Home homebuyer feb06

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February, 2006 Newsletter

+++++++++++ February 1, 2006 +++++++++++++++++++

Introduction: Existing Sales Drop, New Sales Rise
Mortgage Rate Update: Rates Moderate
This Month’s Tip: The Housing Gold Rush

Introduction: Existing Sales Drop, New Sales Rise

Welcome to the February, 2006 edition of the Home Buyer’s
Newsletter. Home sales in December sent a mixed message, with
existing sales falling and new home sales rising.

Existing-home sales declined in December but easily set an annual record,
according to the National Association of Realtors®.

Total existing-home sales – including single-family, townhomes,
condominiums and co-ops – were down 5.7 percent to a seasonally
adjusted annual rate1 of 6.60 million units in December from an
upwardly revised pace of 7.00 million in November. Sales were 3.1
percent lower than a 6.81 million-unit level in December 2004.

There were 7,072,000 existing-home sales in all of 2005, up 4.2
percent from 6,784,000 in 2004. This is the fifth consecutive annual
record; NAR began tracking the sales series in 1968.

David Lereah, NAR’s chief economist, expected the monthly sales decline.
“This is part of the market adjustment we’ve been discussing, with a soft
landing in sight for the housing sector,” he said. “The level of home sales
activity is now at a sustainable level, and is likely to pick up a bit in the
months ahead. Overall fundamentals remain solid, driven by population
and employment growth as well as favorable affordability conditions in
most of the country, so we expect the housing market to remain historically
high but lower than last year’s record.”

On the new home side, sales of new one-family houses in December 2005
were at a seasonally adjusted annual rate of 1,269,000, according to estimates
released jointly on January 26th by the U.S. Census Bureau and the Department
of Housing and Urban Development. This is 2.9 percent (±11.8%) above the
revised November rate of 1,233,000 and is 1.8 percent (±17.1%) above the
December 2004 estimate of 1,247,000.

The median sales price of new houses sold in December 2005 was $221,800;
the average sales price was $272,900. The seasonally adjusted estimate
of new houses for sale at the end of December was 516,000. This
represents a supply of 4.9 months at the current sales rate.

An estimated 1,282,000 new homes were sold in 2005. This is 6.6 percent
(±5.4%) above the 2004 figure of 1,203,000.

Mortgage Rate Update: Rates Moderate

Mortgage rates moderated a bit during the first month of the
year. 30-year fixed-rate mortgages, which averaged 6.21% at the
beginning of January, fell to an average of 6.12% by the last week of
the month, according to mortgage company Freddie Mac. Likewise,
15-year fixed-rate mortgages, which began at an average of 5.76%,
declined to an average of 5.70% in the period that ended January

For current average mortgage rates, see the rates page.

For more information on mortgages, visit the Mortgage Section

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This Month’s Tip: The Housing Gold Rush

I’ve just finished reading an interesting book, “The Klondike Fever: The
Life and Death of the Last Great Gold Rush” by Pierre Berton. Although
the subject of the book is the great Alaskan Gold Rush of 1896-1898, there are
some uncanny similarities to today’s Real Estate market–what we can call
the early 21st century “Housing Gold Rush.” At the height of the Klondike
era, people were paying prices for items that even 100 year later would seem
outrageous. Some examples Berton cites: $800 for a small keg of bent and
blackened nails salvaged from a fire. Eggs often sold for one dollar apiece.
“Log cabins that sold for as much as two hundred dollars per square foot of
floor space.” Add in the fact that inflation has increased prices by a factor
of about twenty times and this means that those eggs would be selling for something
like $240 a dozen today. A basic, log constructed, 400 square foot cabin would
be selling for something on the order of $1,600,000!

So what does all this have to do with the current Real Estate market? The Klondike
Gold Rush was driven by a number of factors–the quest for a better life brought by
new riches, the ability to start a new business using funds from gold, a fear of
missing out on the “next big thing” (the gold rush) and, of course, one of the
biggest factors, greed. All of these factors combined to cause normally rational
men and women to do wholly unrational and unnatural things.

Although some areas of North America have been untouched by the current
Real Estate “mania,” there are plenty of areas, especially on or near the coasts,
where the “Gold Rush” mentality has taken a firm hold. These are the areas
where prices (and activity) have taken leaps never before seen in the history of
the Real Estate market. Areas that have seen, for example, price increases five
and ten times the historical annual appreciation rate. Prices that have risen a
huge multiple of the overall inflation rate, where housing has traditionally tracked
fairly close to overall increases in costs due to inflation.

