Saturday, January 31, 2009

4% Mortgage Rates - ?

In today's weekly radio address, President Obama pledged to "help lower mortgage costs." Will it be the 4% mortgage rates that Senate Minority Mitch McConnell (R-Ky.) intends to propose when the economic stimulus bill goes to the Senate floor next week?

Friday, January 30, 2009

Charlottesville Redefines "Healthy"; Albemarle County Property Tax Values Drop

UPDATE at bottom of post.

The 2009 Property Tax Assessments were mailed today. The notice on the City's website trumpets "New Assessments Show a Continued Healthy Market."

If by "healthy" the City is referring to the fact that this is a terrific place to live, well, sure. But as there is currently a couple of years worth of inventory for sale in this market and more being put up daily--well, "healthy" isn't the first word that comes to mind. "Asking" and "sold" prices have farther to fall...and for some sellers, this is the opposite of "healthy."

The Daily Progress has another view of the situation, entitling an article "City's Assessment Growth Stagnates."

"Real-estate assessment growth is slowing to a near halt in Charlottesville, with the average existing home and commercial property values increasing only 1.69 percent last year after seeing double-digit growth just a few years ago."

The DP reports on the County's tax assessments as well: "Albemarle Assessed Property Values Drop":

"Overall assessed property values in Albemarle County have declined for the first time in at least a quarter of a century."

"Excluding new construction, 2009 property values declined 2.59 percent from 2008 values, according to assessments being mailed to property owners today."

Albemarle reassesses property every two years:

2003 was up 18.74% from 2001
2005 was up 27.21% from 2003
2007 was up 29.08% from 2005

Who coulda known the rise wouldn't continue?!

BTW? Tax assessments mean little to buyers, except for what they're going to owe if they purchase. Tax assessments mean much more to sellers, and to sellers' real estate agents. Ditto "sold comps."

Because this market has buyers coming from other places, buyers are very interested in the 25% decline in values that has already happened nationwide, where home prices are at 2004 levels. And buyers are interested in the fact that in major metropolitan areas, home prices are in freefall. The Charlottesville MSA isn't a major met area; it just has the prices of one.

Buyers are also interested in these numbers:
  • The national median price is $175,400
  • The median price in the south is +/- $155,000
The median price for a sold single family home in December 2008:
  • In the City $290K
  • In the County $390K
There are hundreds and hundreds of unsold properties in the City, County, and in the region with asking prices far more than this. Median prices might actually be higher if it weren't so darn hard to get a Jumbo....

UPDATE 1/30/09 evening:

The WSJ reports "Calls Grow to Cap Property Taxes," which includes issues many local homedebtors will find familiar:

"The values that cities and towns use to calculate tax bills are often based on house sales a year or more before the bills are issued. That means that many recent bills don't take into account the meltdown of 2008....In addition, cities...are facing a barrage of recession-related financial pressures, including cuts in state aid and investment losses. That is tempting many to look for added revenue from property taxes, one of the few revenue sources they control."

Locally, NBC29 reports on the story, and has a comment by Realtor Keith Davis, who says (echoing what we mentioned, above) "These are not appraisals, this is not a statement by the city of how much your house should sell for and your price indeed has gone up."

And don't miss the post and comments over at Cvillenews.

DP: City's Assessment Growth Stagnates
DP: Albemarle's Assessed Property Values Drop
City of Charlottesville Press Release

County of Albemarle Press Release
Albemarle's "State of the County" Bulletin

Thursday, January 29, 2009

New Homes: Record Low Sales, All-Time High Inventory - DEC '08

The Census Bureau report for December 2008 will come as no surprise to market watchers in this area. Several builders in the Charlottesville / Albemarle area have recently faced mass foreclosures and the massive Biscuit Run Development is on hold due to the state of the economy.

December new home sales were at a seasonally adjusted rate of 331,000. This is the lowest since the Census Bureau started keeping records in 1963.

The top graph indicates months of supply: 12.9 (and this is seasonally adjusted). An all-time record.

Even a casual glance at the many unsold new houses in this area, which typically have asking prices higher than existing homes, and the unfinished developments and--well, it's a market clotted with inventory, ioho.

The bottom graph shows new home sales during other recessions. The dark blue lines indicate years during which the nation was in recession. This is the worst performance on record.

Then again, this is an economic crisis unlike any this nation (or the world) has ever encountered....
Graphs courtesy of Calculated Risk. Follow the link to get giant pop-up versions of these and other housing graphs.

BTW, the "new home" data largely excludes condos. There are a lot of those around here for sale, too.

Wednesday, January 28, 2009

In the News: Housing Prices Drop, Sales Drop; Mortgage Mods; and the House Passes Obama's Economic Stimulus Bill....

Economic Stimulus Plan

The House of Representatives has passed the Economic Stimulus bill, and our own Tom Perriello voted in favor. No Republicans voted for the bill; 11 Dems demurred as well. The 5th District Congressman has a statement about the "American Recovery and Reinvestment Act" here.

Some of the highlights include:
  • Unprecedented Transparency and Accountability: See
  • Helping Workers Hurt by Recession: extends/increases unemployment benefits thru 12/09; increases food stamp benefits 13%; provides a 65 percent federal subsidy for COBRA.
  • Education and Workforce Development: 5th District localities alone are expected to receive nearly $85 million over the next two years for education.
  • Transportation and Infrastructure: Virginia is expected to receive more than $1B.
The Fed to Modify Mortgages

In other economy news, the Federal Reserve is taking action to modify mortgages. Fed Reserve Chair Ben Bernanke wrote lawmakers that his purview will help to "avoid preventable foreclosures" on residential mortgage assets that are held, owned or controlled by the central bank. These include mortgage assests previously owned by Bear Stearns, which the government seized in March 08, and AIG, which the Fed bailed out in September.

