Recently released reports show that July new home sales were down over 13% month to month, but existing home sales increased a healthy 6.5%. Why there is such a big difference? The reason is that new home sales are based on signed contracts in July and the existing home sales numbers are based on closings which were contracts signed in May or June. One factor for this difference is rising mortgage rates which jumped from 3.5% to 4.5% between May and July and made buying a home 15% more expensive. This rising expense is just calculating the increased mortgage rate, not the rising prices of homes. Lender Processing Services calculates that prices have increased nationally by 8.4% from last year. The S&P Case Shiller Index calculates the increase at 12.2%. Rising rates plus rising home prices are beginning to effect the ability to buy a home for some home buyers. It is even beginning to effect the investor market. Investors who have been bolstering many markets, accounted for only 16% of the sales in July, down from 22% in February. First time home buyers, who may be feeling the effect of these higher home prices and higher mortgage rates, historically account for around 40% of home sales. In July, first time home buyers only accounted for 29% of the home sales. If mortgage rates level off and the current administration continues to focus on making housing a priority for the ailing economy, then home sales should continue on a steadier pace. However, if rates keep increasing along with prices, the housing market will be negatively impacted. Have questions about the market or any real estate questions in general? Contact the Holloway-Westerling Group today!
In a recent awards ceremony held at Fox Den Country Club, Gables & Gates, REALTORS handed out their top sales awards for 2012. Fresh on the heels of being awarded her 6th straight Diamond Award of Excellence, the top honor awarded by the Knoxville Association of REALTORS, Debbie Holloway brought home the following awards from Fox Den:
- Associate of the Year (5th straight year)
- Most Transactions (7th straight year)
- Top Residential Associate (5th straight year)
- Gold Key Award for Sales Production (12th straight year)
Debbie stated, “My business philosophy has been simple, work hard, be available when your clients need you, and always put the best interest of your clients first!” Debbie is proud to say that most of her business is generated from either past clients or referrals from past clients and friends. She and the entire Holloway Group are committed to serving their clients with the utmost respect and personal service.
Debbie’s partners in the Holloway Group, Troy Stavros and Nancy Westerling also brought home Gold Key Awards for each selling multi-million dollars worth of Knoxville real estate. Debbie Holloway sold approximately $22 million dollars in real estate in 2012, and with the Holloway Group sold over $39 million dollars in real estate. The Holloway Group was again the top producing team at Gables & Gates, REALTORS and ranks as one of the top producing in all of Knoxville.
According to the National Association of REALTORS, the national median home price saw the strongest year-over-year increase in seven years as a growing number of metropolitan areas posted higher median values in the fourth quarter of 2012.
What are the factors causing the price increases of today’s real estate in Knoxville and beyond?
1) Attractive affordability conditions:
- Mortgage interest rates are hovering near record lows.
- Quoting NAR President Gary Thomas, “In reality, home prices overcorrected on the downside and homes in most of the country were selling for less than replacement construction costs, which means they were undervalued.”
- Lawrence Yun, Chief Ecomomist for NAR stated, “The housing affordability index shows that the national median income of families was almost double the income needed to buy a median-priced home in 2012, so most buyers are able to stay well within their means.”
2) Decreasing rent affordability (rising rent prices)
3) Demand for housing:
- The population has been growing faster than overall inventory of Knoxville homes for sale.
- Unsold inventory, nationally, is at the lowest level in 12 years.
4) Job creation:
- Steady job creation leads to more buyers in the real estate market.
Troy Stavros, Broker and Partner with the Holloway Group at Gables & Gates, REALTORS says, “These factors have not only increased the value of Knoxville real estate but have turned what was a buyer’s market no so long ago, into a seller’s market.”
The most detailed survey on the attitudes of consumers of its kind, the Fannie Mae National Housing Survey polled 1,003 Americans via live telephone interview to assess their attitudes toward the housing market and overall consumer confidence.
Troy Stavros, Broker and Partner with the Holloway Group stated, “We see, on a daily basis, the increase in consumer confidence. The influx of buyers into the Knoxville real estate market, that is resulting in a dwindling inventory of Knoxville homes for sale, speaks volumes.” Echoing Stavros’ sentiments, the Senior Vice President and Chief Economist for Fannie Mae was quoted as saying, “”The housing market continues to firm, with consumer home price expectations for both rental and ownership properties near the strongest levels that we’ve seen in the survey’s two-and-a-half-year history. Concerns about job loss are waning as payrolls are growing – a trend that may give potential homebuyers more confidence that they can meet the financial obligation of homeownership. The upward trend over the past year and a half in the share of consumers who say it’s a good time to sell may reflect two related events. First, homeowners see that home prices are improving. Second, the number of homeowners who are underwater is declining, reducing a barrier for those owners who need to sell their home in order to buy a new one.”
