Opening a home-equity line of credit is no longer a slam dunk for three reasons.
It’s not cheap money Even though rates may drop in 2007, in recent years they’ve been going up, up, up. At today’s average rate of 8.7%, the interest-only monthly payment on a $100,000 HELOC is $725 vs. $387 when rates hit their lows nearly three years ago.
You could owe more than you own Lenders have made it possible to borrow 100% of your home’s value. During the housing boom, for instance, many buyers who were stretching to afford a home financed the down payment with a HELOC. Do that today and if prices fall, your home loans could add up to more than your house is worth. If you have to sell (and pay a realtor 6% or so), the difference will come from your wallet.
The market may not bail you out Throughout the boom, homeowners financed lavish upgrades with HELOCs, confident that the run-up in their home value would outstrip the cost of construction. Without that tailwind, you can’t be sure you’ll recoup everything you put into your home. You’re paying nearly 9% to make an investment that’s no sure thing.
What to do
Despite all of this, you may still want to tap your equity - it’s easy, and interest on as much as $100,000 in debt is typically tax deductible. Just be careful.
Make it the right reason That includes doing wise renovations, especially if you plan to stay put indefinitely, but not such extensive ones that you own the biggest house on the block.
An economist and mortgage banker are predicting a continued creep up in housing prices, despite another tough month in the real estate industry.
Data from Metropolitan Regional Information Systems Inc. show the average home sales price in the Baltimore region — Anne Arundel and Baltimore counties, Baltimore City, Carroll, Harford and Howard counties — posted an overall gain of 3.15 percent in October from October 2005, though the number of houses sold in the region fell 22.29 percent.
“Only Carroll and Howard counties showed a downturn,” said John McClain, an economist at George Mason University. That downward movement, he said, is “most likely due to the fact that those areas feature higher-priced homes.”
“High-priced homes are taking longer to sell, as buyers proceed cautiously in light of the softening market nationwide,” McClain said.
In the region, the number of days a house stayed on the market climbed to 70, a 79.49 percent jump from the same month in 2005, according to MRIS data. In Anne Arundel County, it’s 81 days, up 97.56 percent.
In Baltimore City, it’s 69 days, a 56.82 percent jump over last year; 61 days in Baltimore County, up 74.29 percent; 72 days in Carroll County, up 67.44 percent; 74 days in Harford County, up 85 percent; and 69 days in Howard County, up 122.58 percent.
In the popular Baltimore City neighborhood of Federal Hill, the numbers are staggering. The average sale price of a home fell 3.11 percent in October, to $246,261 from $254,163 the same month a year ago.
The total number of homes sold during the month — 71 — was down 26.04 percent from October 2005. And the average number of days on the market skyrocketed 238.24 percent to 115 days. A year ago, a home in the historic neighborhood sold in 34 days.
The housing downturn is now firmly established in retailing, too. Retailer Home Depot (HD) and homebuilder D.R. Horton (DHI) reported weak results for the third quarter on Nov.14, as the fortunes of the latter company sank on cooler activity in the sector, leading to lower income for the retail giant.
Home Depot is also predicting a chilly fourth quarter, with per-share profits falling 12% to 16% from a year ago. “I know there are a lot of points of view out there, but I still think we have deeper to go than we have seen,” Chief Executive Bob Nardelli said on a conference call with analysts. “I do not think we have seen bottom yet. I do not see anything that says it’s going to get significantly better in ‘07,” he added.
For the three months ended Oct. 29, Home Depot’s net earnings sank 3.1% compared to the same quarter of 2005. The company’s sales in stores open more than a year dropped 5.1% during the quarter, as the housing market slowed and fewer customers looked for ways to upgrade or settle into new homes. Net income fell to $1.49 billion, or 73 cents per diluted share, from $1.54 billion, or 72 cents a share, in the same period last year. The mean analyst estimate had been for 75 cents per share, according to the San Francisco research firm StarMine. Home Depot’s total sales grew 11.3% year over year, to $23.1 billion during the third quarter of 2006.
The slowdown of the U.S. housing market will last through 2007 as inventories are pared enough to prompt a change in consumer psychology, the chief executive officer of the nation’s biggest mortgage lender said on Tuesday.
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Mortgage lending has slowed as rising inventories in the housing market led to a “hard landing” for the industry after a decade of strong growth, Countrywide Financial Corp. (NYSE:CFC - news) CEO Angelo Mozilo said at a Merrill Lynch & Co. conference in New York.
