A softening in demand?

I reported to you earlier in the spring a delightful pop in buyer demand. We began to notice the increase in March and it continued through most of May. I define a "pop" as when measurements in demand compare favorably to the same time frame in the prior year.

We noticed the improvement first in showings, next in accepted offers and it manifested itself in closed sales. During the same period in time, we noticed a decrease in the number of homes for sale in Lafayette and homes for sale in West Lafayette. Once again, we found this encouraging....a reduction in what was clearly an oversupply of inventory.

Regretfully, shortly before Memorial Day, we saw a bit of a reversal, specifically a slip in our showing activity. Written offers dropped slightly in June (compared to last June) and we anticipate closings in July will be below July, 2009. On a year to date basis, closed units sales in the Lafayette area are down by 13% from the same period of time last year.

It is always hard to speculate what causes increases and decreases in sales activity, but in this case, it was in all likelihood driven by 60 basis point increase in fixed rate mortgages in May. According to Freddie Mac statistics, the average fixed rate mortgage rose from 4.86% in May to 5.42% in June. However, this is not all gloom and doom. The average fixed rate in June is still 90 basis points better than the 6.43 average in June, 2008.

I guess this is more evidence to show that we have reached the bottom of our local real estate recession and are bouncing up and down. I do not believe we have begun the final and steady road to real estate recovery. We look forward to the second round of buyers that will be generated by the $8,000 first time home buyers credit (the folks whose houses were sold to the first time buyers, who are now have become buyers without a house to sell) and the economic strength that is yet to come from the unspent Federal stimulus money.

Recent modest increase in fixed rate mortgages

I've shared in some earlier posts that in March, 2009 we began to experience a favorable trend in buyer activity. It was not just a seasonal increase, but an improvement compared to the same time frames in 2008.

Initially, our company saw an increase in the number of showings scheduled on our listings (I am not able to measure showings scheduled on listings with other companies, but I am confident the experience of others was similar ours). Next we saw an increase in the number of earnest money checks we collected (an indicator of an accepted offer...again, I can only measure those collected within our own office, but I sense our competitors enjoyed the same experience). Specifically, the number of earnest money checks collected in March, April and May exceeded the number collected in the same months in 2008. Finally, April residential unit sales throughout the market (not just at our company), exceeded April, 2008.

In late May, we began to notice a lull in activity. Specifically, in the last two weeks of May and in the first week of June, the number of showings we scheduled on our listings were measurably less than the same weeks in 2008. However, the situation improved last week when the number of showings was only 5% below 2008. In my mind, the change in the level of buyer activity ties almost exactly to the increase in fixed rate mortages we say in the middle of May. Fixed rate mrtgages rose by 50 to 75 basis points in less than two weeks.

Let's put this in perspective by looking at the history of 30 year fixed rate mortgages over the last year and a half.

Month - - - - - - - - - - - - - - - - - - Average 30 year fixed rate mortgage*

Jan, 2008 - - - - - - - - - - - - - - - - - - - - - - -5.77%
Feb, 2008 5- - - - - - - - - - - - - - - - - - - - - -5.87%
March, 2008 - - - - - - - - - - - - - - - - - - - - -6.62%
April, 2008 - - - - - - - - - - - - - - - - - - - - - -6.54%
May, 2008 - - - - - - - - - - - - - - - - - - - - - - 6.56%
June, 2008 - - - - - - - - - - - - - - - - - - - - - - 6.88%
July, 2008 - - - - - - - - - - - - - - - - - - - - - - -6.94%
Aug, 2008- - - - - - - - - - - - - -- - - - - - - - - 7.00%
Sept, 2008 - - - - - - - - - - - - - - - - - - - - - - 6.65%
Oct, 2008 - - - - - - - - - - - - - - - - - - - - - - -6.85%
Nov, 2008 - - - - - - - - - - - - - - - - - - - - - - 6.69%
Dec, 2008 - - - - - - - - - - - - - - - - - - - - - - -6.01%

Jan, 2009- - - - - - - - - - - - - - - - - - - - - - - -5.80%
Feb, 2009 - - - - - - - - -- - - - - - - - - - - - - - -5.83%
March, 2009 - - - - - - - - - - - - - - - - - - - - - 5.66%
April, 2009 - - - - - - - - - - - - - - - - - - - - - - -5.48%
May, 2009 - - - - - - - - - - - - - - - - - - - - - - - 5.49%
June 16, 2009 - - - - - - - - - - - - - - - - - - - - - 5.94%

Source: HSH Associates, Financial Publishers (Pompton Plains, NJ)
*The rates are an average of conforming and jumbo mortgages from 2,000 lenders surveyed weekly.

I can't help but believe that the reduction in buyer activity around and after the Memorial Day holiday was driven by the jump in fixed rate mortgages. However, when put into prespective our current interest rates are nearly 70 basis points below the level we saw last Thanksgiving and a full point below August, 2008.

Let's hope ,as US consumers we can quickly become accustomed to the "new normal" interest rates and recognize they are still at a level that is far below what we have seen in the last decade.

What a great time to be a first time homebuyer

I think it would be safe to say that within the 20 years that I've been involved with residential real estate, this is the best period of time I've experienced to be first time home buyer.

• Interest rates are attractive,
• credit is still available to those who have paid their bills on time,
• the FHA loan program offers responsible terms for low down payment loans,
• there is a wide variety of homes to choose from,
• the Greater Lafayette market has not suffered from a "free fall" in property values like we have heard about elsewhere, and most importantly,
• The American Recovery and Reinvestment Act of 2009 authorizes a direct income tax credit to first time home buyers equal to 10% of the purchase price of the home, not to exceeded $8,000.

The tax credit is an amazing opportunity and it is simple. Anybody who has not owned a home as a principal residence in the last three years and closes on the purchase of a new or existing home as their principal residence between 1/1/09 and 12/1/09 is eligible. Once you have closed on your home, you can amend your 2008 income tax return and apply for a refund equal to the tax credit amount or apply the tax credit to your 2009 income tax liability.

There are only two "catches" to the program that I can see. 1) The size of the tax credit is reduced for buyers who have income in excess of $75,000 for single taxpayers and $150,000 for married taxpayers filing a joint return. 2) Home buyers who use the home as their primary residence for less than three years are subject to a recapture of a portion of the tax credit. For those who live the primary residence for more than three years, there is NO recapture of the tax credit!

For those who are interested in learning more about the program, Coldwell Banker Shook, in conjunction with three local lenders, is conducting several First Time Home Buyers Seminar. They will be offered two more times this spring:

-Tuesday, March 31st, 6:30 at the Tippecanoe County Library -- Klondike Branch (corner of Lindberg and Klondike Roads, or

-Wednesday, April 29th, 6:30 at the Tippecanoe County Library -- Downtown Library.

Each session will last about one hour. They will be very informal. Registration is not necessary.

If you have any questions about the tax credit, shoot me an email and I will do my best to get you an answer (cshook@shook.com).

Charlie

P.S. As I wrote this post, the men's basketball team lost a great game to UConn in AZ. To Matt Painter and the Boiler basketball team, thanks for a great year and helping us remember what student athletics is all about.