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Posts Tagged ‘percent’

Obama signs bill raising FHA mortgage limits

FRIDAY, NOVEMBER 18, 2011

BY KATHLEEN LYNN
STAFF WRITER
THE RECORD

* Move designed to help more buyers get FHA-backed mortgages

President Obama on Friday signed a bill that allows the Federal Housing Administration to back mortgages of up to $729,500, six weeks after the limit dropped to $625,500. The move makes it easier for more buyers to get low-interest FHA loans.

But loans backed by the government entities Fannie Mae and Freddie Mac will continue to have a $625,500 limit, making them less useful in high-priced housing markets like North Jersey.

Loans that exceed the Fannie, Freddie and FHA limits are considered “jumbo” mortgages, which typically carry higher interest rates and require 20 percent (or higher) down payments.

The FHA allows lower down payments and is more forgiving of imperfect credit. But FHA loans also carry higher fees, so more-affluent buyers tend to prefer Fannie and Freddie loans, when they qualify for them.

Keith Gumbinger, a vice president with HSH.com, a Pompton Plains company that tracks the mortgage market, said high-end buyers who can’t qualify for a Freddie or Fannie loan will have to figure out which is the better deal: a jumbo loan or an FHA loan.

Jumbo loans were recently going for about 4.7 percent, while FHA loans were around 4 percent, Gumbinger said. But the FHA loans require a 1 percent upfront fee, plus about 1 percent a year in insurance fees.

Posted at NorthJersey.com

Home Sales Index Points Toward Improving Market

There's some positive news on the future of home sales. 

The Pending Home Sales Index rose sharply in May, indicating an upbeat outlook for the second half of the year, according to the National Association of Realtors®.  The Index, released on Wednesday, showed pending sales up nationally with every region recording increases on both a month-over-month and one year comparison.  A sale is listed as pending when the contract has been signed but the transaction has not closed, though the sale is typically finalized within one or two months of signing.

The Index rose 8.2 percent to 88.8 in May from April's figure of 82.1 percent which was also revised upward from the preliminary numbers.  The May figures are 13.4 percent above the May 2010 numbers.  This is the first time in over a year that year-over year index figures were up and was the largest increase since November 2010 when pending sales rose 10.6 percent.

An index of 100 is equal to the average level of contract activity during 2001, the base year for the index.  2001 coincided with the first of five consecutive record years for existing-home sales so represents a level that is historically healthy.

Lawrence Yun, NAR chief economist, said the Index increase bodes well for home prices. "Absorption of inventory is the key to price improvement, and this solid gain in contract signings implies that home values in many localities are or will soon be stabilizing as inventories get absorbed at a faster pace," he said. "Some markets have made a rapid turnaround, going from soft activity to contract signings rising by more than 30 percent from a year ago, including areas such as Hartford, Conn.; Indianapolis; Minneapolis; Houston; and Seattle."

Pending home sales have trended up unevenly since bottoming last June, rising in seven of the past 11 months. "Home sales still could be 15 to 20 percent higher," Yun said. "If banks would simply return to normal sound underwriting standards and begin lending to more creditworthy borrowers, we'd get a much faster recovery in the housing sector."

On a regional basis, in the West, which may have been hardest hit by the housing downturn, the Index surged 12.9 percent to 100.6.  This is 13.5 percent above May 2010.  The Midwest rose 10.5 percent to 82.8 percent, 17.2 percent higher than a year earlier and in the Northeast the increase was 7.3 percent from April and 4.4 percent year-over-year.  The Index in the South was up 4.1 percent to 95.0, 14.6 percent higher than a year earlier.

Yun indicated that the figures might have been higher.  "A nonsensical situation has developed recently in some states with HUD unable to complete foreclosure deals because of insufficient funds to pay attorney fees at closing, even with buyers offering the full listing price."

...(read more)

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Home Sales Index Points Toward Improving Market

There's some positive news on the future of home sales. 

The Pending Home Sales Index rose sharply in May, indicating an upbeat outlook for the second half of the year, according to the National Association of Realtors®.  The Index, released on Wednesday, showed pending sales up nationally with every region recording increases on both a month-over-month and one year comparison.  A sale is listed as pending when the contract has been signed but the transaction has not closed, though the sale is typically finalized within one or two months of signing.

The Index rose 8.2 percent to 88.8 in May from April's figure of 82.1 percent which was also revised upward from the preliminary numbers.  The May figures are 13.4 percent above the May 2010 numbers.  This is the first time in over a year that year-over year index figures were up and was the largest increase since November 2010 when pending sales rose 10.6 percent.

An index of 100 is equal to the average level of contract activity during 2001, the base year for the index.  2001 coincided with the first of five consecutive record years for existing-home sales so represents a level that is historically healthy.

Lawrence Yun, NAR chief economist, said the Index increase bodes well for home prices. "Absorption of inventory is the key to price improvement, and this solid gain in contract signings implies that home values in many localities are or will soon be stabilizing as inventories get absorbed at a faster pace," he said. "Some markets have made a rapid turnaround, going from soft activity to contract signings rising by more than 30 percent from a year ago, including areas such as Hartford, Conn.; Indianapolis; Minneapolis; Houston; and Seattle."

