Phillip's Blog

Are we at the bottom?
By Phillip Cantrell

The only way to even partially predict what is to come is by looking at historical data and attempt to identify the trends. The events surrounding historical trends sometimes match up very closely with current events and even my simple mind can say “hey, that’s what is happening now.” Such is the case with current trends in real estate. Historically there have been several factors that were readily identifiable with the “bottom” of a housing market. Many of those factors are present today.

For example: low interest rates. The fed has been buying treasuries over the past couple of years in an effort to hold down interest rates. This has worked in the short term, but over the longer term they will eventually have to stop this process and allow free market equilibrium to return because they simply don’t have the funds to keep going. In the meantime, as you can see from the graph below, mortgage rates are lower now than they have been at any time since 1963...that’s a 47 year history people! Now is an excellent time to take advantage of this “calm before the storm” and use it to your advantage by making your move.

Another historical trend that is evident is the decline in home prices. In Williamson County, the median home price in January 2010 was 14.4% below the same time last year, and a full 22.8% below the peak of the market in late 2006. That a pretty big drop but actually represented an improvement over the lowest point last year when median price was off the peak of 2006 by 25.9%. In hard dollar terms, the median home price in Williamson County was off $104,700 from that same peak in November 2006 – that’s a huge drop, any way you slice it. Of course these percentages of decline were unevenly spread across pricing sector with the more expensive homes taking the bigger hit. What we are beginning to see though is that prices are approaching what I call a “stumbling” recovery. They’ll be up 3 months and down one. We’ll have a few missteps along the way, but overall the trend is upwards.

The biggest trend that I see now which bodes well for the buyer is the huge amount of inventory still on the market. In January there were 13,414 single family houses available in the greater Nashville area. This number should be around 9,500 units. Hence the downward pressure on prices. Again though, this is a number that is beginning to decline and as it does, the downward price pressure will decline as well. Abundant inventory means not only more choice, but more bargaining power for the buyer.

Believe it or not, for those with good credit and documentable income (and that’s a whole different conversation) there are still some excellent loan programs out there. As I write this, FHA is still offering programs with as little as 3.5% down. This is about to change though, so if you qualify, you need to get on it. Given the rapidly changing mortgage underwriting requirements, tomorrow is a new day and who knows what new requirements these folks will come up with next. I have seen instances where we had buyers who fully qualified on Friday, and by Monday they no longer met underwriting guidelines. The universal approach with today’s underwriter seems to be to play a never ending game of “cover your assets” as much as possible. All the big lenders are literally shaking in their boots that the loan they write today won’t be marketable in the secondary market tomorrow. The bottom line is that as FHA goes, so goes the entire mortgage world. They are rapidly moving toward higher down payment requirements while decreasing seller contribution amounts. As a buyer, all this will increase your cost by waiting.

Finally the most popular Tax Credits in history are still available to qualified buyers. If you are a first time buyer, or haven’t owned a home in three years, the government will give you a tax credit of $8000. That means that you can deduct this amount from your taxes and if you don’t owe that much in taxes, you get a big fat government check. Likewise, if you have lived in your home for five years, you probably qualify for a $6500 tax credit. This still seems kind of backward to me since there is a finite number of first time home buyers in any given year, and an almost infinite number of move up buyers. But what do I know? Regardless, it all amount to the government passing out FREE money. Why wouldn’t you take advantage of this if it is available to you? (I’m not an accountant, so be sure to consult yours.)

To sum it all up, this may be the best time in history to buy a home. However, as with all good things, this too will soon come to an end. As the government disengages from the treasury market and discontinues the incentives (due in April 2010), equilibrium of the free market will begin to return and the window of opportunity will begin to close. Mortgage rates rise, inventory declines and prices increase.

In case you don’t know what it looks like, THIS is the bottom of the market.