In June, a survey of economists concluded that housing has hit bottom. Realtors, homeowners and renters, Americans, and citizens of the world all sighed with collective relief.
The economy and housing values both have cycles. It has been more than 80 years since the difference between the top and the bottom was so great.
As a Realtor, I am relieved we might be at the bottom, but I want to be realistic with the changes in the market and our work.
In the not too distant past, the overwhelming majority of our work was prior to sales agreement; now it can be after the sale. In that same time, most transactions closed. The "fallout rate" was almost nonexistent. Most sobering is what is now required to get to closing and how many things can derail a transaction for a "willing, ready and able" buyer.
So as we cautiously engage the new reality, we need to pause. If we do not learn from history, we are bound to repeat it. We do not want to repeat the last 10 years. So what are the lessons we should learn? Here are some that come to mind:
1. The economy cannot recover without housing.
2. Everyone needs shelter, but not everyone needs to own their shelter.
3. High home ownership rates are important, but must be sustainable.
4. Home prices go up and down.
5. The process of purchasing and financing a home is more complicated.
6. Sound underwriting of mortgages is critical.
7. Home equity should not be used for ordinary living expenses.
8. Financial reserves for family, companies and countries are necessary.
9. Homeowner confidence in the economy is directly related to the value of their homes.
10. The economy is global.
I would love to know what you learned from the last cycle. What is important is we remember what happened as we prepare to write the future. Most importantly, we should also have a sense of accomplishment that we endured these life lessons.
Economists, bankers, Realtors and government leaders all had a part in the humanitarian crisis, and we all have a chance to rise to a higher level of responsibility. Could we start with asking why we should rush to declare the crisis is over?
A recent report shows more and more retirees are losing their homes, and more than half of the 50-plus age group is "upside down," hardly an indicator of recovery.
Although the housing market is an important element to any recovery, I believe the creation of full-time jobs should be our primary focus. Once people are working again, the housing market will begin to recover.
In our area, there is an abundance of homes on the market, a direct result of too much uncertainty within the local, national and global economies, reduced market values and an overall low level of consumer confidence. Low interest rates by themselves aren't enough to power a housing recovery.
I have concerns with the appraisal profession, particularly the role played by appraisal management companies. Other issues include the credible valuation of real property, including appraiser competency, local market knowledge and challenges in accurately estimating market value in stabilizing markets. Developing and reporting property values more accurately is critical to improving market performance, reducing risk and strengthening the housing finance system.
I know an accurate appraisal is an important part of the home buying process and that a strong and independent appraisal industry is critical to restoring faith in the mortgage origination process. Appraisals are the gold standard for mortgage.
To change the subject a little, a quick look at the new home construction outlook for our area. Even though you can purchase a very nice building lot for a price that is about the cost to install the infrastructure (roads, utilities, etc., about $30,000 to $40,000), there are other factors that definitely affect the feasibility.
The cost of construction is reasonable, about $95 per square foot to build a nice, middle range home. For example, a 1,700-square-foot home with a full unfinished basement costs approximately $161,500 to build.
Add the cost of building permits ($18,500), tap fees ($12,125), landscaping ($6,000) and finance fees ($15,000). If you are a builder or developer, you have to factor in profit, carrying and selling costs (approximately $45,000.) That gives you a grand total of $298,125.
In today's economy, with the high volume of foreclosure and short sales coming on the market, a builder cannot compete. I have sold several homes in the area that are less than 10 years old, within the parameters listed above, in the price range of $180,000. These homes were in good condition and did not need major repairs. A builder, developer or home buyer can't really justify building a new home with this competition.
That continues to lead to fewer jobs and lower employment in this area. Building has been a strong part of our local economy. Most contractors and sub-contractors have downsized or closed their business and moved on to other things. Maybe a little reduction on some of the fees across the board would help everyone.
Glenn Ault is a broker at Bray Real Estate in Rifle.