Competition for Homes To Increase!

Since last November I have been discussing the increased demand for entry level and firt-time-buyer homes on our area. At present we have a severe shortage of homes in the entire county below $500K and especially below $400K. In Gilroy and Morgan Hill we continue to have fewer than 40 homes available for purchase below $400,000. In Hollister we have fewer than 50 homes available below $300,000. WHen nice homes in these price ranges do come to market, they are receiving multiple offers and selling for $20,000 to $50,000 over list price! Not all of the homes are foreclosures. Some are short-sales, and a few are straight sales.

The rumors are that the banks have another wave of foreclosures coming but what I am seeing is that they are releasing these homes VERY slowly and in bits and batches to minimize any drop in prices due to over supply. So while there may be mnay more homes available over the next six months, they will likely come to market in a slow steady strem, rather than a torrent.

On the buyer side we continue to see many first-time buyers entering the market. I have really been surpised at how many first-time buyers there are who have basically been shut out of the market for so long. Investors are also snapping up good rental properties. And lastly, we are seeing the first signs of a relatively new class of buyer: those who were forced to sell their previous homes via a short-sale in 2007. These sellers may have sold homes that they originally pirchased for $500K or more but were forced to sell at $300K or even less. Now that their two year forced hiatus from the market is expiring, they can re-enter the market at prices even less that they might have sold their previous home. Talk about re-negotiating your mortgage!! Mabe this is the way the government should have their plan operate!

Lastly, while bank-owned sales can close within 40 days of going into contract (up from 20 to 30 due to the new laws governing selection of appraisors that lenders can utilize), short-sales which are dominating the market can take as long as 3 to 4 months to close. Given that the first-time home buyer federal tax credit expires at the end of the year, I would expect a crush of buyers hoping to qualify for this credit as we get closer to fall and especially before the holiday season.

You might think that the recent rise and possible continued rise in interest rates would reduce the buyer pool somewhat. That is a good assumption. The question is more how much will Mr. Bernanke and the Fed allow the Treasury and the Congress to borrow and spend before they really protest (Bernanke last week complained that the government spending if not curtailed soon will cause the economy to slow down). Bernanle faces quite a conundrum in trying to maintain interest rates at levels where they will stimulate home sales while also trying to keep the recovery going.

Bottom line: I don't see the competition for entry-levbel homes easing up even if interest rates do climb abit. I expect interest rates to start a slow, inconcistent but relentless climb as government spending and borrowing drive Treasury bonds yields higher and mortgage rates along with them. I do not expect mortgage rates to exceed 6% in 2009 for a 30 year, fixed, conforming loan but I think they will approach that level- still historically low. Irrespective of what mortgage rates do, the supply of buyers is set to remain constant, if not increase, in the lower tiers of the market. Competition won't lessen which should maintain or even increase selling prices in spite of any increase in foreclosures. Once the next (and last?) wave of foreclosures have been exhausted, unless we have a significant change in the economy, look for entry-level prices to really start to rise- somewhere around late 2010.