Is It The Bottom?

This blog is mostly concerned with the local Sonoma County market, but once in awhile I'll include other information. This is hot off the wires from one of my favorite Real Estate gurus, Adiel Gorel of ICG.

He has been helping people invest in different parts of the country for many years and here are some notes from a recent conference call:

Is it the bottom?

Maybe. Hard to predict precisely, but prices are very far down from peaks and have generally stabilized.

Some homes are selling for far less than construction costs.

      Some examples:

$70k to buy .

It would cost $160k to build and would sell with builder’s profit in addition to costs.

Shadow inventory is often talked about. (Bank owned by not on the market.) The area graphs show that they bank owned properties are going down a bit as a % of the total in places like Phoenix.

Financing is the challenge:

Banks could get softer or harder. Too many variables to predict.

Logic and the banks do not co-exist. We may not see the complete picture.

If you own less than 4 properties with loans, you can get a loan

If you own more than 4 properties with loans on them, 25-30% down

or buy with cash, even use retirement account money.

Once banks relax a bit, you can refi. and get your money back

            There are some special situations with builder/developer financing.

Cash flow is strong, even with 20% down because of low mortgage interest rates and

Average rental prices have come down 10-15%

Some housing prices have come down up to 70%

Markets:

CA and NY some areas

                     Love Sacramento market

But little left. Too many investors

            Likes diversified economy and bigger areas.

AZ, NV, FL , he likes best

Las Vegas

            VA loans with 5% down.

            Prices down 75% from peak.

             Still good long term demographic projections.

Phoenix

            Uptick from 2009

            Does not think the new proposed law in AZ will affect it long term.

            Still good long term demographic projections.

           

Florida:

Orlando

            $40 to $43 per ft for fairly new homes.

Bank owned properties.

$60k priced homes.

Slightly better than Tampa or Jacksonville, because of better economy due to  tourism and conventions (which are starting to come back.)

Still good long term demographic projections.

Atlanta

            Non-recourse loans available.

            20-22% down, new homes, cash flow. Tenant with option to buy.

Oklahoma City

            5 yr loan with 25% down

            30 yr loan, 40% down

            $50-60k - to 100k

Denver

            Some flipping there

            A lot of patience and a strong stomach

Other areas,

Like Washington, Idaho, the deals are not generally there. There are some foreclosures, but prices have not come down so much generally.

Dallas has some malaise, not as good bargains. Did not go up so much and has not come down so much.

Types of Property:

Still likes single-family homes for most investors.

Duplexes and 4 plexus: be careful of the areas for these.

Apartment buildings

More like operating a business.

Best are 150 to 300 units with onsite managers.

Sometimes smaller complexes are OK if managed by a specialty firm which manages several of these.

Flips:

Does not recommend short term flips as much as longer term:

Safer, but not as quick, to keep for a year or 2.

Buy quality:

Not too fancy areas, but good solid areas with school districts and good value.

You can buy junk for less, but there is more risk.

Existing properties:

            Some mods are going through.

Short refis. These are rare.

            $5000 fee or 1% of loan

                       

     What to do with investment properties currently owned with negative cash flow?

If only $100 to $200 negative and you have good credit to preserve, keep them.

            If not, you need to consider individual situations.

Mortgage Rates at 50-year Lows...if you can get them

As this article says, mortgage rates are indeed at historic lows, but.....you need to have cash or a good job and credit to get that great financing. 

 

Local prices are stable to increasing in the lower segment of the market (under $400k) and great discounts are available for some higher priced properties.

 

It is indeed a great time to buy.....if you can qualify. Give us a call. We work with a couple of great loan people who can do a no-cost evaluation of your situation.

 

Mortgage rates hit 50-year lows and it likely won't matter

Ann Brenoff

Jun 25th 2010 at 3:00PM

The good news: Mortgage rates dropped to their lowest levels in more than 50 years.

The bad news: You need to have a job and impeccable credit to get them.

The average 30-year fixed loan rate tumbled to 4.69% this week, down from 4.75% last week, Freddie Mac reported. These are the lowest rates since the mortgage giant began keeping records in 1971 and the last time rates were lower was in the 1950s.

Nobody expects the falling rates to matter much. They aren't likely to snap the housing market back to life. And they aren't likely to benefit anyone who is unemployed, underemployed or who has had their credit rating dinged in the recession. Sales of new homes fell 33% after the federal tax credit incentives expired at the end of April and while existing home sales are still showing better numbers, experts say those numbers are being buoyed by the tax credit buyers still in the pipeline and trying to close escrow.

As long as prospective home  buyers are worried about their financial well-being and job security, many will be reluctant to take the plunge, Greg McBride, senior financial analyst with Bankrate.com, told MSNBC.

The falling rates are tied to investors nervous about Europe's debt crisis and the global economy and who have shifted their money into safe Treasury bonds. Mortgage rates generally track Treasury bonds.

Read more: http://www.walletpop.com/blog/2010/06/25/mortgage-rates-hit-50-year-lows-and-it-likely-wont-matter/#ixzz0sC1LIl62

Distressed Property Programs Making a Bit of Progress

I do not report on national trends very often, because they often do not usually give an accurate picture of local trends, but this is a good general article on the distressed housing market, which seems to mirror what is happening locally.

Lenders are still a long way from doing what is needed, but there does seem to be a bit of progress in helping homeowners retain their homes.

June 22, 2010, 2:46 p.m. EDT
Modifications rise sharply on some mortgage loans
60-day-delinquent loans fall for first time in two years, Fannie and Freddie say
By Amy Hoak , MarketWatch
CHICAGO (MarketWatch) -- Loan modifications through the government's Home Affordable Modification Program tripled in the first quarter compared to the fourth quarter, according to data that covers loans held by Fannie Mae and Freddie Mac, the Federal Housing Finance Agency said Tuesday.

