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Housing Outlook, 2014: Home Prices Head Higher

By: Pat Mertz Esswein
From: Kiplinger’s Personal Finance, January 2014
Full Article

The housing recovery has pushed up home prices nearly everywhere. Over the past year, home prices rose in 225 of the 276 cities tracked by Clear Capital, a provider of real estate data and analysis. (See how home prices are shifting in 276 metro areas.) Prices nationwide rose by 10.9%, pushing the median price for existing homes up by $30,000, to $215,000. For people who have waited to sell their home or refinance their mortgage, that’s good news.

SEE ALSO: The Outlook for Mortgages

Rising home prices in Seattle enabled Mike and Kristin Litke to refinance their first mortgage last summer and pay off a second mortgage that had an 8.2% interest rate. The Litkes, who bought their three-bedroom, 1.5-bath home for $512,500 in 2007 at the peak of Seattle’s housing market, had used the second mortgage to avoid paying private mortgage insurance. In 2010, just as home prices in the area hit a trough, they refinanced their first mortgage to a 30-year fixed rate of 4.375% but were stuck with the second mortgage because they didn’t have enough equity to do a “cash-out” refi.

This time, however, their home appraised for $521,000, allowing them to refinance into one 30-year, fixed-rate mortgage of $416,800 at 4.25%. They have reduced their monthly payment by $360, giving them some wiggle room in their budget and providing an infusion of college-savings funds for their kids: Stephen, 3½, and Stella, 10 months.

What’s Ahead

In 2013, a sense of urgency drove traditional buyers hoping to take advantage of still-affordable home prices and historically low mortgage rates. Buyers found selection limited, and were often forced into bidding wars with investors and other buyers who paid cash. Sellers reaped the rewards in terms of quick sales, often above the asking price. Almost half of the cities tracked by Clear Capital experienced double-digit increases in home prices, led by Las Vegas, with a gain of 32%. Such spikes reflected a continuing “correction to the overcorrection,” says Alex Villacorta, vice-president of research and analytics for Clear Capital. Buyers and investors rushed in to snap up homes with prices that had fallen too far. Homes continue to be affordable, despite recent run-ups—on average, prices are still 31.5% below their 2006 peak. The percentage of monthly family income consumed by a mortgage payment (assuming a mortgage rate of 4.1%) is just 15.6%, on average, compared with 23.5% in mid 2006. “Houses are very cheap,” says David Stiff, principal economist at CoreLogic, a property and mortgage data analytics company.

Strong First Time Home Sales Make This a Move Up Market!

Over the course of the last year, I have noticed that my personal sales history shows that smaller homes are selling much faster than larger homes.  I have seen a number of 3 bedroom, 2 bath homes sell in less than 30 days, even in this austere market.  And these homes are selling for strong prices, several having appreciated in the last year.  One of the small homes that I sold in 2009 set the mark for the highest price per square foot in its Plano neighborhood.

Across the nation, the strength of smaller size homes seems to be consistent.  A USA Today article published this morning addresses this topic directly.  The article quotes statistics from the National Association of Home Builders noting that this trend has not been overlooked by those who bring new product to the market.  The median square footage of homes has dropped about 9%, from a peak of 2300 sq ft in the third quarter of 2006 to 2100 sq ft in the same period of 2009.

I believe there are a couple of factors that cause this trend to occur.  First, the general strength of the economy has everyone scrutinizing expenditures, and people are beginning to realize that they can survive on less.  The thought pattern goes something like this “We’d love to have the media room, but do I really need it?  Perhaps now is not the time – we’ll get that in the next house.”  Second, the strongest segment of the market is in first time home buyers.  People are realizing that given price levels, interest rates and tax incentives, it make sense to buy a home rather than rent for those who can qualify for a mortgage.  First time home buyers have not built up equity over the years and usually start by purchasing smaller homes.  The combination of these occurrences leads to smaller homes outperforming larger homes in the current market.

So what’s the moral of the story?  If you have been in your first home for the last several years, and are thinking that perhaps now is the time to move up, you couldn’t be more right.  Your smaller starter home will yield the best price in the market, and the home that you purchase will likely be discounted from its level of the past couple of years.  The market is taking shape to make now the best time to step into a larger home.