Analyzing the risks may shock you!

It’s hard to be optimistic when everybody is and has been saying how bad everything is. Now, many people are saying that the worst of the real estate crisis is behind us. I see some everyday saying that prices are picking up. I hope they are right. The most pessimistic projections that I have seen recently indicate that we may be in for another 10% decrease in home values.

That sounds pretty bad. However to better understand the risk, I ran 3 scenarios based on equivalent $200,000 homes with 20% down, each for a 5 year period.

Scenario 1 - the market is flat for the first 2 years and then starts to appreciate at about 3% a year.

Scenario 2 – the market declines 10% in the first 2 years and starts to appreciate in year 3 at 3% a year.

Scenario 3 – the market declines 10% for the first 2 years and starts to appreciate in year 3 at 3% a year, but the purchase is not made until the end of year 2 at the market bottom.

Before I give the results, let’s take a look at interest rates. We know that they are at a low point for our home buying lifetimes right now. The presumption is that they will go up. If the economy starts to grow and jobs pick up, we should see rate increases to keep bonds and mortgage backed securities attractive as investments. In addition the fed will have to increase rates to keep inflation in check.

These scenarios use a current interest rate of 5% since most don’t qualify for the near 4% rate that is being reported as I write this. The future rate for the purchase 2 years from now is still a low 6% or a 1% increase over current rates. (If that hasn’t happened, then the economy is likely not growing, jobs are still a problem and we have a lot more problems than if we bought or sold a house or held onto our money.)

So using these scenarios for comparison purposes, what we find is not surprising for scenario number one; we have a positive result with a net advantage based on appreciation and cost savings of about $22,000. Because of the initial loss of 10% in scenario number 2 we actually are only ahead about $1,000 after tax savings. The most surprise is actually generated by scenario number 3. When you calculate the lack of tax savings, and costs of renting for the first 2 years, versus buying at the reduced price with a 1% increase in interest rates. the result is a net loss of approximately $8,000.

Like most investments, for many of us, buying a home now is a better strategy than waiting. MARKETS CAN’T BE TIMED.

September sales

This is a preliminary look at new contracts written during September and compared to contracts written in September 2009.

	Sales	Beds	Baths	Sq Feet	Price	Price/SF
Sep-10	823	3	2	2084	$228,877.00	$104.18
Sep-09	950	3	1	1923	$231,794.00	$118.17
Difference	-127	0	1	161	$2,917.00	$13.99

The sales decrease would be expected since September of 2009 was influenced by the original tax credit and September of 2010 had no tax credit. So, while many believe the market is continuing to crash, I believe this is a pretty good indicator of stabilizing sales. A few more months will tell the story much better.

There are a lot of people saying that prices have been going up, but keep in mind they are talking about median prices. Since the tax credit drew more first time buyers into the market, it would skew the numbers to a lower median.

I think the better indicator is the average cost per square foot, which is down approximately 12%.  This number could be heavily influenced by the condition of distressed properties, which seem to be making up more and more of the market.

October inventory summary

This is a summary of single family homes in the Central Virginia MLS for the RVA and Tri-cities area

There are 8448 homes available in  Henrico, Amelia, Chesterfield, Dinwiddie, Goochland, Hanover, Hopewell, New Kent, Petersburg, Powhatan, Colonial Heights, Prince George, Richmond        

	Beds	Baths	SQFt	Price	Price/SF
High	25	9	18248	$10,950,000	$899.25
Low	0	0	0	$1	$0.002
Ave	3	2	2161	$268040	$118.08

RICHMOND METRO

Paring the area down to Richmond Metro of Chesterfield, Goochland, Hanover, Henrico, Powhatan, Richmond

	Beds	Baths	SQFt	Price	Price/SF
High	10	9	16248	$4,495,000	$899.25
Low	0	0	0	$9,900	$6.21
Ave	3	2	2,209	$277,084	$120.16

TRI-CITIES

Includes Colonial Heights, Dinwiddie, Hopewell, Petersburg and Prince George

	Beds	Baths	SQFt	Price	Price/SF
High	25	10	14,00	$10,950,000	$782.14
Low	0	0	510	$1	$0.002
Ave	3	1	1,795	$194987	$100.91