According to the WSJ, "The Treasury Department, working with the Fed and other agencies, is expected to unveil broader housing-relief efforts in coming weeks."

Will the Fed help to lower mortgage rates, as it did in November?
Will there be new legislation on auto loans and credit cards? Will a "Bad Bank"--one which takes away all the toxic assets--be created? Will the banks be nationalized? What will the changes be?

Housing Prices and Sales

As the economy has suffered, the housing bubble correction has continued, bringing inflated prices closer to historically affordable levels. Prices are now at the 2004 level (nb: though not in this area).

Nationwide, existing home sales declined 13.1% in 2008, according to NAR. In the Cville area the number is about 11%, but in Albemarle and the Region, the numbers are much higher.

Nationwide, December home prices declined double digits--15+%--and sales in the South, which includes this Commonwealth, dropped 7%.

45% of all sales nationwide were foreclosures.

According to the AP:

Nationally, December sales rose slightly compared to a year ago, led by foreclosure sales in the Western region, while the U.S. median sales price fell 15.3 percent to $175,400.

Existing home sales in Southern states fell nearly 7 percent in December compared to the same month last year, while the median sales price slid 8 percent to $158,600, the National Association of Realtors reported Monday.

This article features a prospective buyer in the Richmond MSA.

But the rising defaults on the part of affluent homeowners will further trouble the economy--and this area. About 6.9% of prime “jumbo” loans were at least 90 days delinquent in December; the rate was up sharply from 2.6% a year earlier.
Defaults and foreclosures have moved from Subprime to Alt-A to Prime.

The economy will get worse before it gets better. Over at The Big Picture, Barry Ritholtz quotes the Harvard economists Reinhart and Rogoff:

"[there are] defining elements of the aftermaths of severe financial crises.... On average, for instance, real housing prices plunge 35%, and the agony stretches out over six years...."

For the short version of these economists' view, go here. For the longer explanation, go here.

The Senate votes on the Stimulus plan on Monday, February 2. Announcements about a "bad bank" or "nationalization" are anticipated next week, as well.

As President Obama said, "We don't have a moment to spare."

Monday, January 26, 2009

Biscuit Run Joins Other Developments in Responding to Recession

Biscuit Run, the massive development south of Charlottesville, is delayed for the foreseeable future, according to the DP.

The Biscuit Run development had 3,100 units planned with buildout over 20 years.

"The business climate is such that it's not in the investor's best interest to proceed with development at this stage," said attorney Steve Blaine, a lawyer representing developer Hunter Craig.

December's national housing starts were at an all-time low, weakest since 1959.

Delaying Biscuit Run is a prudent move in an economy that is "resetting" its outlook every week. Just today, Lawrence Summers, Director of the White House's National Economic Council, said “The next few months are, no question, going to be very, very difficult and it may be longer than that." He appeared on Sunday's Meet the Press. Last week, big banks continued tanking: BofA and Citigroup both reported massive losses, and have needed Government handouts twice.

The "good news" this week is the expected confirmation of former NY Fed chair Tim Geithner as Treasury Secretary, which would bring tighter regulation, a TARP overhaul is expected, plus details of President Obama's $850B stimulus plan.

But more bad news is just hours away: This is what's coming up this week, via CNN:
  • Monday: December existing home sales are expected to have declined to 4.40 million.
  • Tuesday: S&P/CaseShiller home index for November, expected to show steep declines.
  • Wednesday: The Federal Reserve concludes its two-day policy meeting with an announcement on interest rates due at around 2:15 p.m. ET. No change is expected.
  • Thursday: The December durable goods orders: expected to have dropped 1.8% after dropping 1.5% in November. December new home sales are expected to have fallen to a 400,000 annual unit rate from a 407,000 annual unit rate in November.
  • Friday: Fourth-quarter gross domestic product (GDP) is expected to have fallen by an annual rate of 5.2%, the biggest quarterly decline in roughly 26 years.

But back to Biscuit Run. Albemarle County Supervisor Lindsay G. Dorrier Jr. said the fallout from the housing bubble seems to have halted the project.

“Any future demand for houses is premature at this time,” Dorrier said.
“We’ve got a long way to go before we get past this unemployment hump and we get past this era with mortgage financing.”

In addition to the "unemployment hump" and "mortgage financing," there seems to be little need for additional housing (except "affordable housing") in this area; by the end of December, there was 26 months of inventory in the Charlottesville/Albemarle area. In the seven day period ending Saturday, January 24, 100+/- properties were added to the MLS in the Charlottesville/Albemarle area alone, not including the surrounding counties, which brings the total to over 3,200 properties available for the Central Virginia area.

Other projects that have been scaled back or paused include Downtown C'ville's Waterhouse and the Landmark Hotel.

Housing Development "Belvedere" builders Church Hill Homes faced mass foreclosures, as did Weather Hill Homes. Parcels from one of K Hovnanian's Four Seasons Active Adult Communities also faced mass foreclosure. A community association is now suing the developer.

Monday, January 19, 2009

"Winners and Losers in the Housing Slump"

The WSJ sponsors a series of finance books; a new one came out in December 08. The book is "The Wall Street Journal Complete Homeowner's Guidebook," by David Crook, the editor of the Sunday Journal. It's excerpted in the weekend issue.

The excerpt
classifies homeowners according to when they purchased, and explains the declining values buyers and sellers should expect to confront in the "new normal" that exists in most real estate markets nationwide. The news is particularly bad for those who bought in the past 10 years.

