Loan Modifications Hit Credit Scores

Applying for a mortgage modification and being in a months-long trial period can devastate a home owner’s credit score.

Under the government plan, troubled borrowers can have their mortgage payments reduced to 31 percent of their pre-tax income. They are first put in a trial modification for several months to test whether they can meet the requirements of the new mortgage.

Borrowers who were previously current on their mortgages will see their FICO scores fall about 100 points while they are in the trial period, according to the Treasury Department. Borrowers who were previously late or missed payments will see their scores fall more, the government says.

The longer a borrower is in the trial period, the greater the impact on their credit scores, Once the modification is approved, the borrowers’ mortgage credit status will be listed as current and that should improve their scores, the Mortgage Bankers Association explains.

Even so, the delinquency remains on credit reports for up to seven years and can make getting credit for something else like a car difficult and expensive, borrowers report.

Source: CNNMoney.com, Tami Luhby (12/28/2009)

Animated Unemplyment Map

I thought this map was amazing to see.  Click the link to see.

 

http://cohort11.americanobserver.net/latoyaegwuekwe/multimediafinal.html

 

3 signs of the next real estate collapse

The latest bubble is about to burst, but this time it's in the commercial market. Here's how to see it coming.

By Katie Benner, writer-reporter

October 22, 2009: 10:16 AM ET

 

NEW YORK (Fortune) -- When the FDIC closed Chicago's Corus Bank last month, it may have signaled the beginning of the next shock to the banking system: commercial real estate defaults.

Corus, whose balance sheet was larded with bad construction loans, is just one of many banks that have a slew of this debt on their books. Refinancing the $2 trillion in commercial mortgages will be tough, as property values decline. And in this new age of cautious lending, few banks are willing to refinance loans.

"There is a lack of new debt," says Michael Haas, a real estate attorney at Jones Day. "There is a hesitancy to extend credit when there is a real possibility that the real estate may be worth less than it was a few years ago."

Now, in a situation eerily similar to the subprime crisis, the result is likely to be a wave of foreclosures and loan defaults that could, in turn, trigger a collapse in the market of the structured bonds backed by commercial real estate and construction debt. But when, and how bad will it be? Here are three indicators to watch.

1. Special Servicers

Firms such as LNR Property, CW Capital, and Centerline are tasked with unraveling the most troubled loans in a last ditch attempt to keep them from default. An uptick in business at these companies means more borrowers under duress.

Between April and August of this year, the value of commercial loans in special servicing doubled to about $50 billion, according to Trepp, a firm that tracks the commercial real estate market.

2. Big Projects

When rents and property values fall, apartment complexes, malls, hotels, and major projects financed during the bubble become more likely to default on their debt.

Fitch Ratings has identified several stressed loans that have been sliced and diced into billions of dollars in commercial mortgage-backed securities, including Tishman Speyer's $3 billion loan for its Stuyvesant Town-Peter Cooper apartment complex in Manhattan and a $4.1 billion loan secured by Extended Stay's hotels.

3. Regional Banks

Watch to see how banks such as Fidelity Southern and United Community Banks -- identified in a SunTrust Robinson Humphrey report as having a high proportion of noncurrent construction loans -- hold up over the next few months. Community banks were especially aggressive in originating commercial real estate loans, but they could still manage to avoid big problems.

"Medium and small banks have a lot of exposure to local building projects," says Chris Whalen, a bank analyst and co-founder of Institutional Risk Analytics. "They're forbearing or getting involved in their customers' business rather than taking losses. They're hoping they can hold out until values come back." 

 

Housing sale prices keep rising

by J. Craig Anderson - Oct. 21, 2009 12:00 AM
The Arizona Republic

The Valley housing market has settled into a pattern of mild price recovery, with the median sale price rising by a few thousand dollars in recent months, according to the latest Arizona State University report on same-home sales.

But the report's author warned area residents not to interpret his findings as proof that home prices have stabilized.

Professor Karl Guntermann, who published the most recent ASU Repeat Sales Index report on Tuesday, said there are signs that home foreclosures in 2010 could jolt the housing market out of its current state of relative calm.

"The worst appears to be past, but the large number of foreclosures likely to hit the market through 2010 makes it difficult to predict the direction of house prices with any certainty," said Guntermann, of ASU's W.P. Carey School of Business.

The ASU index continued to show a steady decrease in the gap between home-sale prices in 2009 and prices a year earlier.

In July, the most recent month covered by the index, home prices were down about 28 percent compared with July 2008, and the median sale price was $125,000.

The index showed steady improvement from June, when the year-over-year decline was 31 percent, and the median sale price was $122,000.

The same-home sales index, which compares prices of homes that have been sold multiple times since 1989, shows an uninterrupted run of year-over-year price decline that has lasted a record 29 months.

However, Guntermann said 2010 is likely to see that losing streak reach its end. With the year-over-year gap closing by 2 to 3 percentage points each month, it's likely the index will cross over into positive territory by the end of next year, he said.

 

Commercial Real Estate Debt Jumps Amid Soaring Delinquencies

By Sarah Mulholland

Oct. 19 (Bloomberg) -- Yields on bonds backed by hotel, shopping-center and skyscraper loans narrowed relative to benchmarks as U.S. programs help drive demand even as late payments soar on the underlying commercial real estate debt, according to Barclays Capital.

The gap, or spread, on top-ranked commercial-mortgage backed securities tightened 0.15 percentage point relative to benchmark swap rates to 6.25 percentage points for the week ended Oct. 15, Barclays data show. That compares with 10.15 percentage points in March, according to Barclays.

Demand for the bonds swelled as rising stocks buoyed investor sentiment and government programs helped further prop up prices of the debt. Rising delinquencies on commercial mortgages provide a “counterpoint to the rally,” Barclays analysts led by Aaron Bryson in New York wrote in an Oct. 16 report.

“The rally in cash CMBS continued,” Bryson wrote. “Better-than-expected earnings reports and strong economic data led to broad-based credit tightening and a further reduction of risk premia.”

Top-rated commercial mortgage-backed debt is trading at a price of about 84.70 cents on the dollar, up from 55.91 cents in mid-March, according to Merrill Lynch & Co. indexes.

Still, “the CMBS delinquency rate is on pace for a large jump,” Bryson wrote.

Commercial mortgages bundled and sold as bonds that are at least 30 days behind on payments rose 30 basis points to 5.42 percent for October, according to Barclays. About 36 percent of the loans hadn’t yet been reported for this month as of the report date. A basis point is 0.01 percentage point.

TALF Fading

The fourth round of the Federal Reserve’s Term Asset-Backed Securities Loan Facility, or TALF, is scheduled for Oct. 21. The Fed began lending against so-called legacy commercial mortgage- backed securities, or those sold before Jan. 1, in July as part of its effort to stimulate lending.

The Fed added newly issued commercial-mortgage backed bonds to TALF in June. No new bonds have been sold through the program.

The impact of TALF has “started to fade” as investors anticipate the start of buying under the U.S. Public Private Investment Partnership, a separate government program that also seeks to attract investors by boosting returns with taxpayer loans, according to Bank of America Corp. analysts.

“Legacy CMBS TALF is still in effect but demand does not seem strong enough, by itself to drive this sector significantly tighter,” the Bank of America analysts led by Roger Lehman in New York said in an Oct. 16 report.

Plunging Values

Unlike the TALF, the PPIP isn’t limited to securities carrying top-ratings and will finance the purchase of a broader swath of securities, including bonds that have had ratings cuts.

