Home Prices Hitting Bottom?

The question usually seems to originate from  personal interest rather than unaffected curiosity. Home values have been on a steady decline for the past four years in most of our country’s densely populated areas. Why do we seem to care so much? I’ve come to notice, home owners that have little to no mortgage debt and aren’t interested in relocating any time soon typically seem have little to no concern regarding the value of their residence. The concern seems to stem more from the moderately leveraged to heavily leveraged consumers.

I also have found that over the past four years that most people asking the question above weren’t seeking the answer if the answer wasn’t “Yes.” With so many sources, like our politicians and media, stating that we were near the bottom, I don’t find it very surprising that most people dismissed the fewer reports that forewarned further decline. It was really optimism out of desperation rather than inspiration. The problem is that our media, our politicians, real estate related organizations, and lending institutions have nothing to gain by portending accurate direction. They will cater to whatever serves them best. The cure is simple. Instead of accepting information from sources that have so much to gain, challenge yourself to learn what drives your market, at least on your local level. How does the job market seem to be doing? What percentage of home owners are currently in default of their mortgages (I wouldn’t recommend using only REO listings as many banks have been withholding some of their REO)? How likely is is that a first time home buyer will be able find a monthly mortgage payment for around the same cost as what they are paying for rent? Are more people moving into the area than leaving? Is there an increase to commercial construction? Do your homework and you will find your answer.

So, have home prices seen the bottom? I can say that in many parts of California, yes. This is regardless of the fact that the federal home Buyer tax credit is going away in April, that mortgage interest rates could increase significantly, it has become more difficult to qualify for many mortgage programs, unemployment at very high rates, and that the trend has been so negative for so long. The reasons why are that the affordability index is at a record high, most areas are are still seeing population growth, and a great percentage of the available inventory is owned or financed by very motivated financial institutions. Also, savvy real estate investors are out in full force. They read this data accurately months ago.

So, can a home’s value still decline in California? Definitely, but while keeping that in mind, also remember that trying to time such an important purchase to squeeze every penny in equity could also cause one to completely miss an opportunity.

Jason Shapiro

CEO

Quality Funding

http://QualityFunding.net

Jason@QualityFunding.net

 

My two cents with interest…

Today’s Rates

 

Today’s Public Employee Home Loan rates

Today’s CalPERS Member Home Loan rates

Today’s CalSTRS Member Home Loan rates

Normally I wouldn’t write about mortgage interest rates as rates themselves aren’t what have macro-economic significance, yet are the results of the economic situation. Today, CalPERS posted 5.25% for their 30 Year Fixed Rate mortgage rates, and this was on a 60 day lock. That is extremely significant. This is the program that also allows for the Member to possibly capture a float down, where if the rate is posted lower on the date of full approval and/or the date of drawing documents for the signing, the Member’s rate floats down to the lowest rate posted for the exact same program. CalPERS has been aggressively pricing their loans for the past year and the program has been extremely successful. CalPERS has not been unaffected by the turmoil in our national economic down trend but is weathering the storm better than most financial entities. Rates being as low as they are today is significant because they are very near their all time low, which I believe was set in June of 2003. Yesterday the same program was actually offering 5.125% but I had no time to write, of course, as I’m in the mortgage industry and time is a rare commodity right now. What these rates are signifying is that our economy is in dire straits. The money being put into long term securities is the cause for the lower rates, which shows extremely low confidence in short term investments like most sectors of the stock markets. Look for rates to stay below 6%, at least until the new presidential administration takes office. It’s my feeling that the new administration will not be able to change much economically but the perception of the masses is where the power eminates and the masses seem to believe the change will be positive. After all, much of the trouble we have in our financial markets is emotionally based as opposed to having factual validity anyway…but I will leave that for a future article.

 

Jason Shapiro

CEO

Quality Funding

http://QualityFunding.net

Jason@QualityFunding.net

 

My two cents with interest…

Foreclosure Bail Outs, Have They Helped?

Today the Federal Housing Finance Agency announced it will be encouraging Fannie Mae and Freddie Mac to work with banks and their servicing departments to assist delinquent home owners in modifying their home loans. They are also requesting a moratorium be placed on foreclosure proceedings where the home owner is communicating with their servicing lender. Fannie Mae and Freddie Mac will be encouraging the servicers with an $800 payment to them for each modification they make. For the past year there have been many bills passed to basically stop the bleeding of the national real estate market. Many of those bills have either proven to be ineffective or worse, worthless. This bill is at least a move in the right direction. In reality the bail outs have not been the root of the solution, yet it’s been the lenders that have been modifying borrowers loans out of their need for self preservation.