Also, loans 60 or more days past due fell for the first time in two years, dropping by nearly 23,800 to about 1.7 million in the first quarter, according to the FHFA's latest quarterly Foreclosure Prevention & Refinance report.

Overall, the FHFA said various efforts to keep homeowners out of
foreclosure, including loan modifications, short sales and deeds-in-lieu,
rose 75% in the first quarter compared with the previous quarter, to a
total of 239,000 completed "foreclosure prevention activity" efforts.
Permanent mortgage modifications through the government's Home
Affordable Modification Program rose to 136,000 at the end of the first
quarter, up from 43,000 in the fourth quarter. Homeowners must
successfully complete a trial modification period in order to make their
modification permanent.

About 66% of modifications completed in the fourth quarter reduced
borrowers' monthly payments by more than 20%.
Meanwhile, cumulative refinance volume through the Home Affordable
Refinance Program rose 53% to nearly 291,600 at the end of the first
quarter, up from 190,180 in the fourth quarter. The program allows
existing Freddie and Fannie borrowers who are current on their
mortgage payments to refinance and reduce their monthly mortgage
payments at loan-to-value ratios up to 125%.

The Federal Housing Finance Agency regulates Fannie Mae, Freddie
Mac and the 12 federal home loan banks; the numbers in the report
don't reflect the Federal Housing Administration's efforts to prevent
foreclosures.

A broader view

Overall, the total number of homeowners receiving restructured mortgages since April 2009 increased to 2.8 million; also, half of homeowners unable to enter a permanent HAMP modification get an
alternate modification with their servicer, according to a separate report Monday from the Department of Housing and Urban Development and the Treasury Department.

The 2.8 million figure "includes more than 1.2 million homeowners who have started HAMP trial modifications and nearly 400,000 who have benefitted from FHA loss- mitigation activities," the report said. "Of those in the HAMP program, 346,000 have entered a permanent modification, saving a median of more than $500 per month," See HUD and Treasury's monthly housing scorecard.

"The good news is the industry is doing more than the government modifications," said Faith Schwartz, senior adviser for HOPE NOW, a private-sector alliance of mortgage servicers, investors, mortgage insurers and non-profit counselors. "They start with the government mods to see if they fit."

Treasury Secretary Tim Geithner said in a news release Monday: "The Administration's housing policies, combined with actions of the Fed, have lowered mortgage interest rates, helped stabilize home prices and reduced the rate of foreclosures, repairing some of the damage caused by the financial crisis to the financial security of millions and millions of American families."

Separately, the percentage of loans in foreclosure or with at least one payment past due was a non-seasonally adjusted 14% in the first quarter, down from 15% in the fourth quarter of 2009, according to a Mortgage Bankers Association report in May. That works out to about 6.2 million loans somewhere in the delinquency or foreclosure process. See story on 14% of mortgages delinquent or in foreclosure.

Sonoma County Real Estate Update June 2010

This is a good article about the current state of the real estate market in Sonoma County.

It mentions a couple of the biggest question marks going forward: the lapse of the Federal tax credits and the number of distressed properties.

There is breaking news that the completion of sales qualified for the tax credit now in the pipeline (accepted offer by last April, but not yet closed escrow) may be extended from the end of June until Sept., but no word on any new extension of the tax credit for new sales from this point forward.

May home sales, prices increase in Sonoma
County
By SAM SCOTT
THE PRESS DEMOCRAT
Published: Wednesday, June 16, 2010 at 6:22 p.m.

Sonoma County home sales increased for the fourth consecutive month, rising nearly
8 percent from April to May, but activity still trails last year.
Buyers purchased 410 single-family homes in May, up from 381 in April but down
slightly from 416 a year ago.

Prices, meanwhile, increased for the first time in five months. The median price hit
$362,000, up 5 percent from April and up 4 percent from a year ago.
“It shows we have a very steady growth in demand in the marketplace,” said Rick
Laws, manager at Coldwell Banker in Santa Rosa, who compiles The Press


Democrat’s monthly housing report.

But others said economic uncertainty was still keeping the market down. Sales have
dropped nearly 9 percent in the first five months of the year, compared to the same
period a year ago — despite a $8,000 federal tax credit for home buyers who signed
their contracts by April 30.

“It’s just sort of a mediocre market right now,” said Mike Kelly, senior sale
consultant at Keller Williams Realty in Santa Rosa, who added that unemployment
and job insecurity were partly responsible.

Unemployment in Sonoma County doubled over the past two years and has hovered
in double-digits in 10 of the last 11 months, receding only slightly to 10.6 percent in
April.

The true impact of the federal tax credit won’t be felt until June sales figures are
finalized, Kelly said. The credit extends to people who signed by the April deadline
but close by the end of June.

Laws said he didn’t think the end of the tax credit would have a big impact on the
housing market. The credit offered an incentive to buy, but ultimately wasn’t enough
to make or break most deals, he said.

Both Kelly and Laws said the mix of sales is changing as the market settles into a
more normal pattern. There has been reduced inventory in distressed properties —
usually either short sales or foreclosed properties, the “rocket fuel” in much recent
buyer interest, Kelly said.

In February 2009, more than 75 percent of homes sold in Sonoma County were
bank-owned properties, according to Laws. In May less than 47 percent were.
As banks put fewer properties on the market, buyers are increasingly having to
compete with each other, particularly for homes in the lower end of the spectrum,
Laws said.


He said the market was “bifurcated.” Above $500,000, he said the situation tends to
favor buyers. Below $400,000, it is generally a seller’s market with inventory not
meeting demand, Laws said.

“If the value is there and the house is in good condition and in a good neighborhood
and priced at market, it gets multiple offers,” said Glen Hurley with Platinum Real
Estate, who is president of the Santa Rosa Chapter of Realtors.