Spreads on some lower-ranked bonds have tightened on “at least the perception of PPIP buying,” according to the Bank of America analysts.

TALF loan requests to purchase legacy bonds will likely increase to around $2 billion for October, compared with $1.4 billion last month, according to Barclays. While the fourth round may be stronger than last month’s “disappointing” results, it will fall short of August’s $2.3 billion high, the Bank of America analysts wrote.

The government has made reviving the $700 billion commercial-mortgage bond market a priority as plunging property values and a pullback in lending threaten to derail an economic recovery. U.S. commercial real estate prices are down 40.6 percent from the October 2007 peaks, according to Moody’s Investors Service.

 

Recession-Proof Places for Working Retirees

Retirees who must return to work because their nest eggs have taken a major hit should consider places where it’s easiest to get a good job.

Forbes magazine analyzed cities to identify those where there is a strong job outlook—as well as plenty of sunny days. It also considered how pricey the housing market is and how high health costs are.

Here are its 10-best recession-proof cities to live in retirement:

1. Atlanta
2. Dallas
3. Tampa, Fla.
4. Houston
5. St. Louis
6. Austin, Texas
7. Las Vegas
8. Phoenix
9. Kansas City, Mo.
10. San Antonio

Source: Forbes, Zack O’Malley Greenburg (10/15/2009)

Foreclosures: Down But Still Elevated

Mortgage foreclosure filings declined in September for the second-straight month, but September was still the third-highest monthly total behind July and August since real estate data firm RealtyTrac began keeping count in January 2005.

September filings were down 4 percent from August, according to a report released Thursday, but they were up 29 percent compared to August 2008. Third-quarter filings were 5 percent higher than the second quarter.

One in every 136 U.S. housing units received a foreclosure filing during the third quarter. "Bank repossessions, or REOs, jumped 21 percent from the second quarter to the third quarter, corresponding to jumps in defaults and scheduled auctions in the previous two quarters," James J. Saccacio, CEO of RealtyTrac, said in a statement.

Nevada’s foreclosure rate led the nation, followed by Arizona, California, Florida, Idaho, Utah, Georgia, Michigan, Colorado, and Illinois.

Unemployed homeowners are driving the increase.

Source: Reuters News, Julie Haviv (10/15/2009)

Economists Predict Housing Recovery

Economic forecasters predict that 2010 will be the first year since 2005 for housing to contribute to the growth of the U.S. economy, according to a survey released by the National Association for Business Economics.

Home prices are expected to rise 2 percent next year, but forecasters don’t believe the increase in prices will discourage homebuyers.

More than 80 percent of economists surveyed by the NABE think the recession is over and recovery has begun, but they expect the expansion to be slow because unemployment persists.

Source: Associated Press, Mae Anderson (10/12/2009)

BoA Struggles With Loan Modifications

Bank of America could collect about $6 billion if it meets the deadline set by the federal government to help struggling borrowers for the Making Home Affordable program.

But the Treasury Department released a report last week that showed that only 11 percent, about 95,000, of Bank of America’s delinquent borrowers who are potentially eligible for the program have been given a loan modification. That puts Bank of America at the bottom of the list of major banks involved in the program.

"We're sure working hard," said Ken Scheller, senior vice president for home retention at Bank of America, when asked about his company's low success rate. "We don't want to be down there."

There appear to be multiple problems, not the least of which is that many of the employees handling the modifications are completely new to the business. Angry investors complicate the issue, with 15 percent of them demanding that the bank get their approval for every single case.

Source: Washington Post, Renae Merle (10/12/2009)

'Foreclosure aid' firms to pay fines

Oct. 14, 2009 12:00 AM

The Arizona Attorney General's Office has reached settlements with two Valley "foreclosure help" firms it filed complaints against this year as part of the national "Operation Loan Lies" crackdown on mortgage fraud.

Richard Winer, principal of the firm Taken Care of Investments, has agreed to pay fines totaling $691,000, half of which goes to consumers who lost money to the firm, according to a Maricopa Superior Court consent judgment.

In March, the Attorney General's Office filed a complaint alleging Winer and his businesses defrauded 270 Arizona homeowners in danger of foreclosure by promising to obtain the deed to their home and then lease it back to them. Instead, homes were sold to investors who usually evicted homeowners. Winer is consenting to pay the fine without admitting guilt.

Glendale-based Hope for Homeowners Now and its principals, Matthew Castaneda and Michael Winding, have been ordered to pay almost $580,000 in fines, according to a default judgment filed in Superior Court. In July, the Attorney General's Office filed a complaint against Hope for Homeowners Now alleging the company solicited an upfront fee of $3,195 from homeowners by discouraging them to work with non-profits that provide loan-modification help for free.

Home Buyer's Fair on Saturday

The Arizona Mortgage Lenders Association is teaming with some government housing agencies to hold the Home Buyer's Fair 2009 on Saturday. The free event offers help with the $8,000 tax credit for first-time buyers, buying a home with no money down, credit repair, qualifying for a mortgage and buying a foreclosure home.

The Mortgage Lenders Association is working with the Phoenix office of the Department of Housing and Urban Development, Consumer Credit Counseling and housing agencies to put on the event, which starts at 10 a.m. at the Glendale Renaissance Hotel. Details: azmortgagelenders.com.

Executives shuffle at brokerages

Some shuffling at the Valley's residential brokerages. Dominic Scappaticci has left Russ Lyon Sotheby's Phoenix office to be president of Phoenix-based Realty Executives. John Foltz, Realty's former president, will become president emeritus. Russ Lyon Sotheby has named Glenn Niere chief executive and Deems Dickinson president. Phoenix-based Russ Lyon merged with Equitable Real Estate last year.

 

Commercial real estate to drive U.S. bank failures

Mon Oct 12, 2009 5:32pm EDT

 

By Elinor Comlay - Analysis

NEW YORK (Reuters) - The next big headache for banks is likely to be commercial real estate and analysts expect big losses and another wave of bank failures to result.

Banks held about $1.7 trillion in commercial real estate loans at the end of September, according to Federal Reserve data, or about 15 percent of their total assets. But to the extent these loans weaken, small banks are likely to be hit the hardest because larger banks are better diversified.

The banks that analysts say could risk big losses include Salt Lake City's Zions Bancorp (ZION.O), Columbus, Georgia- based Synovus Financial Corp (SNV.N) and Dallas-based Comerica Inc (CMA.N).

But it is not just earnings that are at stake -- bank failures could surge in the coming quarters.

"The serenity of the quiet closure of two to three banks per week is soon going to come to an end," said George Ball, chairman of Sanders Morris Harris Group, an investment bank and investment adviser, in Houston.

Banking regulator the Federal Deposit Insurance Corporation had 416 banks on its watch list of problem banks at the end of the second quarter and veteran analyst Dick Bove at Rochdale Securities expects another few hundred will fail in the next few quarters.

The FDIC closed Chicago-based Corus Bank on September 11, following losses on commercial real estate and condominium developments in Arizona, California, Florida and Nevada.

At Warren Bank in Michigan -- closed on October 2 by the FDIC -- almost 40 percent of its $395 million in total loans were in commercial real estate.

"Real estate lending has long been the specialty of Warren Bank," the company still claims on its website.

Analysts are worried banks such as Corus and Warren Bank may be just the first of a coming wave of bank failures due to commercial mortgages.

Banks have been slow to recognize losses from commercial mortgages to forestall posting big losses, preferring to alter loan terms in the hope an improving economy will keep the loans from heading south, a phenomenon widely known as "extend and pretend."