Pending home sales have trended up unevenly since bottoming last June, rising in seven of the past 11 months. "Home sales still could be 15 to 20 percent higher," Yun said. "If banks would simply return to normal sound underwriting standards and begin lending to more creditworthy borrowers, we'd get a much faster recovery in the housing sector."

On a regional basis, in the West, which may have been hardest hit by the housing downturn, the Index surged 12.9 percent to 100.6.  This is 13.5 percent above May 2010.  The Midwest rose 10.5 percent to 82.8 percent, 17.2 percent higher than a year earlier and in the Northeast the increase was 7.3 percent from April and 4.4 percent year-over-year.  The Index in the South was up 4.1 percent to 95.0, 14.6 percent higher than a year earlier.

Yun indicated that the figures might have been higher.  "A nonsensical situation has developed recently in some states with HUD unable to complete foreclosure deals because of insufficient funds to pay attorney fees at closing, even with buyers offering the full listing price."

...(read more)

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Slow Refinance Market Eats at Mortgage Banker Profits

Independent mortgage banks and subsidiaries saw a huge dip in profitability as the average they made on each loan originated dropped from $1,082 per loan in the fourth quarter of 2010 to $346 in the first quarter of this year.  According to the Mortgage Bankers Association's (MBA) Mortgage Bankers Performance Report, lenders increased their overall revenues but profits suffered because of higher production costs.   Only 63 percent of the firms in the study posted pre-tax net financial profits in the first quarter of 2011, compared to 84 percent in the fourth quarter of 2010.

Marina Walsh, MBA's Associate Vice President of Industry Analysis said that a significant drop in volume during the first quarter was due largely to a fall-off in refinancing.  This made it difficult for mortgage companies to manage staff levels which in turn caused higher production costs.  Walsh continued, "In the first quarter of 2011, changes in compensation plans and investor expectations are additional factors that likely drove up loan production expenses per loan to the highest levels ever reported for this study."

Loan production revenues increased substantially from an average of $2,102 in Q4 to $2,297.  Within this number, loan origination fees rose from $1,443 to $1,569; correspondent and broker fee income decreased to $138 from $143 and "other originations-related income" rose from $516 to $590.   Expenses however more than kept pace....

Direct loan production expenses rose from $4,664 to $5,471 driven, as Walsh said, by personnel expenses which rose to $3,640 from $3,124. The cost of fulfillment and production support employees rose by over $167 and $134 per loan respectively while sales personnel costs were down $8 per loan.

Average production volume was $164 million per company, down from $286 million in the fourth quarter and the average number of loans originated was down from 1,296 to 793.  The loss of business came mainly from the refinancing share which dropped from 60.13 percent of volume in the fourth quarter to 48.23 percent and in the share of the dollar volume from 63 percent to 50 percent.  The size of the average loan fell to $196,456 in the first quarter from $208,319.  Loan closings per production employee were down from 3.79 per month to 2.25.

Net Secondary Marketing Income rose to 200.78 basis points to 187.88 bp, but because of the decreasing average loan balance the net secondary marketing income was down slightly from $3,870 per loan to $3,827.    Full-year 2010 production profits were $1,054 per loan originated. In comparison, average production profits in 2009 were $1,135 per loan originated and $305 per loan originated in 2008.

The government share of loans originated by survey respondents rose from 34.5 percent in the fourth quarter of 2010 to 37.9 percent in the first quarter of 2011.  Prime conforming fixed-rate loan production decreased from 58.9 percent to 53.71 of the total while prime conforming ARMs gained 96 basis points in market share to 2.95 percent.  The percentage of ARM loans overall was also up from 3.73 percent of all lending to 4.98 percent.

Just less than 9 percent of loans were written for borrowers having FICO scores below 650 points while 46 percent were to borrowers with scores over 750.  47 percent of loans were written with an LTV above 80 percent compared to 42.6 percent in the fourth quarter of 2010.  Lenders originated 99.15 percent of their loans for sale to others; 37.11 percent were sold to Fannie Mae, Freddie Mac, or Ginnie Mae.

Of the 329 companies responding to the MBA survey 72 percent were independent mortgage companies.  312 reported involvement with residential loan production and 174 company serviced loans.  Those servicing loans reported an average servicing portfolio of $5.6 billion, down from $7.03 billion in the fourth quarter. They serviced 959 loans per FTE employee or a total portfolio averaging 36,769 loans, down from 44,799 in the previous quarter.  Servicing companies reported Net Servicing Operating Income of $197 per loan compared to $231 in Q4 and Total Net Servicing Financial Income $65, less than half the $138 reported in the previous quarter.

...(read more)

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HUD Aims to Correct Rental Housing Misconceptions

Affordable rental housing is the focus of the second edition of Evidence Matters, the Department of Housing and Urban Development's (HUD's) new quarterly publication devoted to housing and community development issues. 

