Housing in 2009: Up and Down

Overall housing news in 2009 could continue to be grim if – as predicted – a flood of Alt-A and option adjustable-rate mortgages reset and push homeowners with previously strong financial situations into foreclosure.

"We're in the middle of the game here," said Joseph Seneca, professor of economics at Rutgers University in New Jersey. "There's significant further unwinding to come. We're in a downward spiral with job losses that is reinforcing the weakness in the consumer markets, particularly in the largest investment the consumer makes, in his home."

Seneca says the government’s aggressive efforts to stabilize housing are helping, but housing won’t really recover until prices fall so far that large numbers of buyers jump back into the game.

In the meantime, the price of housing is increasing in some areas that are immune to the economic slowdown. These areas include the energy-producing states of North Dakota, South Dakota, Okalahoma, Alaska and Montana. Washington, D.C. with its host of government and defense jobs is doing well. Boston, San Diego and Orange County, Calif., where prices have dropped enough to increase affordability significantly, are also seeing price increases.

Source: Business Week, Prashant Gopal (12/24/2008)

Where Buyers Are Picking Up Housing Bargains

Smart investors in all parts of the country are picking up fabulous housing bargains.

Bill Leon, president of Florida’s Broward (County) Real Estate Investors Association, has been buying and selling investment property for years, but he thinks today’s deals are unprecedented. “People are afraid not to sell because they don’t know where the bottom of the market is,” he says.

David Dweck, a hard-money lender, believes the best buys are in what he calls “workforce housing,” aging bungalows on small lots. They are selling for as little as 10 cents on the dollar compared to what they were going for in 2006, he says, then fixed up and resold or rented quickly.

"People have been beaten down by fear, negativity, constant media bombardment," says Dweck. "There is a silver lining. The future looks bright."

Sheresa Pompay, an associate with Hunt Real Estate ERA in Chandler, Ariz., says bad publicity is good for real estate investors. "I love the people who read about all the gloom and doom, because they stay on the sidelines and go, 'It hasn't hit bottom.' Whatever. By the time everyone jumps back in, we'll be out and doing something else."

Fortune magazine predicts that these will be the 10 worst-performing real-estate markets – and the best places for finding bargains – in 2009:
Los Angeles, down -24.9 percent
Stockton, Calif., -24.7 percent
Riverside, Calif. -23.3 percent
Miami-Miami Beach, -22.8 percent
Sacramento, -22.2 percent
Santa Ana-Anaheim, Calif., -22 percent
Fresno, Calif., -21.6 percent
San Diego, Calif., 21.1 percent
Bakersfield, Calif., -20.9 percent
Washington, D.C., -19.9 percent

Source: Fortune, David Whitford (12/23/2008)

Is Now a Good Time to Refinance?

Refinancing now sounds appealing, but for lots of people, it isn’t all that easy.

Applications for refinances tripled earlier this month after the Federal Reserve promised to buy up $600 billion of mortgage debt. And rates for 30-year fixed mortgages are falling below 5 percent – the lowest in 50 years – but many home owners will have trouble doing the deal.

Having at least 20 percent equity in a home is important. A credit score of at least 720 and a debt ratio that is less than 43 percent are both essential.

Jumbo mortgages are still expensive. A 5/1 adjustable-rate with an initial interest rate for five years and an annual reset is averaging 6.6 percent. Traditional 30-year fixed are at 7.49 percent. Home owners in this situation may have to just ride it out.

Source: Business Week, Lauren Young (12/22/08)

Even Modifying Loans Doesn't Seem to Help

The federal Office of the Comptroller of the Currency and the Office Thrift Supervision reported increasing delinquencies and foreclosures Monday.

Although the numbers of loan modifications continue to grow, default rates are increasing more quickly, Comptroller of the Currency John C. Dugan expressed frustration and emphasized the need to figure out why modifying mortgages isn’t working.

The report showed:

• The number of delinquent loans increased during the third quarter across all loan categories — prime, Alt-A and subprime. The percentage of current and performing mortgages fell from 93.33 percent at the end of the first quarter to 91.47 percent at the end of the third quarter.
• Banks and thrifts continued to work with borrowers to mitigate losses and help borrowers retain their homes with loan modifications and payment plans increasing by 13 percent from the second quarter to the third quarter.
• Loans held on the books of servicing banks and thrifts had lower re-default rates at 35.06 percent after three months and 50.86 percent after six months, compared with loans serviced on behalf of third parties. The report speculated that the lower re-default rate for loans held by servicers may suggest that there is greater flexibility to modify loans in more sustainable ways when loans are held on a servicer's own books than when loans have been sold to third parties.

