Every real estate agent I know is thankful that 2010 is nearly over. When the year began there was a lot of hope that the housing market would begin to recover by year's end, and the Federal Homebuyer Tax Credit was stirring people to buy -- boosting that hope.
But when that credit expired, hopes for the recovery began to expire as well. One of the hottest summers in memory kept people inside, and the economic news kept us all sweating. Late summer and early autumn sales numbers retreated back to levels that were equal to the worst of the housing slump.
Never mind that housing prices continued to fall and started to look like good values again, or that mortgage interest rates had fallen to levels that hadn't been seen since our grandparents had been buying homes. No amount of good news could convince the buying public that it was time to make a purchase.
One of the most important trends of 2010 is only now beginning to become plain: the huge number of properties in distress -- either 90+ days late on the mortgage, listed as a short sale, in pre-foreclosure, or actually foreclosed upon and bank-owned -- was creating a large "shadow inventory" of homes that lenders were not listing for sale because buyers were not absorbing the distressed properties that already were on the market.
There are a couple of sources for this information. In late November, CoreLogic released a report on the large increase in the "shadow inventory" in 2010. As of August, there were 2.1 million units of housing classified as being in that shadowy group, up more than 10% from the previous year. When added to the 4.2 million "visible" units currently for sale, that constitutes a distressed property glut that isn't moving. According to CoreLogic's report, Maryland has a two-year supply of such distressed properties; the figure for Baltimore-Towson is only slightly better, with an 18-month supply.
While the sharp and rapid rise in the number of properties included in this category is alarming, at the same time overall sales figures were falling, and the proportion of distressed homes within the number being sold also fell. According to the National Association of Realtors' 2010 Homebuyer Survey, only four percent of buyers purchased a home that would be categorized as "distressed." Nearly 40% of those buyers did not even consider a distressed property among their home choices. Of the remaining 60% who at least considered such a home, one-third decided against it because the process of dealing with the lender as seller was too difficult or complex. One-fourth decided against it because the house was in poor condition; the remaining buyers just couldn't find a distressed property that they liked.
What does this mean? Different professionals will come to different conclusions about this data, all of which was just released at the end of November, but here are two things that I believe are clear:
1. Buyers are learning that purchasing a distressed property, especially a short sale, is not easy and the vast majority of them are opting not to do so. Since half of all homebuyers in 2010 were first-time homebuyers, it might be that the uncertainty of how long it will take to settle such properties makes them impractical. While these first-time buyers don't have a home to sell, they do have a landlord who requires a set amount of notice to get out of their lease — give notice too soon, they might become homeless; give notice too late, and they might be required to pay extra rent. If lenders want to make these distressed properties more attractive to these buyers they have to standardize the short sale process and get it done in a predictable amount of time.
2. Lenders may have to hold back millions of dollars worth of 'shadow inventory' well into the future. That means maintaining these properties in liveable condition for an extended period of time. Most lenders are NOT good at this. While they want to get their money back on these properties, they cannot flood the market with them all at once. Not only will that drive down the price on the properties for sale, it will also drive down the values on the neighboring properties, putting more homeowners "under water" and destabilizing the neighborhood. Since that lender may also hold the mortgages on a significant number of properties in the vicinity, flooding the market with bank-owned properties just damages their own interests as well.
There are many indicators that actually give hope for a much better 2011. I'll cover those in January's article.
Real Estate Q & A
This month its time to answer a couple of the questions I've been getting from readers.
Q. My brother graduated from college five years ago and got a great loan to buy a house, using 100% financing and settlement assistance programs to pay most of his closing costs. Now I'm graduating in December, have got a sweet job lined up, and I'm being told no one can help me. What's the deal?
A. Well, you're a victim of the real estate meltdown. The generous financing programs that fueled the real estate boom of the last decade were one of the first things to go after it all came crashing down. The current market is on a different planet than the market of five years ago: some of the largest lenders in the country then have disappeared today, or been absorbed into bigger companies, and we're going back to the "good old days" when you had to have some skin in the game.
There is some good news. FHA loan programs still allow you to buy a home with just 3.5% of the purchase price as a downpayment. Also, many of the settlement expense loan programs are still out there for qualified buyers. Try to keep your debts down (including student loans and credit cards) and save some money, and you should be able to purchase a home before you know it.
Q. I bought a house in Baltimore with something called a Ground Rent, but it was one that no one has been collecting. I've heard that there was a major change in the law that might allow me to get rid of it altogether, and I've also heard that wasn't happening. I'm confused.
A. Ground rents confuse everyone, so you're not alone. A ground rent is, literally, a lease payment for the right to use the land your house is on, like the old 'quitrent' you might have learned about in medieval history class! In Maryland, they generally are collected by someone, and can be bought out by a homeowner for a small payment and legal fees after which the deed is changed to Fee Simple (where you own the house and the land together). Some Maryland ground rents, you're correct, are so old that no one is actively collecting them. Also, some were not redeemable at all.
After a small scandal a few years ago where someone actually lost their home for non-payment of the ground rent, the legislature tried to modernize and reform the ground rent system by creating a registry, and setting a deadline by which all ground rents had to be registered by the owner, or else they would become void.
Ground rent holders, however, have challenged that reform in court. So everything is on hold until that case is heard and judgment is rendered.
Going Green, Saving Money
Most homebuyers are interested in technologies that will save energy and reduce the monthly utility bills. Reducing energy consumption is also a primary goal of "green" technologies, and there are many ways to reduce the amount of energy you use without having a major impact on your lifestyle.
Owners of existing homes, however, are sometimes reluctant to research this subject because the flashy, high profile technologies, like solar panels, are expensive to implement and inconvenient to try to retrofit into older homes.
Reducing energy consumption is essential, however, both for the long term good of the planet, for assisting stretched household budgets, and -- and this may be a surprise -- for making your home competitive when you are trying to sell it. Replacing appliances and windows will raise the value of your property considerably, and on top of your monthly savings on energy, will reduce the cost of the improvement by resulting in a higher sales price. How? Most buyers in this market will research the monthly energy costs the current owner is paying, and this information is readily available with a simple phone call to your utility.
So, here are a few suggestions for ways that you can reduce your energy bills, and in the process, update and make your homes more attractive to new owners when that time comes.
1. The first way is the easiest and the cheapest. In fact, you'll save money from the very first day: Take advantage of utility deregulation in Maryland. Finally, more than a decade after it was enacted, utility deregulation has resulted in real competition for most Maryland utility ratepayers. Check your current bill, and you'll see a "rate to compare," which is the amount your electrical supplier is charging for electricity.
Be aware of the fact that your electrical *supplier* is now separated from the company that *delivers* the power to your home. The delivery company will remain your local utility. You will receive your bill from them, as always, and call them if there is a power outage.
