Freddie and Fannie

This week President Obama will sign the financial reform legislation passed recently by the U.S. Congress. As mentioned here previously, the reform measure did NOT include any provisions about what to do with the two government lending giants Freddie Mac and Fannie Mae. These private institutions were taken over by the government in 2008 to prevent a giant mortgage meltdown as the financial crisis expanded.
The Wall Street Journal last week estimated that the government has put $145 Billion into these institutions since their takeover to maintain solvency. Other estimates place the possible taxpayer-funded short-fall at three to four times that amount (or more than $450 Billion) if only a fraction of the mortgages in trouble fail in the short-term. Freddie and Fannie guarantee mortgages; i.e. they pay the note holder in case of a default by the borrower. Between the two institutions, they guarantee almost 50% of all mortgages in the USA, about $5 Trillion worth. Together with the Federal Housing Administration (FHA) they guarantee 90% of all residential mortgages in the country.
Any plan to revamp Freddie or Fannie will have to include some form of government subsidy and control. The question is how much and what incentives and requirements will have to be placed upon the private portion of the firms to ensure that mortgage monies will continue to flow. The only reason most, if any, mortgages are available today is because of the government guarantees. Mortgage rates will have to increase which will negatively affect teh already weakened housing market, which is the primary reason no action has been taken to date by the Obama administration or the Congress. However, continued waiting will only postpone the day of reckoning with the risk that the burden taxpayers may have to carry increases daily.

The Next Few Months

The next few months are going to be critical for the housing market. If things go anywhere near the vision of some optimists, we will begin to see a sustainable upturn in home prices. Here's why:
1) A significant majority of CEOs are bullish about hiring. When those who will not lay off anymore are added, the percentage of CEOs who will keep the same number of employees or hire more employees hits nearly 80%.
2) Interest rates are at their loweset in recent history! Given 30 year fixed rate mortgages can be found at 4.5% interest rates, a borrower with a moderate tax bracket of 25% total state and Federal will see an "effective interest rate" (after taxes) of 3.4%. Where else can you borrow up to $429,000 at those kinds of rates with a 30 year payoff period?
3) The upcoming mid-term elections will see candidates (and non-candidates) positioning themselves as pro- anything that will help the consumer. Things like additional help for the housing market if needed, slow rate hikes in interest rates, etc.
4) New home construction has dropped off a cliff as builders have mostly quit building "spec" homes. New home sales in May declined 32% from the rate in April, mostly fed by the expiration of the home buyers tax credit. Unless construction picks up, we could have a shortage of new homes by 2012 which will only fuel demand for existing homes.
5) Consumer confidence (and spending) continues to rise. While not always an accurate indicator of what will actually happen (more an indicator of what consumers wish would happen!), bullish consumers spend money and feel more confident about making major purchases.

Will all these factors actually drive home prices up in the coming months? Stay tuned as we look at the sales numbers for June, July and August. Normally the "last gasp" before the market takes a short recess for "back-to-school", the expiration of the tax credit should have pushed sales forward into April and previous. If sales continue at any reasonable pace, we could be seeing the beginning of a sustained rally in home prices.

Taking a Breather

When I thought about the title for this post I realized it could refer to my recent low postings as well as the real estate market itself! And they are inter-related somewhat. I have been busy with several transactions that went into contract prior to the Home Buyers Tax Credit expiring last month. Now the rush has been to get them closed prior to the deadline of June 30th.

And the market has been taking a breather as well. New sales (new contracts to purchase) are down this month in spite of great mortgage rates (lower again this week and now around 4.78% for a 30 year fixed rate conforming loan). April sales were up as would be expected in the last month of the tax credit to approx 5.65M annual rate. I would expect May new contracts to show a pretty significant decline but closings will continue strong through June. Inventory is up slightly since April 30th and the forecast for the national market is for prices to decline slightly through the end of the year. Locally I am not sure we will see a signifcant decline in prices nor one that will last for long. Employment is improving and mortgage rates are exteremely attractive. There is a large pent-up demand for upgrading or trading up in the populace at large. If rates remain low and the economic news continues to show improvement, then the real estate market will continue to recover. You can't keep a good deMANd down for long!