The return of “normal sellers” who aren’t trying to unload distressed properties is
encouraging, Kelly said. When they sell, they tend to “buy up.” A short sale or foreclosure, however, is rarely matched with a corresponding purchase.

The competition is driving up home prices. The median price for a single-family
home, $362,000 in May, was its highest level since December 2009.
The median is the mid-point at which half the homes sold for more, and half for less.
Sonoma County home prices peaked in August 2005 when the median hit $619,000
before tumbling to a low of $305,000 in February 2009.

Through May the median price of a single-family home sold in 2010 was $350,000,
up 10 percent from the same five-month period last year.
“There is very little inventory,” said Paula Gold-Nocella, a broker with Prudential
California Realty in Healdsburg. “That’s what’s driving the price up.”

Deficiency Judgements - It's a Big Deal

A deficiency judgment can occur when a property sells for less than the current loan balance against the property. For example, if a home sells for $200,000 when the loan balance is $250,000, there will be a $50,0000 deficiency (or more, because there will also be costs of sale the lender will need to cover.)

This can occur either as a short sale (the owner sells the home with approval of the lender) or as a foreclosure (the lender takes the home back from the homeowner and sells it).

If the lender has a deficiency, in many cases they have the right to pursue that amount from the previous homeowner. In the past, lenders rarely tried to collect deficiency judgments, but as the article below explains, they are starting to now. Or they are selling that deficiency collection right to another company, such as a collection agency, and those agencies are pursuing the deficiency from the previous homeowner.

These deficiency rights vary by state and there are some ways to avoid the collection. Call me to discuss if you are contemplating a short sale or giving up your property to the lender.





Lenders go after money lost in foreclosures

By Dina ElBoghdady
Washington Post Staff Writer
Wednesday, June 16, 2010; A11

After the bank foreclosed on Fernando Palacios's Gainesville home in March, he thought he was done with what he described as the most stressful financial situation of his life.

The bank sold the home for far less than Palacios owed on it, as often happens with foreclosures. What Palacios did not see coming was the letter from his lender demanding that he pay the shortfall: $148,064.02. "I really thought I was through with this house," said Palacios, who fell behind on payments when the economy soured and his cleaning business stumbled.

Over the past year, lenders have become much more aggressive in trying to recoup money lost in foreclosures and other distressed sales, creating more grief for people who thought their real estate headaches were far behind.

In many localities -- including Virginia, Maryland and the District -- lenders have the right to pursue borrowers whose homes have sold at a loss to collect the difference between what the property sold for and what the borrower owed on it, also called a deficiency.

Before the housing bust, when the volume of foreclosures was relatively low, lenders seldom bothered to chase after deficiencies because borrowers had few remaining assets to claim and doing so involved hassles and costs. But with foreclosures soaring, lenders are more determined to get their money back, especially if they suspect borrowers are skipping out on loan they could afford, an increasingly common practice in areas where home values have tanked.

Palacios said he was committed to staying in his house, which he bought in 2005. He sunk $20,000 into improving it and hoped to raise his children there. But his lender refused to modify his loan, he said. To avoid personal liability for the deficiency, Palacios is filing for bankruptcy protection, as many people do who are in similar situations, said Nancy Ryan, his bankruptcy attorney.

"I am definitely seeing more people come through my door who walked away from houses a year or two ago and thought they were as free as the dead," Ryan said. "They're stunned when they realize they're not."

Several lenders contacted for this story declined to say how often they pursue deficiencies. But many said they try to collect the debt if they conclude the borrower can repay all or part of it.

"Lenders are not going after people who face a hardship," said John Mechem, a spokesman for the Mortgage Bankers Association. "If they can't pay their mortgage because they have a loss of income, there is no point in going after them."

Those who had a second mortgage, such as a home-equity line of credit, in addition to their primary mortgage may find themselves particularly vulnerable, especially if they tapped into the equity line for cash.

Second lenders are last in line to get paid when a distressed property is sold. There's usually little or no money left over for them, making it more likely that they will pursue large deficiencies, several attorneys said.

Gretchen Somers said she and her husband understood the risks last year when they completed a "short sale," a transaction that allowed them to sell their Manassas home for about $150,000 less than they owed on it. But they felt they had no other options.

Somers said her family hung onto the house as long as possible. They tried but failed to sell it when her husband was transferred to Arizona for his job in early 2006, just as home prices were softening. They moved back into the house then tried to sell it again in 2008, after their adjustable-rate mortgage reset and their monthly mortgage payment nearly doubled. But home prices had plunged further by then, making it even tougher to sell.

Last year, their first lender and their home-equity line lender granted permission for the short sale. But the second lender reserved the right to come after the couple. Six months later, a collection agency called demanding $85,000 for related losses.

In hindsight, Somers said she and her husband should have just walked away from the house. "We took care of the house because we wanted it to sell," Somers said. "If they were going to come after us anyway, we shouldn't have done them the favor of making sure it looked good and cutting the grass even after we moved out, We should have mailed them the key and said: 'Here you go.' "

Carlos Cortez and his wife managed to escape that fate after their second lender came after them for $70,000 when their short sale was completed on his Manassas Park townhouse in 2008.

Cortez knew that was a possibility, but he went through with the sale because his real estate agent said the lender was engaging in scare tactics.

James Scruggs, an attorney at Legal Services of Northern Virginia, said the lender appears to have backed off after Cortez argued that that the loan officer falsely qualified him and his wife for a home-equity line by fabricating key details about their finances.

A handful of states do not allow lenders to pursue deficiencies, nor does a federal program that took effect April 10. Lenders participating in that initiative are paid for approving short sales and as a condition, they cannot go after outstanding debt.

In many states, lenders can go after deficiencies, though laws vary widely, said John Rao, an attorney at the National Consumer Law Center. Some states limit how long the banks have to file a claim or collect the debt. Others may calculate deficiencies based on the fair-market value of the house, Rao said. For instance, if a home sells for $200,000 yet its fair market value is $250,000, "the borrower who owes $240,000 on the mortgage would not have a deficiency," he said.