This edition focuses on several proposals that came out of the Next Generation Housing Policy Conference held last October.   The Conference, sponsored by the White House, HUD and the Departments of Treasury and Agriculture, brought together prominent housing experts and practitioners to discuss, among other topics, the role affordable rental housing plays in improving life outcomes, particularly for children, families and the homeless. The discussions that took place at the conference fell into four distinct topic areas:

  • The mortgage interest deduction;
  • Multibank Consortia and their role in affordable rental housing
  • Informing the Next Generation of Rental Housing Policy

The fourth topic was defined by a conference participant, University of Southern California economist Richard Green who suggested that the concept of rental housing needs re-branding.  Rent, he said, carries a negative connotation and should be replaced with an alternative name such as "leased housing." The editors of Evidence Matters point out that this is just one of many misconceptions about rental housing that need to be addressed.  For example, the image of towering multi-family structures providing rental housing in general and affordable rentals in particular is belied by the reality that these large multi-family developments provide only about a tenth of the rental housing stock.

So, in order to discuss rental housing it is necessary to define the terms with a profile of the rental market and rental market research. For example, the article suggests that rental housing should be defined by tenure choice rather than structure type.  Although most multifamily properties are utilized as rentals, small single family properties (one to four units) make up nearly half of all rental housing and these plus developments of five to 49 units account for nearly 70 percent.  "Therefore," the report points out, "policies tailored to massive multifamily development will affect only a portion of the rental stock."

In the same way that rental housing is conflated with multi-family housing, affordable housing is assumed to be subsidized.  This applies to the most affordable rental units, but not to families earning 50 percent of the area median income (AMI). These units are not subsidized.  The American Housing Survey suggests that of the 17 million units affordable to households at 50 percent of AMI, only about 30 percent are subsidized.  In urban areas this unassisted housing tends to be older, smaller properties in low-income neighborhoods which are typically owned by "mom and pop" landlords. This type of housing has been ignored by federal housing policy for years so local financial institutions have stepped into provide affordable financing.   These small operations are critical sources of housing but their age, high maintenance demands, and low profit margins mean they have high loss rates.  "Preserving these structures is an important element of a broader strategy to ensure quality, affordable rental homes for low income Americans, but it is not a substitute for basic rental assistance."

More than 70 percent of HUD's budget is devoted to some form of rental housing assistance and, even though no consensus exists on how best to measure it, rental housing affordability is the biggest measurable housing problem that HUD programs must address.  The approach that most policy makers have adopted to assess affordability is rent-to-income ratios and the current standard is whether gross rents account for less than 30 percent of a tenant's monthly income.  Worse case need is defined as very low-income renters (earning less than 50 percent of AMI) who do not receive assistance and pay more than 50 percent of their income for housing or live in severely inadequate housing or both.  As a result of the recent recession nearly 7.1 million households are considered to have worst case needs - the highest level on record in both absolute and percentage terms.

Another measure is the difference between the numbers of low-income renters and the units affordable to them.  In 2009 there were 10 million extremely low-income renters (earning less than 30 percent of AMI) and just 6.2 million units that they could rent and pay no more than 30 percent of their income for housing.

Another definition that is necessary is one that takes local nuances into account. Constraints on new construction, employment growth, immigration, housing prices can all create frictions which differ across markets so Federal housing policy should promote market-sensitive investments that recognize how housing stresses play out in different localities.

Related MND comments....

READ MORE: Builder Report Offers Reminder. Affordable Rental Units Needed

READ MOREHUD Focused on Rebuilding America's Dilapidated Housing Inventory

READ MORE:  Affordable Housing Units Needed for Low Income Renters

READ MORE: The Dearth of Affordable Rental Housing

READ MORE:  Gimme Shelter: Homelessness Rate Climbing. Low Income Rental Units Needed

 

...(read more)

Forward this article via email:  Send a copy of this story to someone you know that may want to read it.

HUD Aims to Correct Rental Housing Misconceptions

Affordable rental housing is the focus of the second edition of Evidence Matters, the Department of Housing and Urban Development's (HUD's) new quarterly publication devoted to housing and community development issues. 

This edition focuses on several proposals that came out of the Next Generation Housing Policy Conference held last October.   The Conference, sponsored by the White House, HUD and the Departments of Treasury and Agriculture, brought together prominent housing experts and practitioners to discuss, among other topics, the role affordable rental housing plays in improving life outcomes, particularly for children, families and the homeless. The discussions that took place at the conference fell into four distinct topic areas:

  • The mortgage interest deduction;
  • Multibank Consortia and their role in affordable rental housing
  • Informing the Next Generation of Rental Housing Policy

The fourth topic was defined by a conference participant, University of Southern California economist Richard Green who suggested that the concept of rental housing needs re-branding.  Rent, he said, carries a negative connotation and should be replaced with an alternative name such as "leased housing." The editors of Evidence Matters point out that this is just one of many misconceptions about rental housing that need to be addressed.  For example, the image of towering multi-family structures providing rental housing in general and affordable rentals in particular is belied by the reality that these large multi-family developments provide only about a tenth of the rental housing stock.