The classifications are as follows:

  • "First Time Buyers" - those without properties to unload are in a good position. And will be for years.
  • "Early Cycle Home Buyers" - Those who bought within the past 10 years can expect double digit declines, wiping out equity and, most likely, downpayments, perhaps even putting the mortgage "underwater."
  • "Midcycle Home Buyers" - Those who bought in the '80s or '90s.
  • "Latecycle Homeowners" - Probably about to pay off the mortgage, and thinking of new uses for the cash.

Excerpt from the Guidebook:
[The bolding is ours]

Since the mortgage meltdown began in 2007, the housing market has been grinding ever slower and slower. Direst predictions aside, no one knows whether housing troubles will lead to an irreparable collapse of the nation's economy. But today's problems do clearly signal that home-owning can no longer serve one of the roles it has had for the last 60 years -- as Americans' principal means of building wealth.

For the foreseeable future, house prices are likely to remain stagnant or, in many markets, to continue declining. All but the most optimistic market watchers believe that prices won't bottom out for at least two or three years and that they're unlikely to start going back up until far into the next decade.

So many of us home buyers -- and most of us are home buyers and not home owners, because we are still paying off our long-term mortgages -- are facing broad double-digit home-value declines of a magnitude quite unlike any the U.S. has seen since the 1930s.

But as in any downturn in any other market -- stocks, oil, gold, even tulips -- there will be winners and losers. Here's a quick rundown of how you may stack up:

First-time home buyers. This could turn out to be the greatest "buyer's market" in U.S. history. Smart, cool-headed house shopping could well land you in your dream home at half or less what you might have spent five years ago.

Along with cheaper prices, today's twentysomethings are also likely to get a demographic break when it comes time for them to buy their houses. That's because the huge and aging Baby Boom generation will be leaving a plentiful supply of homes.

So don't listen to anyone who tells you that you must buy a house now. You have years to save your money and prepare to buy a home before prices will start to tick up.

Early-cycle home buyers. It could be rough. If you bought your first house within the past 10 years, the good news is that you face a new, much more affordable move-up market. But the bad news is that your home value could fall so much that you will lose most of your modest equity and could be "upside down," with a mortgage balance much greater than the market value of the house.

Take the price you paid for your house and cut it by 25% ($300,000 - 25% = $225,000). That's about the hit that home owners can count on taking in this market -- wiping out bubble-era appreciation and, for recent buyers, their down payments, too. If at that 25%-off value, however, you still have substantial equity or are about even, then you will probably be able to ride out the storm, provided you have a steady job and aren't facing unmanageably high interest resets.

Just be prepared to stay where you are for a long time. Continue saving for the long term and accelerate your mortgage payments so you increase your equity and reduce your long-term interest expenses. Every dollar you pay on your mortgage balance returns at least the interest you pay to borrow it. That may be the only return you see on your house for a long time.

Midcycle home buyers. If you entered the housing market in the late 1980s or early '90s, even if you have moved up since your first home, you probably have sufficient equity in your house to weather all but a doomsday decline.

So if you feel you really want to move up to a nicer house and want to take advantage of the downturn, you will have to scale back your expectations on the price you will get for your home. On the plus side, the home you want to buy will be cheaper, too.

If you have the cash to buy a new house without selling your existing one, you are in a good position to move up -- you will be able to drive a very good bargain and get your move-up home at a big markdown. But be careful: You don't want to be caught trading up -- and taking on more debt -- on an asset that's declining in value.

If you can't make a great deal on your new house -- 30% or more off the bubble-era value -- you shouldn't move. Take a look at better using the space in your existing home to make the most of what you have.

Late-cycle buyers and home owners. The market is most unlikely to eat away more than just a few years of price appreciation (great years though they were!).

If you entered the housing market before the first Bush administration, you are probably within sight of paying off your mortgage and are eyeing new uses for your monthly mortgage check.

Even if you have moved up once or twice and are still several years from paying off the mortgage loan, you probably have sufficient equity to weather this down market. Finish paying off your loan and try to save more for your retirement in 10 to 15 years.

If you are still working and are no longer paying for your house, you're probably now in a position to stash away cash at a prodigious rate. That's good. You'll need it. You won't be able to count on selling your house for the kind of money that you had hoped would fund your retirement.

If you are already retired, you will have to rethink any plans you had about selling or borrowing against your home equity as part of your retirement savings.

David Crook is editor of Sunday Journal.

Read the excerpt in its original format here.

Sunday, January 18, 2009

WaPo: Foreclosure Knows No Class or Income Boundaries

Our previous post was about saving cash with a Refi, which is great if a homeowner can qualify. But we move to the opposite end of the spectrum again, as we here note an article in Saturday's WaPo. It's part of an ongoing series entitled The Crash / What Went Wrong. What to do about the still-growing numbers of defaults and foreclosures will be a significant concern of the Obama Administration, especially as banks keep needing government bailouts.

The WaPo article, "The Growing Foreclosure Crisis," tells us:

"....interviews and a Washington Post analysis of available data show that the foreclosure crisis knows no class or income boundaries. Many borrowers ensnared in the evolving mortgage mess do not fit neatly into the stereotypes that surfaced by early 2007 when delinquency rates shot up. They don't have subprime loans, the lending industry's jargon for the higher-rate mortgages made to borrowers with shaky credit or without enough cash for a down payment.

In October 2008, for the first time, the number of prime mortgages in delinquency exceeded the subprime loans in danger of default, according to The Post's analysis.

One of every five mortgage holders now has a home worth less than the mortgage on it, according to First American CoreLogic, a firm that tracks mortgages and provided data for The Post's analysis.

The article notes that a couple of DC suburbs are significantly affected by the "Prime" foreclosures, including Prince William County, VA.

