhat. So although 2006 will not be another record-setting year, it will likely beat the previous record for home sales and new construction set in 2003. In other words, 2006 will be another busy year for the housing sector.”

1 percent loans

Will California home buyers find it more difficult next year to qualify for mortgages that allow them to make low monthly payments through "negative amortization?"
Yes -- especially if federal financial regulators force banks and their mortgage subsidiaries to sharply restrict their marketing and origination of negative amortization loans in the coming weeks.
Comments by a top Treasury official last week offered strong hints that new restrictions are likely to be imposed, probably before the end of this month. Comptroller of the Currency John C. Dugan singled out negative amortization loans as a major concern of the Treasury Dept. and other financial regulators. Negative amortization refers to the build-up of principal debt, rather than reduction, that is permitted under various "affordability" loan products used in high-cost areas of the West and East coasts.
Payment-option loans, for example, carry low monthly payments for up to five years because of deferral of principal and interest. Under such plans, a home buyer might start out with a $450,000 initial principal balance on the mortgage, but through payment deferrals have a balance of $475,000 or even $500,000 five years later.
Dugan said regulators are especially concerned about negative amortization loans in real estate markets entering down cycles: "If real estate prices decline -- and there already is evidence of softening in some markets -- these borrowers could face the bleak prospect of loan balances that exceed the value of the underlying properties."
Dugan and other regulators are also worried that many home purchasers using negative amortization plans may not fully comprehend the impending "payment shocks" that will confront them if they can't refinance and have to stick with their "affordability" mortgages.
"Is this an appropriate product to mass market to customers who may be looking at the less than fully amortizing minimum payment as the only way to afford a large mortgage?" asked Dugan rhetorically.
Dugan's comments carry significant weight. Not only does his unit within the Treasury Dept. oversee all national banks and their mortgage company subsidiaries, but his office also has the lead role in drafting forthcoming new guidance to banks on mortgage standards. He said that the new guidance could be issued by the end of this month.
Many loan brokers and lenders have pushed their clients into these loans over the past two years. There is no guarantee such financing will be as widely available in 2006 and it was in 2005 and that’s probably a good thing.