 

Let’s first look at a few key issues. Home values were supposed to be of little importance, having little impact on the economy. These words were spoken by Greenspan over two years ago. Many economists expressed the same sentiment. The Fed’s position over the past few years has been to sit back and watch and only when pushed into a corner would they come out with legislation. The collapse of the economy was inevitable as the same Federal government allowed the banking industry to dig itself into a hole unchecked. Much of the content of many of the bills of 2008 have contained verbiage that suggests lenders work with their borrowers in default. Banks have already been doing this. The moratorium on foreclosure proceedings suggested by today’s statement from FHFA Director James Lockhart is NOT new to the industry. Wells Fargo is amongst many banks that have had moratoriums on foreclosing for at least this past year. The servicing lenders will be modifying loans only when it suits them as there is nothing mandated for banks to comply.

 

Something should have been done sooner, much sooner. It is my opinion that there are and have been better ways to repair some of the damage to our economy. The troubled real estate market is the main reason for the economic recession. Our tax dollars, to the tune of a trillion dollars, are now being used to recapitalize banks. These are the same banks that are at the root of the problem. So, our tax dollars are being directed by politicians and economists, most whom have been in office throughout the past several years. A trillion dollars, let’s take another look at another way a trillion dollars could be used to assist in a recovery. Instead of giving the money to the banks the OFHEO should’ve created an office that would bail out home owners directly. Figuring there may be around 20 million home owners in trouble, the pool of money would’ve been worth $50,000 for each home owner. Most default situations could be cured with less, some needing more.

 

Now, how would that help, and isn’t it still robbing from the rich to give to the poor, or socialism at its finest? Sure, but since our tax money will be used regardless it might as well be used effectively. The reason why this would work is that it would put an immediate halt to all defaults and foreclosures. If a borrower was allotted an amount of money that would reduce their principal amount along with the lender modifying the loans terms, much fewer REO and Short Sale homes will be entering inventory for sale. This has an immediate affect on home values. Less inventory along with the availability of many viable home loan programs will provide a turning point. It’s the basic law of supply and demand. Over 70% of all listings in the state of California are distress situations.

 

Unfortunately, the home owners that have acted responsibly over the past half decade have to sit back and watch as their home’s value has been cut in half in many neighborhoods due to the acts of the irresponsible and now have to watch as the taxes they pay are used to bail out the irresponsible parties.

 

To prevent the transgressions from reoccurrence the Fed should create a council that would work on implementing national certification or licensing for any persons working directly with borrowers. It is extremely unfortunate that thousands of loan officers with no license or formal training were allowed to assist people in their most financially significant transaction of their lives. Also, that same council should have the task of reviewing every loan program and certifying their safety. Loan programs should be graded on risk, complexity, and the potential or likelihood of misuse. Loans like the Pay Option Arm should’ve never been made available to the general public. It was a loan for gamblers, not the average homeowner, but unfortunately the Fed turned a blind eye to this program for the past 20 years.

 

Basically, the FOMC regulates monetary policy. There should’ve been a bill to change their responsibilities long ago to include real estate as a part of their oversight. Ultimately it fell on their shoulders anyway.

 

Look for a positive 2009 after a slow start. Second and Third Quarter real estate sales will very likely be stronger than expected as many buyers have been waiting for two years for the bottom to hit. The lower amount of foreclosures and short sales will help to increase sale prices and maybe once again the average home owners may begin to see their homes gain equity.

 

Jason Shapiro

CEO

Quality Funding

http://QualityFunding.net

Jason@QualityFunding.net

 

My two cents with interest…

Real Estate Market Directions and Investing Made Simple

Forecasting the short term direction of residential home values, whether nationally or in a specific geographic region, may be one of the most difficult tasks. The fact that home values will rise in the long run is a given, as inflation is a part of the make up of our economy. So, how can you tell when a real estate market has hit that peak or trough in a cycle? Well, first, although you may hear the phrase ‘history repeats itself’ keep in mind that very often in real estate the symptoms repeat but usually not the causes. This is the main reason why the assumption that a downward trend might last four years historically is irrelevant to current or future corrections.

