After the Tax Credit, Low Rates (May Newsletter)

Get the latest on what happened in the market this month.  If you’d like to receive our newsletter by email, just sign up! Local versions of the newsletter are available for the Seattle area and for the Bay Area.

Howdy Redfinnians!

Here’s the usual digest of everything that moved in the real estate market this month. New data came out Tuesday showing another drop in real estate prices, and to everyone’s surprise, mortgage rates just fell through the floor.

Here at Redfin, we won Seattle’s startup of the year and also best blog, but our business dipped in the first weeks of May after the federal tax credit expired. Other brokers later confirmed the same trend.

Though we had earlier predicted a summer where prices went side-ways or down, and definitely saw the beginnings of that this month, we’re now feeling a bit better about the market because interest rates are so low. Just this week, business has really picked up.

Prices Dropped Most Everywhere Except California

Now let’s dig into the data! As we expected, the Case-Shiller index of real estate prices published data about March home prices showing a decline across all of our markets except for Seattle, Boston and most of California.

Location MoM Change YoY Change Date of Max Change from Max Prices Last at This

Level in…

Consec. Mos.

of Decrease

Phoenix Area -0.5% 2.4% Jun-06 -51.8% Jun-01 3
LA Area -0.7% 6.0% Sep-06 -37.7% Oct-03 2
San Diego Area 1.5% 10.8% Nov-05 -36.0% Mar-03 0
Bay Area 1.5% 16.2% May-06 -37.4% May-02 0
DC Area -0.7% 5.6% May-06 -30.2% Mar-04 6
Atlanta Area -1.8% -1.3% Jul-07 -24.0% May-00 7
Chicago Area -2.3% -2.3% Sep-06 -29.0% Apr-02 5
Boston Area 0.0% 3.8% Sep-05 -17.0% Apr-03 0
New York Area -0.7% -2.4% Jun-06 -21.5% Apr-04 7
Portland Area -.1% -2.8% Jul-07 -23.0% Apr-05 4
Seattle Area 0.1% -3.6% Jul-07 -25.3% Mar-05 0
20-City Index -0.5% -2.3% Jul-06 -30.6% Jul-03 5

The U.S. market has now lost seven years of appreciation, with homes selling for the same prices as in July 2003. The eye-popper here is that the Phoenix market has lost 52% of its value from the peak, and still builders are finding new aquifers and paving new developments. Crazy. Nation-wide, housing starts for single-family homes increased 10.2% in April, so many developers now believe prices have stabilized.

Gains Erased in Big Markets

Charting Case-Shiller index values over five years shows that that the index’s decline reversed itself last fall when the scheduled expiration of the original federal credit spurred new activity. Then last winter prices began losing ground, erasing the gain entirely in the New York, Chicago and Atlanta areas.

We still expect a tick up in April and May prices, at least in the low-end, because of the federal tax credit’s extended deadline; home-buyers were hurrying to get under contract on a home by April 30 so as to qualify for a $6,500 – $8,000 credit. We saw a huge spike in April offers, and that has mostly continued in California where a state tax credit is still in play. Just judging from the conforming loans that it backs, the federal government reports that low-end home prices actually increased slightly in March.

Sales Volume Rises in April, Plunges in May; Competition Eases

And sales volume was certainly through the roof in April. The National Association of Realtors reported on Monday that the number of existing homes that sold in April increased 7.6% since March, and 22.8% since April 2009. This won’t last. Mortgage applications plummeted 27% in May after the federal credit expired. Within its own business, Redfin has seen competition among home-buyers decrease. In January, 60% of the offers we tendered on a property faced competition whereas the number for May so far has declined to 49%:

Foreclosures: The Beginning of the End

Meanwhile RealtyTrac reported the first significant evidence of a plateau in foreclosures: the number of bank-owned properties coming to market increased by 45% over the past year, even as foreclosure filings decreased in April — by 9% over the prior month, and by 2% over the prior year. Translation: banks are getting rid of more foreclosure properties than they’re taking in. There are so many foreclosures that the supply of bank-listed properties isn’t likely to decline significantly any time soon, but for the first time it isn’t likely to increase either. This is exactly in line with our November forecast that bank-owned listings would peak in mid-2010. It’s the beginning of the end.

Mortgage Rates Plummet

But the big news is the drop in mortgage rates, a drop so large and unanticipated that the Wall Street Journal splashed it across the front page on Monday:

Many in the industry now say rates could drift as low as 4.5% this summer from 4.86% now, instead of rising to 6% as some economists projected, making for significantly lower payments for Americans buying homes or refinancing their mortgages.

As of May 20, the average rate for a 30-year mortgage was 4.84%. We’ve also seen rates on jumbo loans ease, which is important for the credit-starved high-end of the market. So why are rates going down after years of high government debt? The European bond market is so screwed up right now because of Greece that smart money is seeking a safe haven in U.S. mortgages. In the land of the blind, the one-eyed man is king. And as we’ve argued before, interest rates affect real estate prices more than most people realize.

We’re still worried that rates long-term will rise, that foreclosures will remain a major force in the market, that that there will be a big hangover in June or July numbers once the tax credit is truly over and done with. But after June’s tax-credit hangover, we can’t help but believe that rates this low will give summer home-buyers a real jolt.

Anyway, that’s our call. Let us know your thoughts by writing back or leave a comment for everyone to see here. Thanks as always for your support, and feel free to let us know how we can make Redfin better!

Best, Glenn