"It takes a long time for an actively rented commercial real estate space to get to a point where a bank can't be flexible in terms of conditions and has to start writing it down," said Tom Mitchell, analyst at Miller Tabak & Co.

Banks may set aside larger amounts of money to cover losses in the fourth quarter, when banks consult with auditors over their results, Mitchell said.

When commercial real estate makes up a large portion of a bank's balance sheet, the bank is at risk of being forced to set aside much more money for losses.

At Zions, commercial real estate accounted for almost 35 percent of its $41.6 billion in loans at the end of the second quarter, while Synovus had almost 28 percent of its $28 billion loan portfolio in commercial real estate. Comerica's commercial real estate loans made up about 22 percent of its loan portfolio.

But while regulators stepped in to prop up large banks suffering from residential mortgage losses, they are not expected to help out small regional banks suffering commercial real estate losses since these are not seen as a threat to the wider financial system.

"The system will survive but with more cuts and bruises. We're going to see quite a lot of consolidation," said Marshall Front, chairman of Front Barnett Associates in Chicago.

"It's not pretty and there's not a lot of relief out there for these banks."

(Reporting by Elinor Comlay; editing by Andre Grenon)

 

 

 

Experts: Plummeting prices have rendered condos nearly worthless

Experts say changes to FHA-backed loans could force some unfinished buildings into foreclosure

 

 

by J. Craig Anderson - Oct. 9, 2009 03:02 PM

The Arizona Republic

 

 

New federal loan-guarantee rules imposed to fend off future government losses from plummeting condominium prices have rendered condos utterly worthless, Valley real-estate experts said.

 

The Federal Housing Administration rules, which took effect Oct. 1, prohibit any new FHA-backed loans on condo units in projects that include more than 25 percent commercial space.

 

In addition, no single investor - including the developer - may own more than 10 percent of the units in a particular project. That particular restriction alone creates a catch-22 from which condo builders most likely cannot escape, said mortgage originator Jill Hoogendyk of Wallick & Volk in Glendale.

Another rule that has sellers and brokers scratching their heads prohibits FHA loans in condo developments that aren't "primarily residential," which could be taken to mean the FHA won't guarantee loans in future mixed-use projects.

 

"I'm predicting that what we'll see is whole condominium complexes sitting empty," Hoogendyk said.

 

The new rules are a reaction to substantial losses on federally insured condominium mortgages in the past year, government officials have said. In Maricopa County, condominium foreclosures have outpaced condo-unit sales by nearly two to one since Jan. 1, according to real-estate analyst Zach Bowers of Ion Data in Mesa. According to Bowers, lenders foreclosed on about 8,200 condo units between Jan. 1 and Sept. 30, compared with about 4,900 units sold during the same period.

 

"It's been pretty much consistent throughout the year that no one's buying condos," Bowers said. "The whole market seems to have stagnated."

 

The new restrictions won't directly affect high-end, luxury condos that sell for more than the Federal Housing Administration's roughly $350,000 lending limit, but Hoogendyk said FHA loans are by far the most commonly used loan among condo buyers. Without that option, buyers would have to obtain conventional loans, which are more expensive and difficult to qualify for, or they would have to pay cash.

 

Hoogendyk said the FHA rules amount to a death sentence for the Phoenix-area condo market, which had only been kept on life support by the continued availability of FHA loans.

 

Creating a special restriction that only applies to one type of housing is discriminatory, local critics said, and it punishes existing condominium owners by making their properties nearly impossible to sell.

 

"They'll lose everything," Hoogendyk said, "And quite honestly, they'll move just because they're afraid to live there."

 

Bowers said there are Phoenix-area condominium projects in which only a handful of buyers purchased individual units. The only viable use for such projects would be renting the unsold units as apartments, which many condo building owners already have been doing.

 

However, most have continued trying to sell units, hoping to eventually sell out as the real-estate market recovers. Because of the new rules, local and national experts seem to agree that owner-occupants in half-empty condo buildings are now practically doomed to foreclosure. Hoogendyk said the last thing Arizona's real-estate market needs is government decisions that hinder its recovery.

 

"They should be making it more attractive to buy condos, not less," she said.

 

Valley landlords face new reality

by Catherine Reagor - Oct. 11, 2009 12:00 AM
The Arizona Republic

Renting out homes has long been a profitable enterprise for many Valley landlords.

The business model was simple: Buy a home. Rent the home for at least the monthly mortgage payment. And when you decide to sell the home, enjoy the Valley's reliable appreciation in home prices.

That model fell apart amid the housing-market crash. Landlords, like everyone else, saw home values plunge. Rents fell. Many landlords who bought when prices were high now struggle to charge tenants enough to cover their mortgage payments. And this year, as foreclosures mounted, homes were snapped up by investors and turned into inexpensive rentals.

Suddenly, the landlord business has changed. Competition for tenants is increasing as more homes become rentals. Apartment owners are lowering rents, offering free utilities or a month's free rent, eliminating security deposits and credit checks.

This is the third in a periodic Republic series on how different segments of the housing industry are reinventing themselves to work toward a recovery. The new reality for Valley landlords is still taking shape. Longtime landlords slammed by the housing crash find they have to settle for less income, take more risks on tenants' reliability and try to keep their properties out of foreclosure. New landlords see opportunity in the low housing prices.

There is no way to count the number of different types of landlords in the Valley. There are people who own a number of houses as their primary source of income. Other people buy one or two rentals to supplement their income and sell later for retirement or a college fund. Some landlords are local. Others are out-of-state investors. Some landlords manage their own properties. Others pay a fee and turn them over to property management firms.

What they all share now is a rapidly shifting landscape and no clear solution yet as to how to re-establish that simple business plan. And that may not be possible until the housing market in general stabilizes and the variables in making money through rentals also settle.

Those variables include how much to charge for rent to stay competitive, the costs of maintaining properties and the challenges in dealing with problem renters.

Competition

Among many things that have changed for landlords is the level of competition for reliable tenants.

Because of the economic downturn, more people are losing jobs and unable to always pay their rents. Record foreclosures and rising bankruptcies in the Valley also mean more renters with less-than- stellar credit records.

More foreclosures does mean more people who have lost homes turn to renting. But supply still exceeds demand as the number of new homes for rent and vacant apartments is still larger than the pool of tenants.

So landlords are lowering rents to attract tenants. At the same time, apartment owners are lowering rents, giving away flat-screen TVs, iPods, scooters or a month of free rent.

Rent rates used to be a function of covering mortgage payments for many landlords. More downward pressure on rents comes now from people who recently paid cash for inexpensive foreclosure homes and can ask for less in rents. With Valley home prices down 50 percent from 2007, longtime landlords are feeling the pinch.

Rents on Valley homes are now down 10 to 25 percent from last year, depending on the area, landlords say. The drop in rents means many longtime landlords can't cover their mortgages anymore.

David Gudmundsen is offering new tenants $50 off their rent for six months in his 20 Valley rentals.

"The rental market really got tough, probably because apartments are giving away the farm to get tenants," said Gudmundsen, a real-estate broker with S.J. Fowler/GMAC Real Estate. He purchased most of his rental properties during the past two years. Gudmundsen is a longtime Valley landlord who owned 80 rentals in metro Phoenix during the late 1990s but sold them before the market's downturn in 2007. Homes with rents below $1,500 a month are now the most popular in the Valley.

"Just look at Craigslist or other online sites that list rentals. There's a lot of Valley homes for rent priced below $1,500," said Mike Sargent, a former executive with a high-tech firm who became a Valley landlord after the dot-com crash. "That's what most people can afford now."