The summary of the results of Fannie Mae’s January 2013 National Housing Survey are:
- More survey respondents believe now is a good time to sell a home (up 12% from last year’s results). Stavros says, now is a great time to be selling a home in Knoxville because the resulting low inventory levels has turned it into a seller’s market.
- Expectations around personal finances remain flat.
- Approximately 41% of respondents believe home prices will rise in the next 12 months. Stavros confirms that the Knoxville real estate prices have already risen and continue to do so.
- Respondents believing prices will continue to drop reached a low of 10%. Stavros stated, “There will always be that select few that refuse to believe that something positive is happening. Unfortunately those are the same folks that don’t take advantage of good market conditions, and watch as they pass them by.”
- 41% of respondents expect mortgage rates to rise in the coming year. Stavros believes Knoxville mortgage rates will rise slowly, but will stay below 4% for the rest of 2013.
- 50% or respondents believe rental prices will rise in the next 12 months. Stavros confirms that Knoxville rental prices are already on the rise, and the law of supply and demand will send them even higher.
- 65% of surveyed Americans said they would buy if moving in the near future.
- Approximately 43% of Americans see financial situations improving over the next year.
- 23% expect household incomes to rise significantly, an increase over a year ago.
Troy Stavros, Broker and Partner with the Holloway Group states, “The old adage of supply and demand is at it again. Home prices are on the rise because the number of Knoxville homes for sale continues to dwindle.” According to the latest research numbers from the National Association of Realtors, the inventory of homes for sale dropped 8.5% from November, 21.6% from one year earlier, and is at the lowest level since January of 2001.
So why are we seeing inventory of Knoxville homes for sale drop? Here are the reasons:
* Many homeowners still owe more on homes than the current market value and are not willing to bring money to the closing table.
* Many homeowners who might typically be looking to “trade up” have lost the equity necessary to do so (home equity in a primary residence, built over time, is usually the main source of down payment funds in a trade up situation).
* Sellers, feeling the market and prices are still close to bottom levels, are waiting in hopes of selling at a higher price in the future.
* Investors (individual and institutional) are buying homes in bulk and renting them, instead of putting them back on the market for sale.
* Banks are approving more short sales and loan modifications, leading to smaller numbers of foreclosed homes hitting the market for sale.
* Tight lending guidelines for builders have limited the number of new homes hitting the market for sale.
A recent cooperative study released by The National Association of Realtors and Google shows how people search for homes on the Internet and the importance of online first impressions. In “The Digital House Hunt: Consumer and Market Trends in Real Estate,” we are able to see the amazing impact and effect digital media is having on real estate. There is no doubting the huge impact that the Internet has become in everyday living, but the statistics brought to light by this study show with blazing clarity both the effectiveness and importance this tool has for searching Knoxville homes for sale. The following are some highlights of the study:
- 90% of home buyers searched online during their home-buying process.
- 52% of home buyers use the web as their first step in the process.
- Real estate-related searches on Google.com grew 253% over the past four years.
- 36% of new home shoppers utilize a mobile device while they are watching television.
Troy Stavros, Broker and Partner with the Holloway Group at Gables & Gates, REALTORS stated, “As a seller, you have to realize that your first showing is no longer taking place in your home, it is happening on the internet. If your listing isn’t winning a potential buyer over online, they more than likely will never show up at your door.”
The benefits of the digital home search are widespread. Buyers have the opportunity to complete “first showings” of potential homes at their leisure from a computer or mobile device. Buyers can not only search Knoxville homes for sale, but research areas to live and find a REALTOR for representation. Because of these buyer benefits, home sellers benefit from having more educated buyers and more effective showings. Real estate agents benefit from getting buyers who have already done research and are able to make faster buying decisions.
While there is no doubt a wealth of information is out there in the digital space for home buyers and sellers, there is still an abundance of value to be garnered from a seasoned agent. REALTORS are still the best resource for local information, negotiations, and the pulse of the local market.