Borrowers should get a waiver in writing from their lenders to protect themselves, said Diane Cipollone, an attorney at the nonprofit Civil Justice. "Nobody should assume the deficiency is forgiven," she said.

Insider Short Sales Secrets Revealed

Why learn about short sales?
There are a lot of short sales on the market right now and more coming. Lenders are being pressured by the federal government to pursue loan modifications and short sales instead of foreclosures.

If you are a homeowner, who owes more on your loan than your home is worth, if you want to sell, it will need to be a short sale.

Advantages of a short sale instead of a foreclosure for the homeowner:
• Provides some control over the process. (Not a lot more, but some.)
• May provide some financial incentive to the owner. (Rarely, but it does happen.)
• Preserves personal dignity. (No public posting of foreclosure sale notice.)
• Less of a hit to your credit score.
• Less time before your can buy a new home.
• The short payoff can help preserve the neighborhood market values.

Advantages of a short sale for a buyer:
• More homes available.
• Less competition (many Realtors and buyers will avoid short sales.)
• Possible lower price than for a private sale.

Insider info:
I recently attended 2 events with insiders on both sides of the short sale scene: one event featured a lender's representative and the other event had an title company escrow/negotiator representative, who represents homeowner/sellers. They confirmed some things I knew from previous events and also revealed some new information.

First some definitions for the purposes of this article:
Short sale: a sale of a property is made for less than the current loan balance. For example, if there is a loan on a property for $200,000, but the current market value and offer to purchase the property is $150,000, the payoff to the lender will be $50,000 less than the loan amount (minus also all costs of sale.)

Homeowner/seller: person on the title (legal record) as the owner.

Loan originator: the company who originally signs-up the home-owner for a loan. This can be a mortgage broker, who could represent many different lenders, or a lender, such as Well Fargo Bank.

Loan servicer: This is a company, who services the loan. They collect payments, etc. This may be the loan originator, the original lender, or another company.

The lender/investor: This is a company or individual, who ends up "holding the paper" – the owner of the mortgage. This might be the original lender, but most lenders resell their loans to another investor, a government agency, or another financial institution such as a securities firm. Loans can also be packaged with other loans to create a "securitization" of the loan and that security can be resold several times.

The owner’s representative: The processing of the short sale may be long and difficult.
• It is almost impossible for an owner to do it and even Realtors do not have the specialized knowledge and time to be consistently successful.
• The listing Realtor may have someone in their office, who can do it (we do.)
• Many title companies now have specialists, who can handle the processing, but they cannot negotiate with the lender/investor.
• A third party negotiator or another representative may both process the paperwork and negotiate with the servicer.



The short sale process: (in brief)
1. The property is listed with a Realtor for sale by the owner.
2. An offer to purchase is made by a buyer and is accepted by the owner.
3. The offer is submitted to the servicer for approval, along with a complete file of information about the owner, the reasons they qualify for the short sale, etc.
4. The servicer assigns a negotiator to evaluate the file and approve it or not.
5. If necessary, the servicer submits the deal to the lender/investor for approval
6. There may be more negotiations necessary to get final approval

Whew! Sorry, for all of the detail, but you have to know the players to understand the game.


What you should know about the short sale process.

Servicer/lender policies and procedures are constantly changing, their personnel are constantly changing and lender/investor rules are generally unknowable, all making for typically an incredibly frustrating processes.

According to the lender's representative I heard speak, (let’s call him by the code name “Mr. L,” he has the best and most successful processing and closing available. He may just be right, but unfortunately he only manages the short sales for one lender's portfolio loans, (the loans they have kept in their own account.) He does not deal with their investor loans (loans they service, but have sold to another investor.) Only about 10% of the loans they service are their own portfolio loans.

As described by the title company owner’s representative, other servicer/lenders are not as good, some much, much worse. Here are some comparisons.

Insider info:
L’s company’s internal calculation is that the lender/investor will recover 10% more money approving a typical short sale instead of foreclosing on a property.

So, why is it so hard to get a short sale approved? (Keep reading and you will learn some possible reasons.)


The journey of the short sale file:
1. Your representative submits a package of information (a file) to the lender servicer’s Set-up person:
• L’s lender representative provides local processing and approvals. Most big lenders only have remote processing centers in far away states, usually staffed with people, who may have just been hired and have little knowledge of what is going on.
• They make sure the file is complete.
• If the file is incomplete, they may just shred it. It might be missing only one piece of information (maybe some information that no one has previously required) but it will be too difficult to keep track of and update. So, they will ask for a new complete package.
• The processor person may be new or poorly trained and mess up the process.
• Your file may be lost….several times….during the process. This is common.
• L’s response time at any stage of the process is 7 to 10 business days. (The industry average is more like 2-3 weeks.)

When complete, your file goes to -

2. The Negotiator:
• Processing: They may have several hundred files and take several weeks to get to yours. Then, it gets maybe 5 minutes of review.
o By the time the file is considered, the docs may be too dated. They will request new docs and your file goes to the end of the line. (This can happen more than once.)
o If the file is incomplete (by their latest standards which may be new and unknown) you will get a request for more info and your file goes to the end of the line.
o If there are questions, they may ask for clarification or may just trash the file. (Too much work.)

• Valuation/negotiation:
o Review of the purchase offer: the lender/investor want the highest possible net return and the best chance of closing the deal. So sometimes they will accept an all-cash offer, which is lower than an offer requiring financing.
• The lender/investor will have someone do a valuation of the property to determine if the purchase offer they have is reasonable given the current market.
o May use out-of-town appraiser or Realtor who does not know the local market.
o May do a desktop appraisal (just look at computer reports) or a drive by. Rarely will they find out about interior condition or possible anomalies.
o Valuations can be way off.