Source: Office of the Comptroller of the Currency (12/22/08)

Economists Blame Housing Bubble on Tax Break

Some economists are blaming the housing bubble on the tax break that passed in 1997, removing taxes on most home sales.

This tax treatment encouraged people to put more money into real estate because it could be a tax-free windfall. A recent study by the Federal Reserve found that 17 percent of the increase in home sales over the last decade is attributable to this tax change.

Vernon L. Smith, a Nobel laureate and economics professor at George Mason University, has said the tax law change was responsible for ''fueling the mother of all housing bubbles.''

The law’s defenders say that it removed a tax incentive that pushed home owners to trade up because before 1997, people had to buy a house at a price that was at least as high as the cost of their previous home to avoid capital gains taxes. Now they can sell and buy a smaller property or rent.

Source: The New York Times, Vikas Bajaj and David Leonhardt (12/19/08)

Fannie Tightens Lending Rules on Condos

Fannie Mae is tightening mortgage criteria on condos, particularly in Florida.

Fannie sent a memo Tuesday to lenders that the number of delinquent mortgages it owns or guaranteed that are secured by condos in Florida is at an all-time high. To combat the problem, it is requiring higher loan-to-value ratios for condos. It also increased the minimum share of condos that must be owner occupied in a new or newly converted building to 70 percent from 51 percent.

Fannie tightened criteria across the country as well. No more than 15 percent of the units can be 30 days or more past due on association payments.

Source: American Banker, Allison Bisbey Colter (12/18/08)

Buyers Being Lured to 100% Loan Program

More buyers in search of home loans are turning to an obscure program operated by the United States Department of Agriculture.

The program allows no-money-down purchases. In fact, including a mortgage insurance policy, a borrower can seek up to 102 percent.

To be eligible, buyers can’t have income that exceeds 115 percent of the median county income. The loans are restricted to low-density areas, generally towns of no more than 25,000 residents. The loans are made by private lenders, then insured by the government.

Some home builders are promoting the use of this program. "It's one of our main tools right now," says John Bargnesi, vice president for sales of Scottsdale, Ariz., home builder Meritage Homes.

Source: The Wall Street Journal, Nick Timiraos (12/16/08)

Tips for Buying at a Foreclosure Auction

If you’re thinking about buying a house at a foreclosure auction, here’s some advice from experienced auction buyers.

Pay cash. Most auctions require you to close in fewer than 30 days. That’s not enough time to get a bank loan. Hard-money loans are an option, but the going rate is 15 percent plus points, and refinancing right away is probably not an option.

Check the place out. Most auction companies working for banks will let you get in with an inspector a week or so before the sale.

Get a separate appraisal. A knowledgeable appraiser can keep you from getting caught up in the frenzy and paying too much.

Look for short sales. Instead of buying at a foreclosure auction, negotiate a short sale prior to foreclosure. Buying short takes patience, but you are likely to get a very good deal.

Source: Fortune, David Whitford (12/22/2008)

Fed Expected to Cut Key Interest Rate Tuesday

The Federal Reserve begins a two-day meeting today where it is expected to cut it's key interest rate, perhaps to an all-time low.

The Fed will likely announce Tuesday that it is cutting its key rate in half to just 0.50 percent. However, a few economists predict the Fed will go even further and cut the rate to one-quarter of a percentage point.

If that happens, it will be the lowest rate on record going back to 1954, when records tracking the monthly rates were first kept.

However deeply the Fed decides to cut rates, the prime rate for many consumer and small-business loans would drop by a corresponding amount. The prime lending rate, currently at 4 percent, is used to determine rates on home equity loans, certain credit cards, and certain consumer loans, the Associated Press reports.

"It is not so much going to give the economy a big push forward. It's more a case of trying to help the economy from being pushed further backward by all these negative events," said Stuart Hoffman, chief economist at PNC Financial Services Group.

Source: The Associated Press (12/14/12008)

Where Will Housing Prices Go Next?

