November, 2007

Market Analysis
Is this the bottom of the real estate market?
Signs of strength begin to appear within our local real estate market.

It’s no secret that we’re in a down real estate market. However, we at Corus Home Realty are ready to go on record in saying that we see signs of a market bottom, with a possible recovery ahead. We’re not 100% certain, and we’re the first to admit that we may be wrong on this. However, we’ve got some interesting information and anecdotal evidence that may be surprising to you.

Here’s a quick recap of our market history. After reaching a peak in July 2005, the market languished in 2006. We saw a market bottom in November 2006 followed by a small pickup in the first half of 2007. But in August and September 2007, the market got crushed, with over 150 lenders ceasing operations or declaring bankruptcy. A large quantity of foreclosures reached the market, while many fearful buyers held off on purchase decisions. By late September, nervous sellers reduced price, resulting in price declines within some geographic areas. By October, things had stabilized, but the market remains slow.

Some economists have predicted the real estate downturn to last through mid-2008, while others have predicted a turn in 2009. Being on the front lines of the real estate market, we at Corus Home Realty often see trends before they are reflected in industry statistics. Although it’s still very much a buyers’ market, we’re seeing some signs of strength.

A caveat: Real estate agents have a reputation for being perennially bullish on real estate. That’s not the case with us. Those of you who have read our recent Corus Reports will know that we don’t hold back in delivering bad news about the market.

Here’s why we think we may have reached a bottom.

More competitive situations. In the past 3 weeks, Corus buyers and sellers have encountered over 10 transactions where more than one buyer submitted offers on a property. While this was commonplace in 2004, such transactions have been rare since then. Generally, these competitive situations are only occurring on very well-priced properties that represent outstanding values. Also, we’re not seeing escalations – even with multiple offers, the offer prices top out at or near the list price. What this means: There are lots of buyers out there, but the price has to be right.

Buyers stepping up at auction. Recently, we attended an auction of 30 condominium units at Parkside at Alexandria (in Northern Virginia.) The developer of this slow-selling condo conversion project decided to unload his remaining unsold units through auction. The auction took place in a packed hotel ballroom on October 28th, and all units sold for over 90% of what we would consider a “fair market” price. Our clients, along with many other attendees, had been hoping to buy units at 70 to 80 cents on the dollar. We were surprised by the demand for these units. What this tells us: Under the right circumstances, demand is strong.

Fewer foreclosures than we thought? When a homeowner falls into financial distress, they can sometimes prevent foreclosure by working cooperatively with their lender. Such homeowners might attempt a short sale, refinance, or structure a creative payment plan with the lender. Our information is just anecdotal, but we’re hearing that lenders are becoming much more proactive in working with borrowers in recent months. In general, lenders have no interest in foreclosing, so it’s often beneficial for them to keep the property out of foreclosure through creative means. Additionally, the foreclosure rate for “prime” loans has remained unchanged (“subprime” loans, which were issued in large quantities over the past few years, account for most foreclosures.) What this means: The “wave” of foreclosures widely predicted to occur over the next six months may be somewhat smaller than anticipated.

Fewer bargains in the Delaware Valley? On a regular basis, we’ve been publishing our Corus Bargain Report, which highlights those listings that in our opinion represent exceptional bargains. While bargains continue to be plentiful in the Washington, DC area, our Delaware Valley / Philadelphia team has had a tougher time this month finding properties that can really be classified as “bargains.” What this means: In the Delaware Valley, this is potentially a sign of pricing strength.

A bull market in the Lehigh Valley. At a time when home prices are level or falling in many parts of the U.S., Money Magazine reports that prices in Pennsylvania’s Lehigh Valley are up 12.8% year-over-year, putting the region in the top five nationwide for home price appreciation. Our sources tell us that this is due to the area’s emerging role as a commuter suburb for people working in the New York area. What this means: Real estate is local, and even in a down market, regional economic factors can spur appreciation in property values.

Strong job growth. The economy in the Delaware Valley has remained steady, while the Washington area continues to lead the nation in job growth (mostly due to government spending.) We remain firm in our assertion that job growth or loss is the #1 driver of real estate activity. What this means: It is possible that our slow real estate market, combined with continued job growth, may have created a situation of pent-up demand in our local real estate markets.

Stagnant household formation may equate to pent-up demand. Local economists have informed us that household formation has stagnated over the past few years. This may mean that more young adults are living with parents or family members, and that more single people are living together in groups. High home prices in 2004 and 2005, along with uncertainty in the housing market in 2006 and 2007, may have caused these individuals to delay the process of moving out on their own. However, we believe that at some point, many of these individuals will wish to create their own households. What this means: We have a pent-up demand for new households, and at some point, this demand will be released, increasing demand for housing.