Completed package will be submitted to the lender/investor.

3. Investor evaluation:
• The servicer will not reveal the investor’s requirements. It may be that you go through the entire process and the investor will not allow a short sale.
• The investor may have mortgage insurance, which will cover their loss in the case of a foreclosure, but not a short sale, so they will deny a short sale, foreclose on the property and put it on the market, sometimes even at a lower price point than the short sale offer price!
• Sometimes, it will take them a long time to approve the deal. They may only meet to consider files quarterly.
• If there is a second loan or equity line on the property
o Lender/investors in first position know the second loan is not worth anything if the property is sold at foreclosure, but the second lender may demand a payoff anyway to approve the short sale.
o L says he will pay 10 to 15% to a second mortgage holder. Others will typically pay nothing toward a second mortgage, but may pay something depending upon the circumstances.)
o Sometimes this stalemate will prevent the short sale from being approved and the property will end up going to foreclosure.
• The bottom line for the lender/investor is how will they recover the most money?
Loan modification, short sale, foreclosure? That is the option they will take.

The closing: completion of the sales transaction
• L’s average timing from application to closing is 37 business days. (The typical short sale takes 3-4 months and can often take over a year. (If it takes that long, in 4 out of 5 cases the original buyer is long gone and you have to hope to have a back-up offer in hand.)
• Deficiency and other issues: This is a big deal and a more complicated subject than we can explain in detail here, but here are some basics.
o Your short sale can be accepted, but with the provision that the owner will contribute a promissory note for the lender’s loss.
o If the loan is not the original purchase money loan, the lender can reserve the right to come after the owner for any amount that they are short from their loan balance.
o If there is a deficiency provision in your short sale agreement, for example, if your home sells for $50,000 less than the mortgage balance, they can present you with a bill for the $50,000 sometime in the future. They may even sell the note to an aggressive collection agency to come after you. Many owners will not sign that deal.
• Sometimes, the lender may have a quota and just accept a certain number closes per month. If that is so, you have to wait your turn. That’s it.
• L says he closes 70% of his short sales. The industry average is 36%.
So, short sales can be done, but up until now, it has been a difficult process most of the time.

However, there is some additional hope. The new government HAFA program has mandated more standardized processes and procedures for short sales. Time will tell if the lenders manage to implement them.

Demographics Determine Destiny - At Least for Real Estate Prices

One of the most basic law of economics is "supply and demand." If there is more demand than supply, prices will rise. If there is more supply than demand, prices will fall.

The main driver of demand for real estate has historically been population growth and more specifically household formation. More new households menans more demand for new homes and rental houses.

This is a good article about how household formation (demand) has been restricted by the current recession, but so has new home-building (supply.) When the econoomy turns around, there will be a pent-up demand for new and rental homes and the building industry will probably be slow to respond, leading to price appreciation in some markets. Of course, we would need to factor in job growth and financing availability to complete the picture.

Is a housing
shortage coming?
By Les Christie, staff writer
June 15, 2010: 2:08 PM ET
NEW YORK (CNNMoney.com) --

As the nation struggles to shrug off the worst
housing crash since the Great Depression, it
may be hard to believe a housing shortage
could be on its way.

The nation is simply not building enough
homes to keep up with potential demand.
Just 672,000 new homes were started in
April, an annualized rate and less than half
the long-term run rate needed to meet the
nation's natural population growth.

"It is ironic, but there is a growing
consensus that there may be a new housing
shortage coming," said James Gaines, a real
estate economist with Texas A&M.

So far, the shortfall has been masked by a
weak economy that has put a damper on
home buying. Once the job market
rebounds, however, people will look to have
their own homes again. This pent-up
demand could get unleashed on unprepared
markets, causing shortages and rising local
prices.

Household formation -- the technical term
for people moving in together -- has been
on hold during the past few years as young
people, especially, have been unable to find
jobs. In the past, an average of more than
1.3 million households were formed each
year, causing demand for 1.5 million new
homes. (More homes than households are
needed to replace those destroyed by fires,
floods, teardowns and neglect.)

In 2009, only 398,000 new households were
formed, according to the Census Bureau.
That is much lower than average and a
quarter of the number formed just two years
earlier.

"The decline in household formation is
artificial," said Gaines. "The young are
moving in with their parents. There's even
doubling up among working class people.
There's a pent-up demand coming if and
when the economy recovers."

Those doubting a new bubble is near point
to a large inventory overhang. As many as 7
million homes are vacant but not for sale,
according to the Census Bureau, which
should provide cushion to offset increased
demand.

"The housing market hasn't been this way
before," said Nicolas Retsinas, director of
Harvard's Joint Center for Housing Studies.
"The gravity of the problem is deeper and
the challenges different. You have to get
through that inventory."

The inventory number, however, can be
deceiving for two reasons: People may not
want to live in hard-hit areas where the
houses are (think: California exurbs and
Detroit neighborhoods) or the homes may
be beyond repair.
"Many of these vacant homes may not be
habitable or are in locations where nobody
wants to live," Gaines said.

Ordinarily, the nation's homebuilders can
react quickly to meet surges in demand. But
several factors are preventing them from
being nimble. The biggest is the difficulty
getting loans, according to Jerry Howard,
CEO of the National Association of Home
Builders (NAHB).
"When we came out of past recessions, there
wasn't the difficulty of obtaining financing
that there is now," he said.

Many small builders have been unable to
obtain construction loans or lost their
financing in mid-project. That has prodded
NAHB to support federal legislation that
would make $15 billion in lending
guarantees available for private builders.

Hard times also persuaded builders to
postpone purchases of land they could prep
for future development. It will take them that
much longer to gear up production once the
housing market improves.