Recent News Update

The National Association of Relators announced that pending home sales in February showed the highest increase month-to-month since Octiber 2001. The magnitude of this 8% plus rise was a bit unexpected although in our area, sales have been strong for several months. Part of the reason why we are seeing these increases in contracts of sale is the expiration of the Home Buyer Tax Credit at the end of thsi month (new contracts have to be in place by April 30th and close by June 30th).
In addition, the overall economy shows signs of strengthening despite continued high unemployment. Interest rates last week were up somewhat significantly to 5.31% for a 30 year fixed loan under $417,000. Most analysts said the rise was NOT due to the cessation of the Fed buying mortgage backed securities but rather to the strength of the economy and the bullish news on jobs last Friday.
The FHA's new rules for government-backed mortgages went into effect yesterday (April 5th) and raised the amount charged upfront by the FHA for mortgage insurance. While this one-time fee (now 2.25% of the loan amount) can be financed, it does increase the closing costs or monthly payment of most buyers. The FHA did not change the reserve requirements for borrowers and left the minimum down payment at 3.5%.
Buyers are getting frustrated with the time it is taking to get price approval for short-sale transactions. I estimate that 40% to 50% of all short-sales fall apart due to this problem. The Obama administration announced new rules for short-sales this week but their effect may be minimal. Lenders usually can sell a home as a short sale for more money than as a foreclosure (I estimate a 40% loss on the mortgaged amount with the typical foreclosure and 25 to 30% for a short-sale) but lenders have few incentives to move quickly on either type of transaction.
Prices for previously owned homes continue to bum along what many feel is the bottom. We are seeing price increases in some segments of our local market (notably those below $800,000) while other segments and locations are still bumping along. For a sustained turn-around in teh market we will need to maintain low mortgage rates and have more good news on employment. There is pent-up demand out there as evidenced by Open Home attendance and web hits on listings. If we can tap into that demand, prices will rise and inventory will decline.
Inventory remains low in the entry and middle tiers of the market where multiple offers are again common. I expect a few months of decline in total sales after the Tax Credit expires due to buyers being pulled forward in time to qualify for the credit. However, if rates remain low (a big question mark to me) and prices stabilize or fal back abit, sales will continue at the present 5M per year nationwide pace.

Obama's Latest Plan

The plan announced today by the Obama administration on mortgage modification is one more example of missing the target and too little, too late. The biggest fault I have with this new plan is that it is aimed at homeowners who are under water (fine!) but who are current with their payments. These are the people who are holding their heads high, making payments even if difficult. Ones the administration calls "worth saving". They definitely are worth saving BUT SO ARE the 4.5 Million other homeowners that are not able to pay the mortgage and are behind on their payments.
These are the people that need help NOW! The Obama plan is basically an attempt to shore up the results of their original mortgage modification plan that has helped at most 170,000 homeowners out of the 1.1M or more that have applied!
What Obama should do is kick some butts in the banks. Short-sales are a very viable alternative to foreclosure but the banks aren't doing much to make this type of sale "short". I have perosnally had a buyer walk away from a transaction after waiting TEN MONTHS for a price approval and I know of another buyer who waited a FULL YEAR without getting a price approval. This is terrible for both the buyer and the seller. Both transactions involved the same lender. A real American (wink-think about it- you'll figure out who!!).
A second task should be to speed up and streamline the existing loan modifcation process. It's way too complicated if 90% of the applicants are "blamed" for not completing the paperwork on-time or correctly and thus do not get their loans modified.
And lastly, change back the "mark to market" rule that was subverted in March 2009 and now allows banks to hold loans on their books at face value until the property is sold irrespective of what the actual value may be. The change in 2009 destroyed their incentive to negotiate or move quickly.

I'm happy for anyoine who can take advantage of the new plan BUT there'smore important and more pressing priorities out there and the Obama folks just won't make the tough choices.

Are we headed for a double dip in housing?