Make sure that your new supplier beats that "rate to compare", doesn't make you sign a long-term contract, doesn't charge you to switch (or to leave), and doesn't lock you into a particular rate. Rates go up dramatically in the summer, and come back down in winter. Its in the consumer's interest to let that rate float, not be locked in at an inflated price. The supplier that I've recommended, who meets all of those criteria, and who offers the additional bonus of buying green wind-generated power, is Viridian. You can research this company, and switch your supplier if you wish, all online at www.viridian.com/charmcity. A list of all the companies that are currently licensed by the Public Service Commission is available at http://webapp.psc.state.md.us/Intranet/SupplierInfo/searchSupplier_E.cfm
2. Pay attention to those Energy Star labels when you are replacing appliances, especially refrigerators, washers and dryers, and water heaters. According to the US Department of Energy, these appliances are accountable for about 20% of your home's energy consumption. Older appliances, pre-1990 vintage, can consume double the energy of their new replacements. And until the end of 2010, there's a Federal tax credit of up to $1,500 for the purchase of energy efficient products, like the new line of tankless water heaters, which are on average 24-34% more energy efficient than conventional storage tank water heaters.
3. Are your windows old and falling apart? Replacing them with more efficient models can save up to 25% of your winter heating bills and 15% of your summer cooling expense. Properly installed, modern windows are also a huge selling point for a new owner, and they can make your life a lot more comfortable.
The US Department of Energy maintains a website which outlines these type of improvements, their relative benefits, and -- if you're not ready to do any of these types of replacements -- can offer ideas for inexpensive alternatives, all of which will reduce your energy bottom line and reduce our usage of fossil fuels. You can access that website at http://www1.eere.energy.gov/consumer/tips/index.html.
The Summertime Blues
2010 has been a challenge to the real estate market, not only because of the mortgage foreclosure crisis, the up-and-down recession, and the crisis in consumer confidence. Its also had some of the most extreme weather we've seen in a generation. How is that a challenge to the market?
Well, think about it... when the area was blanketed by back-to-back blizzards and many city streets were nearly impassable for two weeks, who could go out and show property? There are still damaged gutters and dormers scattered throughout the city's neighborhoods. If the winter wasn't bad enough, we've now had 40+ days this summer where the afternoon temperatures reached 90 degrees or more -- many of them over 100 degrees. People stay inside when the heat is that oppressive and don't go out and look at property.
Its a shame that buyers are letting the summer pass them by. Prices in the Baltimore area are still declining in many neighborhoods, and according to June statistics, Baltimore was one of only two major metro areas where prices had not stabilized or even started back up. Also, mortgage rates have declined to the lowest level that we've seen since 1971, when records were first kept on that statistic. So with prices declining and mortgage money cheap, why aren't more buyers scooping up bargains?
Knowing the Score
A report came out this month that gave one possible reason. The economic troubles that we've been experiencing in this country have lowered significantly the average credit score. FICO, Inc., the company that calculates your credit score by combining data from the three large credit monitoring companies, announced that now 25.5% of consumers have a credit score of 599 or below. Before the recession, that figure generally averaged about 15%. That means that the great terms and historically low rates we've been seeing on the news are now unavailable to over a quarter of the population. Some analysts expect that before we truly recover from this recession that figure will rise to nearly one-third.
This is the segment of the population that, in the past, had to rely primarily on sub-prime mortgages to be able to get into the housing market. That area of lending has pretty much dried up in the last couple of years. Wells Fargo, currently the nation's largest mortgage lender, made news this month by completely shutting down its sub-prime lending division and laying off over 3,000 employees. But although sub-prime now has a bad smell attached to it, remember that was primarily because of the way that Wall Street and large financial institutions had cut up, combined and re-packaged sub-prime mortgages into investment securities that weren't at all clear on the level of risk they carried. Sub-prime lending had existed as a viable, profitable product for years before this recent mess started.
It doesn't make sense that the housing market will ever regain robust health while we are content to tell 25-30% of the population that they are not able to own a home. If you are thinking of buying your own home, its important that you find out what your FICO score is, and how that will affect your status as a borrower. There are steps you can take to mend a low credit score, and a qualified mortgage officer or any of the local homebuyer counseling agencies can help you get started down that road.
I Saw It on the Web!
The internet has certainly revolutionized the way that people shop for real estate. It has also made it much more likely that inaccurate, out-of-date, and even fraudulent information makes it into your inbox. Here's a primer for the homebuyer in the Internet age.
Before the Internet was born, listings were literally kept in a book -- available at each real estate office -- containing the listings that office's agents were presenting to the public. Searching for a home meant a lot of driving around looking for signs, visiting offices to look at the listing books, and a reliance upon the agent knowing what was available that met your criteria.
Once the Internet was widely available, the real estate industry was one of the earliest players and multiple listing services quickly got their member brokers to agree to make everyone's listings available to the general public. Brokers also wanted to make the MLS available on their own websites, and so an Internet Data Exchange agreement let the number of sites who carried listing data multiply quickly. National search sites, such as REMAX.com and Realtor.com, started to bring together listing data from all across the country. Others came up with the idea to offer computerized property evaluation services, and another group of sites let customers who had visited certain properties blog about their impressions of it, so that the next buyers who came along could read about the property's weaknesses and strengths without stepping foot inside it themselves. The modern Internet is bulging at its virtual seams with real estate related data of all kinds.
The problem is that some of that information is garbage. While many sites are great at importing new data, old data sits around long after its useful. Buyers I work with will often come to me with questions about a property they found on one website, but not on another. When I investigate on the MLS directly, I'll find that the property isn't actually for sale. Sometimes it was withdrawn, or the listing expired, months ago. In one recent case, the property had been sold two years earlier!
Another major source of inaccurate information are the property evaluation websites. Several recent studies have found large margins of error in these computerized estimates of value. On the largest of these sites, their zesty evaluations were routinely off by over 7%, and you had a one in eleven chance that your estimate would be off by a whopping 25% or more. Now, if your house is worth $200,000, a 7% routine error equals $14,000!
The newest trend in real estate sites are the blogging sites where, in theory, you learn details about properties that the bloggers have visited. However, there are no methods to prove that these visits actually took place, or that the blogger might not actually be the seller of a competing property down the block who went online to trash the competition.
The best way to make sure you do not use wrong information in your home search is to ask your real estate agent for the sites that offer data of the highest integrity. In my practice, the sites I recommend are all ones that I know import information on a daily basis directly from our MLS and routinely remove listings that are sold, withdrawn and expired, such as the two largest national sites I've mentioned above, Realtor.com and REMAX.com. If you're looking primarily for local data, then the best site is HomesDatabase.com.
A new service from our local MLS offers even better data, however. Many local real estate agents have subscribed to Listingbook, which taps directly into the very same MLS data that agents themselves use. I've been making this available to my buyers for about six months, with great satisfaction. Data is refreshed every 15 minutes, and the interface is intuitive and flexible. Ask your agent if they subscribe to Listingbook. And if you aren't working with an agent, come to my website and you'll find a link that lets you open your own search.
Condo Issues Becoming Problems
Everyone has read or heard of the problems in the housing market. But most of the news articles and commentary have focused solely on the single family home situation, whether townhouse or detached. The economic recession and foreclosures have created significant problems for condominium owners and buyers that have not been as widely publicized. So if you own a condo, or think you might like to, you should pay attention to these issues before you want to sell or buy.
Condominiums became popular as the price of owning a single family home grew, giving first-time buyers an option to become homeowners. Owning an apartment in a larger building, however, brings a secondary player into the process: the condominium association. The association is in charge of caring for the building itself, for the benefit of each individual unit owner. When a buyer goes to their bank to buy a condo, the bank not only has to approve the buyer for the loan, they also have to look at the condo association to make sure that its being well run, and is doing a good job of looking out for the property in which the bank will be investing the buyer's mortgage.