No doubt the majority of buyers searching Knoxville homes for sale will need to secure a mortgage. While lending standards have been strict it hasn’t slowed the Knoxville real estate market. The following infographic from mortgage lending services provider, Ellie Mae, shows us what it took to get a mortgage in 2012.
In order to avoid the fiscal cliff, a budget package was passed by the U.S. Congress on New Years Day. Implications for homeowners and the Knoxville real estate market include: tax rates remaining the same for most households and the extension of mortgage cancellation relief.
The “American Taxpayer Relief Act of 2012’’ that was passed by Congress extends current tax rates for all households earning less than $450,000, and $400,000 for individual filers. Households earning above these limits will see tax rates revert to where they were in 2003, meaning taxpayers in the highest bracket would pay taxes on ordinary income at a rate of 39.6%, up from 35%. The tax rate on capital gains would also remain the same, at 15%, for most households, but for those earning above the $400,000-$450,000 threshold, the rate would rise to 20%.
Troy Stavros, Broker and Partner with the Holloway Group stated, “From a real estate standpoint, this could have gone in a bad direction and gladly did not. With the Congress keeping the provisions for the exclusion from taxes on the sale of a principal residence and important tax exemptions for homeowners, I feel housing can continue on it’s course of positive momentum.”
Good news from a homeowner’s perspective, the exclusion from taxes for gains on the sale of a principal residence of up to $500,000 ($250,000 for individuals) remains intact, so only home sellers whose income is $450,000 or above, AND the gain on the sale of their house is above $500,000 would pay taxes on the excess capital gains at the higher rate. Therefore there is no change for the majority of home sellers.
Extenders, which keep in place expiring tax provisions, are also included. Of most interest to the Knoxville real estate market, the “American Taxpayer Relief Act of 2012’’ would extend mortgage cancellation relief for home owners or sellers who have a portion of their mortgage debt forgiven by their lender. This is typically seen in a short sale or foreclosure sale for sellers or a modification for owners. Without this extension, the debt forgiven would be taxable, adding additional financial burden to already underwater homeowners. Also extended are deductions for state and local property taxes and mortgage insurance premiums, which, along with the mortgage interest deduction, are important tax considerations for home owners and buyers.
Many experts have voiced that implications of the fiscal cliff will lead to changes in homeownership tax provisions and a recession. Troy Stavros, Broker and Partner with the Holloway Group stated, “Although the recovering housing market has made strides towards normalcy this year, these implications will likely undo gains made in one of the economy’s most important sectors.”
Let’s take a closer look at the tax provisions and changes that could lead us to a recession, and look at how they may effect Knoxville real estate.
#1: Mortgage Interest Deduction: This is the largest and oldest housing related subsidy in the U.S. tax code, that “allows homeowners to reduce their taxable income by the amount of interest that has been paid towards their mortgage.” This deduction costs the government about $100 billion each year and has been a focal point of tax code negotiations. Some changes being discussed are: capping the deduction, limiting the number of eligible taxpayers, or eliminating the tax benefit altogether. Changes would not only have an immediate effect on a homeowner’s cash flow, but an immediate negative effect psychologically. Moody’s Chief Economist Mark Zandi state, “The deduction nevertheless has become ingrained in the psyche of home buyers over generations, and reducing it would have real effects. People account for it when they think about how much house they can afford to buy.” Changing the mortgage interest deduction will result in weakening the housing sector.
#2: Mortgage Debt Relief Act of 2007: Passed by Congress at the beginning of the housing crisis, the Mortgage Debt Relief Act shields forgiven mortgage debt from taxable income and is set to expire at the end of 2012. This protection can appear in three scenarios: “when a bank modifies a mortgage to reduce the principal; when a borrower sells her home in a short sale and the purchase price is less than the outstanding balance on the mortgage; and when a bank waives the portion of the mortgage balance it couldn’t recoup in a foreclosure.” Advocates state that allowing the tax break to expire will endanger progress made this year with troubled mortgages.
What will a recession caused by the fiscal cliff do to Knoxville real estate?
#1: Reduce Home Sales: Higher taxes will leave potential homebuyers with less available money to spend on real estate, increasing fears that the housing recovery will be reversed. But if the fiscal cliff brings the U.S. economy back into a recession, higher unemployment and lower wages will have the most profound impact on new home sales. According to the Chief Economist at National Association of Realtors (NAR), Lawrence Yun notes, “Home sales and construction activity depend on steady job growth, which we are seeing, but thus far we’ve only regained half of the jobs lost during the recession.”