Well, I am on the fence on this one! What an unnatural positon for me! Here is what I see in this debate:

Local inventories are down, way down, from the highs in the past two years. But nationwide things aren't as good. Nationwide inventories are running about 7 months at the entry level and higher as you go up in price. Here we see only DAYS of inventory below $800,000 and several months above that price point.

Prices seem to have stabilized on homes priced below $800,000 and are still declining slightly above that figure. Sales volumes are way up compared to even a year ago locally at prices below $800,000. High-end home sales are also up but only slighthly.

The end of the purchase of mortgage backed securities is scheduled for next week. However, if the housing market falters, or rates start to rise precipitously, expect the Fed to jump back in somehow and support rates. The only problem with this is that more money will be funnelled into the economy "artificially" by the Fed and could be tough to retract later. Consider a loan broker's dilemma. He must loan money to allow his business to survive. If rates rise, he will mkae fewer loans but he still survives. However, if he cannot sell the loans he makes, he will not survive as he can't make new loans without available mortgage money. If the fed stops buying MBS, then the largest purchaser of these securities will be gone and to take up the slack, new buyers will have to be found. Thus rates the lender pays on mortgage backed securities will have to rise. To offset this rise, rates on new loans will have to rise. Lenders will survive but it's a balancing act. I cannot see how mortgage rates will not rise in the coming months!

The Home Buyer Tax Credit is set to expire for new contracts on April 30th, a scany five weeks from now. The tax credit purchase price limit is why the number $800,000 appears so frequently in the above comments. This credithas been the primary driver of previously-owned home sales for the past two years. We are definitely pulling buyers forward similar to the "cash for clunkers" program. What will happen to sales after April 30th? I expect a decline at prices below $800,000. Above that level, things should not be affected unless mortgage rates change.

Employment remains near 10% and is a significant drag on the economy and home sales. As long as unemloyment remains high, sales will be sluggish. While investors and cash-rich buyers are buying today, there is a limit to how many of these buyers there are.

Some banks are showing a reluctance to foreclose on owners IF they are involved in either a re-negotiation of their loan or a short-sale. Even when owners have stopped paying their mortgage, banks are holding off on some Notices of Default if the owners are in a short sale transaction.

I can go on and on, but the bottom line is I think it's 60-40 odds that we will have a double dip in home sales after April 30th. How deep and how lengthy the second dip is will have a huge effect on the rest of the economy.

Investors Are Buying

The article in yesterday's USA TODAY described the surge in home buying by cash-rich investors. We have been seeing that phenomenon here in the S County for over a year. A previous blog addressed the reasons why these buyers are snapping up properties and paying all-cash or buying with large cash down payments.
And there were several interesting statistics in the USA TODAY article. One was that investor buying has risen nationwide to 17% of all home purchases in January 2010, up from 12% in November 2009 and just 9% a year ago.
All-cash transactions have risen as well to 26% nationwide up from 18% from Jan. 2009 and a recent low of 12% in May 2009. That means that almost 10% of all home sales today are being purchased as a primary resience by all-cash buyers! If that astounds you, consider that a good percentage of these buyers likely sold their previous home sometime in the past and have been patiently (or impatiently) watching the market and waiting for the right home to purchase.

Are Last Rites Due for the "Bottom Feeder"?

The days of the "bottom feeder" may be numbered! A look at recent sales activity shows a sustained pick-up in the lower and middle-priced tiers of the market. Well-priced and nicely appointed homes (and some "fixers" on good land) are drawing multiple offers and selling above asking price. A significant portion (but not a majority) of buyers are offering more than 20% down with more "all-cash" offers than I have seen in a long time. Whether there "all-cash" offers are truely that or are just a "get the contract approved" ploy (technically unethical) will be seen. If the home buyer tax credit is extended past April 30th, then this market may continue to boil for sometime as there is still pent-up demand out there. That could mean the death-knell for the bottom feeder as they will continually and consistently get out-bid for properties that they want.