For that reason, lenders and the Federal Housing Administration maintain lists of "approved" condominiums for which they will approve mortgage loans. The criteria for this approval are important, and should be examined by every condominium association Board of Directors and considered -- along with their condo bylaws -- as an important guideline for their operations. When your association falls off of these approved lists, it becomes much more difficult for your unit owners to sell their homes, which means prices fall and you have a group of unit owners who are not very pleased with your stewardship of their investments.
So, what are these criteria? Here are some of the items that can severely jeopardize your association's ability to be approved:
- pending litigation against the condo association, or by the association against the builder/developer.
- 15% or more of the owners being delinquent on their condo fees, even by just one month.
- a high percentage of investor-owned units, or one entity owning more than 10% of the units. The exact percentage varies, depending upon the type of loan or the lender, but in general terms an association should keep a watchful eye on the number of investor-owners, and make sure that the public record is correct as it classifies which units are owner-occupied and which ones are not.
- lack of a reserve fund equal to at least 10% of the annual budget.
- lack of necessary insurance coverage, both property and flood insurance.
If your condo association has issues with any one of these bullet points, it could mean that buyers will have a difficult time getting financing to move into your building, and that your current owners are unable to sell quickly and for the best value.
One other item for condo associations to consider: are your condo fees themselves becoming barriers to buyers? For instance, if a typical buyer interested in your building can afford a total monthly payment of $1,500 -- including taxes, condo fees, insurance, principal and interest -- they most likely can't afford to purchase a unit and live in your building if the condo fee is $500 a month. Yet, I've seen the number of non-luxury condo buildings in the Baltimore area with condo fees far above $500 per month growing in number, squeezing out the buyers in need of financing that they rely upon to absorb units for sale. With those buyers no longer in the picture, your building now has to rely upon cash-rich buyers and investors as purchasers, prices have to fall to reduce the cost of financing, or the units may go unsold and your current owners move out and rent their property, becoming investor owners. If your condo association hasn't submitted its subcontractor agreements or management contracts to competitive bidding in a few years, its time to do it. Saving money and lowering condo fees -- while still maintaining and caring for the property -- will be essential exercises for every condo trustee!
** Mortgage Officer Richard Pazornik provided essential lender information for the writing of this article. He deserves my deepest thanks for sharing his expertise.
OK... What Happens Now?
Nobody can tell you for sure what happens on May 1. No, that's not the day on the Mayan calendar when the world is supposed to end. That's still two years away, so you can relax (a little!) about that.
May 1 happens to be the day after the Federal tax credit expires for home purchases. As a Realtor, I've paid a great deal of attention to the various predictions -- because its my livelihood -- but it has great implications for the health of the financial sector, for the economy in general, and for how quickly the country can climb back out of the hole created by the Bush Administration and the Great Recession. Most pundits I've heard or listened to seem to think that the housing market will slow down again, but they seem to divide into two camps based on their reasons.
The first group of gloomy pundits advance the idea that because of the tax breaks, we've been borrowing buyers from the future; sucking them into the process sooner, rather than later, and so after April 30 we will have a vacuum of buyers for some length of time. This is the group of people who felt that the automobile program, "Cash for Clunkers," would do exactly the same thing for the auto market -- cause buyers to jump in before they were planning on it. Now, if you look at the recent auto sales and the current stock prices of Ford and GM, you'll see that simply didn't happen.
It won't happen with the housing market, either. Homebuyers do not buy homes on a whim. Its a major investment and it can't be rushed. This has been true especially because the IRS refused to bow to pressure to make the tax credit available to buyers at the settlement table. That meant the buyer had to have their own cash in hand, qualify for the financing to buy, pay all the normal expenses, and then wait for the tax rebate later. I can't say that I know of anyone who suddenly decided to accelerate their homebuying schedule because of the government program. I believe the tax credit did coax out buyers who had been on the sidelines for the previous three years, watching home prices slide, and who then -- like savvy investors -- were poised to come out and land a bargain.
The second group of gloomy pundits might be compared to Marilyn Monroe in All About Eve, when she surveys a room and asks, "Why do they all look like unhappy rabbits?" This group believe that homebuyers are skittish, and as soon as the tax credit disappears, they will all hop back to their rabbit holes and hide.
The latest economic data says otherwise. March consumer spending rose much more than expected, consumer confidence is rising, and the stock market exudes the robust energy that led Newsweek to declare on their cover that "America is Back." Now, we still have major problems to overcome: unemployment needs to come down, a second wave of foreclosures needs to be effectively softened by Federal programs to help homeowners stay in their homes, and who knows what else might be lurking around the corner. However, I am already working with buyers who knew from the beginning that they would not be able to qualify for the tax credit, and they are buying on their schedule, not the government's.
Pundits in the early 1990s predicted that the recession we were experiencing then would be long, and deep. They predicted that the entire decade would be swallowed up by slow economic growth and higher than normal unemployment. They were wrong, totally and completely, and the Nineties turned out to be one of the most prosperous decades in our history.
I have no reason to think that today's pundits are any more qualified or accurate as fortune tellers. So, what can I do for you today?
Four Things You Need to Know Today
Real estate news is saturating the business media lately, because so many people realize that the health of the real estate market is crucial to the nation's economic recovery. The problem is the news can be confusing. One day you hear that foreclosure activity was down (which is good) but still much higher than one year ago (which is bad). The next day you hear that pending sales for last month were down (which is bad) but much better than one year ago (which is good). So, what do these confusing news reports do to your attitude if you are thinking about taking advantage of the $8,000 tax credit and buying a home this spring? Are you choosing to focus on the good news or the bad news?
Well, here are four items that are not getting a lot of coverage. Taken together, these four facts should leave no doubt in your mind that this is possibly the best time to buy real estate in at least a generation.
1. Prices are down, and in many areas are still falling -- although more slowly than last year. If you're a buyer of real estate in this market, you are definitely seeing lots of inventory and you're seeing it at lower prices than you are accustomed to. The fact that the rate of decline is slowing means we're near or at the bottom, and in some areas prices are actually stabilizing and beginning to make very small advances. Generally speaking, your dollar buys you more house now than at any time in the last five years, and it might not get any better than this.
2. Interest rates are at historic lows. The cost of borrowing the money you need to buy your home is incredibly affordable right now. And the fact that we can actually say number one and number two at the same time is itself historic. In the last fifty years we've had many periods of time where either prices were low or rates were low, but its nearly unheard of to be able to say both at the same time. So, not only does your dollar buy more house, the interest you'll pay on that dollar is very cheap by historical standards.
So, we have these two incredible opportunities existing -- three, counting the $8,000 tax credit available until the end of April. But, I hear you ask, "How can we be sure that this situation won't go on for awhile?" That's where the last two of my four facts come into play.
3. Interest rates won't stay this low for long. Most economists agree that when the economy starts to gain real steam, fear of inflation and the national debt will force the Federal Reserve to increase its interest rates to banks, who will then pass that increase along to consumers. We could be looking at substantial increases over time, which will leave you kicking yourself for not acting while the cost of borrowing money was so low.
