Housing numbers from January seem like ancient history on this last day of Q1, but I make note of the S&P/Case-Shiller 20-City Home Price Index because it marked a new low along with most of the other housing indicators for January.
As of January 2009, home prices have fallen back to 2003 levels, according to the Case-Shiller Home Price Index. Click chart to see enlargement.
The Case-Shiller Index fell 18.97% year-over-year which represents the largest rate of decline in this cycle. All 20 cities showed a year-over-year and a month-over-month decline. January is the 10th straight month that none of the 20 cities showed a price gain. The cities leading the drop are Phoenix, Las Vegas, San Francisco, Miami and Los Angeles. Phoenix, Las Vegas and San Francisco all declined over 30 percent year-over-year.
“Home prices, which peaked in mid-2006, continued their decline in 2009,” says David M. Blitzer, Chairman of the Index committee at Standard & Poor’s. “There are very few bright spots that one can see in the data. Most of the nation appears to remain on a downward path, with all of the 20 metro areas reporting annual declines, and nine of the MSA’s falling more than 20% in the last year. Indeed, the two composites are very close to that rate and have been reporting consecutive annual record declines since October 2007. The monthly data follows a similar trend, with the 10-City and 20-City Composite showing thirty consecutive months of negative returns.”
March 31, 2009
Housing numbers from January seem like ancient history on this last day of Q1, but I make note of the S&P/Case-Shiller 20-City Home Price Index because it marked a new low along with most of the other housing indicators for January.
March 30, 2009
Get ready to snap your fingers and tap your toes ...
Take a look at this amazing video of Silvan Zingg, a pianist from Switzerland who plays some of the best Boogie Woogie anywhere. He is so BIG in Europe, there is an annual Silvan Zingg International Boogie Woogie Festival. You just missed this year's festivities - April 16-19 in Lugano, Switzerland. Maybe next year.
In this video Zingg is joined by two world-champion Boogie Woogie dancers, William and Maéva.
Click here if video does not appear below.
Zingg did a China tour in November. Hmm. I'll bet Boogie Woogie is universal.
Hat Tip: Rollins Financial - It's amazing those guys have a sense of humor during tax season.
March 29, 2009
Here are this week's Worthy Nods from the news and from around the blogs:
Matrix: Media Behaving Badly? Despite Bad Dunk, Housing Market Could Probably Care Less - "In the world of housing, the biggest target of blame is generally the media." I agree with Miller here; the housing market did not tank because of the press and it will not recover by their efforts either. The housing market could care less about the press.
National Association of Realtors: How Will Foreclosures Affect Credit Scores? -
The damage to a credit score from a foreclosure during 2008 and 2009 may be considered differently in a couple of years. Some legal and credit experts say that because of the unusual nature of the times FICO may have to adjust the credit scores to lessen the impact of foreclosures in the last two years.
Wall Street Journal: Economy Raises Tentative Hopes a Trough Is Finally in Sight - A few good signs this week but there is still cause for caution. Consumer spending rose marginally in February, as did consumer sentiment in a household survey by Reuters and the University of Michigan. The housing market also showed some positive signs with existing and new home sales up. There was also an uptick in orders for big-ticket items is helping raise hopes of a future pickup in manufacturing.
Calculated Risk: U.S. Hotel Occupancy Rate at 58.5% - Ouch! Rates dropped as well as occupancy. I shutter to think what has happened to the Condo Hotel deals.
BusinessWeek: Luxury Homes Are Lingering On the Market - Even wealthy Americans who aren't worried about paying the bills are feeling the "psychological effect" of the economic meltdown. "Even if you can afford to buy certain things, you're less inclined because you feel that you should pull back and be a little more careful."
Wall Street Journal: The Rich Plan to Buy Up Real Estate -"When it comes to real estate, the rich are planning to do some bargain hunting this year." It's not a conspiracy. The rich know a bargain when they see one. Perhaps the rest of us should pay attention. Listen up buyers!
Barron's: The Perils of Real Estate at Arm's Length - Under the heading of what shows up after the tide goes out, is an unanticipated problem with the tenants-in-common 1031 commercial exchanges that were set under an advantageous tax code during the bubble years. As commercial markets are tanking the TICs are unraveling as well.
New York Times: If He Builds It - A really weak interview with Donald Trump, hardly worth including here except for a great quote. When Bernie Madoff asked Trump why didn't he invest with him, Trump replied jokingly "No thanks, I can lose my own money.” Spoken like a true developer.
Wall Street Journal: On Wall Street: Talk of Trust and Civil War - Finance executives expressed anger and betrayal at Washington's latest anti-Wall Street rhetoric during Tuesday's sessions of the Future of Finance Initiative, a conference hosted by The Wall Street Journal.
March 28, 2009
KB Home reports that sales to first-time buyers are responsible for a 26 percent increase in new home orders for this year’s first quarter. This is the first year-over-year increase for the builder in more than three years.
KB Home credits the first-time buyers as a major factor in the company’s 78 percent reduction in first-quarter losses.
Market conditions including better affordability in home prices, the new first-time buyer $8,000 tax credit and record low interest rates make this market segment a hit with the builders and an unprecedented opportunity for these buyers.
Jeffrey T. Mezger, chief executive for KB Home points out that in a tight market, the first-time homebuyer represents a very attractive market segment as they don’t have to sell a home before purchasing. Seventy percent of the company’s first quarter sales were to first-time homebuyers, up from 53 percent in the same period last year.
KB Home’s cancellation rate also plunged to 28 percent, from 53 percent in first quarter a year ago.
Still CEO Mezger said in a statement that the company currently foresees "no meaningful improvement in market conditions for the remainder of this year." The market, he said, remains "severely challenged by inventory oversupply, declining home prices, tightening lending standards, rising unemployment and weakening consumer confidence."
“KB Home reported a net loss of $58.1 million, or 75 cents a share, compared with a net loss of $268.2 million, or $3.47 a share, in the same period the year before. Total quarterly revenue was $307.4 million, down 61 percent, because home sales were still at half last year’s levels.” New York Times
The other contributing factors for a reduction in losses for first quarter included impairments and write-downs of $32.3 million ($223.9 million Q1’08), as well as a $22.7 million FAS 109 charge to deferred tax assets (down from $100 million Q1’08), and a $221 million federal income tax refund.
