2010 Real Estate Update
2009 was quite a year for the Real Estate industry. It’s hard to believe that just twelve short months ago we were in fear of a general collapse in the economy. The stock market was in free fall, banks and other major industries were failing, and our government was throwing billions of dollars at the problem in hopes of averting disaster. We seemed to be looking into a very deep dark abyss, which isn’t the best environment for home sales. As the year progressed we started to see improvement and we ended the year in a much better position than it began. The real question is, will this improvement continue? I’m personally not so sure.
There were two major factors that prevented real estate sales from making major declines in 2009. The biggest factor was the federal government’s decision to purchase Mortgage Backed Securities, (MBS’s) which has kept interest rates at artificially low levels throughout most of the year. Mortgage Backed Securities are bundles of individual mortgages packaged to sell as a single financial instrument. These securities became very unpopular as foreclosure rates rose, and the quality of the underlying mortgages came into question. The government stepped in to buy these securities as part of the Troubled Asset Relief Program (TARP). Without government intervention, there would likely have been few buyers of MBS’s, leading to severely curtailed lending and higher interest rates.
The second major reason why real estate sales didn’t tank in 2009 was the First Time Home Buyer Tax Credit. Throughout most of this year, a first time buyer was eligible for an $8000 tax credit when they closed on a home. In November of ’09 this credit was extended to people who already owned a home, but their credit is limited to $6500.
These two programs have kept sales fairly robust since the second quarter of 2009. After a horrible January and February, sales began to improve, and by June the numbers were better than they were in 2008. This trend continued throughout the year, and although prices were still down (about 5% on average for 2009), major depreciation had been averted. The problem is that BOTH of these programs are expiring early in 2010.
No one has a crystal ball, but given the situation it would seem likely that the real estate market should perform well in the 1st half of 2010, followed by a slow down as rates rise and the tax incentives disappear. The long term health of the market will really depend on the economy in general. I’m very optimistic about our local economy over the next few years. Global Foundries, the chip fab plant being built in Malta is a real game changer for our area. Anyplace in the world a plant like this has been built has experienced significant growth. We also have a new $100 million dollar battery plant being built by GE in Schenectady, and a new $40 million dollar railway terminal being built in Mechanicville/Halfmoon. Add all of this to the $100’s of millions of dollars being invested by International Sematech on headquarters at the UAlbany Nanotech Campus, and we have what looks to be a bright future for the Capital District… but it will take a couple of years for us to feel the impact, as these projects are still in development..
The bottom line is that if you want to buy or sell, you may want to do so sooner rather than later. Interest rates will very likely increase as the government concludes their purchase of Mortgage Backed Securities, and the tax credit on home purchases is only good for contracts accepted by April 30th. Let me put the specter of higher interest rates into perspective. If you borrow $250,000 at 5% (30 year fixed rate loan), your principal and interest payment would be $1342.05. If rates go to 6.5%, which is still well below the 10 year average, you would only be able to borrow $212,327 in order to keep the same payment…$37,673 less!
If you’re a seller, you want your home on the market while the buyers are out in bigger numbers. If you’re a buyer, you want to lock in the lower rates and get that tax credit. If you are looking to sell and buy another house, you have twice the incentive to act quickly!