Sargent recently dropped the rent on a Chandler home with a pool to $1,195. In 2002, the rent was $1,795.

"Everyone is dropping their rents now," said Dean Wegner, a Valley mortgage broker and landlord, who is president of Arizona's Independent Rental Owners Council. "It's not only about getting tenants; it's about keeping those who can pay."

To keep a tenant, Wegner recently dropped the rent $100 on a north Phoenix home with a swimming pool to $850.

In the Valley's current housing market, rental homes can sit empty for months. Cutting rents means lost income for landlords but perhaps less than losing several months of rent in a row.

"My business partner and I pay close attention to our renters, and we have been lucky," said Phoenix City Councilman Tom Simplot, who owns five central Phoenix homes. "We lowered rents 20 percent this year because we want to keep our tenants."

One place tenants can go if they choose to leave is sometimes to a nicer house down the street that was lost in foreclosure, purchased and turned into a rental for monthly payments well below recent mortgage payments. This is especially common in the newer neighborhoods that have been hard hit by foreclosures.

There's no exact figure on how many Valley homes have been turned into rentals, because some buyers don't disclose their intentions on property records.

As many as half of the 50,000 foreclosure homes to be sold by lenders in 2009 have been purchased by investors, according to property records and market watchers. Many investors are renting out the houses until home prices climb again and they can sell for a profit.

It's a renters market now, and most landlords must drop prices to fill their homes, even if they lose money on the deals.

Maintenance

Another variable in the cost of doing business for a landlord is property maintenance and fixing damages caused by tenants.

Before the housing and economic crash, rental rates were rising with home prices. As rents drop, longtime landlords lose money on rents and lose the extra cash to maintain homes.

Landlords used to be able to charge tenants deposits equaling one or two months of rent, as well as non-returnable cleaning and maintenance deposits. But since the crash, many renters don't have the extra cash for big deposits. And landlords have less leverage to ask.

The competition for tenants forces some landlords to drop required security deposits, which, combined with declining rents, makes it harder to cover regular wear and tear on a home or those unexpected expensive repairs. In some cases, landlords are even skipping credit and criminal background checks, which can lead to problem tenants.

"Landlords are lowering the bar on screening tenants and taking deposits," said Margie O'Campo De Castillo, a Valley real-estate agent and landlord with two rental homes. "Homes are being wrecked, and landlords stuck with big cleanup fees. It's hard to make money on rentals now."

A friend of De Castillo has a Phoenix rental home that was recently vandalized by tenants. The friend will lose several months rent and spend thousands of dollars on repairs.

Michael Rhone lives in California and is a partner in seven Valley rental homes. He received a call from a Valley police department a few months ago about a possible meth lab in one of his rentals. "I had to fly in and deal with that. There wasn't a meth lab, but tenants were involved in other illegal activities"

Rhone said the house is "trashed" and he's thinking about letting it go into foreclosure instead of spending the money to fix it up because he's already losing so much money and can't sell for a profit now.

Just as some homeowners caught in foreclosure strip or vandalize their homes, the same thing can happen with tenants. According to Valley landlords, more renters are wrecking or stealing appliances and fixtures because they're being evicted for not paying rent or because the home fell into foreclosure and they have to leave.

Sargent, who is co-owner of the property-management firm HomeLovers, said in today's rental market, a landlord should have enough money to cover half a year of mortgage payments in case they can't collect rents, have to fix homes or pay legal fees for evictions.

Despite the competitive pressures upon landlords, Sargent warns landlords to still be prudent. "Don't forgo deposits just to attract a renter," he said. "Renters must have some skin in the game now."

Collecting rents

Before the economic downturn, fewer Valley residents were struggling to pay their bills. Now more renters, like homeowners, are falling behind on their bills each month.

So landlords sometimes have to find ways to keep a steady flow of payments coming in.

"I know not everyone has perfect credit and everyone makes mistakes, so I won't do background checks," said Elaine Balderas, who owns four south Phoenix rental homes. She drives by her properties every Sunday to check on them and usually collects rent on one of those trips.

"I can't charge ridiculous deposits," Balderas said. "But I want to see a recent pay stub, and I want them to look me in the eye and tell me they will pay."

Julie Bieganski has had rental homes in the Valley for the past decade. She recently rented out a former foreclosure home in north Phoenix for $850 a month.

"You could get $900 a month in that area," she said. "But the tenants are great, and their employer cuts me a direct check for the rent and it goes in my account as a direct deposit. This way I don't have to chase around for the rent."

When tenants stop paying rent, landlords have to decide whether to evict them and potentially go months without income or try to work out a deal hoping they'll catch up on their monthly payments.

One of O'Campo de Castillo's longtime renters recently lost his job and was going to move out.

"I told him, 'Wait, we all are struggling now. Stay put. You need a home. Let's give this a month or two,' " she said. "He is now paying his full rent again. It's much better to lose some money for a few months than have the home empty or look for another good tenant in this market."

More landlords are now faced with evicting tenants for not paying. It can be a costly legal process involving hiring a lawyer, filing court documents and paying to store anything they leave behind.

Rhone said three of his renters are behind on their payments. He is in the process of evicting one and is considering going through the legal process to have that tenant's wages garnished to pay back rent.

When Gudmundsen had to evict a woman from one of his rental homes, she left almost all of her belongings. Under Arizona law, Gudmundsen had to give her more than a month's notice to collect her belongings.

He had to pay to have them stored and pay for a public notice announcing they would be sold if she didn't collect them.

To save money, Balderas skips formal eviction processes with her tenants, because she doesn't have them sign leases.

Instead, Balderas has tenants sign an agreement stating when rent is due, and if they don't pay, they have a month to vacate. To evict, she pays $37 to take them to small-claims court.

Earlier this year, she had to evict a tenant who hadn't paid rent for a few months because she lost her job. "It wasn't fun, and she (the tenant) tried to beat me up," Balderas said. "But she's out, and I found a better renter."

Opportunities

Despite the downward pressure on Valley rents, the housing market's downturn is enticing more people to become landlords or to expand their portfolio of rentals.

Landlords who can afford to buy Valley homes now, maintain them and hold on to them for several years are setting themselves up for the market's recovery.

"Investors need to have a strategy if they want to buy rental homes now," said Beth Jo Zeitzer, president of R.O.I. Properties. Balderas is looking for more rentals to buy but only in south Phoenix. She looks only at brick- or block-built homes that her husband can fix up.

Landlords are also seeking out people for whom renting is a good option.

"When I talk to renters who have recently lost a home to foreclosure, I usually find their mortgage was twice what I am asking in rent," Gudmundsen said. "Unfortunately, a lot of folks are losing their homes to foreclosure. Those people need places to rent."

 

Worst may be over for housing in the Valley

Signs of recovery starting to surface on the outskirts

by Catherine Reagor - Oct. 10, 2009 12:00 AM
The Arizona Republic

Valley homeowners have watched their property values plummet with a sense of shock and horror during the past year. But the gut-wrenching drop could be over as early signs of the market finally hitting bottom have appeared in some areas.

On Sunday, The Arizona Republic's latest Valley Home Values report will show prices dropped in every Phoenix-area ZIP code during the first eight months of 2009. A closer look at the numbers, though, reveals newer communities on the outer edges of metropolitan Phoenix are seeing smaller declines in home prices this year compared with 2008.