But the first-time homebuyer makes a better story. To read more of the KB Home financial details, click here.
Appraisal issues in today's market are at the forefront of deal making. After finally going to contract after strenuous and often contentious negotiations, successfully traversing the mine field of property inspections, the anxious parties present themselves before the mortgage altar. Credit's good, solid employment, cash on hand ... then the nuclear bomb. The house didn't appraise. Once upon a time, agents and sellers never considered that the appraisal would be the impediment to a deal. Not so today.
Listen to a well respected appraisal practitioner and the author of the Maxtrix blog, Jonathan Miller, of New York-based Miller Samuel, Inc. No matter what side of the real estate table you may find yourself, this is an excellent review of what can become the last stumbling block to a successful transaction. If you do not see the video below, click here.
Jonathan speaks on many appraisal issues including,
* Sellers are generally a year behind the market
* The ranks of good appraisers were decimated by the mortgage boom
* Appraisers have long been the “punching bag” of blown deals
* Lack of data is a huge issue
Connie De Groot, Coldwell Banker*, the Beverly Hills real estate agent who is a regular on Fox Business Network, recommends that buyers get an appraisal when pricing their property for sale.
* Cool website.
March 27, 2009
Almost every day a new “unintended consequence” of an upside down housing market is revealed. Today the subject is the possibility that banks are driving down property values by accepting under market valuations on REOs in an effort to liquidate them as fast as possible.
A growing contingent of industry professionals and consumer groups are raising their voices against these low-balled estimates on REO properties that "are artificially depressing property values." To be sure, one thing that is not necessary is an additional impetus to drive housing values lower.
Appraisers are particularly concerned with the loose valuations that are being accepted by many lenders on foreclosed properties. To be sure, banks in no way are required to have an appraisal performed on REO properties before they are put up for sale. Just like any seller, the banks often rely on what is called “broker price opinions” or BPOs prepared by a real estate broker or sales associate instead of paying for a full-blown appraisal. This is where the arguments start sounding like a turf war.
According to the Washington Post there are appraisers and consumer groups that “are demanding that Congress or state regulators crack down on this practice (BPOs) because it is artificially driving down property values.”
“Unlike standard property valuations performed by licensed appraisers, which can cost hundreds of dollars, BPOs often cost $50 and are performed by real estate agents who may have minimal or no appraisal training and are subject to no regulatory oversight. Real estate agents defend BPOs, arguing that their extensive knowledge of local market trends equips them to render accurate estimates.” WP
Several websites have sprung up selling BPO services to real estate agents as a way to make quick money in a down market. These sites suggest that churning out BPOs for lenders is an easy way for agents to make big bucks in 2009. And it has become a booming business as foreclosures come flooding through banks and overwhelmed bank employees search for ways to quickly process the distressed properties. The BPOs are a quick and cheap way to put a value on them for resale.
Make no mistake, there is nothing wrong with a seller using a real estate agent’s valuation of a property’s value. There is however a problem with selling BPOs, at least in 23 states according to appraisal industry leaders as reported by the Post.
The appraisal industry has been under fire ever since the housing bubble burst and the financial crisis lifted the screen on questionable lending practices, if not downright fraudulent practices, which included pressure on appraisers to support unrealistic valuations.
So is this a case of sour grapes from appraisers who feel that broker valuations are costing them business? To some extent, but the fact that in many states it is illegal to sell a BPO is a legitimate beef making those cases good as gold.
The other cases BPOs used by banks on REOs valuations are perfectly legitimate. But it is very possible that those BPOs on distressed properties are artificially low. Banks, unlike on-the-street sellers, are looking for the quickest, easiest way out and not necessarily trying to get top dollar for their properties. The FDIC for example lists properties (in seized banks) for 30 days and if an agent doesn’t sell in that time they are fired, the price is lowered and another agent is hired (at least in philosophy from antedotal accounts.)
It is a flawed system at best in a flawed housing market. The sheer volume of REOs does not lend itself to a thoughtful market plan, executed by a real estate professional, resulting in a sale at the highest price the market will bear.
It's a fact, prices for the fire-sale houses will pull down the values of other houses in the neighborhood.
The Post reports on some of the efforts to stop BPO use in bank valuations:
"In testimony March 11 before the House subcommittee on financial institutions and consumer credit, David Berenbaum, executive vice president of the National Community Reinvestment Coalition, called on Congress to outlaw BPOs when used as appraisal substitutes in distressed property transactions. Berenbaum said that real estate agents 'develop hasty and inaccurate BPOs that underestimate' the value of bank-owned and other distressed real estate. That low-balling, in turn, 'is often destructive to local markets and depresses the value and equity of [lender-owned] properties.'
"Gary Crabtree, chief executive of Affiliated Appraisers in Bakersfield, Calif., says his company's research 'shows very clearly' that BPOs frequently understate market values by as much as tens of thousands of dollars."
Regulators in a number of states have issued warnings that it is a violation of the law for agents to prepare a BPO for any reason other than listing and selling a property. Compensation for BPOs is where the practice crosses the line in some states and may open the door for criminal prosecution.
The National Association of Realtors says it has no policy guidance on the issue, but expects to issue a statement in May. In defense of the NAR, they do not have a place in this fight other than what is covered by the Code of Ethics. It is a licensing matter for individual states.
National appraisal groups, including the Appraisal Institute, are up in arms. Bill Garber, the Institute's head of government relations, said BPOs are an attempt "to pay the least to obtain something".
Today’s housing market offers plenty of heartburn for just about everybody involved. That’s the wisest thing I can offer – a statement of the obvious.
The thumbs-up have it this month, but it is only a very weak thumbs-up. Don’t pop the champagne yet, but I think we’re allowed a discrete smile. There are a few rays of hope and some good news is starting to leak in, but one month does not a trend make. Hold on for more solid signs of good news before exhaling.
Existing Home Sales Up … But …
February numbers for existing home sales merit a thumbs-up although without a lot of enthusiasm. Sales were up slightly on declining prices and inventory levels remain flat.
The sales of existing homes (including single-family, townhomes, condominiums and co-ops) rose 5.1% to an annual rate of 4.72 million for February, from 4.49 million units in January.
Distressed sales accounted for 40 to 45% of sales for February.