How long will it take for home values to zoom back up. Some prognosticators predict decades. Others say there is a brighter picture.

"We will never see these prices again in our lifetime, when you adjust for inflation," says Peter Schiff, president of investment firm Euro Pacific Capital of Darien, Conn. "These were lifetime peaks."

But Wachovia economist Adam York expects home values to recover fairly quickly, beginning in 2010. "The one saving grace is the population is growing by 3 million people a year," he says. "They need to live somewhere. That means more roofs."

You be the judge, Here are some historic measures:

Rent. In the last half century, homes have on average sold for 20 times what it costs to rent them for a year. In 2006, at least in some places, they were selling for 32 times annual rent.

Income. From 1950 to 2000, home values sold for three times average household income. In 2006, average household income was $66,500, which should have put median home prices at $200,000. Instead the median was $301,000.

Appreciation. Existing home values rose 0.5 percent annually, adjusted for inflation, from 1950 to 2000. From 2000 to 2006, they rose at the annualized rate of 8.2 percent above inflation and peaked with a 12.3 percent rise in 2005.

Source: USA Today, Dennis Cauchon (12/12/2008)

'Extreme Makeover' Winners Face Foreclosure

One of the most-watched winners on ABC-TV’s "Extreme Makeover: Home Edition" is about to undergo foreclosure.

The Nov. 6, 2004, show, which set an "Extreme Makeover" ratings record, featured Judy and Larry Vardon, who are both deaf. The show remodeled their home to accommodate their blind, autistic son Vance, now 16 years old.

The Vardons currently face a monthly house payment of $2,300 and a mortgage rate that has topped 11 percent.

"Everyone thought the house was paid for," says Gerald Naftaly, the mayor of Oak Park, Mich., where the family lives. "But that wasn't the case. They still had their mortgage. They are just another number with the mortgage company."

Vardon, 50, works at Chrysler's Sterling Heights stamping plant. The couple is working with Lighthouse of Oakland County, a nonprofit group that aids families in crisis, to help them negotiate a lower mortgage rate.

Source: The Associated Press (12/08/08)

Obama Urges Action to Help Home Owners

President-elect Barack Obama on Sunday criticized the current administration for its failure to aggressively help home owners who are faced with foreclosure.

He called for immediate action and urged the Bush administration to find a way to encourage banks and mortgage holders to renegotiate the terms of existing mortgages in way s that would keep costs for borrowers down.

On "Meet the Press," he told anchor Tom Brokaw that it was the wrong time to worry about whether or not undeserving homeowners will benefit from the plan.

"If my neighbor's house is on fire, even if they were smoking in the bedroom or leaving the stove on, right now my main incentive is to put out that fire so that it doesn't spread to my house," Obama said.

Source: Washington Post, Anne E. Komblut (12/07/2008)

Fraud Grows, Despite More Consumer Protection

Real estate fraud continues to grow, despite aggressive responses from federal regulators.

The Federal Bureau of Investigations has reported that incidents of mortgage fraud have tripled over the last two years to 21,994, with the value of the crimes quadrupling to $1.01 billion.

The crimes range from individuals lying on their applications to complex rings of identity thefts, straw buyers and appraisal fraud.

Harvard Law School professor Howell E. Jackson, who authored a study of mortgage brokers and yield spread premiums, blames the anonymity of the mortgage business. Thirty years ago, applicants went down to their local bank and dealt with a loan officer who they probably knew. Today, the business has grown and changed and most buyers never talk to a lender. Instead, they rely on a broker to get them the best deal.

Jackson estimated that brokers will earn an estimated $33 billion in commissions this year.

"People should ask their broker how much they're making, including both yield spread premiums and direct fees, and if it's over $2,000 they should question why," says Jackson. "No one says the broker has to make a certain amount. It's negotiable."

Source: Los Angeles Times, David Streitfeld (12/05/08)

Economists Ponder Future of Home Prices

For the second year in a row, REALTORS® report that exterior remodeling projects return the most money as a percentage of cost, as detailed in the 2008 Remodeling Cost vs. Value Report.

