- The Washington Times - Friday, March 19, 2010

It is never easy to predict what will happen to the housing market in a given year. Billions of dollars likely have been lost by those who tried to time the market for their benefit.

Those peering into their crystal balls are finding this year is even more challenging to forecast. There are factors that could cause sales and home prices to rise, while other factors threaten to slow things down.

“The tax credit is really fueling some sales, but it’s up and down, very uneven and very fragile,” says Debbie Rosenstein, vice president of sales and marketing at the Christopher Cos.

The federal tax credit that has been boosting sales will disappear soon. It is available only to homebuyers who have a contract on a home by April 30 and who close on their loan by June 30. The credit is $8,000 for first-time buyers and $6,500 for those who have owned a principal home for five consecutive years during the eight years prior to purchasing their next home.

“Nobody knows what will happen when the credit dies,” Ms. Rosenstein says.

For now, the credit seems to be motivating buyers. January sales were the highest in three years, and homes were selling faster than they have since 2006. In many Washington-area jurisdictions, homes are selling in an average of 70 days or less, compared to 120 or 130 days two years ago.

The question many are asking is whether that acceleration in the market is temporary or here to stay.

“We were talking in a meeting, and some agents were saying that their buyers need to hurry and make a decision now, because by April, the homes will be snatched up,” says Holly Worthington, managing broker of Long & Foster’s Chevy Chase and Woodley Park office.

“The tax credit has pushed first-time buyers forward to make a decision in the short term,” she says.

That surge of buyer activity could make it harder for buyers to find a property they like, especially in April. Not only are eager buyers snatching up homes, but fewer homes are being listed for sale. The number of homes coming on the market this year is lower than it has been since 2005.

“We’re having a housing shortage,” Ms. Worthington says. “Demographically, that was the projection we had heard about, and I think we’re seeing it right now in Montgomery County and the District.”

“Housing starts are way down, and our population continues to grow because people are moving here. So when you look at the numbers, there aren’t enough houses in the places where people want to live.”

When buyer activity is good and the supply of homes is down, prices typically go up - but broader economic concerns are making buyers cautious.

“Even those who can afford to buy what they are looking at still don’t want to pay full price,” Ms. Rosenstein says. “That’s why there’s no solid movement in prices.”

The end of the tax credit isn’t the only negative factor looming. Many expect mortgage interest rates to rise if the Federal Reserve stops buying mortgage-backed securities. Last year, the Fed announced its intent to purchase more than $1 trillion in these securities to keep mortgage interest rates low.

It has worked. Rates have remained around 5 percent, which is very attractive to buyers. If rates rise, however, it could dampen buyer enthusiasm.

“Higher interest rates really do hurt buyers more than they believe,” Ms. Worthington says. “It is harder on a buyer’s monthly budget than a higher purchase price. Of course, when the tax credits expire, rising interest rates could keep sales up by motivating people to go ahead and make a decision to buy.”

Financial considerations don’t affect homebuyers only, but builders, too. Just 11,000 new homes were sold last year in the Washington area - compared to 22,000 in 2005.

“Builders don’t have a lot inventory of homes to sell right now, and it is primarily due to access to capital,” Ms. Rosenstein says. “The bigger national builders do have access, but the smaller companies are struggling because they can’t get the money they need to build.”

One other wild card out there is foreclosures. A significant number of homeowners are having trouble paying their mortgages, and unemployment remains high. Those factors could mean many homes will enter the foreclosure process this year.

Even though the number of foreclosures fell 7 percent in the Washington area last year, they still totaled 70,000. That’s a lot of homes to be sold.

“Foreclosures will keep dribbling into the marketplace this year,” Ms. Worthington says. “There are a lot of people sitting in houses right now and not paying their mortgage. They are upside down, but the bank knows that as long as it’s occupied it will be taken care of, and they’ll get around to foreclosing on it eventually.”

When that happens, the market likely can absorb additional foreclosures that are put up for sale - if buyers remain motivated. It remains to be seen, however, how homebuyers will respond to a rise in interest rates and the expiration of the tax credit.

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