The story tracks a family that just a couple of years ago "...bought a $1.16 million Mediterranean-style house in an upscale Southern California neighborhood [and] were not cash-strapped, debt-ridden or credit-impaired." But now they are.

Did we read that right? One in five homeowners now has a home worth less than the mortgage on it!

Read the article here.

Thursday, January 15, 2009

The Good News in Real Estate: Mortgage Refi's

It's January, typically a slow month in RE sales, which is certainly true in our area. Nationwide, we're in a recession, unemployment is rising, and the outlook remains grim for some months to come. But there IS some good news for homeowners.

Mortgage rates
have been falling since late November, when the Federal Reserve announced a plan to buy $500 billion of mortgage securities (MBS). Demand for the securities has a huge impact on rates mortgage lenders charge to consumers. While purchases are still slow, locally, as nationally, there'ss a "refi boom." And the ability to refinance is great news for household balance sheets.

Last December, we had a Q&A about mortgage rates and availability with Jason Crigler, a loan officer at Crown Mortgage Services LLC in Charlottesville (see the Q&A: Part I and Part II). Jason is also the VP/president-elect of the Central Virginia Association of Mortgage Professionals. And he, along with loan officer Michael Martin, writes The Mortgage Buzz blog.

Jason pointed out the savings of a refi in a recent DP story: "For qualifying homeowners, refinancing can save a significant sum of money. If a homeowner with a $200,000 mortgage loan with 6.5 percent interest refinances to 5 percent, for example, the homeowner could save an estimated $130 to $150 per month and a total $30,000 to $50,000 over the life of the loan."

For this post, we asked Jason questions about refi's from the homeowner's point of view, and also asked him for opinions on the mortgage landscape through 2009. Bolding is ours.

1. What kind of refi's are you seeing, that is, at what price points? What kind of properties are you seeing?
What about Jumbos?

Jason: The majority of refis we’re seeing fit within the conventional conforming fixed rate mortgages guidelines. That is, they are mostly Agency (Fannie/Freddie) fixed rate loans that don’t exceed the $417k loan limit. It’s about even between rate/term refis (just changing the rate and/or term of the 1st mortgage) and cash out refis (debt consolidation beyond the current 1st mortgage and/or taking additional cash out from existing home equity).

We have been receiving jumbo mortgage inquiries/requests, but at a lower volume – maybe 10-15% of all inquires. As of Jan. 1, the new “Agency Jumbo” (goes by other names like Agency Plus, Super Conforming, etc) limits went into effect. For the Charlottesville MSA (Metropolitan Statistical Area), the Agency Jumbo limit is $437k.

We’ve seen very little demand for it so far – maybe because guidelines are a bit more restrictive or some lenders are pricing them higher, or both. And we’re seeing a few VA requests. But that’s just our experience.

Detached homes, along with attached townhomes, are the typical property type. Condo refi requests have been coming in, but since fewer condo projects are eligible, not as many condos are eligible for conventional or government mortgage financing.

2. What are the lowest rates you've seen?

Jason: The lowest 30yr fixed rate that we’ve seen so far was 4.375% paying 1 point (rate/term refi at 80% LTV). That was on an 11am rate sheet on December 17th, 2008. But the MBS market was quickly deteriorating by 11:30am and by 12pm rates were already increasing. Most of our lenders issued three rate sheets that afternoon, each one progressively worse. By the end of the day rates were back up .375-.5%. The market that created those rates came and went so quickly that very few folks were able to take advantage of it.

Our lowest 30yr fixed rates last week were posted on Wednesday, January 7:

4.5% with one point at 60% LTV

4.625% with one point at 80% LTV

How much higher are refis rates for jumbos?

Agency Jumbo rates: It depends on the lender, but rates similar to the conforming 30yr fixed can be found.

Non-Agency Jumbo rates: Since Non-Agency Jumbo programs are “portfolio” (held by the bank/lender, not eligible for sale to Fannie/Freddie), availability and rates will vary widely. In fact our 30yr fixed Non-Agency Jumbo rates are so high (8%+) that we don’t even post those rates. We have several Jumbo ARM programs that are in the 6-7% range.

3. How long does the refi process usually take, from completion of application to new mortgage? Is the appraisal process any different for a refi?

Jason: As I’ve mentioned on our blog, we’re in a refinance boom (mini boom, really). All the new business has had a major impact on the mortgage industry. All of a sudden, lenders and brokers are experiencing volume that hasn’t been seen in several years. This has put quite a strain on the lending system, and loan processing times have gone from a previous 2 week period to just under 4 weeks.

Some of our lenders are now taking over 30 days to close. Since the typical rate lock period is 30 days, that can be problematic. Rate locks can be extended for a cost, but those are costs that borrowers and lenders want to avoid. At this point, though, we are still closing refinances within a 30 day period.

Of course purchases are a different story. Purchases are on a closing deadline are therefore put at the front of the line. Closing a purchase within a 3 week period is not a problem, even with all the refinance volume.

Regarding the appraisal: The appraisal process for purchases and refinances are essentially the same. Fanne/Freddie used to have more lax requirements for rate/term refis (like allowing exterior only, property inspection waivers, etc) but now require full appraisals, just like on purchase mortgages.

As a side note: Appraisers are busier now, too. Turn times on appraisals have increased from a couple days several months ago to a week or more at this point.

4. We've read in NYT and elsewhere that mortgage professionals expect rates to stay at 5 or below through 2009. Do you have any reason to doubt this? What could change this?

Jason: I’m not as confident about sub 5% rates for all of 2009. Why? The FED announced that they will purchase $500b in MBS “by the end of the second quarter 2009.” Unless they change their plan, the purchase program will end halfway through 2009. Sure, they could extend the purchase program. But no one (as far as I can tell) sees that happening, especially considering the new administrations lofty goal of a $1T+ infrastructure plan.

