I’m returning to DC after having met with an asset manager of a quasi government organization that buys most of the mortgages in the country.  We went to lunch and discussed the future of the REO business (bank foreclosures) and it is clear there are several more waives of foreclosures to come before we’ve flushed out the challenges in the real estate market.  There are essentially four areas of REO assets and we have really only cleared through one.

1. Subprime mortgages – we’re mostly done with the bulk of these
2. Prime mortgages – moving through this inventory now, unemployment is causing this to increase
3. ARMS –resets coming in the next couple years which will put more inventory on the market
4. Commercial – the damage has just begun

Additionally, lenders are holding back huge stock piles of inventory known as the “ghost market” and releasing it slowly.

The good news for sellers though is I think most of the price declines have stopped in the DC area.  We are now seeing many multiple contracts (as many as 20) on foreclosures and the prices in several cases have fallen to below the material cost of constructing the home itself and sometimes below the land value!  (not in Dupont Circle though) Just as prices could not remain unsustainably high, they cannot remain unsustainably low either.

Buyers:  you’ve missed the best time to buy which I think was last fall, yet now is still an AMAZING time to buy.  My question to you is – what in the world are you waiting for?

We all agree in my office the real estate market has seen a noticeable bump in activity and a slight bump in price in the last 45 days.  Perhaps it is spring, or perhaps it is low interest rates, but who cares – we’ll take it!  Not all segments of the market are moving unfortunately.  It seems the “hot” activity is concentrated in the lower price point of each market category.  There are multiple mini markets in every market and all the buyers are on the trail of only a handful of very well priced homes.  Buyers would be wise to make offers on homes – even if they don’t feel they are well priced – before the seller drops the price and the buyer has to then compete with three other buyers.

Multiple offers are common place for foreclosures and short sales throughout the area.  A recent client of ours bid on a short sale with twelve other buyers in Centreville, VA (we won) – and another had a similar experience in DC.

It is too soon to call the end of the real estate recession, yet I suspect we will soon look back and determine the lowest point in the DC Metro market was October and November of 2008.

So will the new stimulus package include enough meat to bounce the DC real estate market?  Everyone is hopeful, and I remain optimistic.  Here are six points, courtesy of Luke Mullins of US News and World Report.  Click here to see his blog. 

I’ve added my commentary to the points below to give you a sense of perspective in relation to DC Area homebuyers and sellers.

• Eight grand, new buyers: The tax credit included in the economic stimulus legislation is much narrower than the $15,000 proposal. This credit is equivalent to 10 percent of the purchase price of the home - although it’s capped at $8,000–and applies only to first-time home buyers and principal residences. But unlike an earlier $7,500 home buyer tax credit, this one does not have to be repaid. 

The provision that this credit does not need to be repaid is particularly helpful.  We saw nearly no return from the previous “credit” because it really acted as a loan with the repayment provision.  $8000 is great – the tricky part is the income limitation below.

• First time buyers defined: For the purpose of this legislation, a “first-time home buyer” is someone who hasn’t owned a principal residence for three years before buying a house. (The date of purchase is considered the day that the title is transferred.) That means if you’ve owned a vacation home - but not a principal residence - within the past three years, you would still qualify for the credit. 

Fantastic!  The first time home buyers are powerful fuel in our market and this directly speaks to that large demographic.  Many of our clients are first time home buyers that now understand it is time to get into the game.  This should move more people into the market place.

• 2009 buyers only: Only those who purchase a home on or after January 1 and before December 1, 2009 are eligible for the credit. Anyone who bought a home last year won’t be able to take advantage of it. 

Though I wish the credit were longer than one year, this can certainly be a short term shot in the arm.  Will the buyers that have been waiting on the sidelines for various reasons now move off the fence?  I think many will, yet some will wait until the best opportunity has passed.  It is easier to wait, rather than take action.  Those that take action are jumping far ahead of the pack already.

• Income limits: The tax credit is subject to income limitations. Single buyers need a modified adjusted gross income of $75,000 or less to qualify for the full credit, that’s $150,000 for married couples. Those earning more than these thresholds may be eligible for reduced credits. 

Many of our clients, and buyers in the DC area in general, will not qualify for the full credit because of the income limitation.  However, a reduced credit is still better than no credit at all!

• Refundable: Because the tax credit is “refundable,” qualified buyers can take advantage of it even if they don’t have much tax liability. 

This is very powerful – essentially cash in your pocket!

• Recapture: Buyers have to own the home for at least three years in order to capitalize on the credit. If they sell the home before then, they will have to return the credit to the government. (Exceptions will be made in certain cases, such as death or divorce.) 

This is a solid provision.  We want people to understand real estate is a long term investment – 3 years minimum.

What remains somewhat unclear is how this credit interacts with the already in place DC First Time Homebuyers credit of $5000.  Details to follow in the days ahead.