What has fueled these astronomic price increases. There are a multitude of
reasons, including some of the lowest mortgage interest rates in history,
a shortage of housing in some areas, money “looking for a home” after the
early 2000’s stock market problems and the thinking that “real estate value
only goes one way: Up!” There are some other factors, though, in our
opinion that that have pushed the envelope on these huge price increases.
They are, in many ways, similar to the fever of the Klondikers of a century
ago. Many of today’s home buyers rationalize the prices they are paying
with the thought that they are trying to provide the best for themselves and
their families. Others see no problem bidding up a property’s price into the
stratosphere due to the fear of losing out–that the Real Estate market will
“pass them by.” Still others are motivated by simple greed–the “greater
fool” theory–the belief that overpaying for a commodity, whether it be a
stock, a bond or a house, is not an issue since there will always be a
“greater fool” who will pay even more for the commodity, leaving a profit for
the original purchaser.

An additional factor that has helped to heat up the market is the
unprecedented amount of activity from Real Estate investors–those
that have no intention of living in the home–or homes–that they are
purchasing. The National Association of REALTORS reports that 23%
of all purchases in 2004 were for investment purposes. Another 13%
were for “vacation” property, a good percentage of which is also for
investment. These are the highest levels ever for this type of activity,
and the numbers may well have increased in 2005. All of this additional
actvity–over one-third of all transactions were to investors–has done a
great deal to increase not only the number of sales but, because of the
competition that is fostered, drive prices up as well.

There is not a problem with this scenario as long as prices continue to
escalate. The proverbial wrench gets thrown into the mix when prices either
stop their rise or begin to deflate. What could cause such a change in
the overall trend? Higher mortgage rates can definitely have an effect,
since higher rates mean the average buyer can afford less house. Although
rental prices are a factor that influence sale prices only tangentially, they
are more of a factor than normal due to the high degree of investor participation
in the current market. In many areas of the country, while home prices have
been rocketing upward, rental prices have shown little or no appreciable
gains in comparison. This disconnect between rental and sales prices will
eventually have an effect on these investor purchases when they are no longer
deemed an acceptable avenue for investment.

In the “Klondike” analogy, there were those who made a lot of money in
the gold rush–generally those who were the first to arrive in the gold
fields that very first summer. Many millionaires were made in those first
few months. Once the word was out, though, and thousands upon
thousands flooded the Klondike, very few additional fortunes were made.
In fact, due to the huge expense in mounting an expedition, many fortunes
were lost. Those early in enjoyed all the profits while those later in suffered
most of the losses.

For those who have purchased homes in the last few years, likewise, many
will do exceedingly well. Even those who purchase now, if they use common
sense when it comes to pricing, should be able to see a reasonable return–
if they buy the right house. (And please remember, that a reasonable,
historical return is in the 3-3.5% annual appreciation range). Going forward,
though, is not the time to be blinded by the wild price returns of the last
few years. In many areas of North America, those returns may never be
seen again in our lifetimes, so the assumption that big gains are written
in stone is foolhardy.

Summing Up

Don’t jump into this market without spending some time assessing your
personal financial and housing situation. If you are in a super-heated
market, you may want to consider renting for a while or purchasing
a less expensive home. If you are in a market where price increases have
been a bit more in line with normal appreciation, you may have a bit more
protection but you must still prepare yourself financially. Be mindful of
the different mortgage options that may be available, but be wary of those
that have interest rate variability (ARMs, Hybrids and the like) if the almost
inevitable interest increases will make the house unaffordable to you.
Most of all, keep your wits about you. Use your common sense and don’t
get caught in the “gold rush fever” that so dominates much of current
thinking about real estate.

Next Month’s Tip: Buy or Rent, 2006 Style

The Home Buying Checklist

Many of our visitors have said that one of the most valuable
aspects of the Home Buyer’s Information Center is the
Buying Checklist, where they can make sure that all
the bases have been touched. 
You can find the checklist here.

As always, if you have suggestions for improving the
site, or topics you would like to see addressed in
this newsletter (or, if you have used the Home Buyer’s
Information Center to successfully purchase a home),
drop us a quick line here.

A special thanks to all those who have written to let us know
that they have found the Home Buyer’s Information Center a
helpful resource in their buying process.

Have a great month and good luck in all your endeavors!

The Team at the Home Buyer’s Information Center