Those areas, including neighborhoods in Buckeye, Gilbert, Queen Creek and Surprise, were the first to experience the housing market's collapse. Those former housing hot spots could be the first to recover. Older areas closer to downtown Phoenix, including many central Phoenix neighborhoods, suffered the biggest home-price hits this year.

Most of these areas were the last parts of the Valley to see housing values tank, but they could bounce back more quickly because many of the neighborhoods are popular with people who want to live closer in.

Positive signs

And there are signs the Valley's housing market has begun to inch toward a recovery.

Foreclosures have dropped during the past two months. Home sales are well ahead of last year's pace. Home prices are slowly ticking up.

"Valley home prices hit bottom in April," said Mike Orr, who publishes the "Cromford Report," a daily analysis of metropolitan Phoenix's home-sales data. "Foreclosures have peaked. The market is struggling to establish a clear direction."

Orr said the Valley's affordable-housing markets, especially those farther out, are seeing gains in home prices now.

But prices continue to fall in the most expensive neighborhoods.

The latest figures on foreclosure rates, home sales and home prices may be early indicators the housing market is starting to come back.

Foreclosures

Valley foreclosures fell 29 percent in September from the record 5,300 reached in July. Pre-foreclosures were also down last month, but there were still 7,857 homes that lenders started to foreclose on.

This is the key gauge of the health of metro Phoenix's housing market.

As long as lenders continue to foreclose on Valley homes and resell them for half of what they sold for a few years ago, home prices will fall.

Check out the foreclosure-resale chart in Sunday's Valley Home Values package to see how many foreclosure homes sold in your neighborhood this year.

Home sales

In June, Valley home sales buoyed by foreclosure-home resales rivaled monthly records set during the boom years. Although sales have slowed a little in the past few months, 85,000 homes have sold across metro Phoenix so far this year. That's 50 percent ahead of last year's pace.

There's a positive indicator in the slight drop in recent home sales. Fewer of the sales are foreclosure homes.

Earlier this year, foreclosures homes accounted for almost 70 percent of all Valley home sales. Slightly less than half of the home sales in September were foreclosure homes.

Home prices

The median price of a Valley home has ticked up to $135,000 after falling to a 10-year low of about $120,000 six months ago.

The current median is half of what the record median high price for the market was in 2006, but it is heading in the right direction. Valley home prices started falling in mid-2007 but didn't plummet until late in the year when lenders placed thousands of foreclosure homes on the market all at once and began accepting low-ball offers.

The supply of foreclosure homes for sale in the Valley has also fallen, another good sign for the market. There currently are about 4,500 foreclosure homes listed for sale, compared with more than 20,000 in February.

The federal government's plan to push more lenders to restructure the mortgages of borrowers facing foreclosure could help ensure foreclosures don't soar again.

A full recovery isn't imminent, but the latest signs suggest the Valley's housing market is beginning to pull out of its nose dive.

 

 

Banks Making Short Sales Tougher

Banks are backing away from short sales, forcing sellers to pay extra at closing or demanding a promissory note for the amount due. One-third of borrowers owe more on their mortgages than their properties are worth, according First American CoreLogic.

When their situations were really tough, most banks preferred short sales because they were their best opportunity to get the most money back. But with an improving economy, and because the losses on many of these properties have already been written off the books, banks are increasingly reluctant to negotiate a short sale.

Today, banks demand 9.5 weeks to respond to a short-sale request, compared to 4.5 weeks a year ago, according to research firm Campbell Communications. Their reluctance is frequently stymieing sales and frustrating real estate practitioners.

"It drives me up a wall," says Robert G. Hertzog of Summit Home Consultants in Phoenix. "[The bank is] holding my client hostage."

Source: BusinessWeek, Christopher Palmeri (10/09/2009)

Office Vacancy Rates Still Soaring

The U.S. office vacancy rate rose another 0.5 percent in the third quarter, reaching 16.5 percent, a five-year high, according to research firm Reis Inc.

Effective rent fell 2.2 percent from the second quarter to $22.91 per square foot and was down 8.5 percent compared to the third quarter of 2008.

Effective rents fell in 68 out of 79 markets in the third quarter. Markets such as San Diego, Seattle, Boston, San Jose, Orange County, and San Francisco all had double-digit year-over-year effective rent declines. The vacancy rate for New York, the largest U.S. office market, rose 0.6 percentage points to 11.4 percent with effective rent falling to $47.16 per square foot, down 4.4 percent.

Further declines are likely nationwide, said Victor Calanog, Reis director of research.

"At some point they will need to lower asking rents significantly in order to bring prospective tenants in the door, even before talks about concessions are initiated," Calanog said. "We have yet to observe clear, systematic evidence that the office market is bottoming out and has begun to recover."

Source: Reuters News, Ilaina Jonas (10/07/2009)

A Historic Time to Buy

Young people just starting to invest and buying their first homes are potentially the winners in this recession.

First-time homebuyers, most between the ages of 25 and 45, accounted for about 45 percent of home sales from January through July 2009, according to the National Association of REALTORS®

"This is a historic time," says George Jaramillo, a 35-year-old business analyst in Atlanta, who recently bought three homes, two of them foreclosures. "It's a great opportunity to make some great gains in the future."

A study by investment company T. Rowe Price points out that investing when prices are low can result in amazing gains. For instance, between 1970 and 1990, the annualized rate of return for the S&P 500 was 11.5 percent.

"We need to be shouting from the rooftops that this is not the time to get out of the market if you're young," says Christine Fahlund, a senior financial planner with T. Rowe Price. "This is the time to be in the market."

Source: The Associated Press, Chip Cutter (10/05/2009)

No improvement seen for retail real estate

David Woodfill, Tribune

October 1, 2009 - 5:02PM

 

Store closings will continue to outpace openings and rents will persist in a downward spiral, driving some shopping centers into foreclosure as the Valley's job market continues to shrink.

That's the grim assessment of the Valley's retail sector from Marcus & Millichap Real Estate Investment Services. The firm's third-quarter Retail Research Market Update said woes in the Valley's retail real estate sector will persist for the remainder of 2009.

Although job losses slowed in the second quarter, those losses will still continue, prompting consumers to hold firmly onto their wallets. The Valley has shed jobs at twice the national rate since the economy went south, according to the report.

"We're seeing everybody in the economic chain around retail properties just being hammered by all these different occurrences," said Sanford Burstyn, a Marcus and Millichap retail broker.

Researchers at the firm forecast that the overall job market will shrink 5.8 percent this year, or by 104,000 workers. Last year, the job market shrank by 111,200 jobs.

Those losses and the persistent woes in the residential real estate market will drive rents down 7.3 percent from last to $15.84 per square foot.

The report went on to say that although the amount of newly constructed retail space in 2009 is expected to fall from 7.2 million square feet in 2008 to 2.9 million square feet in 2009, vacancies will keep creeping up as landlords struggle to replace closing stores. It said the threat of more Bashas' closures "could impact valuations considerably among neighborhood centers anchored by Bashas' and Food City stores." Bashas' recently entered Chapter 11 bankruptcy.

According to the report, the Mesa, Chandler and Gilbert submarket has the highest vacancy rate in the Valley at 12.6 percent. That will only increase as nearly 1.2 million square feet of space under construction starts to come online.

Retailers are struggling to make current rent payments due to rising unemployment and an ongoing retrenchment in retail sales. Sales dropped about 12 percent in the last year.

Because of a glut of space and less demand, rents are coming down and owners aren't able to make mortgage payments, Burstyn said.

"If they're not able to renegotiate those with the lenders or come up with more money ... then those deals are going to get foreclosed on and get recycled out into the market," he said.

