Home sales continued their move upward in January.  Dane County reported 183 single family and condo sales in January, compared to 151 during January of 2009, an increase of 21%.  While this sounds great, there are caveats.  It’s down 18% from January of 2008, and down 45% from 2007.  So, while improvement is good, we still have a way to go before we see the activity levels we were used to even a couple years ago.  Furthermore, the picture is hugely confused by the effect of the federal government’s homebuyer tax credit. Closings spiked in November of 2009 when it was believed the first time credit was about to expire.  December closings then plunged to levels similar to a year ago.  While January sales improved a little, they were still somewhat subdued.  The good news is that offer activity has picked up considerably, in part because we’re heading into the spring market, but also no doubt because the credit was extended to cover offers written by April 30 and closed by June 30 of 2010.  It was also expanded to include current homeowners with some restrictions.  So, we can expect feverish offer activity through April, and solid closing activity through June.  The question then will be, will activity fall again, like it did in December?  Only time will tell.  We don’t believe there is any chance the credit will be extended again, and that is probably a good thing.  The market needs to learn to stand on its own, and the distortions caused by the credit are making it difficult to assess what the true underlying level of demand really is.  Our hope is that inventories, which are already getting short in the lower price ranges, will diminish through the period of high activity to the point where the market can continue on its own at a reasonable pace for the balance of the year.  For now, we have to be content with the fact that activity is up, and there seems little chance that we will not exceed 2009 when all is said and done.  Look for more improvement in 2011.

With the extended tax credit now in place, we think it’s a virtual certainty that the fi rst and second quarters of 2010 will be very, very active. Based on our experience at the end of last year, we expect that offer activity will again fall off fairly steeply after April 30, and closing activity will likewise decline after June 30. We expect the year to be atypical in terms of the normal seasonal patterns, with heavier than normal activity in the fi rst half, followed by an unusual drop-off. The question is, will accelerated activity in the fi rst half reduce inventories to the point where the market can move forward from there on a somewhat normal footing? While we won’t know anything for sure until a year from now, our guess is that while 2010 will be “front end loaded,” the foundation for further growth in 2011 and beyond will have been laid.

If you’re a first time buyer, the federal government has given you a do over, and you don’t want to miss it this time, since it’s highly unlikely they’ll give you another one.  If you’re a current homeowner, this is your only chance to get a $6500 bonus check for acting now, rather than a year from now.  Add in that the Federal Reserve is still buying mortgages, so rates remain near all time lows.  Inventories are starting to dwindle.  A year from now, prices are likely to be on the rise in many sectors, and rates are almost certain to be higher.  Do we need to give you any more reasons to act now?

2010 starts out with a decidedly different vibe than 2009 did.  A year ago, the economy was still reeling from the effects of one of the worst stock market meltdowns in recent memory, and fear was dominating consumer attitudes.  Even though housing was already through the worst of its difficulties, consumer’s general risk aversion pushed housing activity to the lowest levels since the early 1980’s.

Today, we have a situation that is almost the perfect opposite.  While the economy has not yet returned to a “vibrant” state, the pervasive fear that dominated last year has clearly dissipated.  While unemployment has not yet improved, it seems to have stopped getting worse.  Housing prices on a national basis have stabilized.  Rather than fearing commitment, prospective home buyers are sensing opportunity.

And well they should.  The Home Buyer Tax Credit has been extended to April 30, and expanded to include many repeat buyers.  Interest rates remain at record lows.  Prices are favorable.  Inventories are plentiful.  We think this all adds up to a very active first half of the year.  After the tax credit expires, we expect a slowdown for a couple months.  After that, we hope the markets stabilize and start to approach what we can think of as “normal.”  While we still see 2010 as a year of recovery, it will almost certainly be better than 2009.  A year from now, we hope to be looking at a stable, and bright, 2011.