Existing home sales for February this year is 4.6% below the 4.95 million-unit level in February 2008.
Total housing inventory at the end of February rose 5.2% to 3.80 million existing homes available for sale, which represents a 9.7-month supply at the current sales pace, unchanged from January. Even though the inventory level increased, sales also increased, so "months of supply" was flat.
Click graph to enlarge.
Some encouragement that California is seeking a bottom to the pain: Existing, single-family home sales increased 83% in February to an annualized rate of 620,410 homes. The statewide median price decreased 40.8% year-over-year to $247,590. California’s Unsold Inventory Index fell to 6.5 months in February, compared with 15.3 months in February 2008.
Click graph to enlarge. Note that graph shows February existing home sales and January new home sales.
New Home Sales Up, A Little
New Home Sales in February, like existing sales, merits only a weak thumbs-up. Yes, sales were up on declining prices and there are still too many new houses in inventory.
New home sales for February were 4.7% above January, but February was still the second-worst on record, behind January. The February sales rebounded to a seasonally adjusted annual rate of 337,000.
Here’s the “but” … February sales were still down 41.1% year-over-year.
The other “but” is that the favorable gains in sales were on the heels of declining prices. The median price of a new home tumbled 18 % in February from a year earlier to $200,900. The average price decreased 16.7% to $251,000 from $301,200 a year earlier. And prices month over month fell, too; in January 2009, the median price was $206,800 and the average was $239,100.
Price declines are in part due to builders constructing smaller houses but more likely due to builders slashing prices to compete with REO sales.
The most activity in new home sales occurred in the $150,000 to $199,999 price range, followed by homes priced between $200,000 and $299,999 according to the Commerce Department. Houses over $500,000 accounted for just 5% of home sales in February, indicating the demand for higher-end housing has slipped to near non-existence. This not surprising considering the scarcity of jumbo financing. The $8,000 first time buyer tax credit also drove the lower priced home sales.
There are still far too many new homes on the market. At the current sales rate it would take 12.2 months to sell all the new homes available but the inventory level improved from the12.9 month supply in January. The new home supply in February of 2008 was 9.7 months.
Click graph to enlarge.
Foreclosures Not Abating
Obviously a thumbs-down. The housing market will not find firm footing for a recovery until the rate of foreclosures show a strong declining trend. Government and private banking programs should do much to help stem the tide but the economy will have to show signs of life before foreclosures will decline significantly.
Foreclosure filings — default notices, auction sale notices and bank repossessions — were reported on 290,631 U.S. properties during February, an increase of nearly 6% from the previous month and an increase of nearly 30% from February 2008. The report also shows one in every 440 U.S. housing units received a foreclosure filing in February.
“The increase in foreclosure activity from January to February is somewhat surprising, given that many of the foreclosure prevention efforts and moratoria in place in January were extended through most of February as well,” said James J. Saccacio, chief executive officer of RealtyTrac.
Interest Rates & Loan Applications
Record low interest rates are nothing but great news. Thumbs-up all the way although the low rates are yet to significantly stimulate home sales. But it has to help.
The Mortgage Bankers Association said its seasonally adjusted index of mortgage applications, which includes both purchase and refinance loans, increased 32.2 % to 1,159.4 for the week ended March 20. But refinancing accounted for 78.5 % of all applications.
Interest rates on mortgages fell to a record low after the Federal Reserve’s announcement to buy Treasury securities for the first time in more than four decades as well as more than double its planned purchases of mortgage-related securities. However, so far, the low rates have had only a moderate impact on demand for loans to buy homes.
Price has been the main driver of activity as evidenced by the level of foreclosures and not the cost of money. While refi’s are very helpful, the Fed embarked on this path to spur demand for buying homes.
Housing Starts, Permits and Construction Activity
Much to do about nothing, but I’ll give it a thumbs-up. For builders these days, construction activity usually means little to no profit. Survival is the name of the game.
Housing starts rose 22.2% from January, but the increase was driven by multi-family starts. Single-family starts rose only 1.1% from January to a rate of 357000 in February, 50.6% below February 2008.
Single-family permits rose 11% to a rate of 373,000, still 42.3% off the pace in February 2008.
Government data showed new-home construction jumped 22 % in February, rebounding some from record lows.
Unemployment Continues to Climb
What can I say? That’s right – thumbs-down. People need a job to support the housing market.
In the week ending Feb. 21, the advance figure for seasonally adjusted initial claims was 667,000, an increase of 36,000 from the previous week's revised figure of 631,000. The 4-week moving average was 639,000, an increase of 19,000 from the previous week's revised average of 620,000.
The advance number for seasonally adjusted insured unemployment during the week ending Feb. 14 was 5,112,000, an increase of 114,000 from the preceding week's revised level of 4,998,000.
The raw numbers, not seasonally adjusted, [show] 6.4 million collecting state unemployment benefits, and an additional 1.4 million who were collecting the federal benefits that go to people who've been fruitlessly looking for a job for more than six months. The claims numbers don't show the whole story. About 4 million more people are officially unemployed but not eligible for jobless benefits. In addition, 8.6 million can find only part-time work and another 2 million have given up looking for work. Nearly 15% of the workforce is unemployed, underemployed, or just plain discouraged.
Sources: US Department of Commerce, Census Bureau, Department of Labor, National Association of Realtors, Mortgage Bankers Association, RealtyTrac, Calculated Risk, The Big Picture, Wall Street Journal, New York Times, Matrix, MarketWatch, Big Builder.
March 26, 2009
Et tu Cousins? Cousins Properties Inc., a 50-year old Atlanta-based Development Company operating mainly in the Sunbelt states, finds itself in a death struggle with the sell-out of its only condominium tower, 10 Terminus. Terminus is one of Cousin’s latest projects brought to market in the Buckhead-submarket of Atlanta.
Cousins, with a stellar reputation and a consistent ability to develop homerun real estate deals, launched the iconic 10-acre mixed-use Terminus development in 2006 incorporating retail, office and condominiums in three high-rise towers.
Phase one of the Terminus development , includes the first of two office towers, retail with many of Atlanta’s hottest new restaurants, and a 32-story condo tower. The condo tower opened last fall with average prices ranging between $600,000 to $800,000.