4. Statistics point to a potential housing shortage in a few years. There are a couple of things at work here. First, new home builders have cut way back on their building to "ride out" the recession. It will take awhile for them to get the construction back underway and lay out and design new housing developments once they see buyers coming back to their model homes. Second, there is a new wave of homeowners beginning to search: the "echo boomers," or the children of the Baby Boom generation. This generation is estimated to be 50% larger than the original Baby Boom itself, and they are now roughly in the 18-31 age range: prime first-time homebuying years. Basic supply and demand will rule the day: housing will be in short supply and prices will rise.
There you have four very good reasons to step back from the day to day news cycle and take a long view about home ownership. So, what can I do for you today?
Federal Housing Credit Q & A
I recently asked Richard Pazornik of SunTrust, one of my recommended loan officers, to sit down and walk through a Question and Answer session with me so that we could fully explain the new 2010 housing credit for homebuyers. As you probably know, the initial tax credit from 2008 was beefed up in mid 2009 when Congress increased the amount of the credit and stopped requiring that it be paid back over time. That program was supposed to expire at the end of November, 2009. But last Fall, the housing and mortgage industries pushed to have the credit extended. For a while, Congress seemed to be willing to let the credit expire, which would have had a devastating impact on the housing market which was struggling to stand up again.
Fortunately, Congress and the President were eventually persuaded that extending the credit was in the best interest of the economic recovery.
W: So would you go over how the tax credit works?
R: For first-time homebuyers, which means someone who hasn’t owned a home in the last three years, you’ll get that same $8,000 tax credit if you sign a contract to buy a home before midnight April 30th, 2010 and you have to go to settlement before midnight June 30th, 2010. Hopefully, we will be very busy those two days!
The new Tax Credit also sets a maximum income at $125,000 for a single person and $225,000 for a married couple. Above those limits, the credit is phased out.
W: Now, Congress has expanded the credit to “move-up” buyers. What does that mean?
R: A “move up” buyer can now get a tax credit of $6,500, if they’ve lived in their home continuously for 5 of the last 8 years as their primary residence.â€¨The same income limits and phase outs apply to move up buyers as applied to first-time homebuyers.
W: Can someone buy any house on the market?
R: They can buy any house as their primary home so long as it’s priced less than $800,000. So here in Baltimore, this covers about 96% or more of all the homes listed in the Multiple Listing Service.
The government sweetened the deal by allowing taxpayers to go back and amend their prior year tax returns to claim the tax credit quicker and if your above the income limits in 2010, go back an look at your 2009 income, you might be better off!
W: What’s the difference between a Tax Credit and a Tax Deduction?
R: Well, a tax credit is a lot better than a tax deduction. A credit is a dollar for dollar reduction of your tax bill and a tax deduction only saves you a portion of the amount based upon your actual tax rate. Now, I wouldn’t turn either down, but I’d much rather have an $8,000 tax credit than an $8,000 tax deduction. And here’s why, if you’re in a 20% tax bracket an $8,000 deduction would save you $1,600 in taxes but the $8,000 tax credit actually saves you $8,000 in taxes. That’s why this credit is so good! But, there’s a warning I need to give. If you sell the house within three years then you must repay the $8,000.
W: So, let’s say I’m a regular wage-earner who has taxes deducted from my pay. How would this tax credit work?
R: It means your tax bill is actually decreased by $8,000. So for example, if you had $5,000 deducted from your salary for your Federal Income taxes and your tax bill computed to be $2,000, normally, you would’ve received a refund of $3,000. But, if you sign a contract to buy a house before April 30, 2010 and it settles before June 30, 2010, when you file your taxes in April of 2011, you’ll not only receive the refund of $3,000, but you’ll also get an additional tax credit of $8,000 making your total refund $11,000.
W: That’s a nice piece of change! So what is your overall impression of this new program?
R: Overall, I’m thrilled that the Homebuyer Tax Credit was extended and expanded and here are the 3 keys to remember;
• Income, $125k single, or $225k couple
• Home Price, $800000 or less, and
• Contract, signed by April 30, 2010 for settlement by June 30, 2010.
As we begin the last month of the year, I wanted to review where we stand in the real estate world, both nationally and in Maryland. 2010 will be a critical year for many of us, not only for those involved with property, but for the economy in general.
We're certainly better off in this holiday season than we were a year ago. At the end of 2008 the country felt like a roller coaster car speeding down the tallest slope with no brake and nobody at the switch. Right now, 2009 looks like the turning point, with the economy beginning its long climb up the next hill, real estate stabilizing and just in need of a little push to get back on the track. But there are several issues looming for next year which will really determine how things go for the forseeable future. Here are a few lumps of coal for your stocking:
* A recent Washington Post article quoted a national survey by the Mortgage Bankers Association which found that more than 14 percent of borrowers were in trouble on their mortgage. That translates into 7.4 million households either currently delinquent or in the foreclosure process, the highest level this particular survey has ever recorded. That means we have not seen the peak of foreclosures -- and with unemployment continuing to rise the numbers will only get worse.
* The Baltimore Sun, again using information from the Mortgage Bankers Association, reported that in Maryland roughly 10 percent of homeowners deemed good credit risks were in trouble with their mortgage. We're not talking subprime mortgages here, the widely known source of the financial troubles, but prime borrowers. Again, blame rising unemployment which has destabilized the family budgets of people who have had a history of prudent financial management. In round numbers, this adds 77,000 homeowners to the list of those at least one month behind on their payments.
* Recent widely reported gains in regional home sales and a decrease in the housing inventory seems to be coming from short sales and foreclosures going under contract (and not necessarily going to settlement). From my anecdotal sources, traffic on regular owner-occupied listings -- where a bank is not involved -- is practically non-existent. This means that unless you're in distress and buyers smell blood, they aren't interested in seeing your listing. And, as we saw in the last item, there could be 77,000 more properties on that distressed list that we have to work through next spring.
* Most of our buyers, especially first time homebuyers, in the last year have used FHA loans because they had the least stringent requirements for credit score and money down, and allowed more generous assistance from Sellers. So while the extension of the tax credits until the end of June, 2010 is a wonderful thing, it seems to be coming with a simultaneous tightening of credit from the FHA. The Washington Post reports that new FHA guidelines currently under development will raise the amount of money required from buyers -- from 3.5% of the purchase price to 5% of purchase price -- while cutting the allowed Seller contribution in half (from 6% to 3%). Not only will this shrink the pool of qualified buyers considerably, the FHA will also raise the capitalization required from lenders who issue FHA insured loans -- a move that will most likely cut the number of loans available, if not the number of lenders who will consider issuing them.
Certainly the situation in residential real estate is worrysome as we head into the new year. But it might not be the most dangerous. Many experts are warning that the biggest problem looming on the horizon is in the commercial real estate market, as last week's potential meltdown at Dubai World illustrated. While that particular sovereign wealth fund made European markets tremble, and we were told that the US market has little exposure to it, there are enough potential problems here at home to make us weak in the knees. Moody's Investor Services reported last week that it expects the value of US commercial real estate to continue to fall well into 2011. This is on top of losses in this sector which have already totalled 42.9% since the peak in 2007. The total devaluation from the peak may well reach 55% before things begin to turn around.
The determining factor in these losses? Yep, you guessed it... unemployment. With fewer people working, office spaces and commercial spaces don't need to be as big. Demand for office buildings drops, and fewer companies are growing and demanding more space from their landlords. Also, with more people encouraged to buy homes and get their tax credit, demand for multifamily rental units has also dropped, hurting landlords' cash flow and making it more difficult for them to keep up on their mortgages.