#2: More Foreclosures: Another major impact of higher unemployment onset by a recession could be an influx in foreclosures. Forbes noted, “fewer jobs could translate into less demand for new homes, possibly even a wave of foreclosure filings as newly unemployed workers struggle to make mortgage payments.” The CBO reported that an inability to avoid the fiscal cliff could cost Americans 2 million jobs in 2013 and keep unemployment around 8.0% through 2014. Allowing the Mortgage Debt Relief Act to expire may compound the issue. Homeowners who are selling homes through short sales – purchasing a home for less than is owed on the existing mortgage – may choose to foreclosure on homes rather than be taxed on the unpaid portion of their mortgage. Ultimately, more foreclosures will have a negative effect on the housing market by bringing down home values.
#3: Rental Prices Move Higher: Low interest rates and low home prices have resulted in making Knoxville homes more affordable, but strict mortgage credit requirements have slowed the growth in homeownership. Ben Bernanke, Federal Reserve Chairman, stated “overly tight lending standards may now be preventing creditworthy borrowers from buying homes, thereby slowing the revival in housing and impeding the economic recovery.” Because of this, more potential Knoxville home buyers will continue to stay in the rental market, especially if the country goes into a recession. But rental supply cannot keep pace with the demand. Rents climbed more than 4.0% in 2012 and NAR estimates that number will continue to increase by at least 4.0% through 2015. A report from the Center for American Progress states, “there could be as many as 2.3 million new renters between 2015 and 2020. The result will be an increasingly tighter rental markets and higher rents for many Americans.”
There are big decisions ahead that may ultimately result in big implications for Knoxville real estate. Stay tuned!
Troy Stavros, Broker and Partner with the Holloway Group stated, “As we look into our crystal ball at what we project 2013 to look like, it has positives and negatives for both buyers and sellers of Knoxville real estate. The good news for everyone is that, unless we fall of the fiscal cliff or the Mortgage Interest Deduction gets monkeyed with, the vision is one of a good year for housing.”
Vision #1: Home prices and rents on the rise.
We’ve already seen the lack of new construction raising the national and Knoxville real estate prices in 2012, and we can expect that trend to continue into 2013. Since the housing downturn, national new construction has been at 500,000 units or less for the last 6 years. Experts say construction of new homes and apartments need to be between 1.25 and 1.5 million a year to keep pace with population growth. This shortfall leads to a lack of supply which translates to demand, equaling higher home prices and rents.
Vision #2: Less foreclosure deals and more short sales.
Sales of foreclosed homes fell to approximately 11% of all sales in June 2012, down from about 28% in March 2011. The decrease is partly because the large government entities, along with banks, have been liquidating hundreds of distressed home loans in bulk to purchasers who agree to work out new terms with borrowers rather than foreclosing. Another factor for the drop looks back to our 1st Vision. Rising home prices have improved the equity position of thousands of buyers who were once upside-down.
Also reducing foreclosures is their alternative, the “short sale”. Short sales are deals in which a home sells for less than what the borrower owes on the mortgage, with the bank agreeing to accept the sale in lieu of going through an expensive and time-consuming foreclosure. Within the past few months, FHFA issued new rules on short sales for Fannie Mae and Freddie Mac reducing the documentation that borrowers have to show to demonstrate hardship. Also borrowers now aren’t necessarily required to pay the difference between what they owe on the mortgage and the final sales price. These changes will have national and Knoxville real estate seeing more short sales in 2013.
Vision #3: Higher home construction costs.
Even though levels of home construction are at record lows, costs of building materials like sheet rock, lumber, and copper are on the rise. The last few lean years in construction caused many construction workers to either migrate out of the country or into other occupations, leaving less qualified construction workers. Once again a low supply of workers means they can demand more for their services. Couple the higher material costs with the increased cost of construction labor and that equals higher home construction costs.
Vision #4: Higher mortgage interest rates but loosened lending standards.
The National Association of REALTORS predicts rates will gradually rise to 4% by the end of 2013. While this is still extremely low, economists believe that while we are currently witnessing historically low rates, there is only one way for them to go. Currently, the average credit score of a borrower looking to obtain a mortgage is 760. This is significantly higher than averages in the past, because of an overcorrection by banks coming out of the recession. Look for lending standards to loosen a bit as lenders try to compete for the business.