Real Estate Investment: Return on Investment and Cash Flow Calculation

Home sales rose in ‘09 for first time in 4 years, boosted by government spending, low prices

WASHINGTON (AP) — Sales of previously occupied homes rose in 2009 for the first time in four years, despite a December slump that was due to a tax credit that led many buyers to complete sales earlier.

Still, prices plunged more than 12 percent last year — the sharpest fall since the Great Depression. The price drop for 2009 — to a median of $173,500 — showed the housing market remains too weak to help fuel a sustained economic recovery.

Concerns remain that home sales will weaken after March 31, when the Federal Reserve is set to end its program to buy mortgage securities to keep home loan rates low. Once that program ends, mortgage rates could rise. Adding to the worries, a newly extended homebuyer tax credit is set to run out at the end of April.

Some analysts question whether the housing market can remain stable without the hundreds of billions in government spending now propping it up.

Once the Fed’s mortgage-buying program ends, analysts say rates could rise as high as 6 percent from the current level of around 5 percent for 30-year loans. That’s why some expect the Fed to either extend or expand the program after March, concluding that the housing market remains too fragile.

“You just can’t go from 100 miles an hour to a dead stop and expect it to happen without a big jump in mortgage rates,” said Greg McBride, senior financial analyst at Bankrate.com.

Still, some real estate agents say they feel encouraged. More buyers are shopping around this month than in a typical January, said Kevin O’Shea, an agent with Homes of Westchester Inc. in White Plains, N.Y.

“There are indications that the economy is coming back,” he said. “And that makes buyers feel more secure.”

With median sale prices down 23 percent from their peak in summer 2006, homes have become more affordable in many markets. The tax credit has helped. Many of those active in the housing market these days are first-time buyers or investors looking to gain from the lower prices.

Connie McInturff, 58, and her husband, for example, looked at about 50 properties over 10 months before deciding on a four bedroom foreclosed home in a suburb of Orlando, Fla.

They’re paying $135,000 for a house that’s been vacant for two years, and they plan to spend up to $10,000 to replace missing appliances and install carpeting. They plan to rent it out, with the goal of eventually turning a profit.

The poor December results reported Monday by the National Association of Realtors occurred after Congress extended the tax credit, easing pressure on buyers to act quickly. The credit of up to $8,000 for first-time homeowners had been due to expire Nov. 30. But Congress extended the deadline and expanded it with a new $6,500 credit for existing homeowners who move.

December’s sales fell 16.7 percent to a seasonally adjusted annual rate of 5.45 million, from an unchanged pace of 6.54 million in November, the Realtors report said. It was the largest monthly drop in 40-years of record-keeping. Sales had been expected to fall by about 10 percent, according to economists surveyed by Thomson Reuters.

For all of 2009, sales totaled nearly 5.2 million, up about 5 percent from 2008.

The median sales price for December was $178,300, up 1.5 percent from a year earlier and the first yearly gain since August 2007. But some of that increase might be due to a drop-off in purchases from first-time buyers who tend to buy less expensive homes.

Sales are now up 21 percent from the bottom a year ago. But they’re down 25 percent from the peak more than four years ago.

Last year, first-time buyers were the main driver of the housing market. But their role is shrinking. They accounted for 43 percent of purchases in December, down from about half in November, the Realtors group said.

The inventory of unsold homes on the market fell about 7 percent to 3.3 million. That’s a 7.2 month supply at the current sales pace, close to a healthy level of about six months.

Many analysts project that home prices, which had begun to rise last summer, will fall again as spring approaches. That’s because foreclosures make up a larger proportion of sales during winter, when fewer sellers choose to put their homes on the market.

And foreclosures are still rising. The Obama administration’s program to aid homeowners has been a disappointment, with only 66,500 borrowers, or 7 percent of those who signed up, completing the program as of December.

The Treasury Department plans later this week to announce a streamlined process designed to get more borrowers to complete the loan modification program, a spokeswoman said. The program reduces mortgage rates to as low as 2 percent for five years.

Last week, Richard Neiman, New York’s top banking regulator, warned that 450,000 homeowners risk falling out of the program by the end of the month because they haven’t returned the necessary paperwork. The program, he said, is “simply being drowned by a fierce flood of foreclosures.”

AP Real Estate Writers J.W. Elphinstone in New York and Adrian Sainz in Miami contributed to this report.