Too, many builders went out of business in
the bust, so there will be fewer companies
out there to do the building. The survivors
will confront a transformed regulatory
environment, according to Howard, that will
make new homes harder to build and more
expensive.

"There is an increased focus on smart
growth that will create regulatory barriers to
the kind of sprawling development that has
characterized a lot of recent building," said
Retsinas.

The regulations come under two categories,
according to Susan Asmus, NAHB's senior
vice president for advocacy, covering where
new homes are built and how they're built.

One category is storm water runoff. The
Environmental Protection Agency tightened
requirement governing how builders handle
that. Builders will have to install controls
such as catchments or retaining ponds that
slow the flow of storm runoff into the local
watersheds.

"It could add as much as $15,000 to $30,000
an acre in extra costs, depending on the
soil," said Asmus.

Another proposed regulation mandates
sprinkler systems in each new home. This is
already state law, starting January 2011, in
California, Maryland and New Jersey. That
adds as much as $10,000 to the cost of
construction.

Previous overbuilding one-time boom
towns, such as Las Vegas and Miami, should
provide enough inventory of like-new homes
to counter any strong pent-up demand that
breaks free.

It's the more constrained markets, where it's
particularly hard to build -- such as New
York, San Francisco and Seattle -- that will
field the bulk of the new bubble problems,
according to Retsinas. He, however, is less
worried about the purchase market than
about rentals, the usual entree for the young
buyers expected to lead the new housing
market charge.

"Nobody is building any rental inventory,"
said Retsinas.

What is Happening with Short Sales and Foreclosure Sales

(My comments will be in bolded text).

This is a good explanation about how the rules for Short Sales and Foreclosure sales are both driven by the Loan Servicing Agreement on the original loan. 

Several different companies may be involved with a loan.

When you get a loan to buy a property, the loan is originated by one company. That company may keep the loan in their own portfolio, or (more likely) re-sell the loan to another investment company. 

Then, the loan may be serviced (payments collected, etc.) by the originating company, or the investment company, which bought the loan, or by another company, which just does loan servicing.

Short Sales

So, when there is a short sale situation (there is a pending sale for less than the loan amount) the loan servicing company may be able to make the deal to sell for the loan amount, may be prohibited from making any such deal, or may be able to make the deal only with the investment company's approval. If the loan has been resold several times or packaged with other loans, that becomes almost impossible.  

Foreclosure sales

Traditionally, the minimum acceptable bid has usually been the existing loan amount. If that amount is not equaled or surpassed, the property will go back to the investor company, which holds the loan. They will then list it for sale with a Realtor.

Recently however, if a property is not habitable, due to damage, etc., that means it is almost impossible to get a new loan to buy it, so since it will only attract an all-cash offer anyway, some properties have been selling for less than the current loan amount at the foreclosure sale.

In either a Short Sale or Foreclosure Sale, there will be a "Loan Servicing Agreement" telling the company collecting the loan payments how to collect payments, what to do if payments are late or the borrower does not pay and if they can make a deal to sell at less than the loan amount.

 (From the Bryan Ellis News)

The Real Truth Of Why Short Sales Are So Hard To Complete

I had a meeting this week in Las Vegas with some high net worth investors and a colleague of mine who runs a large real estate brokerage that focuses on asset management and foreclosure disposition for very large mortgage lending clients.  He was explaining the process of foreclosure auctions and mentioned that the vast majority of properties that go to auction have a starting bid that matches the amount of the debt against the property.  Since most foreclosures are tremendously over-leveraged, the typical auction result is the return of the property to the lender.  Makes sense… nobody would want a property with massive negative equity to begin with.

But the really interesting part of this discussion came when he was asked why some lenders will drop their starting bid price to a much lower level, potentially even creating attractive deals.  His answer shed some light on the difficulty with short sales, and I thought I’d share this info with you here.

He explained that most mortgages are “serviced” by a company separate from the person or entity that originally funded the loan.  These “servicers” are governed by a “servicing agreement” that specifies things like how to collect payments, what to do when payments are late, how are foreclosures handled, and many other things, including:  How to handle the bidding when a property goes to foreclosure auction.

As it turns out, most servicing agreements stipulate that the servicer has to try to sell the property at auction for the full amount of the debt.  As a result, there are very few real “deals” at foreclosure auctions.  But some of the servicing agreements are more realistic and allow the servicer to base the starting bid pricing on the current market value minus the costs of foreclosures, repairs, holding, etc.  It’s on these properties that a good deal can sometimes be found at foreclosure auctions.

And all of this leads us back to short sales.  The reason that my colleague said that short sales are so hard to complete is because most of the servicing agreements that exist today do not address the issue of short sales and how they can be handled.  As a result, most short sales have to be evaluated on an individual basis and may even require the direct approval of the original lender.  And if the loan servicing agreement on the loan that you are trying to short sale does not have specific guidance concerning short sale criteria, you’ll be fighting an uphill battle to get it approved, regardless of how well the transaction is handled on your end.

Rent or Buy NY Times Writer Decides to Buy

Here is a great article about Renting vs. Buying. It does not cover all of the advantages of buying, but it is a pretty good discussion.

(Please also see my previous post Rent vs. Buy? Which Cities are Best and Worst.)

 

As Home Prices Drop Low Enough, a Committed Renter Decides to Buy

By DAVID LEONHARDT

Published: May 28, 2008

For the last few years, I have been an evangelist for renting.

I’ve told my sister-in-law and her husband that they would be crazy to abandon their reasonably priced one-bedroom rental in Brooklyn. When two of my colleagues were moving to Los Angeles, I e-mailed them a spreadsheet that helped persuade them not to buy a house there. That same spreadsheet was the basis for an article in 2005, when I argued that “renting has become a surprisingly smart option.” Last spring — like any good evangelist, comfortable with repetition — I wrote a similar article.

The case for renting has been simple enough. House prices rose so high in the first half of this decade that you could often get more for your money by renting. You could also avoid having a large part of your net worth tied up in a speculative bubble.