So, in order to discuss rental housing it is necessary to define the terms with a profile of the rental market and rental market research. For example, the article suggests that rental housing should be defined by tenure choice rather than structure type.  Although most multifamily properties are utilized as rentals, small single family properties (one to four units) make up nearly half of all rental housing and these plus developments of five to 49 units account for nearly 70 percent.  "Therefore," the report points out, "policies tailored to massive multifamily development will affect only a portion of the rental stock."

In the same way that rental housing is conflated with multi-family housing, affordable housing is assumed to be subsidized.  This applies to the most affordable rental units, but not to families earning 50 percent of the area median income (AMI). These units are not subsidized.  The American Housing Survey suggests that of the 17 million units affordable to households at 50 percent of AMI, only about 30 percent are subsidized.  In urban areas this unassisted housing tends to be older, smaller properties in low-income neighborhoods which are typically owned by "mom and pop" landlords. This type of housing has been ignored by federal housing policy for years so local financial institutions have stepped into provide affordable financing.   These small operations are critical sources of housing but their age, high maintenance demands, and low profit margins mean they have high loss rates.  "Preserving these structures is an important element of a broader strategy to ensure quality, affordable rental homes for low income Americans, but it is not a substitute for basic rental assistance."

More than 70 percent of HUD's budget is devoted to some form of rental housing assistance and, even though no consensus exists on how best to measure it, rental housing affordability is the biggest measurable housing problem that HUD programs must address.  The approach that most policy makers have adopted to assess affordability is rent-to-income ratios and the current standard is whether gross rents account for less than 30 percent of a tenant's monthly income.  Worse case need is defined as very low-income renters (earning less than 50 percent of AMI) who do not receive assistance and pay more than 50 percent of their income for housing or live in severely inadequate housing or both.  As a result of the recent recession nearly 7.1 million households are considered to have worst case needs - the highest level on record in both absolute and percentage terms.

Another measure is the difference between the numbers of low-income renters and the units affordable to them.  In 2009 there were 10 million extremely low-income renters (earning less than 30 percent of AMI) and just 6.2 million units that they could rent and pay no more than 30 percent of their income for housing.

Another definition that is necessary is one that takes local nuances into account. Constraints on new construction, employment growth, immigration, housing prices can all create frictions which differ across markets so Federal housing policy should promote market-sensitive investments that recognize how housing stresses play out in different localities.

Related MND comments....

READ MORE: Builder Report Offers Reminder. Affordable Rental Units Needed

READ MOREHUD Focused on Rebuilding America's Dilapidated Housing Inventory

READ MORE:  Affordable Housing Units Needed for Low Income Renters

READ MORE: The Dearth of Affordable Rental Housing

READ MORE:  Gimme Shelter: Homelessness Rate Climbing. Low Income Rental Units Needed

 

...(read more)

Forward this article via email:  Send a copy of this story to someone you know that may want to read it.

Negative Feedback Loop in Action: Existing Home Sales

The National Association of Realtors today released Existing Home Sales data for May 2011.

Existing Home Sales declined by 3.8 percent to a seasonally adjusted annual rate of 4.81 million in May from a negatively revised 5.00 million pace in April. This is 15.3 percent below the 5.68 million annual pace reported last May (*when sales were surging to beat the deadline for the home buyer tax credit).   All regions saw annual contractions in both the pace of home sales and median prices.  And while total housing inventory was reduced by 1.0 percent to 3.72 million previously owned homes for sale,  it's now going to take longer to sell those homes because the annualized pace of sales declined to 4.81 million. That works out to 9.3-months of supply, up from 9.0-months of supply in April. FYI: Supply of between six and seven months is viewed as an equilibrium range. Higher readings general point to lower home prices to better balance supply and demand.

Existing-home sales were down in May as temporary factors and financing problems weighed on the market, according to the National Association of Realtors®. Lawrence Yun, NAR chief economist, said temporary factors held back the market in May, as implied from prior data on contract signings. "Spiking gasoline prices along with widespread severe weather hurt house shopping in April, leading to soft figures for actual closings in May," he said. "Current housing market activity indicates a very slow pace of broader economic activity, but recent reversals in oil prices are likely to mitigate the impact going forward. The pace of sales activity in the second half of the year is expected to be stronger than the first half, and will be much stronger than the second half of last year."

Excerpts from the Release...

Existing-home sales, which are completed transactions that include single-family, townhomes, condominiums and co-ops, fell 3.8 percent to a seasonally adjusted annual rate of 4.81 million in May from a downwardly revised 5.00 million in April, and are 15.3 percent below a 5.68 million pace in May 2010 when sales were surging to beat the deadline for the home buyer tax credit.

Single-family home sales declined 3.2 percent to a seasonally adjusted annual rate of 4.24 million in May from 4.38 million in April, and are 15.4 percent below a surge to 5.01 million one year ago. The median existing single-family home price was $166,700 in May, down 4.5 percent from May 2010.

Existing condominium and co-op sales fell 8.1 percent to a seasonally adjusted annual rate of 570,000 in May from 620,000 in April, and are 14.7 percent below the 668,000-unit pace in May 2010. The median existing condo price was $165,400 in May, which is 5.8 percent below a year ago.