Now, with all this coal in your stocking, remember you can't really burn it anymore to lower your heating bills. Global warming, you know. Ho, ho, ho.
A Quirky Halloween
If you've been confused by the various statistics that have been released in the last few weeks, you're not alone. Yes, home prices were up in August. But, existing home sales volume was down in September. These various indexes and figures take weeks to calculate and then release to the public, so you have to pay attention to the time frame each one covers.
Its obvious from these conflicting reports that the housing market is still in some disarray. Most real estate and mortgage professionals I’m acquainted with have had a disappointing autumn, at least as far as first-time homebuyers are concerned. When Labor Day had passed, we all felt that the Fall Market would bring a crush of new buyers who would be eagerly cramming our hallways to get a look at homes so that they could settle in time to qualify for the government’s tax credit. And in the first two weeks of September it started out that way.
And then something happened. No one is sure exactly why, but the enthusiasm waned. Interested buyers decided to postpone their search, or just disappeared altogether. Then in October the statistics — which always lag the event — started to shed some light: consumer confidence was starting to drop again. What was the reason?
The economy was continuing to shed jobs in numbers that, although declining, were still worrysome. But that had been the case throughout the summer, when the numbers were much bigger, and the buyers were out in force then.
September was colder and wetter than normal, and put everyone in a wintertime huddled pose on the street. But would chilly days be enough to keep interested people from getting money back from Uncle Sam?
Controversy erupted over whether or not the tax credit would be extended into next year, or even broadened. But would that cause people to postpone, or to hurry up and make sure they got theirs — just in case it went away completely?
Or, was it something even more personal? Was it the fear that began to seep into people’s minds as epidemic reports started to fill the news, and more untimely swine flu deaths caught the attention of the media? Certainly, most first-time homebuyers are going to be in the age group that has been identified as the most susceptible to this particular flu bug.
Its unlikely that we will ever have really clear data, and what you'll hear people proclaim will really be their own opinion. As for me, I’m putting my money on the pigs.
As Summer Fades
With summer now definitely a memory, its time to turn again to real estate as the Fall market begins and buyers start looking for Open Houses to attend on crisp Sunday afternoons.
News about real estate in general and the Baltimore market in particular continues to be cautiously optimistic. Both the Baltimore SUN and the Washington POST have recently published analyses of regional real estate trends which show positive movement. Home sales in the Baltimore region increased by 5%, year over year, in August -- marking the third consecutive month that figures showed increasing sales over the previous year. Some of the hardest hit markets in this region -- suburban counties south and west of Washington DC -- also showed increasing home sale prices, not just an increase in sales. That could be an indication that the foreclosures which had been slamming existing home prices in those areas are decreasing and these critically ill areas are beginning to stabilize.
The overall economic health of the region, boosted by the employment engine of the nation’s capital, continues to be better overall than that of the nation. Maryland unemployment is hovering at just over 7%, more than 2 points better than the national average.
And in what might be the best technical news we’ve had in months, Fed Chair Bernanke has made a widely publicized statement that the recession is most likely over. Recovery will be slow, but the fact that he sees economic growth beginning, instead of continuing shrinkage, is great news for the future. There actually may be light at the end of this dark tunnel we’ve been going through.
But that’s not the end of the positive news bits: industrial production started to rise, retail sales for August were higher than expected, and the Dow-Jones Industrial Average has gone back over 9700. Banks are starting to repay the loans from the Federal government that kept them afloat. The country is starting to feel better.
First time homebuyers have been coming back from their summer vacations and making the phones ring this September. The November expiration of the $8,000 tax credit seems to be the most likely explanation behind the recent surge in activity. But its also true that this is a great time to buy. If the recession is now over, home prices will most likely continue to stabilize and end their long slide. Home price appreciation may be a good distance off, but its likely that buyers who live in their homes for the next 3-5 years will not see further loss in equity. So while prices have fallen and are nearing the bottom, interest rates continue to be very affordable.
Consumer confidence is the most important factor in the rebound of the economy and the housing sector. The government MUST extend the tax credit into 2010 to make sure that the progress we’ve made in recent months doesn’t fall backwards again, and that we continue to absorb the short sales and foreclosures that are coming. With a housing market that’s firmly in recovery, with equity in homes stable and beginning to make small advances, the public will begin to realize that the worst is past and that its time once again to take a deep breath.
Fall Market Anticipation
The dog days are done. All of us who make a living in real estate are anticipating the Fall Market, and hoping that there will be one. We’ve had a nice run of very positive sales figures in the last few weeks. How much of that will continue into the Fall? How much of the activity we have seen is due to the Obama Administration’s $8,000 tax credit for first time buyers? There are many unanswered questions as we look toward the end of the year.
Most writers and colleagues are unanimous that the tax credit should be at least extended past its current expiration date at the end of November. Some go so far as to advocate for broadening it to all buyers, not just first timers.
For Baltimore, a recent trade article regarding commercial property was ominous. Baltimore was listed as one of the ten most likely markets to see a second meltdown in commercial real estate because of rising vacancy rates and more inventory, without a pickup in accompanying economic activity. As September arrives, we have many questions and concerns for Autumn. Let’s cross our fingers and hope that things go better than the doomsayers expect.
Dog Days Not So Bad
This is the time of year when people just sit inside during the dog days of a southern summer. High humidity, hot temperatures, and a city where not everything is air-conditioned all combine to slow down real estate activity. Even in good years, beach vacations and summer camps tend to slow down every business, and ours is no exception.
But this year is not so bad. That’s an incredibly good sign, given the market slump we’re coming out of. Federal homebuyer incentives are encouraging traffic through listings, and a wary sense of confidence that things are slowly getting better are having an overdue good effect. Cross your fingers that the fall market, which usually starts about Labor Day, will come roaring back.
I’d write more, but its just too hot.
Baltimore in the Top Ten
I don’t usually lift large sections from local media, but this article in the Baltimore Business Journal by Rachel Bernstein, caught my eye:
Baltimore was named one of the top cities for young professionals to work in, based on cost of living, educational opportunities and the city’s nightlife.
The survey was conducted by Madison, Wisc.-based Next Generation Consulting. The report broke down cities into three population categories — Baltimore in the largest city category for those with more than 500,000 people — and evaluated them based on assets the report deemed as important to 20 to 40 year olds.
Among the other cities in Baltimore’s category, San Francisco was named No. 1. Baltimore was named No. 7, beating out Portland, Ore., New York City, Chicago and Los Angeles.
The seven indexes of a top city, or “Next City,” are average earnings, dedication to education, cleanliness of the city, around town, nightlife, cost of lifestyle and safety and diversity of the
population, according to Next Generation Consulting.
Baltimore residents have historically had an inferiority complex about their city compared to their more cosmopolitan neighbors in Philadelphia and Washington. But in the last ten years, the city skyline has grown and spread across acres of what once were parking lots and hinterlands. Neighborhoods have revitalized, and a burgeoning arts and entertainment scene has developed — whether its theatre in Mt. Vernon, fine arts and art galleries in Fells Point and downtown, or live music in Fells Point. Baltimore now has one of the most heavily populated downtown areas among cities its size, with the re-development of old office buildings into modern apartments and condos and the return of grocery stores and even big box retail to the Inner Harbor. And never forget about the added life that the tens of millions of Inner Harbor visitors, sports fans, half-dozen new hotels, and an expanded convention center bring to the city.