Burstyn said this scenario has been playing out across the Valley for about a year now.

"It's really unprecedented, and it's continuing because we're seeing tenants who came back and renegotiated leases and are coming back a second time," he said.

"It's not like the tenants are trying to hurt the landlords," he added. "They're just reacting to the lack of consumer spending that's impacted from job loss and credit restraints."

Burstyn said foreclosures will hit two categories of owners, those who bought at the top of the market or put maximum debt on the properties.

Bob Kammrath, a Phoenix real estate expert, said he expects that about half of those owners who financed shopping centers over the last five years or so will lose their properties to foreclosure.

That includes those who took out loans to acquire existing shopping centers.

"And the reason of course will be because values are falling and the loan was based on a ratio of probably an appraised value at that time," he said, adding that it isn't surprising to find properties going for 50 cents on the dollar.

Retail vacancy rates

1. Mesa/Chandler/Gilbert, 12.6 percent

2. Northwest Phoenix/Glendale, 11.3 percent

3. Central Phoenix/Northeast Phoenix/South Scottsdale, 10.6 percent

4. Tempe/South Phoenix, 10.1 percent

5. North Scottsdale/Paradise Valley, 10.1 percent

6. West Phoenix/ Southwest Valley, 10 percent

 

Source: Marcus & Millichap

 

Recession Rising Like Phoenix With Area Delinquencies Surging

By Brian Louis

Oct. 1 (Bloomberg) –

Drive up to the Peaks Corporate Park in north Scottsdale, Arizona, and the only person you’ll encounter at the luxury office complex is a security guard.

The development was planned to offer executive suites with views of the McDowell mountains, neighbors such as General Electric Co. and a location just minutes away from Jack Nicklaus’s Desert Mountain golf courses. Plans to lure tenants haven’t materialized and today the complex in this city next to Phoenix is empty, the entrance blocked by a traffic barricade.

Delinquencies in the Phoenix area on loans backed by office, industrial, retail and apartment properties have risen more than five-fold since March, according to data compiled by Bloomberg. The Phoenix region has the second-worst U.S. delinquency rate, behind Detroit’s 10 percent. In Phoenix, the economic recovery looks a lot like a recession.

“A commercial recovery in markets that are heavily dependent on construction will be slow, which means the overall recovery will lag the nation as a whole,” said Susan Wachter, a real estate professor at the University of Pennsylvania’s Wharton School in Philadelphia. “These are more volatile markets and getting back to normal could take years.”

Phoenix and other southern and western cities such as Atlanta, Houston and Dallas grew because they offered an affordable lifestyle to middle-class Americans, said Edward Glaeser, an economics professor at Harvard University in Cambridge, Massachusetts. That growth has slowed.

Slowing Growth

The Phoenix area’s population is forecast to increase 1.6 percent in 2009 from 2008 and 1.8 percent in 2010, according to a forecast by Scottsdale, Arizona-based real estate and economic consulting firm Elliott D. Pollack & Co. That’s the slowest growth since at least 1990. Employment may fall 6 percent in 2009 and another 1 percent in 2010, according to the firm.

The real estate crisis has brought economic growth to an end. Arizona had the highest unemployment rate since 1983 in July at 9.2 percent, according to the U.S. Bureau of Labor Statistics. The rate fell to 9.1 percent in August. Single- family building permits in metropolitan Phoenix may fall to 5,973 this year, down 81 percent from 2007, according to a consensus forecast of real estate and consulting firms and universities compiled by Arizona State University’s W.P. Carey School of Business.

“The economy in Phoenix is in tatters right now,” said Matthew Anderson, a partner at Foresight Analytics LLC in Oakland, California. “It’s now really hit the skids.”

The decline demonstrates that it may take even longer for states with slower growth to emerge from the recession.

Rising Unemployment

In August, 19 states had higher unemployment rates than Arizona’s, U.S. Bureau of Labor Statistics show.

Worse, more real estate is at risk of defaulting throughout the U.S. Investors in commercial mortgage-backed securities are holding assets with a delinquent unpaid balance of $28.9 billion, up more than five fold since June 2008, according to a report issued by the Congressional Oversight Panel. Under a worst-case scenario, the panel estimates that commercial real estate and construction loan losses through 2010 may total $81.1 billion at 701 banks with assets of $600 million to $80 billion.

“The problems in commercial real estate are just getting started and they will dampen what is already going to be a weak economic recovery,” said Jim Rounds, senior vice president and senior economist at Elliott D. Pollack. “In Arizona, the recession is probably going to last to the middle of the next calendar year.”

Growth Fallout

Wachter, who has been studying housing markets for more than two decades, predicts that Phoenix won’t see a recovery until at least 2012.

The city of Phoenix is suffering the fallout from growth that boosted its population from 983,403 in 1990 to 1.6 million in 2008, according to the Census Bureau. Single-family building permits in Maricopa County, which includes Phoenix, rose more than five-fold from 1975 to the peak earlier this decade.

Delinquencies for loans backed by office, industrial, retail and apartment properties that were bundled into securities in Phoenix increased five-fold since March, according to data compiled by Bloomberg.

The Phoenix office vacancy rate probably exceeds 30 percent, including space that’s leased yet vacant because the tenants have pulled out, Rounds said.

More offices are becoming available. Los Angeles-based commercial broker CB Richard Ellis Group Inc. said in a second quarter report 2.2 million square feet will be ready for occupancy this year and in early 2010.

Late Payments Rise

As tenants abandon space, landlords are struggling to meet their obligations. Commercial properties with mortgage payments 60 days late or more rose to 8.5 percent as of August in the Phoenix, up from 1.6 percent in March, data compiled by Bloomberg show.

“The commercial markets are the second shoe to drop,” said Marshall Vest, the director of the Economic and Business Research Center at the University of Arizona’s Eller College of Management in Tucson. Vest has lived in Tucson since 1970 and worked at the business school studying and forecasting the Arizona economy for 30 years.

For the last three decades, Arizona’s population growth has exceeded most of the nation’s. From 1970 to 2007, the state’s population more than tripled to 6.3 million. Its population growth ranked second or third in the U.S. from 1970 through 2008, according to Pollack data.

Onetime Growth Engine

The state was also an engine for job growth. Arizona was fourth in the U.S. in employment growth from 2000 to 2008 and second from 1990 to 2000. Arizona’s gross state product, a measure of overall economic activity, jumped to $249 billion last year from $30.3 billion in 1980.

Residential construction soared from 1980 to 2005, the peak of the new-home market boom in the state. Single-family building permits rose from 22,919 in 1980 to 87,415 in 2005, according to data on Texas A&M University’s Real Estate Center Web site.

The fallout can be seen throughout the Phoenix. Completed and empty office buildings and retail developments dot the desert landscape of the region, the 12th-largest metro region in the U.S. Vacant retail shops are hard to ignore.

‘Going Under’

“It’s kind of going under locally,” said Chris Dellrie, who was working at Axis Sports, a sporting goods and clothing store, one of at least two businesses open in a Gilbert shopping center that’s mostly empty.

The slump forced Opus West Corp., one of the region’s biggest real estate developers, to file for Chapter 11 bankruptcy this year, listing debts of $1.46 billion and $1.28 billion in assets, according to bankruptcy records. Opus West is part of the Opus Group, a real estate developer based in Minneapolis.

“It’s really nothing out of the ordinary,” said Craig Henig, senior managing director at CB Richard Ellis in Phoenix. “They believed like everyone that the market would expand.”

