Where are Housing Prices Heading?

Article By:  The KCM Crew on January 28, 2011
Courtesy of Keeping Current Matters
 
The National Association of Realtors (NAR) has been reporting great news recently. Last week’s Existing Home Sales Report and yesterday’s Pending Sales Report both showed consecutive months of increases in the number of homes sold. Finally, buyers are jumping off the fence and taking advantage of one of the most opportune times to purchase a home in America’s real estate history. With an increase in demand, price appreciation can’t be far behind, can it?

Actually, the answer is NO! Prices are not determined by demand alone but in the relationship of demand to available supply. The inventory of homes for sale is still too high and about to surge higher. Along with the news of increased demand yesterday, RealtyTrac released their 2010 Year-End Metropolitan Foreclosure Market Report. The report showed that distressed properties across the country are on the rise:

… foreclosure levels remained five to 10  times higher than historic norms in most hard-hit markets, where deep  fault lines of risk remain and could potentially trigger more waves of  foreclosure activity in 2011 and beyond.

The report also explained that the foreclosure epidemic is spreading to more and more of our communities:

… foreclosures became more  widespread in 2010 as high unemployment drove activity up in 72 percent of the  nation’s metro areas — many of which were relatively insulated from the initial  foreclosure tsunami.

What does this mean for prices?

Here are a few quotes from this week.

Washington Post:

The closely watched S&P/Case-Shiller report shows that housing prices, compared year-over-year, have declined nationally for six consecutive months. The downward path suggests that housing prices could, by spring, hit their lowest level since April 2009, said David Blitzer, the index committee’s chairman.

New York Times:

A new slide in housing prices has begun in earnest, with averages in major cities across the country falling to their lowest point in many years.

CNN Money:

Barclay’s Bank analyst Theresa Chen doesn’t expect a reversal in housing market trends any time soon, since there is no end in sight to the foreclosure crisis.

“We expect softness to persist,” she said, “as home prices continue to face headwinds from the large pipeline of foreclosures entering the market.”

Housing Wire:

“… we believe that home prices will continue to weaken on a month-over-month basis until spring, and a year-over-year basis through the end of 2011,” the Radar Logic said.

Bottom Line

Prices will continue to soften in the first half of 2011 in most regions of the country. This information should be taken into consideration if you plan on selling your house in the next twelve months.

What the Crystal Ball Says About Rates

Article By:  The KCM Crew on January 27, 2011
Courtesy of Keeping Current Matters


Predicting what will happen with interest rates is risky for a person’s credibility.  Last year at this time, I (and the KCM Crew) believed rates would climb after June and for very logical reasons: the end of the Fed’s purchase of mortgage-backed-securities (MBS) and the end of the Tax Credit. What we didn’t anticipate was the collapse of the Greek economy.  

That being said, I firmly believe that my opinion on the topic has some value. So, here’s my opinion (which assumes the governments of Ireland, Spain and Portugal stay solvent and no other major geo-political event occurs- like a war or terrorist activity).

The Fed and the federal government have publically (sic) stated their desire to get the American Economy back on track.  Their goals:

• Creating Jobs. They want to put Americans to work.
• Improving Production in the corporate and manufacturing sectors (which will create jobs and profits)
• Ratcheting Up Inflation in order to get prices moving upwards (really as a prevention of deflation)

Accomplishing these goals will likely improve the fortune of businesses (by creating higher sales, profits and stock prices).  In turn, the expectation is that these businesses will expand (spending money and creating jobs).  The money spent and jobs created will beget more spending in the private sector which will, in turn, create more sales, profits and jobs for the businesses.  Logical? Yes. Simple to accomplish? No.

Rewind 18 months: the Fed decided to buy massive quantities of mortgage-backed-securities to keep rates low (which encourages businesses to borrow and invest….and to refinance their existing debt to help their bottom lines).  Unfortunately, there was little confidence in the plan and many businesses instead of expanding, actually tightened their belts. You see, CONFIDENCE is a crucial component to any recovery.  There wasn’t enough confidence (look at the November elections as proof).