Baltimore’s affordable housing certainly provides one of the most important boosts to this type of favorable publicity. People can afford to live here, and live well. That’s a message that really needs to be told, and its studies like this that will tell it better than an ad campaign or promotional gimmicks that the public doesn’t always trust to be accurate. Young, first-time homebuyers have been the rock on which the budding recovery of our housing market is being built — the very buyers that are covered in this survey. The timing couldn’t be better for this type of news.
Baltimore is moving from the classification of “big small city” to “small big city” and its about time.
Real Good News
Recent economic statistics and recent opinion polls are showing a peculiar dissonance in the public mind.
On one hand, economic news lately has been predominantly positive. Unemployment, while bad, has not risen as fast as had been predicted and there is even some evidence that its slowing and may be in the process of turning around. Housing news has been (and I feel will continue to be) positive, as residential resales and new home construction have both increased at surprising rates this spring. Even media outlets that tend to look on the dark side all the time (are you listening, Baltimore SUN?) have written headline stories on the positive trends that are developing. It would seem that economic stimulus, an increase in positive consumer sentiment, and other factors are turning this recession faster than had been predicted just six months ago. Great news, right?
Then how can the news be explained that a growing number of people are dissatisfied with the performance of the new administration and are losing confidence that the stimulus and the new government spending, regulation and other initiatives aimed at the recession will work? It would seem that the evidence is all around them, that it will — and is working — right now.
I have a couple of theories. First is simply that as a nation our ability to wait for good things has been severely diminished over the last 30 years. If its hard, if it takes awhile, and if it requires personal sacrifice, we don’t like it. We lose patience quickly, and blame the very people whose policies and principles are necessary to achieve the goal. Second, as a body politic, we have not yet managed to shake the poisonous habit of the last decade of shouting doom and gloom and twisting reality simply to fashion a hammer with which to beat up the other side. This has begun to achieve Orwellian dimensions… no matter the reality, no matter the truth… simply say the lie often enough and some people will believe it. And as more people join the Falsehood Chorus, more people believe. Passionately.
In my own personal life, I’ve seen friends who I have always credited with being smart, reasonable people become raving lunatics by repeating things that they have heard that are simply ridiculous. And believing them.
This gives me unease, both for the future of the efforts to curb this recession and return us to economic health, and for the future of the country. But as long as the public rewards the liars, the lunatics, the hatemongers, the loud and bombastic over the truth seekers and the reasonable explainers… we will be condemned to travel the wrong paths.
The recent statistics published by the National Association of Realtors — that pending sales of existing homes rose 6.7% in April over the previous year — was the first time in the last several months that highly publicized statistics actually agreed with the experience I was having, out in the trenches. Finally the stats publicly confirmed that people *were* returning to the marketplace and putting homes under contract. Throughout April and May I’ve been busier than I have been in years, and put in five contracts worth about $1.4 million total … one of which has now settled. And as I look around my office, I’m hearing tales of similar activity. My colleagues and I were running crazy, but none of the national statistics were showing it.
So this is real *good* news, but its also *real* good news. Statistics don’t always show what’s going on beneath. And the media — for whatever reason — prefers to trumpet bad news over encouraging developments. If this manages to keep going through the hot months, we will have a genuine recovery under way, with declining inventory and stabilizing home prices. I just hope that if that happens, the people who decide what news *is* will decide to let everyone else know. I’ll certainly be broadcasting it to anyone who will listen.
Billion Dollar Thrills
An idea that has floated around Baltimore for several years became headline news this week, as the city proposed studying the potential reviving effects of tearing down an elevated stretch of Interstate 83 from Chase Street to President Street. This elevated highway has divided downtown and Mount Vernon from parts of East Baltimore for the better part of fifty years, and has created a divide. On the west side of the structure is the prosperous nineteenth century city center; on the east side, desolated residential areas and empty parking lots (and, lets not forget, the state SuperMax Penitentiary). While I have no doubt that replacing the elevated highway with a wide, street level boulevard — President Street extended? — would knit the city back together and encourage a more unified and prosperous area, the problem comes with the price tag, currently estimated at a billion dollars. Real money.
All you have to do is look at other cities where such a structure has been removed to see that it could be wildly beneficial. One city with which I’m very familiar is Boston. The Central Artery divided center city from the North End for several generations, and when I first moved to Boston in 1984, talk was just beginning about the “Big Dig” that would rip it down, replace that stretch of Interstate 93 with a tunnel, and a wide boulevard would be built on top, ending the harrowing experience of crossing beneath the highway over a desecrated street pattern, to walk or drive from one part of the city to another. Despite what you think of the results in Boston from a financial and quality of construction standpoint, the results of the “Big Dig,” finally complete twenty years later, (alas, long after I moved away) have proven its merits when it comes to knitting the city back together.
But Boston is not Baltimore. Boston has a multi-prong, comprehensive mass transit system that is used by hundreds of thousands of commuters every day. Traffic and parking in that colonial city convinced people generations ago to take public transit to work and leave their own vehicles at home. The investment in the Central Artery tunnel was made with a world-class transit system in place and functioning well.
Baltimore has practically no public transit. Its bus system is pathetic. Its one heavy rail subway serves Owings Mills and Johns Hopkins Hospital and very little in between. Its one light rail trolley system is unfriendly to city dwellers because its route takes it through a lightly populated river valley to the suburbs, north and south. Amazingly, the two rail systems do not connect. There is a plan on the boards to create another light rail line from east to west that might connect to the other two, if the money is there. But that plan is in serious jeopardy because two short sighted communities would rather drown in carbon monoxide from the cars choking their streets.
Spending a billion dollars to tear down a highway, and make the automobile congestion even more abysmal, is true insanity.
Spend a billion on a comprehensive, functional, convenient light rail transit system that knits the existing communities of the city together and gets people out of their cars. THEN talk about ripping down highways — because then, and only then, will you not need them.
Fannie Tightens Condo Requirements
According to a recent article in the Wall Street Journal, Fannie Mae is in the process of tightening the requirements for condominium mortgages at the very moment in time when home lending of all stripes needs a boost. We are also about to see a flood of new condominium units come onto the market — those projects where financing had been obtained and construction begun before the lending meltdown took place — and these new rules will certainly make it more difficult for those developers to avoid bankruptcy.
First the specifics: Fannie Mae has always had restrictions on condo lending, in particular the requirement that the developer own less than half of the units in the building. That requirement will now be greatly increased, so that a developer will have to have sold at least 70% of the units before Fannie will guarantee the mortgage. The new rules will also require that a purchaser have at least 25% downpayment to avoid paying a closing cost penalty of .75% of the loan — no matter what the purchaser’s credit score. It keeps going. Fannie now will not back the loans in an existing condo association where 15% or more of the residents are behind on their condo fees, or where a single outside entity owns more than 10% of the units.
The mortgage giant defends these new policies as being careful with the taxpayer’s money by not taking responsibility for loans made in speculative or failing condominium developments, while ignoring the fact that these tightened rules make it more likely that currently healthy communities will be weakened. In many cities, condominiums are the least expensive option for home ownership and serve as the entryway for first time homebuyers, so these rules are making it tougher for new purchasers to enter the housing market and help drive down the excess inventory that has been built up over the last three years.