There were notable regional differences in home sales. “A large decline in Midwestern existing-home sales can be attributed partly to the flooding and other severe weather patterns that occurred, but this also implies a temporary nature of soft market activity,” Yun explained.

Regionally, existing-home sales in the Northeast declined 2.5 percent to an annual level of 770,000 in May and are 13.5 percent below May 2010. The median price in the Northeast was $241,500, up 6.1 percent from a year ago.  Existing-home sales in the Midwest dropped 6.4 percent in May to a pace of 1.02 million and are 22.7 percent below a year ago. The median price in the Midwest was $136,400, which is 8.5 percent below May 2010. In the South, existing-home sales fell 5.1 percent to an annual level of 1.85 million in May and are 14.4 percent below May 2010. The median price in the South was $149,200, down 3.1 percent from a year ago.
Existing-home sales in the West were unchanged at an annual pace of 1.17 million in May but are 10.0 percent lower than a year ago. The median price in the West was $192,300, which is 12.6 percent below May 2010.

“Home prices are rising or very stable in local markets with improved employment conditions, such as in North Dakota, Alaska, Washington, D.C., and many parts of Texas,” Yun noted.

The national median existing-home price for all housing types was $166,500 in May, down 4.6 percent from May 2010. Distressed homes – typically sold at a discount of about 20 percent – accounted for 31 percent of sales in May, down from 37 percent in April; they were 31 percent in May 2010.

“The price decline could be diminishing, as buyers recognize great bargain prices and the highest affordability conditions in 40 years; this will help mitigate further price drops,” Yun said.

All-cash transactions stood at 30 percent in May, down from 31 percent in April; they were 25 percent in May 2010; investors account for the bulk of cash purchases.


First-time buyers purchased 35 percent of homes in May, down from 36 percent in April; they were 46 percent in May 2010 when the tax credit was in place. Investors accounted for 19 percent of purchase activity in May compared with 20 percent in April; they were 14 percent in May 2010.

Total housing inventory at the end of May fell 1.0 percent to 3.72 million existing homes available for sale, which represents a 9.3-month supply at the current sales pace, up from a 9.0-month supply in April.

Yun said the market also is being constrained by the lending community. “Even with recent economic softness, this is a disappointing performance with home sales being held back by overly restrictive loan underwriting standards,” he said. “There’s been a pendulum swing from very loose standards which led to the housing boom to unnecessarily restrictive practices as an overreaction to the housing correction – this overreaction is clearly holding back the recovery.”

When calling attention to high gas prices and severe weather Yun is referencing the economic connection between Consumer Confidence and housing demand. We have described this relationship as the "negative feedback loop". This is what we wrote in August 2010 after the home buyer tax credit expired in June....

HOUSING  IS STAGNANT

This should come as no surprise to folks working in the industry. Uncertainty is abundant in all sectors of the economy and prospective (qualified) homeowners are too worried about further declines in home prices to buy a house right now. When investing outlooks are unusually cloudy and the market's strategic perspective is stuck in the "here and now", a brutal negative feedback loop can arise. Some may refer  to this phenomenon as a "downward spiral", where negative data leads to more negative data.

Plain and Simple: Although mortgage rates are at all-time lows and home affordability is at an all-time high, fence sitting home buyers are waiting for proof that home prices have hit bottom before making the biggest investment decision of their life.  While they wait for a clear cut buy signal, home prices will fall further and home buyer pessimism will intensify which will lead to more weak housing data. And the downward spiral begins...

We could go on and on about the industry, lender, and borrower specific problems limiting the housing recovery, however we believe the general big picture economic environment is providing enough roadblocks to recovery on its own. Thus, we will continue to state that until the labor market stabilizes and jobs start being created, the housing market will undergo a slow, frustrating recovery process (for mortgage and real estate professionals especially)

Some Optimism: Nationally, housing faces a long road to recovery, but not all markets are equal. While areas with a high concentration of distressed properties are clearly stuck in a deflating scenario, some communities will see price stability.  It's all based on local and regional economies. Where are jobs being created? Where are the best schools? Where is value being created by the community? Where do buyers want to live? This is where the housing recovery can find momentum. Of course you need to be in the right financial situation to even be asking these questions. That's another problem all together...

NAR President Ron Phipps, broker-president of Phipps Realty in Warwick, R.I., said a number of proposals being considered in Washington could further jeopardize the housing recovery. “We’re concerned about the flow of available capital, including a possible rule that would effectively raise minimum downpayment requirements to 20 percent,” he said. “We don’t need to throw the baby out with the bath water – increasing downpayment requirements would effectively shut many qualified families out of the market. What we critically need is a return to the basics of providing safe mortgages to creditworthy buyers willing to stay well within their budget.”

