Charlotte’s San Francisco Real Estate Blog

MARKET RECAP

A popular journalism cliché states, “If it bleeds, it leads.” The gist being that bad news sells, so no wonder that many in the business media lead with an NAR report stating home prices fell in the third quarter from year-ago levels in 80% of U.S. metropolitan areas, while the national median price for single-family homes fell 11.2% to $177,900.

We cannot argue the numbers; they are true. The financial crisis of 2008 hit full bloom in the third quarter of 2008, and its fallout ravaged the housing market over the subsequent six months. However, we all knew that, so is it really news?

If we dig a little deeper, we find that average home prices actually rose 2.2% during the third quarter. Moreover, if we dig deeper still, we find that several of the poster-child markets improved substantially: Median home prices in Miami-Fort Lauderdale, Fla. , a market that epitomized the market collapse, improved 4.6% over the quarter to $217,000, while Phoenix-Mesa-Scottsdale saw prices rise 8.8% to $142,700.

Legitimate concerns weigh on the housing market, to be sure. Few outweigh foreclosures. RealtyTrac estimates as many as 3.4 million households will receive a foreclosure notice this year, a 48% increase over last year. Moreover, RealtyTrac sees only marginal improvement in 2011. We do not want to understate the foreclosure problem (if the employment situation does not improve soon, foreclosures could indeed rise), but it is worth noting that foreclosures dipped 3% in October from September even as unemployment rose.

On a more positive note, we are encouraged by the turning of homebuilder fortunes. Atlanta-based Beazer Homes returned to profitability in its fiscal-year fourth quarter, earning $35.3 million. Even more encouraging, the country’s largest luxury homebuilder, Toll Brothers, reported that its contracts increased 42% in units and 62% in dollar amount in its fiscal-year fourth quarter compared to the same quarter in 2008.

The dramatic turnaround in Toll Brothers’ business suggests the recovery isn’t confined to the lower end of the housing market, nor is it solely dependent on government stimulation. Given the income required to buy a Toll Brothers home, most of the purchasers were likely ineligible for the government homebuyer’s credit.

For the past four months, we have been forwarding the argument that housing prices have stabilized. Wells Fargo has provided another arrow for our quiver. To avoid defaults and foreclosures, the banking giant is offering homeowners with Alt-A ARMs the option to offset monthly payment increases with interest-only loans to defer amortization for six to 10 years.

It sounds like a risky move. After all, interest-only loans were a contributing factor to the housing meltdown. But many of those loans were originated in a much riskier era – near a market top. That is certainly not the case today, which is why Wells Fargo is betting that home prices have stabilized and that the economy will improve. We think it is a smart move.

We also think it is a smart move to refinance or buy today. Rates are very, very good (but they will not be forever, for sundry reasons we have previously stated). What’s more, the purse strings aren’t nearly as tight as borrowers might think. According to the Federal Reserve, the rate of banks that reported tightening lending standards for prime residential real estate loans was 25% in October, which is well off the peak of 75% reported in July 2008.

In other words, 30-year fixed-rate mortgages are readily available at 5% (which for borrowers in the 28% federal income tax bracket works out to 3.6% after tax). Meanwhile, the 5/1 hybrid ARM presents an intriguing option for borrowers planning to move within the next few years. A 3.75% 5/1 works out to a mere 2.7% after tax for someone in the 28% tax bracket. Yes, rates could go lower, but not much lower.