All this time, I have been a renter myself, first in the New York suburbs and then in Manhattan. But my wife and I will be moving to Washington this summer. And the housing market has, obviously, changed quite a bit since our last move, in 2005. Nationwide, prices fell 14.1 percent from early 2007 to early this year, as Standard & Poor’s reported Tuesday. Home prices almost certainly still have a way to fall, but they’re now well below their peak.

So my wife and I began our search with open minds, willing to consider renting or buying. We ended our search by signing a contract to buy a house.

This is the story of my conversion.

One of the big lies of the real estate business is the idea that renting a home is tantamount to throwing money away. It’s a useful fiction for real estate agents, because they make vastly bigger commissions on house sales than rentals. But the comparison isn’t nearly so straightforward for the rest of us.

Renting involves one obvious, recurring cost that can never be recouped: the monthly rent check.

Buying, on the other hand, involves multiple expenses, some of which aren’t so obvious. On top of closing costs, there are repairs, property taxes, mortgage principal and mortgage interest. (The mortgage-interest tax deduction reduces this last cost but doesn’t eliminate it.) When you own, you also lose the ability to invest your down payment elsewhere, like the stock market.
(My comment: He leaved out 2 big advantages of buying. Appreciation (yes the last couple of years have been negative, but the historical trend is solidly up) and when you pay off the mortgage, you own the home. Yes, many people still do this!)

Of course, owning also brings benefits that have nothing to do with money. You can settle into your home, confident that no landlord will kick you out. You can repaint the walls and redo the kitchen. All else being equal, owning seems far preferable to renting.

Knowing all this, my wife and I were willing to buy a house even if it was ultimately going to cost us a bit more than renting. We just weren’t willing to have it cost a lot more than renting.
Over the last several years, I’ve come to like a simple, back-of-the-envelope way to compare the costs of renting and owning. You find two similar houses, one for sale and the other for rent, and divide the sale price by the annual rent. You can call the result the rent ratio.

The concept will probably sound familiar to stock market investors. It’s the real estate market’s version of a price-earnings ratio — a measure of how expensive an asset is, relative to the underlying economic fundamentals. Like a P/E ratio, the rent ratio provides something of a reality check.
Throughout the 1970s, ’80s and ’90s, the average rent ratio nationwide hovered between 10 and 14. In the last few years, though, it broke through that historical range and hit almost 19 by the time the housing market peaked, in 2006.

And while home prices — and rent ratios — have always been higher on the coasts, they reached whole new levels recently. In the Washington area, the ratio went above 20. In Boston, New York, Los Angeles and south Florida, it topped 25. In Northern California, it approached 35, higher than it had been in any city, at any point on record.

In concrete terms, a rent ratio above 20 means that the monthly costs of ownership well exceed the cost of renting. At current mortgage rates, for example, a $500,000 house would typically bring monthly expenses of about $3,000 (taking into account taxes, repairs, a typical down payment and, yes, the mortgage deduction). When the rent ratio is 20, that same house could be rented for only about $2,000 a month.

There are two problems with buying a house in this situation. The first, plainly, is the extra $1,000 you’re paying each month for the privilege of owning, on top of the thousands of dollars you spent on closing costs. The second problem is that a rent ratio above 20 is a good indication of a bubble. When the prices of houses get out of line with the competition’s prices — that is, those in the rental market — a correction is coming.

The question facing my wife and me was whether we were entering the market before the correction had gone far enough. I really didn’t know what the answer would be. So as we looked at houses, I started calculating rent ratios.

In the neighborhoods where we were looking, two-bedroom condominiums were selling for $400,000 and being rented for about $2,100 a month, which makes for a rent ratio of 16. Four-bedroom houses were selling for $700,000 and being rented for almost $4,000, which makes for a rent ratio of 15. No matter the price range, pretty much every apples-to-apples comparison produced a similar ratio.

Historically, this is still a bit high. But it’s very different from where the market was just a couple of years ago. With house prices having fallen over the last two years and rents continuing to rise, the decision became a much closer call. We would now have to spend only a little more each month for the privilege of owning.

This month, we found a house that we really liked, and we made an offer. It was accepted.

I’m still not sure how good our timing was. Based on the backlog of houses on the market, I fully expect that our new house will be worth less in six months than it is today. I’m also not sure that we would have been willing to buy in Boston, New York or much of California, where the rent ratios remain above 20, according to data from Moody’s Economy.com.

In fact, if you’re now renting — almost anywhere — and do not need to move, I’d probably recommend that you wait to buy. The market is still coming your way.

But it’s O.K. with me if our timing wasn’t perfect. After several years of reporting on the housing market, I’m convinced that the most common real estate mistake is viewing a house first as a financial investment and only second as a home. That’s one big reason we ended up in this bubble-induced mess.

Most of the time, the decision whether to rent or buy should be based above all on life circumstances.

Do you expect to move again in a couple years? Or is there a good chance that you’re ready to settle in — and stop worrying about real estate for a while?

The housing bubble, unfortunately, forced a reconsideration of this standard, because houses became so overvalued. But they’re slowly coming back to reality, which means that buying has again started to make sense for more people. Apparently, I’m one of them.

Rent or Buy? Which Cities are Best and Worst?

There are a lot of personal advantages of owning your own home. You can settle in without being at the mercy of a landlord and of course if you pay on your mortgage until it's term is up, you own the home free and clear. Also, you can add your own personal touches and truly make it your own.
As an investment, historically (OK, not the last couple of years!), homes have appreciated much better than inflation (especially considering the leverage of financing, etc.)

Our neighbor bought her home for $73,000 in the 1970s and even with the recent crash in prices it is still worth $350,000 or more...and she owns it free and clear! If she had been renting all of that time, she would be paying probably $1800 per months and own...nothing.