Actually, I’m quite concerned about what happens AFTER the purchase program ends. Once the FED takes their hand out of the cookie jar, then what? Who’s going to take their place? With THE major buyer out of the market in mid 2009, the MBS market will look to the “normal” supply/demand function. And this time, Japan and China might not be there to back it up. One would expect MBS prices to drop and rates to rise, even as the economy worsens. To paraphrase Rumsfeld, these are the known knowns and known unknowns.

Yet there are also unknown unknowns. As we’ve all witnessed over the last 6 months, markets can change on a dime after government announcements for intervention, crises in other parts of the world, etc. The MBS market, like any other, functions on investor knowledge and expectations in the moment. When circumstances change, markets change.

(Historically, bad economic news often strengthens bond markets, including MBS. As investors flee the stock market, they look to safer havens such as bonds. Increasing unemployment numbers, low or negative growth expectations and other signs of a deteriorating economy typically make bonds and MBS more attractive. So as money flows into MBS, prices rise and rates fall. That’s how it often works. But months ago, as news of a worsening economy increased, investors were rushing to Treasury bonds, not MBS. And that had government officials concerned – hence the FED’s $500b MBS purchase plan, aka the MBS Bailout.)

I mentioned in a post that Jim Cramer thinks we’ll see 3.5% rates. Maybe he knows something most everyone else doesn’t, but I doubt it. [Seeking Alpha seems to think 3.5% is coming, too...but it's speculation. -- BB]

Trying to time the bottom on mortgage rates is not unlike trying to time the bottom in stocks – getting in on the bottom can happen for a few lucky investors. For many, though, the bottom is usually observed in hindsight, after it’s come and gone. And the fact is, mortgage rates just don’t get to levels we’re seeing on their own, under normal market forces. These rates will only last as long as the FED/Treasury keeps their heavy hand in the market, and even then they’re not guaranteed.

5. Do you care to make any comment on cram-downs? Citi has agreed to stop blocking federal legislation. And Tanta at CalculatedRisk, a former mortgage loan officer, supported them. [We posted recently about cramdowns here; basically, a "cramdown" is the ability of a bankruptcy judge to change the terms of a mortgage for a primary residence - BB]

Jason: I think both sides, for and against, have good points. If it truly helps out those that need/deserve it (not the speculator) and the collateral damage can be minimized (increased costs to banks/securitizers, passed on to consumers) I’m all for it. At this point folks can only speculate as to how effective or damaging it will be.

6. What (if anything) does it mean for the consumer when banks exit wholesale mortgage lending? (that is, does it impact rates & how quickly) The Mortgage Lender implode-o-meter has a list of entities potentially exiting the market.

Jason: Let me give my disclaimer before I answer your next question: As a broker I am of course biased towards the broker model. I think mortgage brokers are a valuable part of the mortgage financing landscape - our competitive mortgage financing options and services are beneficial to consumers and the real estate market. [We appreciate the transparency...and we agree with this, which is why we're glad to have a mortgage broker, rather than a banker representing just one entity, aswering mortgage questions -- BB]

As the Implode-o-Meter shows, there are hundreds of wholesale mortgage lenders that are gone. Most of the “imploded” lenders specialized in subprime or alt-a mortgages, while a smaller number were wholesale channels of national or regional banks/lenders.

Wholesale lending is the channel through which mortgage lenders and banks work with brokers and correspondent lenders (lenders who fund loans through their own means, but then transfer/sell them immediately).

I do think as more lenders exit the wholesale lending channel, consumers will be hurt through reduced competition and financing options. But the wholesale channel is still alive and kicking as quite a few banks and mortgage lenders still have strong, profitable wholesale lending operations.

7. Do you have any opinion you'd like to share about what Treasury Secretary Paulson said recently said about the need for Fannie & Freddie to become "utilities," that is, regulated like for example electric companies, plus this paragraph:

"Among other options, he said the government might buy a massive number of home loans through Fannie and Freddie in an effort to bring down the rate for a 30-year fixed mortgage to 4 percent."

Jason: Does he mean that the FED will continue its MBS purchase program? Or is he saying that there will be a new plan from Treasury or elsewhere? If Paulson is suggesting that Treasury might purchase MBS, on top of the FED’s current program, that could very well continue to keep mortgage rates low and for a longer period of time.

And as far as the Fannie/Freddie utility concept is concerned – I’m in agreement that they need to be one or the other, public (govt owned) or private. I’d prefer to see them as a private organization.

I probably don’t have the issues with Paulson that you may have. However, the Goldman Sachs/White House relationship is WAY too cozy. And the irony with it all (Paulson’s term, Bush’s administration, Republican rule – free marketers who expanded gov't to historic proportions) has not been lost on me.

I’m really looking forward to our new President and administration, with the full understanding that it will be rough for a number of years.

[BB: ditto and amen to your last sentiment....]

A related article in the WSJ is here; it discusses issues some homeowners may have in qualifying.

MANY THANKS to Jason Crigler for taking the time to answer these questions.

Tuesday, January 13, 2009

We Won't Call Him "Jacka**" or "Liar-eah"

We'll let other folks call former National Association of Realtors economist David Lereah such names. But it's too bad a former UVa professor is so widely disdained. Lereah is the author of "Why the Real Estate Boom Will Not Bust--And How You Can Profit From It."

The book is subtitled "How to build wealth in today's expanding real estate market." Nowadays it may be found at Barnes & Noble in the "Fiction" section.