What drove the most recent boom in many of the ‘hot’ markets was emotion, pure and simple. Whether it was the fear of feeling the need to buy a home before one could no longer afford it or the greed that motivated people to invest at any cost, as real estate was perceived as an investment with which one just can’t lose, the result was the same, grossly overinflated home values. Exacerbating the problem were other factors including excessively loose and irresponsible lending practices along with historically low interest rates, real estate professionals more concerned with commissions than offering responsible advice, and a lack of judgment from governmental agencies that could certainly have curtailed the problem instead of ultimately needing to play ‘clean up’. The mainstream media had an enormous part to play in the boom. Sensationalism sells, and most of the focus was given to economic reports that were unidirectional. The general public bases many of their decisions to purchase, or not, on industry professionals and confirm this with what their favorite news anchor has to say. Unfortunately, most of the data reported in the media was biased and came directly from the real estate and mortgage industry.

Now, we hear reports on how real estate prices have bottomed, yet many analysts are predicting more inventory and higher interest rates. How is it that something that seems so simple can find well-informed industry professionals sitting on both sides of the fence? Basically, for people employed in a real estate profession there is an inherent need for optimism when one’s profession revolves around the need for delivering sound advice to potential home owners. If a real estate salesperson or a loan officer was to greet a customer and then proceed to tell that customer that they will be able to buy a home for less money in six months, would that industry professional have a reasonable shot at earning the customer’s business?

As you read this, consider your own local real estate market. Were new jobs added at a high rate through the boom (NOT considering the explosive growth in real estate related professions!)? Was there an inordinate amount of people buying on speculation (now you can include the real estate professionals)? Were the homes in your market incredibly undervalued throughout most of the boom? Did your area suddenly become recognized as a new center for industry, commerce, or resorts? If the answers to these questions are no then the foundation for the phenomenal increase in values was weak, at best.

There were certainly areas where significant growth was warranted, like coastal properties along the Atlantic and Pacific seaboard, resort areas with international appeal such as Lake Tahoe, Aspen and Vail, Hawaii, areas that had seen a large increase in new jobs and growing commerce centers, and also areas that were economically stable and had great potential for investors to obtain a positive cash flow with limited risk. Many of these areas experienced higher paced growth and some still saw values increase above a healthy pace but for the most part were safer markets.

In California, we currently are seeing a rise in home sales. Most of what is currently selling are foreclosures, short sales and homes at auction. It’s my belief that there’s a large seasonal influence and that the trend will be positive through August. When Fall arrives we will see a decrease in buyers, as always. Potential buyers will realize that the enormous supply of inventory will continue to grow, interest rates are likely to increase, and home values will decline. This will be the ultimate time to buy. Sellers, mostly banks that need inventory moved out of their REO, will become HIGHLY motivated to accept very low offers as they will all want to start 2009 with cleaner books. As these properties sell they will contribute to the lowering of values. We’ll still see media reporting information behind the curve and many buyers will be scared until reality hits around the normal start of the 2009 buying season, let’s say March. This will be enough time for the less-informed to see prices legitimately on the rise and will have given them enough time to watch investors bottom feed.

After March 2009 I see values correcting to more appropriate values rather quickly as they will have certainly over-corrected to the negative by then. Foreclosures will be much less common starting in 2009 for several reasons, such as loan modifications will be in place, most people will be in healthier loans by refinancing, and simply the fact that foreclosures are less likely when money is to be made (appreciating home values). Also, lending guidelines will begin to loosen a little. Those, too, have slightly over-corrected in response to losses and it will dawn on investors that once again, mortgage backed securities may offer a reasonably safe and sound investment choice.

Of course, as we live in this great, capitalistic, free society, we will be sure to experience similar market swings in the future. Where there is money to be made there are also people willing to take inordinate risk and throw caution to the wind. Greed will not go away. Being ahead of the curve, recognizing the tell-tale signs, and using sound judgment will always be the safest and most profitable approach. Real estate investing is, and will remain one of the most powerful wealth-building tools available to anyone willing to do their homework.


Jason Shapiro  

CEO

Quality Funding http://QualityFunding.net

My two cents with interest…

Jason@QualityFunding.net

   

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