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New home sales: 'Really good news'

NEW YORK (CNNMoney.com) -- Sales of newly constructed single-family homes spiked 11% in June to an annualized rate of 384,000 homes, according to a report released Monday.

The gain over May was much greater than expected. A consensus of housing industry analysts had forecast seasonally adjusted sales of 352,000, according to Breifing.com.

However, sales are still 21% below the levels of a year ago, when new homes sold in June at an annualized rate of 488,000, according to the report released by the U.S. Department of Housing and Urban Development. Four years ago, during the height of the housing boom, the sales rate for June was 1,374,000, nearly three-and-a-half times higher than last month.

Still, the report was very positive, according to Peter Morici, an economics professor at the University of Maryland who had forecast June sales to be at the 350,000 level. "That is really good news. Considering what's going on in existing home sales, with all the foreclosure activity sending down home prices, for new homes to jump like that is a good indicator that the economy is bottoming out."
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Is Now The Right Time To Buy A Vacation Home?

A couple of years ago I wrote an article about buying a vacation home in a buyers' market and mentioned that you should watch for inventories to start falling, and prices to stabilize before you make your move. I also said to hold off even longer if we enter into a recession. Current real estate market conditions, though still hazy, are now affected by several other factors.

The dollar is in a freefall, and prices on many commodities are rising drastically. The question as to whether we're in a "recession", or not, is in the news nearly every day. Vacation home prices have fallen marginally in most areas (in comparison to their gains over the last 5 years), but only a few isolated hotspots have experienced drastic reductions in the second home market, mainly in the western states and much of Florida.

No one knows when the real estate market (in general) will actually bottom out - that is, until after the fact. But buying at the bottom may not be the wisest move under current conditions. Most vacation home destinations are within a 2-3 hour drive of where aspiring second home owners live. And, the majority of these locations were not as vulnerable to the sub-prime lending schemes that plagued major metropolitan areas and booming vacation hot spots. Many were not overbuilt on speculation.

Many experts are recommending buying this spring, but making lowball offers, as there still may be more reductions coming throughout the year. The problem is that sellers in local second home markets have had it with price reductions. Inventory is beginning to fall - but not because vacation homes are selling like hotcakes. Sellers are taking their homes off the market to wait it out. Foreclosures are not common in comparison to the metropolitan areas and outskirts where most second home buyers now reside. Distress sales are also uncommon in these local areas. The bottom of markets like these may already be here. Maybe not. But rising interest rates may be looming around the corner, and that could be more costly than waiting for the market to bottom out.

The financial markets are staggering with the fallout of the sub-prime lending crisis. And there's another blow coming down the pike. Loans based on income documentation or no income documentation from self-employed workers/business owners are baring down on these same, shaky institutions. Many of these small businesses revolved around the homebuilding industry. Translation: credit is going to become even tighter. Add the soaring costs of fuel, food and healthcare to the mix, the falling value of the dollar, and a serious threat of rising inflation rates, and some of the haze begins to clear.

It seems as though the Fed will cut interest rates once again this week (March 2008). The economy definitely needs some shoring up. But it's pitted against an already embattled dollar. Mortgage rates, we're told, are not directly tied to these cuts either, because mortgage lenders need to use a much longer term outlook on which to base current lending rates. However, I do remember the banking and loan crisis of the early 90's, where there was talk of the government having to come up with $400-$800 billion dollars to keep thousands of Savings and Loan institutions from going under. This problem was brought on by a hot real estate market combined with speculative overbuilding. That problem mysteriously disappeared when the Fed's cut the rates, but they weren't passed on to consumers. Here's a recent article by Jon Markman of MSN Money, Why the Fed's rate cuts won't help you. It seems to suggest this is something new, but the previous banking financial crisis of 15 years ago would indicate otherwise.

Nevertheless, during this spring, and perhaps through year's end, mortgage rates may be most favorable. After that, it's anyone's guess as to whether rates will climb to 7 percent, or even higher. That's the risk involved with waiting for the market to bottom out. It's not a certainty, but the indications are there.

Vacation homes in the US are also becoming more attractive to buyers from other countries - whose currency has risen substantially against the dollar. Canada, for instance, has gone from $0.65 against the US dollar, to just about on an even par over the last few years. Euro dollars have gained nearly 50%. If you're planning on buying a vacation property close to home, and waiting for the right time, it may be sooner than you think. If you're planning on paying cash on the barrelhead, you can afford to wait until more of the full scenario unfolds. Just don't get your hopes up expecting to find mushy sellers willing to jump at any offer in your closest vacation market, unless it was overbuilt during the last few years. The vast majority don't have to sell, and are becoming increasingly less willing to budge.

In Florida, and several other hotspot areas that were vastly overbuilt, there are plenty of bargains to be had. Vacation condos and homes in some areas are selling for considerably less than it would even cost to build them. And, it doesn't look like the cost of materials is going to come down any time soon, if at all. That's a good indicator for buying, but you do have to make sure that there aren't excessive liens, property taxes and even federal taxes held against the property you want to buy. And, if there's an association that has essentially fallen apart, that could be a factor, too.

The bottom line: if you've played your cards right, and have the financial clout and stability to buy, there are exceptional opportunities to fulfill your dreams of owning a vacation home. That's the biggest problem right now. As the economy weakens, many buyers (even those who were waiting for this opportunity) are forced out of the market. And the banks are compounding this by tightening lending requirements. Many economists seem to think that the second half of 2008 will begin to stabilize in the housing market. Others see problems through 2009. We'll see.

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