The good news about 10 Terminus, the condo tower, is it has just about everything a condo dweller could want in a great location. And the execution is outstanding. The bad news is that the condo market is just about as bad as it can get in the Atlanta submarket of Buckhead.
The Atlanta Business Chronicle reports that 10 Terminus is “one of 35 condo projects in the hard-hit Buckhead market, where just slightly more than half of 3,061 units were sold at the end of last year, according to real estate market research firm Haddow & Co.”
Only 103 new condo units sold in the Buckhead submarket in 2008. The overall Atlanta market saw 645 sales in 2008 with 89 percent of the annual sales happening in the first half of the year. In other words the Atlanta condo market hit a wall towards the end of 2008 with 5,100 new unsold units in the city’s stable.
Following the market depths, only 13 of 137 units sold since the 10 Terminus was completed in 2008. Seventeen units are under contract.
Cousins, however, is not sitting on their hands waiting for buyers to drift in. They have launched a bold and aggressive buyer incentive program guaranteeing the value of the condos and provisions allowing buyers to walk away during the first three years. I’ll share the details in a minute.
“We’re taking all the risk out of the equation,” Cousins CEO Tom Bell said. “We’re also letting people see how much confidence we have in this market.”
Financing has also become a huge stumbling block for condos. Fannie Mae is requiring 30 percent down on conforming loans, under $417,000, without suffering additional high fees under new regulations. The new Fannie approval process has also caught many developers outside the walls without viable alternatives for financing.
Conforming loans are not an option for 10 Terminus with higher price ranges that most likely, will require jumbo loans for those buyers wishing to finance. Jumbo loans, when you can find them, are often requiring large downpayments and higher interest rates. Bank of America is in the process of re-entering the jumbo loan market but no news yet whether their program will be extended to multi-family sales.
Cousins is bypassing the financing issues, at least for three years, by offering up to 95 percent developer financing at a 4 percent. Unlike most developers Cousins is able to offer this very unique opportunity because it does not have a construction loan on the condo tower; the project’s financing lies on the office towers.
There is also an incentive program for people who need to sell their house. Buyers who put 20 percent down can move in with no payments for a year.
The 10 Terminus buying incentives began March 20 and is initially being offered on only 25 condos. First come, first serve.
The ABChronicle reports that Cousins’ goal to sell out 10 Terminus was moved to the end of 2011, a move that reduced its rate of return on the $80 million tower by at least 4 percent. Cousins also took a $2 million write-down on the project earlier this year.
Now on to the details of the incentive program. One thing I was particularly impressed with is that the details of the program, and I mean details, are laid out clearly on their web site. I expected that I have to visit with a sales associate to get the details. Nope. Cousins is treating their customers like grown-ups. In the age of information I appreciated the absence of games. I would have really appreciated it if I was a bona fide buyer.
Highlights of the program (from the website)
- Cousins financing with 5% initial downpayment
- Monthly payment based on 4% interest + HOA Dues + taxes
- Cousins financing term lasts for up to three years. If you no longer wish to own your home at any time, you can move without any further mortgage obligation
- If your home appraises for less than your purchase price after three years and you wish to move, we will refund your equity
- Ask about our downpayment option which allows you to move now and make no payments for the first year while you sell your home
- Each home comes with a five year extended warranty.
Questions and Answers (from the website)
Cousins Assurance Program
Question 1: What is the Cousins Assurance Program?
Answer 1: Pursuant to the Cousins Assurance Program, the Seller is providing short-term financing for the majority of the purchase price of your Unit. If your Unit decreases in value, if you lose your job, or if you are not satisfied with the Unit for any reason, you can move out without any further mortgage obligation.
Question 2: How is this different than traditional lender financing?
Answer 2: With traditional lender financing, you sign a note and mortgage. If you stop making payments under the note, the lender can foreclose on the Unit and seek a deficiency judgment. The foreclosure is also a mark against your credit history and score. Under the Equity Protection Program, the Buyer and Seller utilize a "contract for deed" rather than a note and mortgage. The Buyer and Seller sign a contract which sets forth the payment terms of the Buyer, which is described below. The Buyer gets equitable title at closing with many of the benefits of ownership, including the ability to take homeowner deductions for interest carry and property taxes and the potential for a new home purchase tax credit if you qualify*. When the Buyer pays off the outstanding principal balance, a standard deed of conveyance is recorded giving the Buyer both equitable and legal title.
Question 3: Will Buyer's interest in the unit be subject to construction financing?
Answer 3: No. Seller is able to offer this program because there is no debt on the project.
Question 4: What are the financial terms for your standard Owner financing with the Cousins Assurance Program?
Answer 4: 5% down payment with 4% interest only payments, made in monthly installments on the unpaid balance of the purchase price for one year. In addition, the Buyer is responsible for monthly assessments for HOA dues and property taxes for the Unit. The Cousins Assurance Program is for a 1 year term, but may be extended as set forth below:
·1 year extension for additional 2.5% down payment applicable to purchase price, exercisable at the end of 1 year after closing.
·2nd year extension for additional 2.5% down payment applicable to purchase price
Question 5: What are the financial terms for your Owner financing with zero payments, (i.e. interest, HOA dues and taxes) for the 1st year while I sell my home?
Answer 5: The Cousins Assurance Program is for a 1 year term, but may be extended as set forth below:
·20% down payment, zero payments for 1 year — with 100% of down payment applicable to purchase price.
·1 year extension - Buyer pays monthly 4% interest only installments, HOA dues and taxes. No additional down payment is required.
·2nd year extension - Buyer pays monthly installments with 4% interest, HOA dues and taxes. No additional down payment is required.
Question 6: How are commissions paid on the Owner financing option?
Answer 6: 50% of the sales commission will be paid when the Buyer closes with their initial down payment. The remainder will be paid when the balance of the purchase price is paid in full to Owner.
Question 7: Isn't this similar to a Lease to own program?
Answer 7: No. A lease to own provides none of the benefits of home ownership.
Question 8: How do I know if a Buyer will qualify?
Answer 8: The Buyer will pay a loan application fee for the Seller to do a background and credit check, similar to the process conducted by a banking institution.
Question 9: Will there be an actual closing?
