The "good" news in the housing market is that more homes are selling. The number of existing homes sold in May was 2.4% higher than the number sold in April, which itself was higher than the number sold in March. (Those figures, from the National Association of Realtors, are annualized and seasonally adjusted.) Yes, prices are still falling, thanks largely to foreclosures and short sales, but at least the market is starting to show signs of life. New data from the S&P/Case-Shiller 20-city home-price index indicate that home prices in April dropped less than they did in March, when compared with a year earlier.
Just don't pull out the noisemakers quite yet. The segment of the market that's reviving is very narrow. In May, some 29% of sales were to first-time home buyers. The federal government's $8,000 first-time home buyer tax credit provided a lot of the boost. That means if you're trying to sell a house that a first-time home buyer probably wouldn't purchase — anything that's not priced as a starter home — you're not likely to feel the benefit of a faster moving inventory. And if you're trying to sell a high-end house, you're really out of luck.
The way the housing market has stratified can be clearly seen in Howard County, Maryland. After falling for six months in a row, the number of contracts signed by buyers ticked up in January, and has been rising ever since. The problem, though, is that almost all of the activity is among the lowest-priced homes. In May, sales of houses under $300,000 (for the D.C. suburbs, that's low-priced) jumped 41%, as compared to the same month last year. Sales of houses $300,000 and above, meanwhile, dropped by 26%. The super-high-end is particularly grim. At the rate houses worth more than $700,000 have been selling, it will take three-and-a-half years to get rid of the existing inventory. And that's not including new houses that come onto the market.
"People are scared, they aren't buying the big stuff," says Pat Hiban, a real estate agent at Keller Williams in Howard County's Ellicott City. "The sweet spot is in the low range." In 2005, Hiban's team sold 10 houses worth more than $1 million dollars. So far this year, they haven't sold any. That's why Hiban, like agents across the country, has retooled his business to target homebuyers of more modest means. "I'd rather have five sales for $200,000 than to sit and wait for $1 million," says Hiban, who now markets to first-time buyers and takes foreclosure listings from nine different banks.
Out in Scottsdale, Arizona, Gayle Henderson, a real estate agent at RE/MAX Excalibur, still works with the high end of the market, but today that job takes a different shape. She was recently approached by Luxury Home Magazine to write a piece on short sales — that is, selling your house for less than what you owe on your mortgage. "What might have been selling at $2 million two years ago could be selling for $1.2 million today," says Henderson. Compounding the problem: people who buy expensive homes often want them as second homes. Those folks are most certainly gone from the market, which means an even smaller pool of buyers.
Then there is the financing issue. The federal government has done a lot to try to keep interest rates low — like buying up mortgaged-backed securities from Fannie Mae and Freddie Mac — but loans over a certain size are often exempt. The rates on "jumbo" loans (generally those that run about $417,000) have historically been about .25 percentage points higher than on regular mortgages. That spread jumped all the way up to 180 basis points last fall, according to data-tracker HSH Associates — but has since settled down to about 100. Still, that's a big added expense. Plus, consider that for houses worth more than $1.5 million or so, banks are likely to look for a down payment in the 30% range.
The result — since expensive houses tend to sit next to other expensive houses — is certain neighborhoods practically become no-sale zones. Rich Toscano, a financial adviser at Pacific Capital Associates in San Diego, crunched listings data for his metro area and found that while sales for the 20 most-expensive zip codes were down 8% in May, compared to a year ago, sales in the 20 cheapest were up 37%. Try to sell a house in Chula Vista and you're good to go — but don't expect much luck in La Jolla. Of course, what houses are selling for is a whole other question. Homes in those 20 least-expensive zips average sale pries are down 30%, while the high-end areas only saw an average drop of 12%. An uptick in sales hasn't affected all price points evenly — but in certain ways, maybe that's a good thing.