Lereah is bounding back into public view this month, perhaps missing the platform that the National Association of Realtors afforded him from 2000 until his departure in April 2007.

In a 1/12/09 article in the Wall Street Journal, we read:

NAR, which represents half the 2.6 million licensed real-estate agents in the country, has its critics. One concern is that while the organization collects and releases objective data about home sales, it also provides commentary on those statistics -- and has a mission to advance its members.

Lawrence Roberts, author of "The Great Housing Bubble," says the Securities and Exchange Commission should regulate NAR the way it regulates financial advisers. "Realtors are currently able to make any statement they wish regarding the investment potential of real estate, no matter how ridiculous," he says.

Mr. Lereah admits to one mistake: believing there would be no national housing crash. "I have to take the blame for that," he says. "I never thought it would be as bad as this."

Lereah's house, and the several condos he bought as investments, have declined by 20% or more recently.

The WSJ article came about from a recent short interview in Money Magazine:

(Money Magazine) -- Q. Were you wrong to be so bullish?

A. I worked for an association promoting housing, and it was my job to represent their interests....I put a positive spin on [numbers]. It was easy to do during boom times....I never thought the whole national real estate market would burst.

Q. The NAR's latest forecast calls for a slight increase in home prices next year. Thoughts?

A. My views are quite different now. I'm pretty bearish....Home prices will continue to drop. I think we'll see a very modest recovery in sales activity in 2009. But we've still got excess inventories, a bad economy and a credit crunch that will push prices down further, another 5% to 10% more. It'll take a long time to get back to the peak prices we saw in many markets.

Q. Any regrets?

A. I would not have done anything different. But I was a public spokesman writing about housing having a good future. I was wrong. I have to take responsibility for that.

Barry Ritholtz, over at The Big Picture, says:

Of all the various parties who contributed to the boom and bust in housing and credit, none have escaped more unscathed than the National Association of Realtors, and their former Baghdad-Bob-in-Chief, David Lereah.

The NAR turned a blind eye to fraud amongst realtors in terms of referrals to corrupt appraisers and mortgage brokers. They constantly cheerleaded prices, despite evidence to the contrary. For 3 years, they have been forecasting 2nd half price recoveries, dissuading realism amongst home sellers. They continually spun data, presented misleading commentary, and otherwise engaged in behavior that could only be characterized as sleazy.

Ritholtz is the one who calls Lereah a "jackass."

Lereah is now a "real estate consultant." Subscriptions to his internet newsletter are $495 a year. There are currently 50 subscribers.

Lawrence Yun, the current NAR economist, addresses Lereah's forays into the media. He does not, however, attempt to disupte anything Lereah says, or has said in the past.

Why would he? Just one year ago, January 2008, NAR was still pegging real estate as a "Great Investment." And the paid economist for the trade association for half of the nations's real estate agents needs to keep as many folks as possible working on transactions. Even if it's with puerile ads like those in the 2009 Public Awareness Campaign.

Yun, who is harshly criticized around the web as well (there's even a blog devoted to this) "comments" on Lereah's appearances here.

Monday, January 12, 2009

Real Estate Issues in the News: Foreclosure Mitigation, Cramdowns, Help for Homebuilders

Today President-elect Obama asked the Bush
administration to request the remaining $350B of TARP funds, so they may be used ASAP after January 20. These funds will be used in addition to the $800B stimulus plan proposed by the new administration. The Bush administration has agreed.

The Troubled Asset Relief Program was initially supposed to help "solve" the housing crisis...but the funds "somehow" wound up bailing out major Wall Street players and insurance companies, and recapitalizing banks. Foreclosures continue to rise, housing values continue to fall, and with unemployment currently at 7.2%, the recession more than a year old, there's no bottom to the housing market in sight. And the entities that have received the monies can't give a clear accounting of where it all has gone.

A Possible TARP Focus?
Foreclosure Mitigation

TARP needs an overhaul. On Friday, House Financial Services Committee chairman Barney Frank, D-Mass., released the outline of a bill to amend the TARP.

Distribution of the remaining $350B TARP will be contingent upon increasing transparency and overseeing Treasury actions. Distribution will also be “conditioned on the use of a minimum of $50 billion for foreclosure mitigation.” Treasury Secretary Comrade Henry Paulson is tasked to develop a comprehensive plan by March 15, 2009. The elements of the plan include:
  • a guarantee program for qualifying loan modifications
  • lowering costs of Hope for Homeowner loans
  • a program for loans to pay down second lien mortgages that are impeding a loan modification
  • grant servicer incentives and assistance to stimulate modifications, and include the purchase of whole loans for the purpose of modifying or refinancing them

TARP has come under increasing criticism
, and Frank is taking steps to make the use of funds more transparent--and effective.

Mortgage Cramdowns

The Recession has begun its second year and job losses are expected to rise through 2009. Resetting subprime mortgages have hit their peak of defaults and foreclosures, but Alt-A foreclosures are still rising...and homeowners without jobs will swell the ranks of foreclosures as well. The Chair of the Sentate Banking Committee, Chris Dodd, D.-Ct., notes that there are 9,000 foreclosures per day. So what's a bank to do?

Accept them, that is. A "cramdown" is the changing the parameters of a mortgage, through reducing principal or interest, during a bankruptcy, which would be in lieu of a foreclosure. A bank could lose less by allowing a modified loan than by going through the foreclosure process.

Current federal bankruptcy law prohibits
a judge from modifiying the terms of a primary residence mortgage, either in terms of principal owed or interest rate. However, modifications may be made on other kinds of debt, both secured and unsecured, including that for credit cards and autos. And, interestingly, second homes.

