Real Estate Professionals Pondering Wrong Question

April 12, 2010 - Real estate professionals are pondering the same question from coast to coast, trying to figure out how much of the market improvement has been impacted by the soon-ending Homebuyer Tax Credit. Bill Fulton from Orlando writes:

To what extent do you think the end of the tax credit will effect the recent uptick in the real estate market. Down here in Orlando, March sales were up 5% over February and 40% over March 2009. Prices have ticked up 12% from January. Two thirds of the transactions were short sales and foreclosures.  The hidden positive I believe is the sudden influx of foreign buyers. I think investors may feel that we are now coming off the true bottom.

As we have mentioned numerous times in the past, the tax credit is coming to an end this summer, with closings that must occur by June 30th to qualify (and be under contract no later than the end of April). But what about the "other" real estate question that we should all be asking?

What Will We Do Without Traditional Equity For Move-Up Buyers?

The Homebuyer Tax Credit did a good job of motivating first time homebuyers, but like all good things, it must come to an end. Even if the government continued the program (which it is not going to do), there are only so many people that the program was going to motivate and most of them have already jumped in to the real estate market.

The real question that lingers now is how long will our toughened lending standards (meaning toughened to how they used to be) continue to put downward pressure on the market? While rising interest rates hurts home values, the real problem that exists is the "re-normalized" down payment requirements.

Traditionally, the move-up buyer used the equity in the sale of an existing home to use as a down payment on the purchase of the next home. Now that more than 1/2 of our households are underwater, where will this equity come from?

Home Sellers Must Heed Tough Advice

Most home sellers are failing to sell their homes right now. We continually check the "failed to sell" trend at the Housing Report, and it has been staying in the mid-70% range for over two years. Home sellers who successfully sold their homes in the past two years will look back one day and realize how fortunate they were.

The tough advice for home sellers is rather simple. Stay or go. If you decide to stay, take your home off the market and quit worrying about value. The long-term will be fine, it's just the next five or more years that will get ugly. When growth returns to the market, scarcity will return (due to increased costs of labor, materials, and land), and values will appreciate.

But if you decide to go, then go! Quit eroding any equity (positive or negative) that you have, as prices are dropping. Hire somebody that you trust will give you the best advice and who can reach the largest market for your home, and get your home sold today. Be somebody that one day will look back and be glad that you got out when you did!