Buying or selling a home in 2012? Here’s what you need to know.
By Amanda Abrams,
Matthew Branch and his wife, Rachel Sayre, decided to finally put down roots in Washington. After several months of searching for a house, the couple just made an offer on a detached home in the Northwest neighborhood of Takoma. Branch, 32, doesn’t seem particularly anxious about diving headfirst into the area’s housing market. “I think it’ll probably appreciate, but it’s anybody’s game,” he said. “It’ll be interesting to see what happens.” ¶ Interesting? Indeed. After all, it’s 2012 — six years after the country’s housing market began its downward slide, and zero years into a whole-hearted, full-fledged recovery. Most of the Washington region has been insulated from the worst of the housing crisis, but the local market is nonetheless in an unpredictable spot. ¶ Still, not all is random. Many of the issues and conditions facing those who enter the real estate market this year can be assessed and even prepared for. Here’s a rough guide to what home buyers and sellers should take note of in 2012.
The year things start to get better?
On the national scene, analysts are hopeful that this is the year home prices finally begin inching upward again. Lawrence Yun, chief economist for the National Association of Realtors, predicts that low interest rates and rising rents will lead to a 5 percent boost in home sales, with prices increasing by about 2 percent. And new housing starts should be 15 percent greater than last year, said David Crowe of the National Association of Home Builders. But according to RealtyTrac, foreclosures are also slated to rise, which will result in a flood of cheap homes on the market that could depress prices for another year.
The prediction for the Washington region is generally sunnier than the national forecast. “Housing prices are higher now than they were a year ago and inventory is lean, so it looks like we should be poised for some recovery in the housing market,” said Stephen Fuller, director of George Mason University’s Center for Regional Analysis.
But the area will be affected unevenly. Fully half of the region’s federal spending occurs in Northern Virginia, so real estate in Arlington and Fairfax counties and Alexandria should continue to boom. But suburban Maryland had major job losses last year, probably pulling down housing prices in some areas in 2012. Prince George’s County in particular will see a rise in already-high foreclosure numbers that will continue to undercut the market there.
The District is a bit harder to predict. “The outlook for 2012 depends on which neighborhood you’re looking at,” explained Ed Downs, president of the D.C. Association of Realtors. Still, certain neighborhoods are in very high demand, and inventory across the city is fairly tight, indicating a healthy market.
FHA vs. Fannie and Freddie: Pros and cons
One of the big housing policy issues of 2011 was the lowered limit on mortgages backed by Fannie Mae and Freddie Mac in October. Congress had voted to decrease the ceiling of these loans, which are eligible for lower interest rates, from $729,750 to $625,500 — a crucial difference in a high-cost market like Washington.
But the upper level was restored by Congress in November, after an intense lobbying effort from the housing industry. The loan limits are now back up to $729,750, but now it’s the Federal Housing Administration, rather than Fannie Mae or Freddie Mac, that’ll be behind those loans.
Does that matter? Yes, said Keith Gumbinger, a vice president of HSH.com, a mortgage information Web site. “It’s a benefit, in some ways, to the high mortgage balance borrower,” he said. That’s because loans backed by FHA require a much lower down payment than others.
Lower down payment, lower interest rates — it sounds like a win-win for the consumer. But FHA has some disadvantages, too, particularly the higher price of its mortgage insurance premiums, which can cost up to 1 percent of the loan annually. Borrowers should closely work out the details with their lenders to determine whether an FHA loan really is the best deal for them.
At the end of last year, the Greater Capital Area Association of Realtors and the Northern Virginia Association of Realtors revised the standard sales contract used across the region. Many of the changes, which went into effect Jan. 1, simplify the document’s structure and language, but one key component has the potential to hit home buyers in the pocketbook.
In the past, the seller was required to provide a warranty that the house’s appliances, plumbing, electrical systems, and heating and air conditioning were all in good working condition. If those elements turned out to be defective, the seller could be held liable. According to the new contract, however, the entire home is to be sold in “as-is” condition, with no guarantee about the state of anything in the home. If a pre-sale inspection fails to catch an on-its-last-legs boiler, for example, that’s simply the home buyer’s bad luck.
The real estate professionals who made the change say that they were aiming to clarify obligations, but others in the business say it’s an anti-consumer move. “The burden completely shifts to the buyer,” explained Steve Israel, president of Buyer’s Edge Company in Bethesda. “The buyer will have to spend tons of money and assume tons of risk on every transaction to understand even if the house is worth buying.”
The shift isn’t necessarily a big deal in Virginia, where full written disclosure by the seller has never been common. The District, by contrast, prides itself on a mandatory disclosure form forcing the seller to list the condition of the home and its systems — and that will serve in lieu of the former contract’s language. But it’s Maryland home buyers who will be most affected: A property disclosure form is required in Maryland, but sellers can opt to disclaim any representations about property conditions on the form.
Those who are about to settle on a home do have a few options. One is to hire a buyer’s agent who will carefully examine the property’s conditions. Even better, a buyer could insert an inspection contingency clause that provides them with the right to conduct a home inspection, and then give the seller a list of those items that need repairing or replacing. The seller must then make changes or reduce the price.
Mixed policy issues
that may or may not
occur this year
There are several other potential policy changes afoot that could seriously affect Washington home buyers and sellers. One is elimination of the mortgage interest deduction, an action that has a swath of small-government fans behind it. But in this election year? Probably not going to happen. Ditto with edging out Fannie Mae and Freddie Mac from the housing scene; they still have a crucial role to play, Gumbinger said.
But possibly around the middle of this year, the Consumer Financial Protection Bureau will release a streamlined version of closing documents that should be easier for buyers and sellers to read and understand; the agency is currently testing new versions to determine what works.
Buyers looking for homes in the District will want to watch the D.C. First-Time Homebuyer Tax Credit, which rewards those purchasing their first home in the District with a $5,000 federal tax credit. The policy, which is part of a larger tax credit package, generally expires at the end of the year and is retroactively reinstated by Congress early in the new year, but the fight to put it back on the books gets tougher every year.
The elephant in the room:
Pending budget cuts
But the elephant in the room is government spending. The debt ceiling talks this summer between President Obama and Congress resulted in hundreds of billions of dollars in cuts to federal spending that are already on the books — $460 billion to the Defense Department alone over the next 10 years. They won’t take effect until 2013, but that budget will be out early this year.
In a region as dependent on government spending as this one, cutbacks play a significant role in home buyers’ mentalities. “People don’t buy houses if they feel threatened; they want to stay in place until they feel okay to buy,” said George Mason’s Fuller. Homes at the lower end of the market — rentals, condos and townhouses — probably won’t be particularly affected, but bigger houses may face a standstill in the market. “I don’t see them going up much,” Fuller said.
The presence of known budget cuts on the horizon is one thing. But there’s also the looming specter of potentially massive revenue reductions coming down the pike. When the congressional supercommittee failed to come to an agreement last fall, $1.2 billion in cuts across the board were automatically set into motion. Of course, some observers think those cuts will never see the light of day; they hope a lame duck Congress will step in around late November and raise taxes to avoid a draconian outcome.
But until then, no one knows what will happen — which means uncertainty could hang over the local housing market like wet fog. “Until Congress gives some direction, everyone will be sitting around waiting, because they don’t want to make the wrong decision,” Fuller said. “It could be a tough year.”
Amanda Abrams is a freelance writer.