Answer 9: Yes. The closing will be held at Weissman, Nowack, Curry and Wilco exactly like all other sales. Buyer and Seller will each pay their respective closing costs. At closing, the Seller will execute a limited warranty deed which will be held in escrow by Weissman, Nowack, Curry and Wilco pending Buyer’s payoff of the outstanding principal. In addition Buyer and Seller will execute a memorandum of contract which will be recorded in the real estate records of Fulton County, Georgia thereby protecting Buyer’s interest.
Question 10: If the Buyer decides they do not want to own the Unit and they are current on all payments and terms of the contract will they be foreclosed on? Will their credit be affected?
Answer 10: No to both questions. The Buyer’s total risk is their down payment and any damages they cause.
Question 11: How does the Buyer gain final title and assume 100% Ownership?
Answer 11: When the Buyer pays off the balance due to Seller, the limited warranty deed will be released from escrow and recorded. This can be done with an all cash transaction or refinancing with a traditional lender.
Question 12: You say the Buyer will refinance. Why would this not be traditional financing of a new acquisition?
Answer 12: Technically the Seller has provided financing and as such the lending institutions normally look at this as refinancing of an existing home.
Equity Protection Pledge (from the website)
Question 1: What is the Equity Protection Pledge?
Answer 1: If your Unit does not appraise for your original Purchase Price after 3 years and you choose to vacate your Unit, your down payment will be refunded. For the 20% zero payment during year 1 Option, the aggregate amount of interest, taxes and HOA dues for the 1st year will be deducted from the refund.
Question 2: Does a Buyer have to own the unit for 3 years to qualify for potential equity reimbursement under the Equity Protection Pledge?
Answer 2: Yes. No reimbursement will be made in year 1 or 2. Additionally, no reimbursement will be made in year 3 if the Buyer is no longer a participant in the Cousins Assurance Program or otherwise sells, leases or conveys all or any portion of the Buyer’s Unit.
Question 3: How does the Buyer know that money will be available to fund the Equity Protection Pledge?
Answer 3: All potential liabilities pursuant to the Equity Protection Promise will be secured pursuant to an escrow account maintained for the benefit of the Buyer.
Question 4: How long will this program be available?
Answer 4: The program is for a limited time only. It is subject to change or termination at any time.
Now that's a plan.
March 25, 2009
David Crowe, Chief Economist of the National Association of Home Builders, speaks on the Bloomberg business network about the housing market, the new home sales numbers and prospects for the near and long term market.
His level headed assessment of the housing market demonstrates that a trade organization does not have to spin the news to the public or its members.
Click here if video does not appear.
h/t: The Big Picture
at 4:09 PM
The GOP is making another attempt to bring about a broader based housing stimulus package, according to an article in today's Washington Post. The new proposal is called "Responsible Homeowner's Act."
House Republican leaders plan to propose a new housing package today that would increase the tax credits for homebuyers to $15,000 for primary residences. This proposal revives a $15,000 tax credit proposal that Republicans unsuccessfully promoted last year. This time the proposal also includes a requirement that the downpayment be at least 5%. The current watered-down version of the tax credit is only available to first-time homebuyers and is only $8,000.
Both existing home sales and new home sales were up for February, month over month, but most buying activity, at least in new homes, occurred in the $150,000 to $199,999 price range according to the Department of Commerce. This suggests that the first-time homebuyer tax credit, along with lower rates, was effective in stimulating that segment of buyers to make a move. So although we're seeing some movement in the first-time buyer market, across all price points, the low rates have had only a moderate impact on demand for home sales. More is needed.
Undoubtedly, a $15,000 tax credit that is not a loan, and is available to all homebuyers, would be much more effective and should, along with the current low interest rates on 30-year fixed loans, get many buyers off the fence.
There are more goodies in the new GOP housing proposal. Borrowers refinancing their mortgage would be eligible for $5,000 to help cover closing costs or to reduce their principal balance. Refinances pump more money into the economy assuming a lower payment for the borrower.
Both of these programs would expire in July 2010.
House Minority Whip Eric Cantor (R-Va.), who will introduce the legislation, says, "If you can get a $15,000 tax credit, that is a tremendous incentive to get qualified buyers back into the game."
The Washington Post reports, "The Republican proposal also calls for providing additional resources to law enforcement agencies, including the FBI, to investigate and prosecute mortgage fraud." According to the Mortgage Asset Research Institute, mortgage fraud was up 26% last year over 2007 even though the number of loans for 2008 were far fewer.
I'm contacting my representatives now. You might want to contact your people in Washington as well. Can the GOP actually get a bill through our "non-partisan" Congress? Maybe with our help.
March 24, 2009
Yesterday, the words offered by Treasury secretary Timothy Geithner on the economic recovery plan in an op-ed piece that ran in most newspapers, clearly showed his vision for the recovery of the housing market within the overall economy:
… We launched a broad program to stabilize the housing market by encouraging lower mortgage rates and making it easier for millions to refinance and avoid foreclosure. We established a new capital program to provide banks with a safeguard against a deeper recession. By providing confidence that banks will have a sufficient level of capital even if the outlook is worse than expected, more credit will be available to the economy at lower interest rates today -- making it less likely that the more negative economy they fear will take place.
“More credit, at lower interest rates” is a great start and the delta of this plan is the purging of the toxic bank assets.
Investors may soon be queuing up to buy some of that toxic gold of bad home loans and mortgage-related securities now that the plan's basic structure has been released by the Treasury secretary. All in all, the total buy up of real estate assets by Treasury from the banks could be as much as $2 trillion.
There were some immediate takers; “several major investment firms, including BlackRock and Pimco, said they would participate as buyers of bank asset,” the Wall Street Journal reported. CNBC reported that BlackRock was interested in investigating a mutual fund vehicle by which individuals could participate.
In a very, very simplified nutshell, here’s what’s happening with the Treasury secretary's bank plan:
"Administration officials outlined a three-part Public-Private Investment Program that offers private investors vast amounts of cheap, taxpayer-supported financing for every dollar they put up of their own money. In essence, the Treasury and the Federal Reserve will be offering at least a tablespoon of financial sugar for every teaspoon of risk that investors agree to swallow.
"But the crucial incentive for investors — traditional fund managers, hedge funds, private equity funds, pension funds and possibly even banks — is that the government would lend as much as 85 percent of the purchase price for each portfolio of mortgages.