Citigroup has now agreed to drop its opposition to cramdowns. And where the largest financial services company in the world goes, others are thought to follow. Financial industry lobbyists are vowing to continue to fight this. And it should be noted that Citi has (thus far) received $300B in bailout monies...and is currently trying to sell parts of itself. The WaPo has an editorial about cramdowns; one of the greatest minds in financial blogging explains the benefits.

Help for Homebuilders

The National Association of Homebuilders brought 80 homebuilders to DC to meet with their legislators on Jan. 7 to push for a $150 Billion stimulus package. The builders hope to persuade Congress to include in the stimulus package subsidies that would bring mortgage rates below 3% for the first half of 2009. The builders also hope to pass $22,000 in tax credits for homebuyers.

However, many analysts believe this is just a "fix," not a solution for the housing crisis. These analysts believe s the best thing for the economy is to prevent as many foreclosures as possible by giving lenders more incentive to modify loans at lower rates. Those who are opposed to the NAHB believe that spending taxpayer dollars to try to boost home sales and prop up prices will not help the economy in the long run.

As we've mentioned recently, local home builders in trouble include Church Hill Homes faced mass foreclosures and massive liens; Weather Hill Homes recently faced mass foreclosures; and, most recently, parcels from one of K Hovnanian's Four Seasons Active Adult Communities, this one in Charlottesville (actually Ruckersville), is facing mass foreclosure.

The Foreclosure Mitigation and Cramdown push are likely to have allies in congress as they will help individual owners already in trouble; but the NAHB request, while it may save some jobs, is akin to bailing out the auto industry, and will enounter opposition.

Wednesday, January 7, 2009

Good-Bye & Good Riddance to 2008 in the Charlottesville Area Real Estate Market

2008 is gone. It was a bad bad year. But we have high hopes for 2010. That's right, 2010. Like many regular joes, economists and finance experts, we expect 2009 to be an exceedingly challenging year--to put it mildly.

As we've said before, we're pro-homeownership. But not ownership at the expense of the entire US economy and a global credit crisis. Houses--homes--are about security and comfort, and should reflect the habits, tastes, and predilections of their owners. Houses are not meant to be cash cows.

And btw? We're anti-spin, not anti-Realtor. Realtors who survive this downturn are the ones who don't lie to the American public.

We have a couple of "predictions" for 2009. But first, a look back at 2008.

1. INVENTORY - There's a lot to choose from.

By the end of December 2008, the Charlottesville / Albemarle area alone had 26 months of inventory, which translated to sales significantly down from 2006 and 2007.

2008 down from 2007
: 10% City, 33% County, 25% Region.

2007 down
from 2006: 17% City; 20% County; 19% Region.

More comes on the market nearly every day. 26 months was December's figure. By the beginning of January, the figure is down to 18 months for the region.

But the available numbers don't tell the whole story.

CAAR's 'number of homes on market' fell by 181 properties between Dec. 31, 08 and Jan. 1, 09. Expired listings? Withdrawn listings? This number is not reflective of sales. (Please feel free to correct this in comments.)

And not everything "for sale" appears in the MLS. We've discussed "shadow inventory": homes pulled from market because they'd been on too long; or were rented; or homes that are in the foreclosure process or REO. Today, Jan. 7, there's a post on local shadow inventory over at RealCentralVA.

Nationwide, the number of pending home sales in December dropped. (Thanks, JH). January typically has fewer sales than December. Combined with the expected dismal retail sales reports on 1/8, and the shocking unemployment rate on 1/9...January's not looking good.

2. BUYER'S MARKET - Last June, on the front page of the Sunday Daily Progress, an industry professional stated homebuyers should not be greedy. We're not likely to see an article like this in 2009.

The bubble's burst, the US economy is in recession, State, County, and City govs are having budget issues.

But Asking Prices often remain high. This is because many Sellers have to make a certain amount
due to having paid a bubble price or having a HELOC...though their homes are no longer worth what they paid.

What Sellers call "a protected market," buyers call a "bubble." Nationally, prices are down to 2004 levels. Sure, we're not a major metropolitan area; we just have the prices of a major metropolitan area.

Here are just a few examples of "bubble" asking prices, ioho. The impetus behind each price of course varies with each seller, but some reasons include a "need to make" a certain amount, knowledge that a neighbor's property fetched a certain amount, love of/sentimental attachment to the home, poor advice from a professional, a belief that it's still 2005, a belief that Charlottesville is a protected market, or a disconnect from the wider world:
  • 708 Park Street originally had an Asking Price of $850K. The place went through significant renovations, but still couldn't find a buyer at the upper price point. After almost a year on the market, $470K = sold price.
  • In the Belmont Bubble eight cottages have been available since July. These properties haven't changed hands for decades; no individual or investor is biting at the +/-$200K prices. Unsold.
  • In the middle price range of City housing, this collection of properties, offered by one seller, have "appreciated" by 100%-237% over time spans of 3-8 years. All unsold.
  • At the higher end are these "$1M" Asking Prices: 615 Kelly Avenue, assessed at $245.5K - Unsold. 517 2nd St NE, assessed at $664.8K - Unsold.
  • At the top end: Coran Capshaw's Seven Oaks. Asking: $12.5M; dropped to $10.5M in October. Purchased in 2000 for $2.5M; assessed: $4.4M. Unsold.
The properties that sell are those where sellers are able to set prices to reflect the "new reality" of the burst bubble and the US recession.

Most buyers no longer believe homes will appreciate, that in this area they're more likely to depreciate, since the correction has been much slower.

Those buying right now seem to be doing it for the "right" reason: because they need a "home."

Lowball offers will prevail. We wrote about lowball offers last Spring here and here. You may also find information from a professional point of view here.