The inventory of unsold condo units will only swell as projects currently under construction start to open sales offices. According to the National Association of Realtors, the United States ended 2008 with a fourteen month supply of condominiums on the market, the highest backlog since they began keeping records ten years ago. In 2009, industry sources estimate that another 93,000 brand new units will enter the market across the country — a whopping 12,000 of them in the greater New York City market alone. Not only will these units be more difficult (if not impossible) to sell given the new guidelines, but even some of the pre-sold units may not settle since lenders now have these new rules in place that will “de-approve” buyers who thought they had a loan locked in. Never mind the fact that these units may also be worth significantly less than their pre-construction pricing a year or two ago.
Sometimes that Law of Unintended Consequences is a real bitch.
Buyers Gaining Back Edge Over Renters
Its been awhile, but in many markets in the United States it is once again a no-brainer to own a home. According to a recent article in the Wall Street Journal, the financial advantages of owning had been dwindling over the last few decades. Evaluated nationally, after tax mortgage payments have been averaging over 25% more than rental payments for nearly 26 years, according to a California real estate consultant firm. In 2006 some metro areas saw that grow to as much as 66% more. But, after the last few years of housing meltdown, average montly rent for the largest fifty metro areas was $1,045 while the after tax mortgage payment was $1,300, the narrowest gap (24%) since 2001. Some mortgage professionals have estimated that if mortgage interest rates fall to 4.5%, a number often seen as possible in the next few months, the gap will narrow even further to a 1998-era 14%.
A study by Moody’s Economy.com gives even better news. They have found eight markets around the country where home prices relative to rents are within 5% of historic levels, leading one of their economists to predict, “The bottom is coming into view.”
While we’ve heard that phrase before over the last few years, its nice to have a fresh reason to believe it might be true this time.
There was a populist backlash to the President’s housing initiative last week, with an unlikely leader. A cable-TV commentator known for his rants, Rick Santelli of CNBC lost his cool again when describing the package of mortgage revisions that the Administration hopes will put the housing market back on the rails, stabilizing it and cutting down on foreclosures while keeping as many people as possible in their homes. As if to add some kind of justification to his nonsense, Mr. Santelli turned to the traders on the floor of the Chicago Board of Trade for support and used their obedient chorus of catcalls as proof that “average America” didn’t like the President’s plan.
Later, as a guest on Chris Mathews’ HARDBALL, Mr. Santelli went further, advocating that people in trouble simply be allowed to fail. He added, dramatically, that he’d be willing to “bite the bullet” and let both of his neighbors go into foreclosure if necessary because he wasn’t planning to sell his home. He would ride out what he considered the small amount of collateral damage to his home or his neighborhood, because he wasn’t planning to sell anytime soon. The next day, on the same program, he began to finally tip his hand when he used the term “redistributionist” to describe the goals of the plan. Mr. Mathews moved in for the kill: it turns out that Mr. Santelli is a Republican who voted for John McCain.
Mr. Santelli engaged in manipulative, insincere populism, and his premise and description of the results were simply wrong.
I’m sure that in the lovely upscale suburbs of New York and Chicago, the million dollar plus homes on large lots could indeed survive several foreclosures without significant hits on property values. The neighborhood probably won’t see an increase in drug havens, increasing street crime, physical deterioration, or other negative results. Investors won’t swoop in to snap up the lavish homes, slap on a new coat of paint, and then stuff them full of tenants who have no ties to the neighborhood and have no real stake in maintaining it. In short, I’m sure that in Mr. Santelli’s neighborhood he could let the country’s housing market go down the toilet without too much discomfort. It makes it very easy for someone in his position to wrap himself in populist rants of “unfairness” to thwart a solution that will mitigate the terrible consequences for the rest of us.
So, Mr. Santelli, since you’ve made it clear you don’t give a damn about the rest of us, why don’t you just go back to your lovely home in your lovely neighborhood, build a very, very, very tall fence, buy lots of assault rifles to fortify the ramparts, and never come out again. I can tell you that the rest of us will not miss you.
Of Mice and Men
We’re now less than 24 hours since the Obama Administration announced the shape of the housing rescue package that will be TARP2. The short-sightedness of much of the opposition in their attacks is truly appalling. Many of their politically motivated arguments have been widely debunked by other sources, but the “moral hazard” argument is the one that bothers me the most. Lender statistics show that once a property is 90 days behind, the ability of a borrower to have a successful renegotiation of their mortgage is severely compromised. If we are going to truly avoid some of the foreclosures that are coming, the renegotiation has to begin while the struggle is still somewhat successful — while the borrower is still current, but when they know they are at the end of their rope. That’s how you prevent a property from becoming a foreclosed property.
The people who argue that is an unnecessary “bailout” which punishes the “people who have played by the rules” and have cut back, saved, etc. to be able to live within their means is really a straw man. It needs to go away. The folks who will be helped by this package also “played by the rules.” But for reasons beyond their control… declining housing market prices, loss of work, medical problems… they are fast sinking and will soon go under. There is no “moral hazard” in this program. Speculators and people who got in trouble by living beyond their means are specifically omitted from it.
And what about their neighbors who “played by the rules” and are making it by ok? They will be helped by the fact that the house next door does not go into foreclosure, presenting a potential haven for illegal activity, and dragging down their property values by another 9-10%. Their community will benefit from having homeowners staying in their homes, not being sold to an investor at a bargain price who will bring in renters who may, or may not, value the quality of life in the neighborhood, maintain the house, cut the lawn, trim the trees, shovel the walks, etc.
In short, these carping critics would have criticized Christ for hurting local fishermen and bakers by performing the miracle of the fishes and the loaves. I say we need a miracle right about now.
I don’t know of many people who really loved the idea of new home developers putting bigger homes on smaller lots, but certainly many people over the last decade bought them. Personally, if I had a choice between two huge houses sitting so close to one another that I could see into my neighbor’s window, and a two similarly sized townhouses … I’d pick the option with the solid wall separating us from the nuts next door. (And, in fact, I did.)
Still, the “McMansion” craze was a national development, and as the square footage of these hulks increased and the size of the lots decreased, you had to wonder if living shoulder to shoulder in the suburbs with little underlying sense of community wasn’t the cause of many of our society’s problems. Media rooms and “man caves” taking what used to be times of communal experience and building camaraderie and putting them in windowless basement rooms where we were cut off from those around us.
Now, in the middle of our dark winter, comes news from the National Association of Homebuilders. The average size of new homes is shrinking — from the 2,629 sq. ft. average in the third quarter of 2008 to 2,438 sq. ft. in the fourth quarter of the year. Fully 88% of their members surveyed in January said they will be building a larger share of smaller homes in their new developments, although they make no mention on whether they will try to downsize the lots as well. And from that venerable source of information on how Americans design, build and decorate homes — Better Homes and Gardens — come survey results involving 733 potential new-home buyers that find 32% of them expect their new home to be “either somewhat smaller or much smaller then the one they already live in.”
