The median home price in the U.S. has plunged nearly 40% in a little over five years, but the worst is definitely over: The market has finally wrung out the last excess valuations born of the housing bubble. Before you break out the party hats, note that this doesn't mean prices across the nation are poised to rebound anytime soon. Alex Villacorta, director of research and analytics at Clear Capital, a provider of real estate data and analytics, says the housing market is in a suspended state, with positive and negative factors offsetting one another. But he doesn't expect another free fall in prices, assuming things are left to work themselves out and there are no further shocks to the economy.
Houses haven't been this affordable since appliances came in harvest gold or avocado green. The benchmark of affordability -- the ratio of median home price to median family income -- has fallen to 2.6, below the historical ratio of 2.9, says Stiff. Another measure, the percentage of monthly family income consumed by a mortgage payment (principal and interest, using a mortgage rate of 4.1%), is 12% nationally, the lowest since 1971.
Theoretically, low rates should help push buyers to act. The average interest rate on 30-year fixed mortgages fell to 3.94% in the first week of October 2011, according to Freddie Mac. The past couple of years predictions that rates would rise were based on the premise that the economy would improve, says Guy Cecala, publisher of Inside Mortgage Finance, an industry publication. As long as the economy remains stagnant, unemployment remains high, and the housing market is in the toilet, rates will remain near historic lows, he says. At least for the first part of 2012, he adds, rates should hover between 4% and 5%.
Other positive signs: Existing home sales increased during the summer and early fall of 2011, according to the National Association of Realtors, after a deep slump following the expiration of the first-time home buyer tax credit. Although the inventory of homes on the market and in foreclosure remains high, a lull in home building over the past three years is gradually easing the surplus.
The lure of affordability and low mortgage rates hasn't increased buyer demand as much as one might expect. Some would-be buyers can't get a mortgage, given lenders stiffer requirements. Many more are hesitant to pull the trigger on a home purchase for fear that home prices will continue to fall or that their job prospects are uncertain. Although the recession has technically ended, the economy doesn't feel better to many.
The dark cloud of foreclosures still hangs over the housing market. The pace of foreclosures has slowed as lenders, loan servicers and regulators have sorted out paperwork and procedures in the wake of the robo-signing controversy that emerged a year ago. But RealtyTrac, which monitors the foreclosure market, says that foreclosure filings have begun to ramp back up.
Bank-owned foreclosures sell for an average discount of one-third off the per-square-foot price of conventional homes for sale, according to RealtyTrac. Buyers who want to snag a bargain on a distressed property will face competition from investors, and the biggest bargains may require a lot of work. Short sales, or homes sold with lenders permission for less than their owners owe on their mortgages, have also grown in number. Lenders take an average of 16 weeks to sign off on a short sale, so patience is imperative.
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