The Charleston Real Estate Market showed a little spark in the first quarter - hopefully it will continue, but there may be some bumps along the way.

The number of closed sales during the first quarter of 2010 reported to the Charleston MLS was up 10.9% (1,670) over 2009, the number of pending sales was up 40.7% (2,543), the average sales price was up 5.9% ($269,780) over last year and the inventory of homes on the market in the Tri-County area as of 1, April 2010 stood at 20.1 months (17 months for homes priced under $300K and 34.6 for homes over $300K.

What will the months ahead look like? Well that's hard to predict - here are few issues we're keeping an eye on: 

  1. Rising Interest Rates: For the past couple years, interest rates have been held in check by the government to help spur the economy. Many of those policies that kept interest rates low are set to expire and experts are predicting rates to rise - perhaps to 7 ½ - 8 percent.
  2. End of First Time Home Owner Incentive: While we don't expect to see as large of a drop in sales at the end of this incentive period - we do expect to slower sales the second quarter.
  3. Foreclosed Properties : A big unknown in the real estate market is how many foreclosed properties banks are sitting on, and how many properties owners are in default on their loans who may be forced into foreclosure in the next six months (in 2009, South Carolinas mortgage default rate was 13.9%, 16th highest in the nation).  Since the beginning of the mortgage crisis, banks have been reluctant to put their reclaimed properties on the market. Rather than selling the homes for less than the loan value, which would be recorded as a loss on their already battered balance sheets, many have been waiting for the market to improve. However, they cannot hold these properties indefinitely. 
  4. Resetting ARM's: For many borrowers, their Adjustable Rate Mortgages (ARM's) will be reset in the next few months. For those with traditional ARM's there should be few problems as they convert their ARM's to fixed rate mortgages at interest rates between 4-5 percent. However, there is a large group of borrowers who opted for more "creative" ARM's such as interest only loans whose debt grew as their property value depreciated.
  5. More Defaults: It's estimated that as many as 25% of homes entering foreclosure is the result of the borrower simply deciding not to pay the mortgage even though they have the resources available. This strategy is often taken when the homeowner sees the value the property depreciate below the loan amount.
  6. Shrinking pool of buyers: The number of qualified buyers is also diminishing. Since the beginning of the mortgage crisis last year lenders have tightened the qualification - which reduced the buyer pool. Higher interest rates creates a smaller buyer pool as it takes a large income to qualify for a loan. And, almost every homeowner who is in bankruptcy, has had their property foreclosed or forced into a short sale will not qualify for a home loan for 3-5 years!

Concern; over 1.8 million current homeowners could be ineligible for a loan for 3-5 years - taking them out of the potential buyer pool.

Experts predict the number of homes for sale - many bank owned - could grow significantly over the next 6-12 months, many the result foreclosures and short sales. Banks could be anxious to move these properties as quickly as possible - perhaps at a loss.  As the number of homes on the market increases, prices could fall. If banks unload their properties below market value neighborhood property values may suffer. The number of potential buyers may be reduced significantly by rising interest rates and unqualified buyers as a result of foreclosures and short sales - with less buyers, the demand for homes could fall, inventory may increase, putting even more downward pressure on prices.