I wish that the reason for this change in attitude was a sense that things had gotten out of hand instead of the devastating impact of the current economic crisis. Not a week goes by that I don’t go into a home built two generations ago, where mom, dad and a brood of four children were raised to hard-working adulthood in half of the square footage of our current median home size of 2,090 sq. ft. These were real communities, where people got to know their neighbors, where much of the activity of life took place on front stoops in warm weather, and people looked out for one another.
And when adults had to get away from the little darlings, there was also a bar on every corner. Dark, windowless “man caves” where…
Oh, never mind.
Shortening the Agony of the Short Sale
In the last few months we’ve seen a growing number of so-called “short sales” in our market place, and around the country. While the name implies that the sale will leave the borrower “short” of the full amount needed to pay off the mortgage, there’s nothing “short” about the amount of time it takes to actually accomplish the sale. Short Sales, in fact, take forever. In 2008 I personally had clients who tried to buy a Short Sale. After eight weeks of waiting, the case had barely budged through the bureaucracy at Wells Fargo, and we were told it would take at least another eight weeks to be processed and reach the settlement table. National City, to their credit, had cleared the property within two weeks, since they had the second mortgage and were most likely not going to get a cent. My clients, who were purchasing a primary residence, simply couldn’t continue to put their future on hold. We found another house.
This one experience is an all-too-common example of what Short Sales are like. They are the real estate equivalent of Chinese water torture. In the past more than 80% of them fell apart before they could settle. Not exactly an efficient model of disposing of bad assets, eh?
So, its with some relief that we read that Fannie Mae is field testing a process that will shorten the time it takes to achieve a Short Sale. Relief, that is, until we read just what the process IS.
Our brightest financial minds have come up with a plan to “pre-approve” a property for short sale, even before a buyer has been found. Its proponents say that it will save the paperwork and bureaucracy of trying to find out what amount of loss Fannie will take and allow the purchase to proceed much more rapidly. Huzzah!
Except that the short sale I was involved with never got to that point after eight weeks of waiting. Wells Fargo had just gotten around to appointing a negotiator for that property to begin the process with Fannie (and meanwhile, the foreclosure department at Wells had started implementing foreclosure, blissfully unaware that there was a contract pending in the short sale department). And what about the fact that most properties are spending so much time on the market waiting for a buyer that the property might actually depreciate from the time the value was determined and approved and the time a contract is written. Oh yeah, and will the buyer try to negotiate down from that price? YOU BETCHA.
This “new process” is another screwball idea from the people in Washington who didn’t see the problem coming. President Obama seems to be coming around to the point that the previous administration’s appointees never reached… just take over the bad assets. Get the commerical banks out of the picture, get these mortgages off their balance sheets, and lets revive the housing sector. Once these assets are fastracked for disposal, the short sale process can truly be streamlined. Nothing else will really do the trick.
Hope for the New Year
January is normally one of the worst months for real estate activity, for good reason. Cold, snow, and other seasonal hangovers do not translate into a busy market. So, its a hopeful sign that there have been some positive news stories in the last few days. First, home inventory levels dropped in December — not as much as in years past, but the fact that they dropped at all in the current climate is good. Fewer homes on the market means a tighter supply and some price stability returning. According to the monthly ZipRealty survey, Baltimore’s inventory level dropped nearly 6%. The other hopeful sign came out just yesterday, when December sales of previously owned homes were released by the National Association of Realtors. According to their data, home sales in December rose a robust 6.5% during the month on a national basis, the biggest monthly jump in nearly seven years.
Many of these sales, no doubt, were sales of low-priced foreclosures, but far from discounting the good news, I think that actually is incredibly positive. First, we need to eliminate the foreclosures from the marketplace before we will see prices begin to stabilize on occupied homes for resale. Second, these sales mean that investors are finally returning to the real estate market, since they are the buyers most likely to purchase a foreclosure for repair and rental purposes. Lastly, clearing the market of foreclosures will stabilize the lending institutions that have taken possession of them, and hopefully begin to unfreeze the credit markets for other qualified buyers.
Will any of this happen in the short term? Of course not. But the latest good news might mean that we’ve taken a few steps down what will definitely be a long road. Its a start.
Looking Ahead to 2009
The passing of the old year and the beginning of the new is a great time to look forward and try to predict where the road ahead will take us. So as 2009 trudges forward, here are a few things to think about and look out for, and what the new year might hold for the local real estate market.
This index gets reported monthly and is an attempt to measure the level of optimism in the general public’s mind. I think its an important leading indicator of how the economy in general, and the real estate market in particular, will fare in the months ahead. People don’t buy houses if they are worried about their jobs, their financial stability, and whether their property will appreciate in the mid- to long-term. After the nation gets a new President, I think this indicator will begin to rise — especially if the new administration is able to get a stimulus package in place and mortgage interest rates, either naturally or artificially, are kept low.
The Change We Needed
Aside from the stimulus and mortgage interest rate support mentioned above, the incoming Obama Administration also will need to get a handle on last fall’s financial industry bailout: where that money has gone, and why banks are not using it to make existing home mortgages more secure and new lending a bit easier to get. The current Treasury Department “oversight,” from all public appearances, has not been enforcing the terms and spirit of the legislation that made the funds available. For housing to stabilize and begin to recover, troubled mortgage assets have to be addressed. That’s where this crisis began, and that’s also where I believe the solution will begin.
We’ve been hearing a lot about Base Re-Alignment and Closure for several years, but according to the impact study prepared for the Department of Labor back in 2006, this is the year we should actually start to see some significant impact of these jobs moving to Maryland. The numbers are impressive: between now and 2015 there should be 14,000 new jobs on the bases at Aberdeen Proving Ground and Fort Meade, plus thousands more support jobs created by the move of these new professionals. Based on past base closure experience, at least 5,000 of those on-base jobs and thousands more of the support positions should be filled by relocating personnel, the rest will most likely be filled by new hires. That’s thousands of new households, many of them buying homes in Maryland. Thousands more of those new hires from the local population might also decide the new job and higher salary make a new house possible.
These figures are conservative; the government impact report actually predicts that there could be an even greater impact on local housing. However, since it was written in 2006 the economic downturn and the housing crisis were not factored into its predictions, so a healthy skepticism might be in order.
Since Baltimore and its surroundings have some of the most affordable housing in the region, we should see some increase in activity in those areas closest to the two bases in question: the Aberdeen area of Harford County, the east sides of Baltimore County and Baltimore City, and the southwestern neighborhoods of the city and adjacent areas in Anne Arundel County.
Baltimore’s real estate market started weakening in late 2006 and early 2007, which means we have been in a difficult environment for two years. That uncertainty persuaded people to delay making decisions and taking action, keeping them out of the real estate market long after they felt the need to change their living situation.
That pent-up demand can only be held back for so long before the need to make a change becomes overwhelming, so I believe that 2009 will see some of those people finally moving forward. Watch the local housing figures as spring returns, the weather starts to warm up, and the traditional spring market gathers steam. A robust improvement in sales could be enough to start stabilizing the local real estate market by bringing down our current inventory of houses for sale.
This could be good news for city neighborhoods that offer great housing value for the dollar, areas like Greater Hamilton and Lauraville, and the downtown and harbor areas where the draw is location, location, location!
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Remember, most everything above is simply my own opinion. (Pay no attention to the man behind the curtain!) I hope that 2009 has started well for you, and that we see some of these signs of returning prosperity sooner rather than later. Happy New Year!