Last week we discussed the fact that interest rates have been an overlooked element of the current housing market.  Well, just today, Freddie Mac announced that the weekly reading on the 30 fixed rate mortgage came in at 4.71% on the national average, the lowest rate in the history of the index since they started keeping track.  This underscores that fact that consumers are currently being presented with an unprecedented opportunity to buy real estate on attractive terms.  Everything is lined up:  inventories are still on the high side, the government is offering a tax credit to most buyers for the next 5 months, and interest rates are at historic lows.  We believe that none of these factors will be in play, at least not to this extent, 12 months from now.  We still believe that the housing market has 1-2 years ahead of it to return to some semblance of “normal,” whatever that will prove to be, so buyers should plan to buy now and hold for 5 years or more.  With the demand likely to be generated over the next 5 months, there is a good chance inventories will be lower a year from now, which will help to stabilize the relationship between supply and demand.  We’re hopeful that will set us up for a more normal market in 2011.

The National Association of Home Builders recently forecast that existing single family sales nationally will total 4,452,000 this year, 4,900,000 next year (a 10% increase) and 6,025,000 in 2011. If we apply those percentages to our market, we would see 6100 transactions next year and 7500 in 2011. We think 6100 is right on for next year, but we think 7500 for 2011 is too high. The NAHB also forecast 30 year rates at 5.74% in 2011, which we think is too low. We see rates more like 6.5% in 2011, and 6500-6750 transactions. We think both numbers are healthy, and sustainable, with the promise of steady growth from there.

Probably the best news from the standpoint of the overall health of the market is the improvement in active inventories. In Dane County, seasonally adjusted months of inventory in single family homes dropped from 8.8 months a year ago, and 8.1 months three months ago, to 6.9 months, the lowest it’s been since the second quarter of 2007. If a balanced market is defi ned as 6 months of inventory, then Dane County is getting close in the single family sector. Furthermore, as you’ll see in tables nearby, inventories under 300,000, which account for over 60% of the inventory and almost 80% of the sales, are well under 6 months of inventory already. Overall inventories are continuing their slow but steady decline in almost all sectors. Although condo inventories remain higher, they’re still down from their peaks. Sauk and Columbia counties continue to show higher inventories overall, but even they showed movement in the right direction. Arguably the only fundamental problem in our market throughout the ordeal of the last three years has been the level of inventory, and that seems on its way to being corrected.

It’s been a long time coming, but for the first time since 2006, we have a significant increase in the number of homes sold in South Central Wisconsin for the 3^rd quarter of 2009 compared to the same quarter last year.  For all residential sales in the combined Dane, Sauk and Columbia markets, sales were up 11.8% in the third quarter compared to 2008.  For the year they’re still down 3.3%.  But think for a minute about how slow the first quarter of this year was, and you can see how much the market has turned around in the past 6 months.  And, as the TV pitchman likes to say, “but wait, it gets better!”  Preliminary indications are that offer activity was up in the neighborhood of 45% in September over last year, and October is off to a similarly strong start.  If these trends hold throughout the rest of this year, there’s a good chance we’ll fill in the entire hole created in the first quarter and perhaps finish with a year over year sales gain.

We normally experience a seasonal dip in sales activity after Labor Day, which often leads people to conclude that business is “slow.”  In our seasonal market, “slow” is a very relative term.  While it would be rare indeed for September sales to be at the pace we would expect to see in the spring, or even July or August, this year might be an exception.  While it’s still early, initial offer activity has been very robust in the first two weeks of the month.  The catalyst, we assume, is the pending expiration of the first time home buyer tax credit.  Closings must be finalized on or before November 30, 2009.  Close on December 1 for any reason and you’re out of luck.  So, if you want to be taking advantage of the credit, you need to be looking right now.  If you don’t have an accepted offer and a completed loan application by mid-October, it’s doubtful that you’ll be able to close in time given the anticipated backlog of loan applications that will need to be processed.  Late October, you may be pushing your luck.  So take advantage while you can.  We expect a very bust autumn to continue.