ABOUT: Existing Home Sales report on the number of completed real estate sales transactions on single-family homes, townhomes, condominiums and co-ops. The methodology in calculating existing-home sales statistics is really quite simple. Each month the National Association of Realtor® receives data on existing-home sales from local associations/boards and multiple listing services (MLS) nationwide.  The monthly EHS economic indicator is based on a representative sample of 160 Boards/MLSs. NAR captures 30-40% of all existing-home sale transactions with its monthly survey. HERE is the methodology for the data collection

...(read more)

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Fannie Mae Downgrades Outlook. Housing Stuck in a Rut

At the second anniversary of the current economic expansion, housing remains stuck in a rut according to Fannie Mae's Economic Outlook for June which notes that most housing indicators started the second quarter with little momentum.  Housing starts and builder's confidence are still at depressed levels and the sluggish construction activity reflected in both measures is one of the reasons that the current economic recovery is less robust than previous ones have been. 

Total construction spending improved in April but it was driven by home improvements rather than single or multifamily construction, both of which declined below the first quarter's average.  Single-family construction spending fell for the third consecutive month to reach the lowest level since June 2009. 

The report says that market conditions continue to favor multifamily and rental housing with demand outpacing supply in some markets.  Consequently, rents are beginning to rise.  The strong multifamily figures in the first quarter had already moved Fannie Mae to revise higher its multi-family starts projections for the year.  Total housing starts are now expected to increase 3.5 percent solely because of the multi-family sector.  Single-family starts will fall "modestly" in 2011 compared to 2010. 

The supply of new homes hit a record low in April while sales of new homes have increased twice since they hit an all time low in February.  At present the inventory of new homes stands at 6.5 months, nearing the long-term average of about six months.  However, the good news does not carry over to existing homes where few of the indicators are positive.  The National Association of Realtors® (NAR) is blaming the sluggish market on what is calls unnecessarily tight credit and to low appraisals.  NAR reported that one-quarter of its members claimed in a survey that they had to cancel contracts or renegotiate them at a lower price because of the appraised values.

That same NAR survey showed that distressed and cash sales continue to account for a big but declining part of the market.  Distressed sales made up 37 percent of all sales in April, down from 40 percent in March while 31 percent of sales were all-cash compared to a record 35 percent in March.   The report states that a continued decline of distressed home sales as a percentage of the market would reduce the discount component and might give a lift to home prices in the second quarter.

The discounts serve to depress appraised values, leading to the canceled or renegotiated contracts referenced above.  Homebuyers have also become accustomed to watching prices fall and continue to delay action on purchasing non-distressed homes. 

There is some good news about mortgage performance.  The Mortgage Bankers Association reported that short-term mortgage delinquencies were near pre-recession levels.  Serious delinquencies (90+ days) have dropped for five consecutive quarters and are at their lowest levels since the beginning of 2009 and foreclosure starts are at the lowest point since the end of 2008.  The report states that these figures along with the drop in the percentage of loans in the foreclosure process from the record high of the previous quarter indicate that the shadow supply of housing may have peaked, although remaining at very elevated levels.   "It will likely take years for the excess supply and the shadow supply of housing to be absorbed, even with a meaningful improvement in the labor market and household formation, which has been elusive so far."

The elevated inventories continue to hold home prices down.  "However, most third-party price indices adjusted for distressed sales seem to indicate that troubled loans being put through foreclosure are getting seasonally adjusted (foreclosure is not a seasonal activity), and also are likely causing an over statement of price declines for "arms length" transactions."

On the broader economy Fannie Mae believes the likelihood that "the economy will slip into another downturn within a year is still quite low, but has risen slightly." Still Fannie Mae did downgrade their economic growth outlook for 2011 from +2.9 percent to +2.5 percent in the previous forecast, which is more than a full percentage point lower than their forecast at the start of this year.  Several reasons for the downgrade were cited including continued European sovereign debt problems, a marked slowdown in growth in China as it fights rising inflation, the trade-related effects of reduction in Chinese economic activity , and dampening effects surrounding U.S. monetary and fiscal policy.

Fannie Mae's economists conclude that the near-term outlook for home sales appears gloomy with both mortgage applications down in May and again in June and pending home sales dropping 12 percent in April. 

"Ultimately, employment remains the key to the outlook for the economy and the housing market. If the tentative labor market recovery falters amid signs of a slowdown in consumer demand, it could jeopardize the projected moderate rebound in home sales later this year. Continued deterioration in home prices, tight lending standards, and households' desire to reduce their debt loads much further are among the main risks to the housing market and the overall economy."

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Rental Demand Brightens Dark Housing Outlook

The gloomy picture painted by The State of the Nation's Housing report released yesterday by Harvard's Joint Center on Housing Studies has but one bright spot - the improving rental housing market. 

On virtually every other level it appears that a housing recovery is still months if not years away. Rather than leading the country out of the recession as it has done in prior downturns, the housing industry is holding back economic growth. The report details a number of housing areas where, rather than the outlook improving as the economy began to pick up, things actually got worse.