But what about the cash flow economics of buying vs. renting?

When is a real estate market affordable for buyers? The short answer is "When it is less expensive to buy than rent."

There are 2 ways to look at this: the "Rent vs. Buy Ratio" and the actual rent cost vs. market rent.

Rent vs. Buy Ratio
Some real estate experts say that when a market price of a home is 15 times the annual rental cost, it is a good value. In recent years, that has certainly not been the case in many parts of the country, including Sonoma county, but it is now.

For example, if the the price point to buy a home is $300,000, divide that number by the annual rental cost for a similar home, say $20,000 ($1666 per month times 12 months),  the rental ratio would be 15.

Actual Rent vs. Market Rent
 
This is a more accurate analysis, because it takes into account interest rates, which are historically low at this time.

We have recently helped several people buy homes who now pay less than a comparable home would rent for.


In one example, our clients had been paying $1650 per month for a typical home. They bought a better home in the same neighborhood and now pay $1600 per month in mortgage payments. (Of course they must also pay property taxes and insurance, but the mortgage and property tax income tax deductions more or less cover those costs. And part of that $1650 they pay every month goes toward paying down that mortgage.)


Here are 2 articles about cities with the current best and worst Rent To Buy ratios in the U.S.

If you are thinking about investing in rental real estate, the cities with the best Rent to Buy ratios  offer some of the best opportunities. If you are considering this, please contact us. We have contacts in those areas and we also know some of the advantages and disadvantages of investing out-of-state. For example, Florida has some low prices right now, but some of the areas in Florida are very poor rental markets and the homeowner's insurance costs are prohibitive.

San Francisco has one of the worst Rent to Own ratios at 22. So, I consider Sonoma County a good buy at this time. It is in the greater San Francisco Bay Area, but is affordable.

10 U.S. Cities Where It's Cheaper To Buy Than Rent

If you're looking for a quick and easy calculation about whether you should finally buy your dream home, you'll likely want to first check out your area's price-to-rent ratio. (For a list of 10 U.S. cities where it's better to rent than buy click here.) Trulia, the online real estate data provider, recently took a look at this hand statistic in the 50 largest U.S. cities by population. By comparing the average purchase price of a 2-bedroom home --including mortgage fees and maintenance expenses -- with the average rental price for 2-bedroom apartments, condos, and townhouses, Trulia calculated the price-to-rent ratio to determine whether it is better to rent or buy in a particular city. Cities with low price-to-rent ratios (under 15) indicate that is cheaper to own a home than rent. "At the peak of the real estate bubble, cities like Miami, Phoenix and Las Vegas were not affordable for many. Now the opposite is true," said Pete Flint, co-founder and CEO of Trulia. "Home sellers in these hard hit areas are forced to lower their prices to compete with all the foreclosures on the market. As a result, these unattainable markets are so affordable it makes better financial sense to buy than rent."

The Top 10 Cities Where It's Cheaper To Rent Than Buy A Home

If you're enamored of the age-old wisdom that renting a home is akin to throwing your money away, think again. A simple calculation called the price-to-rent ratio can give you an indication of whether it's a better move to rent or buy a home. Trulia, the online real estate data provider, evaluated the price-to-rent ratio in the 50
largest U.S. cities by population. By comparing the average purchase
price of a 2-bedroom home -- including mortgage fees and maintenance
expenses -- with the average rental price for 2 bedroom apartments,
condos, and townhouses, Truilia came up with a handy,
back-of-the-envelope way to gauge a local market.
Cities with price-to-rent ratios between 16 and 20 indicate that is
cheaper to rent than purchase a home, but certain financial situations
may make ownership a viable option. In cities with price-to-rent ratios
of 21 and above, it is much more expensive to buy than rent.
"It is not a surprise to see cities like New York and San Francisco
on the 'Rent' cities but I was surprised to see areas like Omaha,
Oklahoma City and Kansas City on our rental list, "said Pete Flint,
co-founder and CEO of Trulia. "We're not suggesting that it's unwise to
buy in these areas though -- just that it's significantly more expensive
than renting."
"In many of these cities, even though home buying is much more costly
than renting, prices are still much lower than they have been in a
long, long time," Flint added.

Long Term Growth but Short Term Challenges for Sonoma County

I recently read an article titled "What To Do With The Suburbs?"

The article is too long to post here, but the main points are that there will be a lot of populations growth in the years to come and there are not many good plans in place to accommodate this growth. To quote the article:

"A panel on the history and future of the "Great American Suburb" where architect and planner David Dixon, co-author of the 2009 book, Urban Design for an Urban Century: Placemaking for People, pointed out that to accommodate predicted population growth from now until 2030, 150 billion square feet of development would be built. This growth will not and cannot all take place in revitalized cities."

"The issues facing 21st century planners will be how to deal with population growth while avoiding more sprawl at the edges, and how to prevent more decades marked by (i) disinvestment in cities and older suburbs and (ii) isolation of the disadvantaged (who may well include a huge mass of elderly Baby Boomers). The consensus among planners is that to solve these problems there need to be strategies for allowing and encouraging existing suburbs to evolve into denser versions of themselves, with more of the good qualities of cities and towns."

There are some good plans for Sonoma county to do this type of growth, (downtown Santa Rosa, Sonoma Mountain Village, etc.) but there is a lot of sensitivity to "too much growth" and a lot of development costs which will restrict building.

The quality of life is great here, so people want to move to live here. Also, the demand of local population growth will add demand. Both of these demand factors, coupled with modest development supply, should spur increases in real estate prices long term.

But short term, there are still a lot of under-water mortgages (loans amounts are higher than the current value of the property) and too many people behind on their mortgage payments. (According to the Press Democrat today, 1 in 13!) So, expect many distressed properties to be available in the short term.

Ongoing demand and a continuous supply points to an active real estate market in the coming months.