"On top of that, the Treasury would invest one dollar of taxpayer money for every dollar of private equity capital to cover the remaining 15 percent of the portfolio’s purchase price." New York Times
The word on the street is that this could be a very profitable venture for investors and a highly risky plan for taxpayers. There are still many “ifs” and “how tos” to be worked out. Click here to read the New York Times' coverage of how the plan may work.
Laurence D. Fink, BlackRock’s chairman and chief executive said, “The combined impact of all the Treasury and Fed bailout programs could start to stabilize the economy sooner than many expect.
“I think right now there’s so much pessimism that no one is seeing anything beyond their nose. With all the triage from all different activities from the government, you could say that by the latter part of this year, we could start seeing the economy start restabilizing itself.”
Mr. Geithner concludes his op-ed piece with the following:"Our goal must be a stronger system that can provide the credit necessary for recovery, and that also ensures that we never find ourselves in this type of financial crisis again. We are moving quickly to achieve those goals, and we will keep at it until we have done so."
March 23, 2009
The National Association of Realtors reports that existing home sales rose in February as buyers took advantage of improved affordability. Home resales rose 5.1% over January’s pace with the number of sales climbing in February to 4.72 million from January’s unrevised 4.49 million.
About 45% of the February sales were distressed transactions from foreclosures or short sales which accounts for the further drop in home prices year over year. The median price for an existing home fell last month to $165,400 in February which is down 15.5% from $195,800 in February 2008.
The good news is the median price from January to February was slightly up from $164,800 in January to $165,400 in February. This is a good sign, but to early to call a pattern.
The inventory supply remained steady at a 9.7-month supply at the current sales pace. Sales were up but inventory of resale homes on the market also rose 5.2% at the end of February to 3.8 million available for sale.
February sales of existing homes exceeded the expectations of Wall Street with sales of 4.72 million outstripping an expected 4.48 million. The 5.1% increase was the largest monthly gain since July of 2003.
"This is a rebound from January," said NAR economist Lawrence Yun. "Home sales are still very soft." Mr. Yun added that Realtors hope the Obama administration's economic stimulus helps the market in the next few months.
Tight credit and unemployment continue to plague a housing recovery and the high percentage of distressed sales to overall numbers is a blow to new home sales that can’t compete with low foreclosure prices. Without a healthy new home industry the overall housing sector will continue to weaken.Regionally, sales rose 15.6% in the Northeast, 1% in the Midwest, 6.1% in the South and 2.6% in the West.
March 22, 2009
Here are this week's Worthy Nods from the news and from around the blogs:
Wall Street Journal: Home Prices Nearing Bottom? Well, That Depends - An interesting article on the effect of distressed sales on overall market values. Does the fact that distressed sales are driving the market in places like California really signal a bottom? Well, that depends ...
The Economist: A Dizzy Descent - Global Housing Market Goes From Bad to Worse - "When we last looked at global house prices, only six of the countries we surveyed had recorded year-on-year declines. Three months later that figure has risen to 16." See the chart with home price indicators for countries around the globe.
North County Times: Housing: Banks Selling Properties In Bulk For Cheap - Controversy is growing around banks who are selling foreclosed properties for far below real value. The effect is a terrible blow to property values for the rest of the market.
Reuters: Washington Mutual sues FDIC For Over $13 Billion -Washington Mutual’s holding company is suing the FDIC for billions of dollars, saying the firesale of the bank’s assets to JP Morgan Chase violated its rights. Lawyers for the holding company argue that the bank was worth more than the $1.9 billion JP Morgan paid for it in a deal arranged by the FDIC. The lawsuit argues that if WaMu’s assets had been liquidated prudently, they would have been worth more than that.The FDIC seized the Seattle-based savings and loan in September. It was the largest bank failure in U.S. history. And the beat goes on.
New York Times: Mortgages - Appraising the Appraiser - With falling home prices, appraisals are often the deciding factor on a borrower's ability to obtain a loan. New processes center on a controversy of compensation issues and correlated quality. See what the fuss is all about. Does the cost of an appraisal speak to its quality?
The Big Picture: Rent Bits - Pretty cool: Find rental statistics and trends for houses, apartments, and other types on many U.S. cities listed.
New York Times: Greenbrier Resort Files for Bankruptcy - It took a 21st-century recession to do what the Great Depression and the cold war could not: drive the historic, 231-year-old Greenbrier resort, the West Virginia playground of presidents and royalty, into bankruptcy.
And finally ... on AIG ...
The Rolling Stone: The Big Takeover - "It''s over — we're officially, royally f****d. No empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when the buffoons who have been running things in this country finally went one step too far ..."
The Daily Beast: Wall Street Mob - AIG: America's New Punching Bag - "How did AIG become the symbol for all that's wrong in the world? With death threats on its employees and AG’s on the hunt, The Daily Beast takes a look at how the bonus debacle spun out of control." Check out this interesting interactive compilation of headlines from the most prominent news sources.
The Big Picture: A Lynch Mob! -Let's go hang'em! "Members of the US House of Representatives who voted for this bill said they were reacting to the anger of their constituents. In failing to show leadership they have just undermined the entire structure designed to repair the financial system."
New York Times: The Problem With Flogging AIG - Can we all just calm down a little? And Drive-By On the Elite Streets of Fairfield - "The bus pulled to a stop ... " A bus tour of protesters?
Fortune: AIG's Rescue Has a Long Way To Go - "Within insurance giant American International Group, but known to only a few people, is something irreverently called the 'kill list.' " The rest of the story... when AIG's Controller, Herzog, flung his e-mail grenade ...
Financial Times: Banker Fury Over Tax "Witch-Hunt" - Unintended Consequences: "Senior executives on both sides of the Atlantic on Friday warned of an exodus of talent from some of the biggest names in US finance, saying the 'anti-American' measures smacked of 'a McCarthy witch-hunt' that would send the country 'back to the stone age'."
I hope that we can move beyond AIG retention bonuses next week. Bigger fish to fry, etc.
March 21, 2009
Bank of America is riding to the rescue of the luxury housing market. Since the collapse last year of the private mortgage bond market, the upper-end housing market has been bereft of jumbo financing, or has been subject to punitively high interest rates and huge downpayment requirements. Since last fall jumbo loan rates often exceeded conventional financing by three to five percentage points, if the loan could be had at all. Bank of America and a few other lenders are now re-entering the lucrative jumbo loan market.