The botton feeder wants a steal. And they need a buyer's market with a large inventory to gain the leverage needed to squeeze the seller for the lowest possible purchase price. A year or more ago that may have been the case. Of late, however, the low inventory, the availability of historically low rate mortgages and the threat of an end to the home buyer tax credit have combined to fuel the market and drive prices to the first signs of stability and even an increase in many areas. Unfortunately, this makes it harder for first-time homebuyers to compete with high-down payment buyers and investors. But the flip side is that the bottom feeder may becoming an extinct species!

The FED's Conundrum

Ben Bernanke and the Fed face some tough choices in the coming weeks. With the termination of their purchase of mortgage backed securites due to occur on March 31, what will the Fed do with these assets? Bernanke has indicated that the Fed will slowly release them but only after the expected re-tightening of credit has begun via other methods. Nonetheless, the Fed faces a conundrum. If they hold these securities too long, they face the possibility of flaming the fires of inflation and also contributing to the givernment's deficit. If they sell these securities too early or too quickly it will drive up interest rates and mortgage rates. If they try to finance these sales they run the risk of depleting capital that could be used by private companies for growing their businesses and the economy in genral. It's a tough balancing act. If Bernanke manages this tightrope successfully, he will have earned his place in history.

The Time To Act Is NOW!!

This was the basis of a message I wrote in late December to my most valued clients. I am making this market information avaialble to everyone here.

Yesterday the National Association of Realtors announced the November 2009 “pending sales” results. These pending sales are the homes that went into contract in November and the numbers are recognized as a preview of the actual sales results that will be posted one or two months from now. November’s pending sales FELL 16% from those in October! This decline is largely attributed to buyers that were sitting on the fence while the extension of the First Time Buyer Tax Credit was in debate by the U.S. Congress. With the original credit due to expire Nov. 30th, 2009, only cash buyers could possibly enter a contract in November and be assured of closing by the credit’s expiration. The credit was extended in mid-month by the Congress (through April 2010 for contracts of sale with closings required by June 2010). Even though the period of indecision was just two weeks in November, pending sales declined by one sixth!

These numbers should trigger warning bells for sellers and buyers. There is a confluence of factors coming by the end of Q2 2010 that will definitely impact residential sales. The first is the end of the Home Buyer Tax Credit scheduled for April / June. The second is the termination of the purchase of mortgage-backed securities by the U.S. Government in late Q2. These purchases have suppressed mortgage rates for the past year. Once this program is terminated, rates should begin to rise. The third factor is the employment forecast which the Federal Reserve now expects to remain between 9.3% and 9.7% for all of 2010. And the final factor is the time that short-sales are taking at present where six months to price approval and seven month or longer escrows are becoming common.

My interpretation of these factors is that the normal “spring bump” in home sales will begin earlier and end sooner than normal. Savvy sellers will have their properties ready for market and priced to sell by the middle of February. The weeks between Valentine’s Day and April 30th will be more active than normal for properties priced below the $800,000 price ceiling of the Tax Credit, but properties at all price levels will see increased activity as we near the termination of the Treasury’s securities purchases and the rise in mortgage rates. If a two week period in November where the possibility of no Tax Credit shrinks the buyer pool by 16%, what will its termination bring to the market? Consider the “cash for clunkers” program which pulled forward car sales and led to sharp declines in sales after it’s expiration. I expect that May 2010 pending sales will be at least 25% below the April 2010 numbers!

If you are a seller, I cannot emphasize strongly enough that you should be ready to sell and on the market by the end of February even though the rainy season may not yet be done. You cannot afford to miss any potential buyers, especially if you have a property being sold as a short-sale. There will be little time for ”price improvements” as the window for selling will be shorter than normal. Strike while the iron is hot will be the mantra. Keep in mind that 25% of your potential buyers may evaporate after Q2.

If you are a buyer, while the market may stumble along a bumpy bottom for a few more months and prices may rise only minimally for awhile, an interest rate increase from 5% to 6% will increase your monthly payments by 12%. If you can qualify for the Tax Credit, it’s elimination only adds to your urgency. Lastly the predicted number of foreclosures that are “coming” remains elusive. It is my belief that we will NOT see the number of foreclosures that some predict and those that do occur will be slowly fed to the market since the banks can keep these properties in their assets at FULL VALUE until they are actually sold.