“We have another year of adjustment, or transition” in the industry until consumers believe home prices won’t decline, Mozilo said. “Various events will make the change take place and one of them is” a decline in available homes, he said.
Mozilo said he expects the industry will see lending volume grow progressively from 2008 to 2010 because of a build-up of demand. Until then, the industry will continue to consolidate and eliminate excess capacities.
Calabasas, California-based Countrywide last week said it has funded $375 billion in residential mortgage loans in the year through October, down 7 percent from the same period of 2005. Its pipeline of mortgages that haven’t yet closed totaled $61 billion in October, down 14 percent from a year earlier.
Countrywide has also said it would trim more than $500 million of annual costs by year end, in part by firing more than 2,500 employees.
Some housing bubble reports from Wall Street, New Orleans and Washington. “The slowdown of the U.S. housing market will last through 2007 as inventories are pared enough to prompt a change in consumer psychology, the CEO of the nation’s biggest mortgage lender said.”
“Mortgage lending has slowed as rising inventories in the housing market led to a ‘hard landing’ for the industry after a decade of strong growth, Countrywide Financial Corp. CEO Angelo Mozilo said at a conference in New York. ‘We have another year of adjustment, or ‘transition’ in the industry until consumers believe home prices won’t decline, Mozilo said.”
The Globe and Mail. “First, Americans quit buying homes. Now, they may have stopped fixing and furnishing them too. Bob Nardelli, Home Depot’s CEO said job losses in the home construction market are the worst he’s seen in 35 years, and the pain is starting to spread to the home renovation market.”
“‘The loss of jobs…in the home construction market is at unprecedented levels,’ Mr. Nardelli told analysts. ‘Home builders [are] basically writing off earnest money and liquidating land. We’re starting to see a lot of that unemployment find its way over to the small repair and remodel contractors.’”
“In October, U.S. retail sales fell at an annual rate of 0.2 per cent, the third consecutive monthly decline, according to a U.S. Commerce Department report yesterday. ‘The housing slowdown left its grimy fingerprints all over this report,’ economist Douglas Porter said.”
“‘People are being very cautious,’ said economist Ian Shepherdson. ‘The housing crunch is now hurting.’”
Sellers reigned during the market’s 2001-’05 boom; now it’s payback time for buyers, real estate agents say. In this year’s first 10 months, metro Milwaukee sales - which include the four-county area - are down 4.8% and “for sale” offerings are up 16.1%, MLS figures show. That count includes one-, two- and condo-unit properties in Milwaukee, Waukesha, Washington and Ozaukee counties.
“Our biggest difficulty is keeping deals together,” said Maddente, who is executive vice president of Wisconsin-based First Weber Group. “When something (bad) comes back on an inspection, they want to reopen negotiations.”
Deals are being made, sometimes at a snail’s pace, “as sellers become more realistic,” said Mike Ruzicka, president of Greater Milwaukee Association of Realtors.
What’s realistic? “Buyers want a place in move-in condition and a price that’s in the ballpark - 3 percent to 10 percent over last year’s levels, depending on the property and its location,” Ruzicka said. “But even a property that looks good and is priced right is going to take time to sell. Buyers have a lot of options, and they’re taking their time looking.”
The secret to selling a home successfully in this year, said Howard Loeb, broker-associate at Shorewest Realtors in Mequon:
“Price right, present well - and be open to negotiation.”
Not every deal comes down to price, Loeb said. Sometimes, concession cinches the deal.
“Maybe the seller can help with interim financing, or the buyer’s PMI (private mortgage insurance) or even buy out the lease on their apartment,” Loeb said. “Buyers like a seller who’s flexible.”
San Diego County’s housing price slide reversed course last month and brought the median up $9,000 from September to $485,000, DataQuick Information Systems reported yesterday.
September’s overall median of $476,000 was the lowest since February 2005, making October’s turnaround a welcome sign to sellers tired of cutting prices and waiting for buyers to make an offer.
“Buyers can only stand on the sidelines so long when interest rates are 6.25 to 6.50 percent,” said Charles Jolly, president of the San Diego Association of Realtors. “There’s been enough information in the media indicating that buyers can negotiate and prices have softened.”
Jolly said a lower inventory of homes on the market indicates that sales are making a dent in the backlog.
“It’s just taking a little longer,” he said.
The statistics bear him out.
While the inventory of unsold active listings was 35.9 percent higher than a year ago, standing at 20,416 homes, it was the smallest percentage increase since July 2004. The largest inventory of homes in eight years of record keeping was 22,990, recorded in August.