At 24th at Camelback II, an 11-story, 300,000-square-foot office building going up in Phoenix near the Arizona Biltmore Country Club, developer Hines hasn’t preleased any of the space. The building will be finished in the first quarter of 2010, said Kim Jagger, a spokeswoman for the Houston-based real estate company. Jagger said there are at least half a dozen potential tenants.

‘Horrible Economy’

People who’ve moved to Phoenix and adjacent suburbs have found life difficult as the economy has slumped.

Ambre Mauro moved to Gilbert, a suburb of Phoenix, in March after struggling in Oregon.

“The economy was horrible there,” said Mauro, 25, who graduated from Brigham Young University-Hawaii with a degree in exercise sports science. “Eventually I decided to come here.”

Things aren’t much better in Arizona. Mauro now holds two jobs. She’s a personal trainer and front desk clerk at a local gym and a waitress at a Japanese restaurant, where she makes about $10 an hour, including tips.

“I have a four-year degree and I never expected to be a waitress,” Mauro said.

About 25 miles northeast of downtown Phoenix, the Peaks Corporate Park stands as a reminder of just how optimistic developers were about the region’s growth prospects.

Prestigious Neighbors

The office complex was built in one of the most prestigious and wealthy parts of the state, where the median price for a new home was $920,000 in the second quarter.

A Web site for the development boasts that it’s near several resort hotels including the Boulders, a Waldorf Astoria property, and “neighbors such as General Electric, Pacesetter, DHL, Taser, USF Bestways, Toll Brothers, Pulte Homes.” Dale Dowers, a principal with the developer, didn’t return calls or e-mails for comment.

With no tenants, the development’s courtyard is barren but for a sculpture featuring wildlife.

 

More Than Half of Modified Loans Back in Default

More than 50 percent of home owners whose loans were modified in the first six months of 2008 had fallen behind on their payments a year later, the federal Office of the Comptroller of the Currency and the Office of Thrift Supervision said Wednesday.

The situation could have been worse. One-third of borrowers whose monthly payments were reduced by 20 percent or more had fallen behind again with a year. But more than 60 percent of borrowers whose payments were left unchanged or increased fell behind.

The report covers 34 million loans, representing 60 percent of first mortgages on residences. More than 11 percent of all borrowers covered by the report had missed at least one payment in the first six months of 2009.

Source: The Associated Press, Alan Zibel (09/30/2009)

Guess Who's Ditching Their Mortgages

A study of 24 million credit files by national credit bureau Experian and consulting company Oliver Wyman has shown that home owners with high credit scores are 50 percent more likely to deliberately walk away from a mortgage than lower-scoring borrowers.

The industry calls these “strategic defaults” and their numbers grew to 588,000 in 2008, double the total in 2007, and well beyond most earlier estimates.

The study determined:

• Strategic defaulters tend to go straight from paying their mortgages dependably to not paying at all.
• Strategic defaulters are heavily concentrated in negative-equity markets like California and Florida.
• Two-thirds of strategic defaulters have only one mortgage.
• Most likely to default are home owners with large balances and the highest credit ratings.

Piyush Tantia, an Oliver Wyman partner and a principal researcher on the study, said strategic defaulters "are clearly sophisticated” and look on the decision to default as a business strategy. "Well, I'm $200,000 in the hole on my house, and yes, I'll damage my credit," Tantia says of defaulters.

Source: Washington Post Writers Group, Kenneth R. Harney (09/27/2009)

Consumer Confidence Is Down

Consumer confidence as measured by the Conference Board’s Consumer Confidence Survey declined to 53.1 in September, down from 54.5 in August.

The Conference Board, a private research group, said shoppers’ intentions to buy big-ticket items like homes, cars, and major appliances dipped because shoppers simply don’t have money to spend.

The index hit a historic low of 25.3 in February, rose from March through May, and then declined as joblessness paralyzed consumers. Readings above 90 means the economy is solid. Above 100 signals strong growth.

Source: The Associated Press, Anne D’Innocenzio (09/29/2009)

Signaling Confidence, Fed Holds Rates Steady

In an announcement that should bolster the housing industry, the Federal Reserve said Wednesday that it intended to keep key lending rates near zero "for an extended period" and continue to buy mortgage-backed securities and debt through March 2010.

That’s the second time the Fed has decided to stretch out its program to encourage spending and stimulate the economy.

Economists predict that the Fed will keep the key lending rate near zero into the first quarter of next year. Holding that rate low means that consumer loans, including mortgages, home-equity loans, and credit-card rates, remain at the lowest point in decades.

Greg McBride, senior financial analyst at Bankrate.com, warned that these low rates will eventually head higher and said home owners interested in refinancing should realize that "it could be a different story 12 months from now," with much higher rates for 30-year fixed-rate mortgages.

Source: The Associated Press, Jeannine Aversa (09/23/2009)

 

Thank You,

Russell Gould

REALTOR®

StoneCrest Properties, LLC

(480) 215-4555  Direct

(480) 899-4262  Office

(480) 452-0264  E-Fax

 

 

NAR: Existing-Home Sales Fall

Existing-home sales in August gave back some of their strong gain in July but remain above year-ago levels, according to the National Association of REALTORS®.

Existing-home sales—including single-family, townhomes, condominiums and co-ops—declined 2.7 percent to a seasonally adjusted annual rate of 5.10 million units in August from a pace of 5.24 million in July, but remain 3.4 percent above the 4.93 million-unit level in August 2008. In the previous four months, sales had risen a total of 15.2 percent.

Lawrence Yun, NAR chief economist, says the tax credit is working. “Home sales retrenched from a very strong improvement in July but continue to be much higher than before the stimulus. The first-time buyer tax credit is having the intended impact of bringing buyers into the market, allowing them to take advantage of very favorable affordability conditions,” he says. “Some of the give-back in closed sales appears to result from rising numbers of contracts entering the system, with some fallouts and a backlog contributing to a longer closing process, but the decline demonstrates we can’t take a housing rebound for granted.”

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to 5.19 percent in August from 5.22 percent in July; the rate was 6.48 percent in August 2008.

First-Time Buyer Tax Credit

An NAR practitioner survey shows first-time buyers purchased 30 percent of homes in August, and that distressed homes accounted for 31 percent of transactions; both were unchanged from July.

“The recent trend shows broad improvement in most of the country, but with an expected rise in foreclosures over the next 12 months we need to maintain a healthy level of ready buyers to absorb the inventory. An extension of the tax credit is critical to preserve incentives for financially qualified buyers to enter the market,” Yun says.

He adds that many buyers have been on the sidelines during the past few years, waiting for signs of stabilization. “Now that the market is showing some momentum, we have an opportunity to achieve a more rapid and broader stabilization in home prices. Extending and expanding the tax credit also would help to keep other families from becoming upside down in their mortgages or risk foreclosure,” Yun says.

NAR President Charles McMillan says time is running very short for the existing tax credit. “Because it’s generally taking 60 days to close on a home after a contract is offered, buyers have little time to act to complete a purchase by the November 30 deadline,” he says.

Inventory Falls

Total housing inventory at the end of August fell 10.8 percent to 3.62 million existing homes available for sale, which represents an 8.5-month supply at the current sales pace, down from a 9.3-month supply in July. Unsold inventory totals are 16.4 percent lower than a year ago.

The national median existing-home price for all housing types was $177,700 in August, down 12.5 percent from August 2008. Distressed properties continue to downwardly distort the median price because they generally sell for 15 to 20 percent less than traditional homes.

