Always Look on the Bright Side of Real Estate

On this April 1, optimism was abounding on all fronts for there is a feeling that the bottom is near for the economy. In typical fashion, Americans want things to turn around now; they don't like to suffer and are tired of the doom and gloom. The stock market surged again following up on its gains of last week on the belief that this should be the bottom yet investors found hope in data that was too arcane for most of us. The economic data to be published later this week and the upcoming 1^st quarter numbers will be a better indicator of the real deal.

For those of us, looking for data that we could feel joyous about, Newsday published an article today that made lemonade out of a sour real estate market. (See Buyers may find LI homes affordable now by Jonathan Starkey) No matter the economic conditions, there is always a bright side to the real estate market and right now it is brighter for buyers. The article quoted a real estate professional spouting the numbers,

“In February, the median closing price for a home in Nassau County was $400,000. That's down from $458,800 the same month last year and $502,500 at the peak in August 2007. In Suffolk County, the median closing price for a home was $309,500 in February, down from $359,500 in February 2008 and $420,000 from its peak in June 2007.”

The data cited should be welcome news for buyers but for sellers, the reality of the new pricing still has not hit home, so to speak. This is bad news for those who bought during those high periods because the odds are they are now underwater in their mortgage. This is also bad news for those who have home equity loan products that together with their mortgage lands them underwater. This is really bad news for those who want to refinance their mortgage just to find out that they are now officially underwater. This is really, really bad news for those who want to trade-up; the desirable next step for those who bought “starter” homes during the last 5 years or so. Many of them would probably have to sell for less than they paid if they are lucky to find a buyer. But, most of all, this is really, really, really bad news for the rest of us who are watching our home equity evaporate along with the rest of our savings and investments.

Anyhow, much of the article is geared toward the first-time home buyer – plenty of incentives exist to help them purchase a home, if they so desired, in the form of tax credits and the like. However, moving out to the island requires a much greater income than most people realize. Unless you are a first-time buyer, you need a 20% down-payment plus the ridiculously expensive NY state closing costs so at the Nassau average of $400,000, a buyer needs $80,000 down plus closing costs which can easily exceed $5,000, not to mention moving and move-in expenses. If you are a first-time home buyer and are lucky to get one of those FHA 3.5% down payment deals and you get assistance with the closing costs, you will still need at least $20,000 to cover the down payment and all of the other expenses. Since we have not been encouraged to save over the last decade, and any investments we had have tanked, where is that money coming from?

Technically, if we understand that banks have reverted back to the general rule of thumb of income to home price, a home price of $400,000 requires at least $125,000 in household income. A mortgage of $300,000 at today’s 5-6% rate is still a $1700 - $1800 payment plus at least $1,000 for taxes and insurance per month and that’s with no PMI (private mortgage insurance). Yep, nearly $3,000 a month for that average home. How many first-time home buyers can afford that?

Houses for sale in my community have been sitting, some for over a year now, and more homes are added to the pile weekly as the older folk realize they have to sell and leave. Since many of these communities are ageing, the sad fact is that there are very few young folk who can afford to take over. Back in the nineties, there was a similar housing decline on Long Island and it recovered nicely. However, the entire economy was not declining drastically across all sectors along with that decline nor did people have the high debt levels that they have today or were losing their jobs or having their salaries frozen or reduced to the magnitude that we are now experiencing. Most of all, there was a steady supply of Wall-Streeters and similar professionals who migrated out but now, even they have been decimated. Maybe there are some "dinks" (double income no kids) out there who continue to dream of raising kids in the suburbs one day and are still waiting to pounce on the housing market. Too bad there may not be enough of them this time around.