But in the last few months, Americans seem to have to begun to feel that things can and will improve.  QE2 has encouraged borrowing and expanding.  Jobs are starting to come back slowly. The infusion of $600 billion into the economy from the Fed via their new MBS purchase program is both inflationary and helpful in devaluing the dollar abroad (which allows foreign money to buy more American goods and services for less).  That helps improve sales, profits and jobs for businesses here.  The wheel is beginning to grind its way in the right direction.  At least, there is some confidence in that plan.
How is all this likely to affect mortgage interest rates?

• Inflation is always…bad for rates
• More jobs is inflationary…bad for rates
• A strong stock market…bad for rates
• A devalued dollar helps companies selling abroad and their stock value…bad for rates
• Consumer Confidence typically good for stock prices…bad for rates

Conventional wisdom is that, while rates have climbed from the low 4s to about 5% already, 2011 looks to be a volatile year with rates bouncing from 4.75% to 5.5% throughout the year. That’s a significant range and it behooves home buyers to pay attention and strongly consider locking in their rates when they are 5.125% or lower. 

Additionally, home sellers need to recognize that a .75% hike in rates makes a home about 8% more expensive to afford monthly. As we know, buyers don’t buy on price but instead buy on monthly carrying costs. Sellers are going to have to lower their prices by 8% to achieve the same cost for their buyer.

That’s my prediction in an unpredictable world….Let the debates begin.

Distressed Properties Spur Remodeling Rebound

Reprinted from REALTOR® Magazine, January 27, 2011 with permission of the NATIONAL ASSOCIATION OF REALTORS®. Copyright 2011. All rights reserved.

The U.S. remodeling industry is “poised for growth” and a return to more normal levels, but it won’t be coming from the industry's traditional drivers, according to a report by the Joint Center for Housing Studies (JCHS) at Harvard University. The remodeling industry has faced double-digit declines in activity since its peak in 2007.
The overall aging of homes and home owners eyeing the potential income gains is expected to provide a boost to the remodeling market, but the major drive leading the rebound in the remodeling industry is expected to come from distressed properties, the report says.

Instead of reducing the price on a property, more lender servicers who manage aging REO portfolios are considering remodeling and raising the price, says Dale McPherson who has more than 30 years in the mortgage industry. The servicers are growing tired of watching investors repair and remodel these properties and sell them at a much higher price — now banks want to cash in, too.
Remodeling distressed properties has the potential to cut the cost on losses of the lender servicers as well as help home owners benefit from remodeling margins too.
Kermit Baker, director of the Remodeling Futures Program at JCHS, says that the slumping housing market has caused “lower household mobility” and as such, more home owners will likely now be looking at what home improvements they can make that will offer longer paybacks, such as energy-efficient retrofits.
In the next five years, the focus of remodeling spending will shift from upper-end discretionary projects to replacements and systems upgrades, the report also notes.

Source: “ Remodeling Poised for a Sharp Recovery,” National Mortgage News (Jan. 18, 2011) (login required)

Google to Drop Real Estate Listings

Reprinted from REALTOR® Magazine, January 27, 2011 with permission of the NATIONAL ASSOCIATION OF REALTORS®. Copyright 2011. All rights reserved.

Google announced that it will drop real estate listings that real estate professionals upload to its classified site Google Base, as well as any for-sale, foreclosure, or rental properties through its search function on Google Maps.

The real estate listings at the site will discontinue by Feb. 10, 2011.

Google officials say they decided to stop featuring the real estate listings because of low usage and the popularity of other property-search tools on real estate Web sites. Google Base also is being replaced by Google Shopping APIs, which will not support real estate listings.

Google says visitors still will be able to be use Google to find real estate information and Web sites and explore neighborhoods through Google Street View.

"This does not come as a surprise to me,” Pete Flint, CEO of property search site Trulia, told Inman News. “Even with Google's huge audience, it shows having listing data is clearly not enough to deliver a good real estate search experience and build audience."

Source: “ Google Drops Real Estate Listings,” Inman News (Jan. 26, 2011)

'Secret' Way to Lower Mortgage Payments

Reprinted from REALTOR® Magazine, January 5, 2011 with permission of the NATIONAL ASSOCIATION OF REALTORS®. Copyright 2011. All rights reserved. 

Home owners can trim their monthly mortgage payments by “recasting” or “re-amortizing” their loan, without having to refinance and face hefty closing cost fees, experts say.


When recasting, the borrower pays off a lump sum of the loan’s principal and then resets monthly payments at the loan’s original interest rate and terms.