First of all, household growth has dropped precipitously since 2007.  In the four years since, an average of 500,000 new households have formed each year compared to the 1.2 million annual pace averaged between 2000 and 2007.  This is even more disheartening as the "echo boomer" generation, those born after 1986, is the largest generation in our history to reach its 20s, peak household formation years.   Instead of forming households, many in this age group have stayed in or returned to their parents' homes.  At the same time, for the first time in decade the rate of immigration as slowed.  From 2004 to 2007 the number of new households headed by foreign born citizens increased by 200,000 per year but since 2007 the number foreign-born non-citizen households have declined by the same amount. 

The rental and the homeowner market have diverged.  There has been a net shift of 1.4 single family homes from owned to rental property between 2-007 and 2009, almost twice as many as in the previous two year period.  Still, rental vacancies are down, dropping from about 3.5 million to less than 2 million between 2009 and 2010, and rents have begun to move up.  At the same time homeowner vacancies, which dropped from over 9.5 million in 2008 to about 7.8 million in 2009 has declined only fractionally since even though new home construction has slowed considerably and banks appear to be holding large numbers of foreclosed homes off of the market.  Still, housing prices, unlike rents, have resumed their decline. Unusually large numbers of households are switching from owner to renter and the ownership rate has fallen from 69 percent in 2004 to 67 percent in 2010.  The report says that the continuing foreclosures and reluctance on the part of owners to buy as long as prices are unstable will cause home ownership to continue its decline through 2011. 

The Harvard report cites a Fannie Mae study showing that while attitudes toward homeownership have become more negative over the last few years, 74 percent of renters and 87 percent of the general population still view homeownership as safe investment.

While many households aspire to homeownership, tightened underwriting standards may stand in their way and the report speculates that the proposed 20 percent down payment requirement for qualified residential mortgages could sharply curtail homeownership unless the borrower obtains a government guarantee.  "Over the longer term, it is unclear how the impending reform of the housing finance system, (...) will influence the cost and availability of mortgage loans.

The number of rental households accelerated in the second half of the last decade, swelling by an estimated 3.9 million between 2004 and 2010 but rental vacancy rates increased and rents fell during the same period as new units were added and homes were converted from ownership to rentals.  In 2010, however, the rental market moved into high gear and the vacancy rate dropped from 10.6 percent to 9.4 percent over the course of the year.  MPF Research reported vacancy rates below 5 percent in almost one third of the 64 markets it studied and more than half had rates below 6 percent.   As vacancies declined, rents rose.  Rents in professional managed apartments were up 2.3 percent last year with most of the growth in metropolitan areas.  As employment grows, especially among younger persons, and homeownership continues to decline there will be pressure on the rental market, pushing rents up and encouraging multi-family construction.   Given the time line for new construction, however, rents are likely to remain tight in the short term and will present increased affordability challenges for low-income renters.

There is much uncertainty in the market regarding access to mortgage credit, home buying attitudes, immigration trends and laws, and household formation, but there is certainty about some factors related to demographics.  It is known that the aging baby boomers will drive up the number of older households by some 8.7 million by 2020.  This tends not to be a mobile population and will provide "ballast" for the owner market, offsetting in part the lower homeownership rates among younger households.

While the senior population is likely to age in place, if boomers follow the pattern of the preceding generation some 3.8 million will downsize their homes over the next ten years, lifting demand for smaller housing units and having a major impact on the housing markets in preferred retirement destinations.  The large pre-boomer population will create a similar demand for assisted and independent living developments.

The echo-boomer generation will have a less predictable impact on housing markets.  There are questions involving their homeownership attitudes and the net impact of immigration.  There is reason to believe that this generation will be large enough to boost household formation and the demand for starter homes and apartments.  The report states that if household formation (headship) rates return to their pre-recession average and if immigration is just half of what the Census Bureau projects, the number of households under age 35 will grow to nearly 26.5 million in the next decade.

Affordability is another challenge facing the housing market.  In 2009 10.1 million renters and 9.3 million owners paid more than half their income for housing.  While this hits low-income households the hardest, households with incomes under $15,000 pay over 80 percent of their incomes for shelter, the cost pressures have been moving up the income scale.  Households earning $30 to $45 thousand increased the proportion of their incomes spent on housing from 30 percent to 40 percent over the ten year period ending in 2010.

The recent crash has wiped out household wealth, ruined credit ratings and devastated communities with foreclosures and has left nearly 15 percent of homeowners in homes that are "under water".  This has reduced the amount that owners can cash out of their homes by selling or refinancing.

The report concludes by saying that the strength of the housing recovery, when it does finally occur, will depend on how fully employment bounces back, and then local markets will revive in proportion to the increase in jobs, the depths housing fell during the recession, and the amount of overbuilding that occurred before the downturn.  But the most critical factor for housing recovery in the resumption of household growth and it may be that the unemployment rates on top of the long-term housing affordability issues may have lowered the baseline trend of household growth itself.  "To match the 1.12 million annual rate average in the 2000s, household formation rates must return to their 2007-2009 average and net immigration must reach at least half of Census Bureau projections," the report says.

In the near term it will be rental markets that are likely to lead the housing recovery, but once consumers decide that a floor has formed under house prices, their reentry into the market could quickly burn through the lean inventory of unsold new homes and reduce the excess supply of existing homes on the market.  There is also the danger that government programs to address rent affordability and assisting distressed neighborhoods will feel the budget axe just as affordability problems are escalating.