There is still no secondary buyers for jumbo loans on Wall Street but several major banks, led by B of A, will originate these large loans, at reasonable rates, for their own portfolios. This real estate segment has been the hardest squeezed by the credit crisis and the need for luxury loan product has gone largely unfilled for the last year. The fact that some major banks are launching a foray into jumbo loans with capacity in their own portfolios demonstrates that these banks have plenty of capital on hand.
The Washington Post reports that “Bank of America, the country's largest mortgage lender, is rolling out a large program to finance jumbo loans between roughly $730,000 and $1.5 million, with fixed 30-year rates starting in the upper 5 percent range.” The minimum downpayment requirement is quoted at 20 percent. The loans will be originated through B of A’s retail network and through its subsidiary, Countrywide, acquired in 2008. In a wise marketing move, Contrywide will be rebranded as Bank of America Home Loans after April 27.
Bank of America's entry into the mass-market jumbo arena is a welcome relief to the luxury housing market. The lack of liquidity to this market segment has really hurt upper-end home prices, particularly in areas like California and areas on the East Coast where a large percentage of homes need jumbo financing.
Jumbo loans represent those mortgages with a loan balance that exceeds $417,000 which is the maximum loan amount that is accepted by Fannie Mae and Freddie Mac for purchase from the originating lender. There are some high cost areas that have a higher conforming loan limit (up to $729,750).
The Washington Post provides information on several other jumbo lenders who can provide higher loan limits than Bank of America:
“Several other financial institutions are also becoming more active in the jumbo loan market. ING Group, an Amsterdam-based banking and insurance conglomerate, offers jumbos as large as $2 million through its online ING Direct unit. The minimum down payment for an ING Direct jumbo is 25 percent; Bank of America quotes a minimum 20 percent.
"ING's jumbos typically are "5/1" and "7/1" hybrids with a fixed interest rate for the first five or seven years, followed by an adjustable rate tied to the LIBOR interbank index for the balance of the 30-year term. Current rates start around 5 percent.
“San Diego-based Luxury Loans originates jumbo and "super-jumbo" mortgages of $3 million to $5 million and higher in 50 states for a handful of large commercial banks, who then put them in their investment portfolios. Victoria Johnson, CEO of Luxury Loans, declined to identify the banks that buy her mega-loans but said their underwriting standards can be rigorous. For example, some investors want proof of substantial cash reserves -- at least six months of borrower income -- deposited even when down payments are substantial.
“Bank of America's new program requires hefty liquid resources -- six months of principal, interest, property tax and insurance payments in reserve -- plus fully documented income, solid credit scores and a full appraisal.
“In Fort Collins, Colo., Brian Shaver, senior loan officer for 1st City Mortgage Group, originates jumbos through MortgageBase.com, selling them to banks in this country and as far away as Hong Kong. For a loan of $1.5 million to $2.5 million, MortgageBase wants a 40 percent down payment and liquid reserves of 50 percent of the loan amount to qualify for a 4.875 note rate on a 5/1 hybrid."'
These new non-Wall Street sources for jumbo loans are a welcome relief to the stressed housing market. The underwriting guidelines are more stringent than in past years, but the fact that there is once again a lending source for jumbos is very encouraging.
OK, let’s pop the champagne on this one.
March 20, 2009
Despite the Federal Reserve’s herculean efforts to push down long-term interest rates, including mortgage rates, a steep decline from 5% may be difficult, even with Bernanke’s clout behind it. The euphoria over the last few days at the prospect of interest rates dropping to a record 4% from a current record low rate at 5% may be dashed on the shores of not-going-to-happen.
Yesterday mortgage firms were quoting rates around 4.75% for a 30-year fixed-rate mortgage as compared to 5% at the beginning of the week and a 6% rate in mid-November. It is to be seen whether the rates will fall to the magical expectation of 4%. I wouldn’t hold my breath. In the fall the Feds moved to knock down interest rates but it never came to fruition as far as mortgage rates because credit was still frozen.
The Wall Street Journal weighs in on the argument and also thinks a dramatic drop is unlikely:
“…further big declines will be hard to achieve, partly because the mortgage-lending market has grown less competitive in the past year as hundreds of small banks and independent mortgage lenders have collapsed. The big banks that dominate the market are eager to boost their profits margins, not give deeper bargains to consumers.
“Rates for borrowers with the strongest credit are likely to be in a range of roughly 4.5% to 4.75% for the rest of this year, says Mahesh Swaminathan, a mortgage strategist at Credit Suisse in New York.
“Others say that is too optimistic. Assuming no big change in government policy, Walter Schmidt, an analyst at FTN Financial Capital Markets, sees a range of 4.75% to 5.5% for most of this year.”
The Fed’s plan to buy mortgage securities was expanded this week to a budget of up to $1.25 trillion which is enough to “provide funding for more than half of all home-mortgage loans likely to be made in the U.S. this year. The Fed also is buying long-term Treasury bonds to drive down rates on those securities, whose pricing affects mortgage rates.”
“By historical standards, rates look incredibly low. Until recently, 30-year fixed-rate mortgages hadn't been below 5% since the 1950s. For the past couple of months, rates have been bobbing between about 5% and 5.25%. The 30-year rate averaged 4.98% in the week ended March 19, down from 5.03% the prior week, according to Freddie Mac's survey. Fifteen-year fixed-rate mortgages averaged 4.61%, down from 4.64%.” WSJ
Here are a few interest rates from random years that I pulled from the Federal Reserve website which will filter today’s rates with historical perspective:
July 1973 -- 8.05%
Dec 1979 -- 12.90%
April 1980 -- 16.33%
Oct 1981 -- 18.45% (My first mortgage - unbelievable!)
March 1982 -- 17.16%
March 1983 -- 12.80%
Oct 1984 -- 14.13%
Sept 1987 -- 10.89%
Dec 1992 -- 8.22%
May 1996 -- 8.07%
March 1999 -- 7.04%
Jan 2001 -- 7.00%
May 2004 -- 6.27%
June 2006 -- 6.68%
2007 Average -- 5.95%
2008 Average -- 6.02%
The supply and demand effect often kicks in after a substantial mortgage rate decline, causing rates to increase after a rush of people seek to refinance quickly. Lenders often don’t have the people to process all the applications and the flood of files quickly logjams the system. "If lenders are working people overtime to close loans, they don't have an incentive to compete too hard on price," says Arthur Frank, who heads research on mortgage securities at Deutsche Bank in New York.