Single-family home sales fell 2.8 percent to a seasonally adjusted annual rate of 4.48 million in August from a level of 4.61 million in July, but are 2.5 percent higher than the 4.37 million-unit pace in August 2008. The median existing single-family home price was $177,500 in August, down 12.1 percent from a year ago.

Existing condominium and co-op sales slipped 1.6 percent to a seasonally adjusted annual rate of 620,000 units in August from a spike of 630,000 in July, but are 10.1 percent higher than the 563,000-unit level a year ago. The median existing condo price was $179,300 in August, which is 15.7 percent below August 2008.

Northeast: Regionally, existing-home sales in the Northeast declined 2.2 percent to an annual pace of 910,000 in August, but are 5.8 percent above August 2008. The median price in the Northeast was $241,100, which is 10.5 percent below a year ago.

Midwest: Existing-home sales in the Midwest fell 6.6 percent in August to a level of 1.14 million but are unchanged from a year ago. The median price in the Midwest was $149,900, down 10.4 percent from August 2008.

South: In the South, existing-home sales were down 3.1 percent to an annual pace of 1.89 million in August but are 1.6 percent above August 2008. The median price in the South was $157,400, which is 11.0 percent below a year ago.

West: Existing-home sales in the West declined 2.7 percent to an annual rate of 1.16 million in August but are 7.4 percent higher than a year ago. The median price in the West was $220,500, down 12.2 percent from August 2008.

—NAR

 

Seven New Rules for the First-Time Home Buyer

New York Times, Your Money

By RON LIEBER

Published: September 11, 2009

Too many people bought too much house for too many years.

 

Yes, the financial system almost collapsed because mortgage bankers and brokers told lies about loan terms and loosened standards in dangerous ways, and investment bankers packaged those loans into bonds that were far more toxic than ratings agencies predicted.

But the roots of the mortgage contagion lie with all of us and our desire to own just a bit more house.

So as the one-year anniversary arrives of our near financial collapse, it’s a good time to blow up a long-standing but underexamined maxim of real estate — that you should always stretch financially when buying your first home.

No one is quite sure who came up with this idea, though suspicions rest on real estate agents or kindly parents with the best of intentions who never expected that real estate prices could fall. Whatever its origin, the economists and financial planners I spoke with this week are almost unanimous in their rejection of it.

Here’s how they dismantled the old saw — and a list of seven suggestions they offered up in its place.

START WITH THE BASICS Let’s begin with some other standards, tried and true advice that served banks and borrowers well for years, until they forgot all about them in the race to write more loans and buy bigger houses. Put 20 percent down, so you have less of a chance of owing more than your home is worth if prices fall again. Get a fixed-rate mortgage, so the biggest part of your monthly housing bill remains stable.

If you’re determined to be truly conservative, don’t spend more than about 35 percent of your pretax income on mortgage, property tax and home insurance payments. Bank of America, which adheres to the guidelines that Fannie Mae and Freddie Mac set, will let your total debt (including student and other loans) hit 45 percent of your pretax income, but no more.

That said, if you end up with an adjustable-rate loan, banks may not be concerned with whether you’ll be able to afford the maximum possible payment when the interest rate adjusts in five or seven years. But you should be worried about it.

CONSIDER YOUR INCOME The best case for stretching for a first house is that first-time home buyers in their 20s and 30s will probably see their incomes grow more quickly than older people buying their second or third home.

Harvey S. Rosen, a Princeton economics professor, finds in a forthcoming Journal of Finance article that he co-wrote with two Federal Reserve Bank economists, Kristopher Gerardi and Paul S. Willen, that the size of a house that someone buys tends to be a good indicator of what their income will be later. “People can, on average, make reasonably good predictions of their future incomes and act on them in sensible ways by buying bigger houses,” Mr. Rosen said.

Indeed, much of the mess in the mortgage market has been because of people borrowing money with loans that they didn’t understand — or betting that housing prices would continue to rise enough that they would be able to refinance their loans before the payments rose. Income overconfidence may have had something to do with it (and high unemployment worsened the problems), but it’s probably not the primary cause.

BOW TO UNKNOWNS This research is all well and good as long as you continue to work. But if you’re buying your first home before you have children, you may feel quite differently about work once you become a parent. And if you do, you may not want a mortgage boxing you in to going back to the office three months after the baby is born.

Bobbie D. Munroe, a financial planner with Fraser Financial in Atlanta, encourages younger clients in this situation to model out their budget, including any proposed mortgage, three ways — with both spouses working full time, one working part time and one staying at home for a few years. She also suggests imagining or even practicing living on one income, to see if it’s truly realistic.

“What people should do is ultimately their own decision,” she said. “But they should do it with eyes wide open.”

Even people who don’t want to have children need to consider this. Besides the obvious possibility of sustained unemployment, what about the need to escape a dying industry or an early midlife crisis that necessitates career change to stave off depression? Even government employees and medical residents who believe that their incomes are set for life ought to consider this possibility.

MAP OUT EXPENSES It stands to reason that anyone tempted to stretch for a house will be inclined to play down the expense of maintaining it. These costs are anything but ancillary, though.

For many years, Dennis G. Stearns, a financial planner in Greensboro, N.C., has been alarmed enough by clients’ unrealistic expectations that he’s maintained a home cost spreadsheet that he shares with clients shopping for houses. He also updates it periodically with aggregate, real-world data based on their subsequent experiences.

Mr. Stearns estimates that owners of a newer home that do some work for themselves but contract major work out to others will pay 3.6 percent of the original purchase price annually for maintenance and 4.5 percent if it’s an older home. So if you own a $400,000 home, your costs will probably hit the five figures each year — and may rise with inflation. These expenses will be another 20 percent or so higher if you live in a severe weather area. He does note, however, that the tax benefits of home ownership can offset half or more of these costs in some areas of the country.

BUY BEST (OR CHEAPEST) All of these caveats have given rise to some unusual strategies. Michael Kalscheur, a financial planner with Castle Wealth Advisors in Indianapolis, suggests buying the dream house you covet (if you can afford it) or an inexpensive starter house but not anything in the middle.

“If people have their heart set on something, inevitably, if they can’t afford what they really want, they buy the next best thing,” he said. “That’s absolutely the worst thing you can do. Not only do you not get what you want, but it sucks you dry.”

Why? Well, if you buy that entry-level home instead of the silver-medal home, you can save a lot more money each month after making the house payment (as long as you’re disciplined) than you would if you were paying a big mortgage toward that next best house. And all of your other housing costs will be lower, too. Then, several years later, you’re in a much better position to buy what you actually want.

STRETCH THE HOUSE Better yet, keep in mind that you don’t ever have to move from that first home — and incur all of the transaction costs associated with selling and buying and moving again.

J. Michael Collins, an assistant professor in the department of consumer science at University of Wisconsin’s School of Human Ecology in Madison, suggests paying less for a home that you can upgrade periodically when your income is stable and your savings or available credit make it possible.

In other words, stretching out your tenure in a home (and the physical boundaries of the home itself) may make more sense than stretching for each successive mortgage in a series of two or more houses.

THE EIGHT-HOUR RULE One rule about all of these rules is that it’s unlikely that every one will apply to every circumstance. Individuals and their income streams are too varied, and real estate markets are themselves unique.

When all else fails, however, you can always fall back on the eight-hour test. Whatever the size of your mortgage, you have to be able to sleep soundly at night. So if an impending loan has you stretching for the Ambien, it’s a pretty good sign that the loan is a bit of a stretch as well.