Related MND comments....

From: HUD Focused on Rebuilding America's Dilapidated Housing Inventory

"Take note of HUD-sponsored initiatives aimed at rebuilding America's dilapidated housing stock." says MND's Managing Editor Adam Quinones. "This is where housing professionals will find the most opportunity in years ahead.  The FHA should reopen the 203(k) program to investors if they want to encourage private investment in the U.S. housing market."

From: Home Remodeling a Forward Indicator of Housing Bottom?

"With so many foreclosed properties sitting empty on the market we can expect remodeling and rehabbing to be a leading indicator of a bottom in the housing market", says MND's Managing Editor Adam Quinones. "We already know there is dearth of affordable rental housing available to low income renters. From that perspective, FHA should open its 203(k) program to investors if they want to accomplish their affordable housing goals."

READ MORE: Affordable Housing Units Needed for Low Income Renters

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Foreclosures Sell at 27% Discount. Distress Focused in Few States

Foreclosed properties continued to impact the home sales market during the first quarter of 2011 according to a report released Thursday by RealtyTrac. 

Sales of bank-owned homes or those in some state of foreclosure represented 28 percent of all residential sales in the first quarter of 2011, up modestly from 27 percent of all sales in the fourth quarter of 2010 and the highest percentage of distressed sales since the first quarter of 2010, when 29 percent of all sales were foreclosed properties.

While foreclosed properties were more prevalent in the first quarter as a percentage of total home sales, they declined from a sheer numbers perspective. A total of 158,434 properties were either sold out of bank inventories (REO), at auction, or while in some stage of default through a short or other sale.  This was 16 percent fewer than in the fourth quarter of 2010 and 36 percent below the number one year earlier.

The average price of distressed home sales was $168,321, 1.89 percent below the previous quarter and 1.46 percent under prices one year earlier. One statistic that speaks well to the term "distressed property" is the 27 percent price difference foreclosed inventory and non-foreclosed homes.  That figure was however unchanged from the fourth quarter of 2010 and up 1 percentage point from the first quarter of 2010.  

James J. Saccacio, chief executive officer of the Irvine California based firm said, "While foreclosure sales continue to account for an unusually high percentage of all residential home sales, sales volume is well off the peak we saw in the first quarter of 2009, when nearly 350,000 foreclosure properties sold to third parties" While this is probably helping to keep home prices relatively stable, it is also delaying the housing recovery. At the first quarter foreclosure sales pace, it would take exactly three years to clear the current inventory of 1.9 million properties already on the banks' books, or in foreclosure."

Sales can occur in two-phases of the foreclosure process.

  1. Pre-Foreclosure Auction or Short Sale: if the borrower does not catch up on their payments the lender will file a notice of sale (the lender intends to sell the property). This notice is published in local paper and contains information pertaining to the date, time and subject property address.
  2. Real Estate Owned or REO properties : "REO" stands for "real estate owned" and typically refers to the inventory of real estate that banks and mortgage companies have foreclosed on and subsequently purchased through the foreclosure auction if there was no offer higher than the minimum bid.

Pre-foreclosure sales totaled 51,291, down nearly 26 percent from the previous quarter and 45 percent lower from Q1 2010. This represented nearly 9 percent of all sales, down from 10 percent in the fourth quarter and 11 percent in the first quarter of 2010. Pre-foreclosure sales, which are often short sales, sold for an average discount of 9 percent, down from an average discount of 13 percent in the fourth quarter and an average discount of 14 percent in the first quarter of 2010.

REO accounted for 107,143 of sales in the first quarter, down 11 percent from the fourth quarter and nearly 30 percent year-over-year.  REO sales accounted for almost 19 percent of all sales in the first quarter, up from 17 percent in the previous quarter and 18 percent in the first quarter of 2010.  Bank-owned real estate sold for an average discount of 35 percent, unchanged from the previous period but up from 33 percent a year earlier. 

Bank-owned properties that sold in the first quarter had been repossessed by the bank an average of 176 days prior to the sale, while properties that sold in the earlier stages of foreclosure in the first quarter were in foreclosure an average of 228 days before selling.

Once again the three states with the highest rate of foreclosures had the highest percentage of foreclosure sales.  Such sales accounted for 53 percent of sales in Nevada and 45 percent in both California, and Arizona.  The average discounts from market sales were 18 percent in Nevada, 34 percent in California and 25 percent in Arizona.

Other states where foreclosure sales accounted for at least one-quarter of all sales were Idaho (33 percent), Florida (32 percent), Michigan (32 percent), Oregon (32 percent), Virginia (30 percent), Colorado (30 percent), Illinois (29 percent), Georgia (27 percent) and Ohio (25 percent). 

States registering the highest discounts for properties in foreclosure were Ohio (41 percent), Illinois (41 percent), and Kentucky (39 percent).  Maryland, Tennessee, Wisconsin, Delaware, Pennsylvania, and Louisiana all had discounts of over 35 percent.

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