New flexibility in mortgages. The real estate slowdown in August and September was largely due to a contraction in the credit markets. The subprime market dried up, and buyers of jumbo mortgages evaporated. This made mortgages more expensive and less accessible, shrinking the pool of potential homebuyers. Since that time, FHA mortgages have grown in popularity as an alternative to subprime. Institutional buyers of jumbo mortgages have begun to return to the market, narrowing the spreads between jumbo (more than $417,000) and conforming (less than $417,000) mortgages. Additionally, it is possible that the Federal Government may introduce new flexibility into the FHA lending program, and may also increase the maximum loan amount for conforming mortgages. What this means: A healthier mortgage market, new flexibility in some lending programs, and overall decreases in interest rates will make mortgages more accessible, thereby increasing the pool of potential homebuyers.

A tightening rental market. The rental market remains strong throughout the Corus service area, and rents have increased an average of 4% annually in each of the past four years. In 2005, home affordability was low, and for many purchasers, renting was the cheaper option. Since then, housing costs have fallen in some areas, rents have increased, and interest rates have remained low. Housing affordability is far better than it was two years ago. What this means: As the cost of renting increases, homebuying becomes more attractive, leading to a stronger real estate market.

Now, for the caveats.

These observations represent signs of underlying strength of our local real estate markets, but understand that a near-term recovery is by no means certain. Indeed, there are a few factors that could drive our markets in a negative direction:

Inflation and interest rates. High energy prices could simultaneously dampen economic growth while forcing increases in interest rates (remember “stagflation?”) If this occurs, mortgages become more expensive while the resources of potential homebuyers simultaneously get squeezed.

Consumer sentiment. Like any other investment, real estate prices can decline. Indeed, home values in some areas have declined since 2005. The prospect of losing home equity, combined with negative news reports about real estate and the national economy, have kept many homebuyers sidelined in 2007. Further negative news or worries about price declines may continue to keep such buyers out of the market.

Increased foreclosures. Despite our observations that lenders are becoming more creative in keeping homeowners from foreclosure, it is possible that the rate of foreclosures may increase in the next 12 months. In 2005 and 2006, some homebuyers accepted mortgages that offered low “teaser” rates, and the interest rates on these loans will begin to adjust upward in 2007 and 2008. Those homebuyers who cannot afford the higher payments may be forced into foreclosure, further increasing the inventory of bank owned properties in the market.

What to do from here?

Homebuyers: Being “close” to the bottom may be good enough. We realize that many of our homebuyer clients are attempting to time the bottom of the market, getting the best possible price for a home. This is tough to do. When asked if we’re at the bottom of the real estate market, our answer is “We’ll tell you nine months after it occurs.” By that time, they buying opportunities have passed, and prices are rising. The bottom will pass before it’s reported on in the press, and the best bargains will have dried up. Given that we’re seeing signs that a bottom may be nearing, we would encourage opportunistic buyers to begin exploring their options in the market. Buying “close to the bottom” is a worthwhile strategy.

Homebuyers: Check out the “baked in” price discounts. In some neighborhoods, we’ve seen anxious sellers price their homes 10% to 20% below what we consider to be “prevailing market value.” These can be really good deals for buyers. Now, even if we envision a pessimistic scenario in which home prices fall, we think it’s unlikely that prices within the Corus service area will fall quite that significantly. So, by taking advantage of these deals, homebuyers enjoy potential protection against price declines and are possibly purchasing their home “below the bottom of the market.”

Sellers: You must still price your home competitively. A strengthening market sounds like good news for sellers. However, it remains imperative that sellers must price their homes competitively. Within any given neighborhood, only those listings representing superior values are being considered by buyers. It’s not enough to price your listings in line with other listings – if your home is not one of the top two or three values in the neighborhood, you won’t likely see much traffic regardless of how the home is marketed.

Would you like more information?

Contact your local Corus Home Center, or call us at 888-812-6787. While we think that this report provides a good summary of the Washington and Philadelphia / Delaware Valley markets, the market conditions within local neighborhoods can still vary widely. If you’re interested in buying or selling, we encourage you to join one of our home specialists for a meeting. Even if you’re early in the process, or are not sure whether you’re ready to make a move, we’ll be happy to provide you with relevant real estate information.

Corus Home Realty is expanding its headcount and is seeking qualified candidates to join our company. We are interviewing…

Salaried real estate professionals to join our transaction teams.

Referral agents seeking generous income for helping us expand our business.

Commissioned agents to assist us in handling our transaction inflow.

We have flexible opportunities for full time and part time professionals.
We welcome both new and seasoned agents, as well as prospective agents interested in entering the business.

For more information on opportunities in the Washington DC metro area, please contact Bob Clark at bob@corushome.com. For opportunities in the Philadelphia metro area, contact Kathy Davila, at kathy.davila@corushome.com.