Here’s one scenario: $230,449 is left on a 30-year fixed rate loan for a $300,000 mortgage taken out at 7.93 percent in 1995. The borrower pays $20,000 toward the principal and asks the lender to reamortize their payments over the remaining 15 years of the loan. The monthly payment then drops by $52, from $2,187 to $2,135 per month. ($100,000 toward the lump sum would save $730 a month.)


Since borrowers are not asking for a new loan, they will not have to pay closing costs or submit to another credit check. (Note: “Recasting” is often used in the mortgage industry to refer to interest rate resets on adjustable-rate mortgages. In this case, the interest rate and loan term remain the same. )


“People don’t really know about it, but it’s become more common recently,” Alan Rosenbaum, founder and chief executive of the Guardhill Financial Corporation in New York, said about recasting.


Borrowers who just make extra payments toward the loan’s principal but do not ask the bank to recast the loan will keep monthly payments the same and just shorten the overall time it takes to pay off the loan. Recasting, on the other hand, reduces the principal but then, in turn, lowers monthly payments and interest over the life of the loan.


Some recent buyers may find recasting a good option, particularly when it makes little financial sense to refinance so soon after purchasing a home but are expecting a large sum of money. For example, buyers who expect to receive a tax refund or other substantial money after closing on their property, such as proceeds from the sale of another property or stocks, may want to look into recasting to lower monthly payments, says Edward Ades, the owner of Universal Mortgage in Brooklyn, N.Y.


Source: “A Little-Known Strategy for Cutting Mortgage Payments,” New York Times (Dec. 30, 2010)

Down Payments Under 30% Risky?

Reprinted from REALTOR® Magazine, January 14, 2011 with permission of the NATIONAL ASSOCIATION OF REALTORS®. Copyright 2011. All rights reserved. 
 
The mortgage industry is divided over how much down payment a borrower should be required to have in order to be considered less risky. Regulators have until April to come up with a down payment requirement as part of the Dodd-Frank financial overhaul legislation.


Wells Fargo & Co., the nation's largest mortgage lender, has asked U.S. regulators to set a new down-payment standard of 30 percent on mortgages. If approved, banks would have to retain 5 percent of the loan if it is securitized for any borrower who came with a down payment below 30 percent in order to meet a risk retention requirement. The new requirement is aimed at preventing lenders from facing big losses in case the loans goes into default. 
 
While banks would still make loans to borrowers with down payments lower than 30 percent, those loans would be more costly to banks because of the risk retention requirement. Analysts say that lenders will likely pass that cost on to borrowers via higher interest rates. 
 
Much of the housing industry opposes the Wells Fargo proposal, saying that a 30 percent down payment standard is too high. 
 
The NATIONAL ASSOCIATION OF REALTORS®, along with the Mortgage Bankers Association and other groups, sent a letter to regulators warning that an “inordinately narrow" mortgage definition "would mean that millions of creditworthy borrowers would be deemed, by regulatory action, to be higher risk borrowers."
 
If the 30 percent requirement does stand, some in the mortgage industry say it will drive more of the lending business from the private sector to the government. The Federal Housing Administration is exempt from the risk retention rules and offers loans with down payments as low as 3.5 percent. 
 
Wells Fargo says it suggested the 30 percent requirement because about half of all mortgages already have that big of down payment. 
 
Source: “Banking Law Hung Up on Down Payments,” The Wall Street Journal (Jan. 13, 2011)

Housing Improvement Will Be Gradual

Reprinted from REALTOR® Magazine, January 13, 2011 with permission of the NATIONAL ASSOCIATION OF REALTORS®. Copyright 2011. All rights reserved. 
 
The U.S. housing market could rebound this year even as foreclosures continue to dog the industry.


Fannie Mae expects home prices to start to rise in the third quarter, the Chicago Fed projects real residential investment to jump 9.6 percent, and the Mortgage Bankers Association and the National Association of REARLTORS® anticipate higher home sales and construction in every quarter.


Even so, analysts agree that any housing comeback will not be strong enough to have much of an impact on U.S. economic expansion this year.


Source:"Housing's Anemic End to Five-Year Slump Means Little Boost to U.S. Economy,"Bloomberg,(Jan. 12, 2011)