3. THE FUNDAMENTALS REMAIN WEAK - In late September, Charlottesville Area Association of Realtors CEO Dave Phillips, not himself a REALTOR, stated in the Daily Progress:

"The turmoil on Wall Street will not affect Charlottesville’s housing market. Unless you’re in the financial business, it’s not going to affect you.

Phillips also suggested that the troubled economy was the result of media spin. This caused shock and disbelief on this blog, at the DP, and on RealCentralVA. We're not likely to see a real estate professional make such a pronouncement--ever again.

We invited Phillips to clarify this statement, and he obliged.

4. BUILDERS GO BELLY UP - Contrary to "the fundamentals remain strong" idea, Church Hill Homes principals Jamie Spence and Josh Goldschmidt knew they were in trouble: they unloaded 11 properties at "green community" Belvedere to Eagle Construction of Richmond and took jobs with the company. In October, Church Hill Homes faced mass foreclosures. And at the end of the month, The Hook's cover story detailed hundreds of thousands of dollars of liens owed subcontractors.

On December 31 the DP reported Weather Hill Development also faced mass foreclosure; the developer says Hauser Homes is to blame.

5. REAL ESTATE OFFICES CLOSING - Real Estate III is closing a couple of offices. Call it "merging," call it" streamlining," call it going green: the fact remains that the bubble is over and downsizing is key.

6. COMMERCIAL REAL ESTATE FALTERS - Landmark Hotel construction paused--or did it? Silverton Bank of Georgia defaulted on payments--or did it? In any event, Developer Lee Danielson is off the project. The money man, Halsey Minor, hired a new developer for the $31M luxury hotel on the Downtown Mall. But much on the Downtown Mall is empty. Some storefronts apparently have future tenants lined up; but other businesses are closing, due to the economic downturn.

7. FORECLOSURES ARE ON THE RISE - C'ville Weekly ran A Tale of Two Foreclosures in mid-December about the travails faced by RE/MAX Realtor Doug McGowan, who used "Option ARM" loans to pay for three properties "bought" during 2005-2006, totaling more than $1.3M, with usurious interest rates of 7%-13%. He then re-fi'd--and fell behind on payments. His properties were scheduled for auction, and he failed to notify his tenants. The article elicited a veritable firestorm of commentary at C'ville and on this blog.

McGowan's not alone, however. The Daily Progress in December ran an article on the rise of foreclosures in this area.

Additionally, local bankruptcies are "skyrocketing", in part due to Option ARMs, falling home values which prevent refinancing, and rising unemployment.

8. REALTOR, VICTIM - Judy Savage, the Broker at RE/MAX and current President of CAAR, logged on to the comments at C'ville to defend Realtor Doug McGowan as a "victim." She was, she said, speaking as a "friend."

In defending him, she put him in a larger group of professionals who apparently made similarly infelicitous business decisions:

She asserted:
  • "Many of us have seen our incomes fall 75% from just a few years ago."
  • "The Realtor in question is only one of many facing foreclosure and bankruptcy..."
  • "I know of several Realtors and Lenders who have now been foreclosed on because they relied on this bad loan product."
  • "Just about every restaurant and big box store in town has a Realtor working there part time just to keep their head above water."

9. IT'S A GREAT TIME TO SELL? - Whether it's 26 months or 18 months of inventory, it's a lot. Ray Caddell, Broker at Century 21 on Rio Road put 15 properties up for sale the weekend before Christmas. From the buyer's perspective, this seems mystifying. But we're 100% sure Caddell knows many things we do not.

10. SALES PITCH: DON'T AREA REALTORS NEED SOME NEW MATERIAL? - We suggest that the phrase "Charlottesville is a protected market" be stricken from everybody's sales pitches until 2010 or later--whenever this area hits bottom.

"Protected" or "Insulated" is supposed to mean that the market is buffered by the presence of its largest employer, UVa, a regular fount of buyers and sellers--and thereby protected from the wider world.

But UVa faces budget cuts and more endowment losses. Some recent Endowment loss info is here and here. The Endowment is currently worth $3.9B...but $1.6B is in uncalled commitments to private investors, due over the next five years. UVIMCO CEO Chris Brightman still believes there's such a thing as long-term investing.

We suggest "protected market" be dropped until the "fundamentals" around here really are strong again. Or until UVa gets that Federal bailout and doesn't have the feared wage freezes and layoffs this Spring due to state budget cuts.


"PREDICTIONS" for 2009

We looked into our crystal ball. FWIW, we hope most of these do not come true.

1. Mortgage rates are currently at 37 year lows. Lately, much of the mortgage activity has been confined to re-fi's, even in our area. Still, many sellers may use this as an excuse to keep their Asking Prices at 2008 levels.

2. "Lowball offers" will become the "norm." Buyers tend to be realistic when Sellers can't or won't. (See #2, above.)

3. More builders will face mass foreclosures.

4. There will be civil suits filed against local builders for fraud.

5. Retail closings: couple big boxes, some smaller mall chains, a number of privately owned stores/galleries/services, and a couple of car dealerships.

6. Local unemployment will rise due to #5 and the contracting national economy. The pool of Realtors will contract.

7. Foreclosures will rise. They're already on the way up... this recent study occurred before the Stock market crashed in October.

More optimistic:

8. A major regional media outlet will do a story about the local Real Estate market and won't rely on spin from NAR, VAR, or CAAR.

9. The Obama Administration will take swift and decisive action--specifically for the housing crisis. Deficit, shmecifit. A high deficit is better than a Depression. And action could help ameliorate "predictions" 5, 6, 7.

10. There will then be some progress made toward returning this area to "realistic" housing values and the historic paradigms of 1:4 income to price ratio and the price to rent ratio.