It took 71 days to sell a detached home last month and 72 days to sell an attached home, according to the Realtors association, compared with 56 and 59, respectively, in October 2005.
It’s been busy here, and once again, I’m crossing the country by airplane. I planned to write this blog on this flight, and I guess the gods are on my side because US News has a couple of interesting home related stories in it today. The first story looked like it was going to talk about how NAR’s data is showing a slowing housing market. Quickly, though, the piece turned to telling people’s personal stories of suddenly being unable to sell homes that were easily flipped in the last few years- even at reduced prices. The reaction of these would-be sellers was somewhere between disbelief and depression, and the article includes a few quotes that show just how caught up people became in the housing bubble. Now that things are slowing, these same people are caught with their pants down- and it hurts. Articles like the one in US News will make the burst of the housing bubble common knowledge. It will also make the average person into a housing bear, and at some point, they will be just as negative on the market as they were positive a few years ago.
The second story is about how the housing slowdown is now officially denting GDP. Although to some it was obvious that the economy would take a hit once trillions of dollars stopped flowing out of housing, not everyone agreed. Now it’s official, and although many argued that the bursting bubble wouldn’t affect the general economy, there can no longer be any dispute.
Turning back to the NAR data, I’ve loaded the Q3 Northeast existing home sales numbers into BATT, and the following chart was the result. In short, Q3 showed slowing existing homes sales, and falling prices
A housing report from the Idaho Statesman. “The inventory of vacant single-family residential construction lots and unsold speculative homes rose dramatically in the third quarter of this year, according to a recent survey. The survey’s author and veteran Treasure Valley builders believe the increases will provide potential home buyers with more options, which in turn will help drive area home prices lower.”
“The survey, by a local Web site that tracks new subdivisions, vacant lots and unsold spec homes in the Valley, showed that 7,740 lots got preliminary approval in Ada County during the third quarter, bringing the total number of available lots to 25,883.”
“Recent industry statistics show that the drop in area home sales during the third quarter shaved 3.5 percent off the median price of an Ada County home between July and September. The median price at the end of September was $240,000.”
“Wayne Forrey, director of development for Kastera Homes in Eagle, said the growing inventory of building lots and unsold homes means the turnaround for the home building industry will not be immediate. ‘It’s going to take a while to absorb all of that (inventory),’ Forrey said. ‘And the high end housing market will be slowest to recover. We have a disproportionate number of homes priced over $300,000. But we don’t have many buyers at that price range.’”
“The Treasure Valley area housing market will remain strong as long as Idaho employment growth remains among the strongest in the nation, said Don Hubble, owner of Hubble Homes in Meridian. ‘Another problem is that most of the jobs being created are in the $35,000-a-year range, which are not top-paying jobs. And that is going to limit the parts of the market that people can afford,’ he said.”
Some housing bubble reports from Wall Street. “D.R. Horton, the largest U.S. homebuilder, said Tuesday that quarterly profit fell 51 percent as orders declined, but results topped forecasts. Net sales orders for new homes fell 25 percent to 10,430 from 13,950, while the dollar amount of these orders fell 33 percent.”
From MarketWatch.”The latest quarter included charges of $142 million, or 28 cents a share, covering inventory impairments as well as $57.2 million, or 11 cents a share, covering write-offs of deposits and pre-acquisition costs related to land-option contracts that the builder doesn’t intend to pursue.”
“During the conference call Tuesday, D.R. Horton’s management said the company’s cancellation rate rose to 40% from 29% in the third quarter, underscoring the pullback in the housing market. Gross profit margin on home-sales revenue in the fourth quarter before inventory impairments and land-option write-offs fell to 20.9% from 25.4% a year earlier.”
“‘This decline was due primarily to core margin deterioration resulting from a lack of pricing power and increased use of sales incentives relative to last year,’ said CFO Bill Wheat. The company is focusing on further scaling back its inventory, the CFO added.”
“Fellow builder Technical Olympic USA Inc., meanwhile, said it swung to a third-quarter loss of $80 million, from the profit of $70.3 million it generated in the same period a year earlier. The Hollywood, Fla.-based company said the results included $203.9 million in charges resulting from the write-down of assets including investments in joint ventures, write-off of deposits and abandonment costs, and inventory and goodwill impairments.”
“The company said its gross profit margin as a percentage of home sales dropped to 17.3% in the third quarter from 27.6% a year earlier. Technical Olympic revised its 2006 profit outlook to a range of $62 million to $72 million on the expectation of ‘continued difficult market conditions.’ CEO Antonio Mon said the forecast does not include additional impairment charges or deposit write-offs.”
