For home buyers now, 'it's win, win, win all over the place'
MSN Real Estate
Falling prices are making it easier for some Americans to enter the housing market. The U.S. economy is expected to be a winner, too, because housing has been the biggest drag on it.Six months ago, the 1920s-era Southern bungalow in Atlanta's Kirkwood neighborhood probably would have sold at its full asking price of $325,000. But after playing hardball with the seller in the past few months, Phil Hagedorn and his fiancée, Kristen Burgess, got the price down by $25,000. And the seller paid the closing costs.
"It's absolutely getting better for buyers," says Hagedorn, a medical-school student. "I had a gut feeling that (the price drop) was going to happen."
Falling housing prices in some areas are now making it possible for people such as Hagedorn and Burgess to enter the housing market. If this were to happen nationally, it would be good news for the housing market since, currently, affordability is a major issue for many would-be buyers. This year, the percentage of household income going to mortgage payments has been at the highest point since 1990.
Any improvement in the housing market will help the nation's economy because housing is now the biggest drag on it.
"By my math, when housing was extremely affordable in 1998, it was an important reason for the boom that followed," says Richard DeKaser, the chief economist at National City, a bank holding company in Cleveland. "We're coming off a relatively unaffordable time, and so we're looking forward to a subdued housing market in the future."
On a national basis, monthly mortgage payments are a stretch for many people. In September, according to data from the National Association of Realtors, mortgage payments took 23.3% of household income, down from a high of 25.1% in July. Anything under 18.6% is considered low, and above 21.8% is considered high, DeKaser says.
Affordability varies from region to region. Homes in the Midwest, particularly in Illinois, Indiana and Ohio, are very affordable, with the mortgage payment absorbing 17.4% of an individual's paycheck. Homes are a little less affordable in the South (21.4%) and the Northeast (24.8%). However, in the West, it takes almost 35% of an individual's income to meet the mortgage payment.
| Region | Median-priced home* | Payment as % of income | Median family income |
|---|---|---|---|
| Northeast | 265,200 | 24.8 | 65,450 |
| Midwest | 167,300 | 17.4 | 58,863 |
| South | 183,500 | 21.4 | 52,761 |
| West | 341,200 | 34.9 | 60,599 |
*Existing single-family home
Source: NAR Housing Affordability Index
To make houses more affordable, developers are agreeing to upgrade kitchens free, make the first year of mortgage payments and pay closing costs. Incentives and deals vary around the nation, says Michael Lerner, the president of MCZ/Centrum, a national builder based in Chicago. "In Sarasota, buyers are looking for the best price. In Miami, it's upgrades to the kitchen and bathroom and help on closing costs. In Phoenix, prices have been rolled back to 2002 levels to clear out inventory."
(Read more on how builders are sweetening the pot here.)
Even in some of the hottest markets, such as New York, prices are falling. They're now at the same level as 18 months ago, estimates real-estate broker Christopher Mathieson, a principal at JC DeNiro & Associates. But, he adds, "If it's a great location, and the unit is priced well, it's moving."
On the other hand, the market has turned quite difficult for people who bought homes to renovate and resell, or "flip."
"You see a lot of houses where they do renovations that are the least expensive: They use builder-grade everything, and then they find out they can't sell them because they're not what people are looking for," says Sara Jane Klingaman, part owner of Ten Fingers Unique Restoration in Atlanta. "So the houses sit and sit and sit until the price drops enough that somebody's willing to buy it despite the renovation." (Read more in "Flipping houses is harder than it looks.")
Because of the availability of such deals, Maria Azuri and her husband, Nathan Schlaud, are confident they will find something they can afford in Atlanta.
Homes that have been selling for $250,000 and more are now within their reach: about $220,000. That's about the median for what a tech accountant in Atlanta can do with one paycheck and a family.
"No offer is ridiculous. There are a lot of for-sale signs along with a lot of new construction, and we think that's ... making sellers nervous," says Azuri, who's also paying off loans from her master's work at Columbia University. "So we're seeing sellers doing more to make it possible to sell, including lowering the price and even offering to do a 1% buy-down on the mortgage interest."
Such financial inducements are multiplying, says John Baen, a real-estate expert at the University of North Texas. "There are now deals where, if people qualify for a 6% loan, they get a little freebie because the seller comes to the party and brings in some extra money to supplement the buyer's payments for the first two years," he says. "For the buyer right now, it's win, win, win all over the place."
However, even falling prices may not be enough to stabilize some markets that have seen skyrocketing appreciation and development. For example, in Palm Beach County, Fla., the median home price has appreciated 148% since 2000.
Two consequences of higher valuations are spiraling insurance costs and rising property taxes, says Jack McCabe of McCabe Research & Consulting in Deerfield Beach, Fla. But the biggest damper on the Palm Beach market, he says, is a 47-month supply of houses based on the current selling rate. "It's the highest level in our history," he says.