December market is all over the map

Anyone looking at December's market statistics would be hard pressed to decipher whether it's good news or bad. Home builders are still having a tough slog, but existing homeowners can take some solace that pricing has appeared to stabilize.

Nationally, the numbers raised fears that the housing market will begin falling again when the tax credit expires. Several stats highlighted the concerns:

• Pending home sales dropped 16% from November, but was up 15.5% on a year over year basis
• Existing homes sales dropped 16.7% on a monthly basis, but up 15% on a yearly basis
• New home sales fell 7.6% (with a 41% decline in the Midwest region)
• The Case-Shiller price index was still showing a slight decline nationally, but the price curve shows prices flattening.
  

Cincinnati's numbers did show a somewhat more positive trend than the national numbers:

• On a full year basis, the number of sales increased modestly over 2008. However, the average sales price was lower as first time buyers were an outsized portion of the market.
  
• Average sales price increased from Dec. '08 to '09 from $141.6K to $152.8K. The number of sales year over year also increased from 1,271 to 1,306 for the month.
  
• Overall inventory continued to fall. The absorption rate (ratio of sales to inventory) continued to remain below '07 and '08 at 8.9 months. There was probably a bit more increase from November to December (8.0 to 8.9) than we'd like to see, but was typical going into winter.
  

See charts for December based on the Cincinnati MLS.

No doubt it is and will be a buyer's market for some time yet. However, I do see some balance returning to the market. Buyers continue to ask for as much as 20 - 30% off list prices, but banks, builders, and even homeowners have begun to hold more firmly on pricing. For their part, banks have learned where to price houses to get them sold quickly and at full asking price (or more).

FHA loosens restrictions that may help investors

Effective February 1st, the FHA will waive its "90 day rule" for 1 year. In its current form, this rule prevents a potential buyer from buying a property that has been owned for less than 90 days by the current owner. The initial basis of this rule was to eliminate "flipping" properties (that is, buying the property only for the purpose of reselling it quickly in a hot market).

This temporary waiver of the rule should help legitimate investors who can rehab a property quickly without imposing an arbitrary timeline before they can sell again. In some cases, this has held back investors looking at buying a low-priced foreclosure "as is" that could be fixed up and sold again quickly due to the additional costs associated with sitting on the property for a time - or alternately - if a rehab was well done and priced to sell quickly, then buyers eligible for an FHA loan were effectively eliminated from bidding on the property.

While this change will help in certain situations, there are still some constraints a potential investor has to consider, including:

• Transactions must be arms-length, i.e., the buyer and seller must be unrelated
• A new requirement has been added that if the sales price is 20% more than what it was bought for previously, it requires supporting documentation of improvements, and possibly 2 appraisals.
  
• It is not applicable to "reverse mortgages" (or an HECM mortgage as it is officially referred to).

In addition to the items noted above, the waiver does not have any affect on the existing requirement for documentation and 2 appraisals if the price is more than double the previous sale and is being sold in less than 180 days. This does happen on occasion and has surprised more than a few buyers.

Click here to see the full FHA press release.

FHA changes likely to impact first time and median income buyers

FHA loans have been a significant part of home sales over the past couple of years after 100% loans went away. While these low down payment loans have no doubt help stabilize the housing market, the burden on the FHA has grown relative to their presence in the market.

This week, the clamps began to tighten down. While some are concerned that this will cause home sales to drop off again, it nonetheless is probably a good thing for the longer term return to normalcy. Changes for buyers include:

• Increased mortgage insurance from 1.5% of loan amount to 2.25%
• Increased down payment requirements based on credit score
  
• Reducing the amount a seller can pay towards a buyer's closing cost from 6% to 3%

The timing of these changes varies, but some will be implemented very quickly. To see the full list of changes and timelines, view the HUD announcement

Snapshot of buyers shows focus on energy costs

This chart came across my desk today which some may find interesting. Not surprisingly, many homebuyers focus on the energy saving features available in a home if they are considering "green" features. Midwest and Northeast buyers probably focused on this the most due to high winter heating bills.

Other items that are "environmentally friendly" or even those that may improve indoor air quality are currently important to only a small segment of buyers, likely due to either limited awareness or the perceived low value relative to cost.


Copyright REAL ESTATE BUYER'S COUNCIL. Reprinted from Green REsource Council.net with permission.

Tax Abatement Program spurs LEED-certified homes

A recent search for LEED (Leadership in Energy and Environmental Design) certified homes in the Cincinnati MLS showed awareness among builders and buyers has grown considerably within the past year. Prior to 1/1/09, only 3 homes were marketed and sold as LEED certified in the MLS database. In the year since, 15 homes have sold with 24 actively being marketed.

While these numbers aren't overwhelming by any means, they do suggest that a market for these homes is evolving - keeping in mind that this is new construction during a year when few new homes have been built. I believe the #1 factor for the increase is Cincinnati's property tax abatement program that incentivizes new development with a big push for LEED construction.

It's critical to note that any homeowner living within Cincinnati's borders can potentially take advantage of this tax program. The tax abatement has been around for a good while, initially neighborhood specific but growing city-wide over the years. The program was augmented with increased time and value benefits for LEED-certified property in 2007.

Some of the highlights of the program include:

• Tax abatement is 10 years for regular improvements or new construction, 15 years if LEED certified.
• The current amount eligible for abatement is $291,750; a whopping $530,450 if LEED certified.
  
• It applies to any 1 - 4 unit residential construction. For improvements, you must be able to show at least $2500 of work for 1 or 2 unit housing, $5000 for 3 - 4 units.
  
• For improvements, the value applies only to construction aspects, it does not impact the tax on the land value.
  
• The actual value of the construction / improvements is determined by the auditor's office (and yes, there is an appeals process).
  

The full application has details on what does and doesn't qualify as well as a nice little example of the potential savings on the standard cap of $291,750. In their example scenario, a homeowner stands to save over $6000 per year in property taxes (over $500 per month in housing costs). That's a good chunk of change for any homeowner.

Not surprisingly, the majority of new construction that is targeted as LEED certified is heavily concentrated in Hyde Park, Columbia-Tusculum, and nearby areas with a couple of projects associated with Over-the-Rhine development. In discussions with builders, these are the areas that support the higher price for LEED certification and enough home buyers that actively seek out "green" construction.

As one builder pointed out to me, at a certain price point home buyers are simply leaving money on the table if they don't get the certification. While you don't have to be LEED certified to achieve the energy savings available, the tax abatement ultimately pays for the additional costs one might incur - as well as being a possible plus when you sell the home down the road.

A couple of adventurous souls have attempted to bring in lower-priced LEED homes in other areas, but indications so far are that the profitability isn't quite there yet for the builder. Likewise, taking an existing home and getting LEED certification may not to get over the cost-benefit hurdles. That, however, doesn't mean improvements focused on energy and environmental savings can't still have a big payoff.