The situation highlights a conundrum for the government. It wants low rates to spur the housing market, but also wants the banks to make profits on low-risk loans so they can return to financial health.
Another reason that interest rates may not fall as expected is that many of the small mortgage banks that are still in business are struggling. Since they don’t take deposits they have to borrow money for short periods from “warehouse lenders” in order to have the capital to originate these loans. “They use this short-term credit to make loans to their customers and then pay back the warehouse lenders after selling the loans to bigger banks or to government-backed mortgage investors Fannie Mae and Freddie Mac.”
But the warehouse credit is much constricted these days and there are fewer sources for these funds, leaving mortgage banks with greater demand and less money to lend. The warehouse credit was funded by the big banks and Wall Street firms and well, you know that sad story.
Despite these constraints, the Fed's action is a big positive and their actions are moving us in the right direction. All of their unprecedented moves to jolt the economy will eventually show signs of life.
The good news is that rates are at a unprecedented low. The other news is that the underwriting guidelines are pretty stringent for these low rates. These will require that credit is in very good standing and a down payment of 20 % or more. Lenders are being far pickier on appraisals and this has derailed many deals. Most importantly, to obtain these low rates the loan amount must be conforming at no more than $417,000, unless the house to be purchased is in an area with higher limits. Anything outside of those parameters will carry extra costs and fees.
What goes up must come down as has been so painfully proven. But the opposite is just as true. When interest rates go up, and they will, many people will be taken out of the housing market because they will be unwilling to give up a mortgage at such low rates. But for now, if you can, take advantage of this very unusual time in our economy. It’s not very often that interest rates and housing values are low – that is usually diametrically opposed.
The housing market has not found a bottom yet (although I think California may be near the bottom), but 2009 may prove to be a buyer’s bottom in that interest rates and housing values together are conspiring to combine the perfect house buying opportunity.
March 19, 2009
Below is an excellent interactive map, courtsey of The New York Times, showing the unemployment rates county by county with overlays for housing influences.
Job losses have been most severe in the areas that experienced a big boom in housing, those that depend on manufacturing and those that already had the highest unemployment rates. As of January, there were 19 counties with unemployment rates of 20% or higher, with six of them in Michigan. In December, only nine counties had jobless rates this high.
"As you’ll see, high unemployment rates were concentrated in the West (especially California and Oregon), in the Great Lakes area (especially Michigan), and the Southeast (especially South Carolina). The band stretching down the middle of the country — from North Dakota to Texas — was still relatively protected, as was West Virginia."
A screen grab is below; click on the image to go to the interactive version.
File this one under "Unintended Consequences".
Michigan has been one of the hardest hit states by the recession. From foreclosures to unemployment (double digit), GDP, auto industry woes, you name it, these folks have been hit with it.
Saginaw is about 100 miles northwest of Detroit and could be the poster child for the weak economy. There are about 800 abandoned houses in this city of 56,000 people, which by some estimates, was double the current population during the height of the Detroit automobile boom.
This story is a window with a view into what many cities and neighborhoods could face if the foreclosures continue in a contracting economy. Very sobering.
Click on the image to see the New York Times slide show. Post continues below.
The last thing Saginaw needs is more houses. The Saginaw Habitat for Humanity affiliate went to work continuing its humanitarian work, but in a far different manner than its usual home building for those in need. Now they are ripping down sheetrock, removing hardware, and tearing off roofs, demolishing abandoned houses down to the foundations.
The Habitat volunteers along with some paid workers, often the unemployed and homeless, plan to demolish two vacant, dilapidated houses a week for the next two years as part of an agreement with the city. They also plan to refurbish or build eight houses this year.
International leaders of Habitat for Humanity, an organization more than three decades old, say their focus is changing to meet the demands of a changing economy. In cities where so many homes sit empty, the group is leaning away from building new houses and instead fixing up old ones, said Ken Klein, the vice chairman of the group’s board.Here’s how it works. Workers remove and sell reusable housing material rather than send it to landfills. Some homeless or unemployed people will be paid to work on the program, and money earned through the demolitions will go toward the organization’s longtime goal of getting poor families into new or rehabbed homes.
In recent years, about 100 of the organization’s affiliates around the country have done the same, removing recyclable items, like cabinets, floorboards, plaster and light fixtures, from condemned houses and, in a few cities, even razing some structures. New York Times
Many of the houses are larger than Habitat for Humanity’s size limits. There is no point in restoring a larger house that someone in need could not afford to maintain or heat. And then many of them are just not habitable – too far gone.
These days instead of proudly standing in front of a completed home, the Habitat workers stand proudly in all that is left, a foundation.
Shrinking cities, empty neighborhoods and abandoned houses is a problem endemic throughout the Midwestern, older industrial towns. Its going to be a long road ahead for many of these areas.
Reuters reports that “Thornburg Mortgage Inc., a large and troubled provider of "jumbo" mortgage loans, on Tuesday said it may file for Chapter 11 bankruptcy protection.” Thornburg specialized in making mortgages above the conforming loan limit ($417,000 in most areas) to borrowers with good credit.
Now the jumbo mortgage market is less a large key player.
Same story different cover. Thornburg ran short of capital as investors stopped buying its loans. The company survived for a while through agreements to restructure, the altrernative being delaying paying its debts.
“The Santa Fe, New Mexico-based company has struggled with liquidity problems since the summer of 2007, when the value of mortgages on its balance sheet began to tumble. Thornburg later suffered a series of margin calls from its own creditors.”
A bankruptcy filing would make Thornburg one of the largest U.S. mortgage providers to seek protection from creditors since the housing slump began, joining rivals such as Washington Mutual Inc., and IndyMac Bancorp Inc. Reuters
With sources for jumbo financing drying up due to a lack of buyers on the secondary market, coupled with rising foreclosure of jumbo loans, the high-end luxury housing market will continue to show weak sales.
h/t: Calculated Risk