On a national level, wood deck additions and all types of siding replacements–upscale fiber cement, midrange vinyl, and upscale foam-backed vinyl–returned more than 80 percent of project costs upon resale. Of these, the most profitable project was upscale fiber cement siding, which recouped 86.7 percent of costs, followed by wood decks at 81.8 percent, midrange vinyl siding at 80.7 percent, and upscale foam-backed vinyl siding at 80.4 percent.

The 2008 Remodeling Cost vs. Value Report compares construction costs with resale values for 30 midrange and upscale remodeling projects comprising additions, remodels and replacements in 79 markets across the country, expanding from 60 markets last year.

Projects With Highest, Lowest Returns

In addition to wood decks and siding, window replacements and kitchen remodels also returned a relatively high percentage of remodeling costs on a national basis.

All types of window replacements–upscale and midrange wood and upscale and midscale vinyl–returned more than 76 percent of costs. A major midrange kitchen remodel returned 76 percent of project costs, while a minor midrange kitchen remodel returned 79.5 percent of costs.

On a national level, bathroom remodels, while still a relatively good investment, do not return as high a percentage as in previous years. A midrange bathroom remodel was estimated to return 74.4 percent on resale, comparable to a midrange attic-to-bedroom conversion, at 73.6 percent of costs recouped, and a midrange basement remodel, at 72.7 percent of costs recouped.

As in last year’s report, the least profitable remodeling projects in terms of resale value were home office remodels, sunroom additions, and back-up power generators, returning only 54.4 percent, 56.6 percent, and 57.1 percent, respectively, of project costs.

National Association of Realtors® President Charles McMillan says the resale value of any given remodeling project depends on a variety of factors.

“A home’s overall condition, availability and condition of surrounding properties, location, and regional economic climate are all factors that will influence the value of any remodeling project,” he says.

Results of the report are summarized in the December 2008 issue of REALTOR® Magazine. The issue also includes examples of actual remodeling projects that were less expensive than many of the report’s cost estimates. Read the story online.

Full project descriptions, as well as national, regional and local project data for the 79 cities covered by the report will be posted at www.costvsvalue.com by Dec. 5.

This is the 11th consecutive year that the report, which is produced by Hanley Wood, LLC, was completed in cooperation with REALTOR® Magazine. For the report, Realtors® provided their insight into local markets and buyer home preferences.

Source: NAR

Economists Ponder Future of Home Prices

When will home prices go back up again?

Economists surveyed by The Wall Street Journal say that home prices won’t hit bottom until the second half of 2009 at the earliest and some say the downward trend will continue until 2011 or 2012. After that they may rise again, but not nearly as fast as they have in the last decade. Instead they will rise just a little faster than inflation and stay in line with increases in household income.

William Wheaton, a professor of economics and real estate at the Massachusetts Institute of Technology, says he expects house prices to increase at a rate roughly 1-percentage point higher than inflation over the long term.

Celia Chen, director of housing economics at Moody’s Economy.com is more optimistic, expecting home values to rise an average of 4 percent per year over the next couple of decades.

Demographer William Frey predicts that growth will continue in coastal and Southern cities while populations in rustbelt areas like Michigan, Ohio, Western Pennsylvania and Upstate New York will continue to decline.

The great unknown is the impact aging baby boomers will have. While retirees in the past have often headed for warmer and suburban areas, boomers have tended to confound expectations. They could well show a propensity for staying put or moving to urban areas for the cultural life or to be near friends and family, shunning sun-dappled retirements communities.

Source: The Wall Street Journal, James R. Hagerty (12/02/2008)

Warnings of Mortgage Meltdown Were Ignored

According to a review of regulatory documents by the Associated Press, the Bush administration ignored multiple warnings of impending financial meltdown during the last five years and didn't follow through on federal regulator’s proposals for tighter regulations.

In 2005, federal bank regulators proposed new guidelines for banks writing risky loans. They proposed a cap on the number of exotic mortgages and sought to make banks that bundled and sold mortgages inform buyers about their risks. The proposal also would have required banks to better vet potential borrowers and clearly inform them of the potential for skyrocketing interest rates.

The proposals didn’t require congressional action or a presidential signature, but the banking industry lobbied heavily against the proposals and administration urged regulators to drop them.

Diane Casey-Landry, of the American Bankers Association, said industry opposition was based on the banks' best information. "You're looking at a decline in real estate values that was never contemplated," she said.

Source: The Associated Press, Matt Apuzzo (12/01/2008)