Archive for May, 2008

Are we at the bottom yet?

One of the biggest questions on everyone’s mind when they think of real estate is…’Are we at the bottom yet?’  Well, according to an article from the Wall Street Journal on May 6, 2008 titled The Housing Crisis is Over: ‘it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.’

When the term ‘bottom of the market’ is mentioned, this actually means the trend is not getting, and not necessarily  that prices will all of the sudden skyrocket back to levels of 2005.  The market ‘bust’ is three years old, home prices peaked in July 2005.  The author of the same Wall Street Journal article, Cyril Moulle-Berteaux, goes on to explain the indicators of the bottom:

New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.

Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what’s going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.’

How can affordability solve the housing market in this economy? Well, read how Cyril explains that homes are just as affordable as they were in the 1990s:

‘The boom made housing unaffordable for many American families, especially first-time home buyers. During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much.

Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the bubble to burst.

Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in.

As we are seeing in our local market, home sales are picking up month after month, but even so, how can prices stop declining with so many vacant and unsold properties one may ask.  As the Wall Street Journal tells us: ‘because they always do’.  Historically we have seen this happen as the article illustrates:

In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.

The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in “months of supply” terms. That’s the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high – but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.

Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually.

Inventories will drop even faster to 400,000 – or seven months of supply – by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won’t stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.

I speak with people all the time who claim the prices need to come down another 30% to bring back in line with the historical trends.  Well, according to the Wall Street Journal,

‘This is usually based on an analysis of house prices adjusted for inflation: Real house prices are 30% above their 40-year, inflation-adjusted average, so they must fall 30%. This simplistic analysis is appealing on the surface, but is flawed for a variety of reasons.

Most importantly, it neglects the fact that a great majority of Americans buy their houses with mortgages. And if one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one’s income is required to be able to make the mortgage payments on the house. Today the rate on a 30-year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today’s house prices to the 1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading.

Finally, the bigger worry is if the economy doesn’t turn around, the real estate market will get even worse. Well, I agree with the final sentiments of Cyril at the Wall Street Journal when he writes,

‘This is all good news for the broader economy. The housing bust has been subtracting a full percentage point from GDP for almost two years now, which is very large for a sector that represents less than 5% of economic activity.

When the rate of house-price declines halves, there will be a wholesale shift in markets’ perceptions. All of a sudden, the expected value of the collateral (i.e. houses) for much of the lending that went on for the past decade will change. Right now, when valuing the collateral, market participants including banks are extrapolating the current pace of house price declines for another two to three years; this has a significant impact on the amount of delinquencies, foreclosures and credit losses that lenders are expected to face.

More home sales and smaller price declines means fewer homeowners will be underwater on their mortgages. They will thus have less incentive to walk away and opt for foreclosure.

A milder house-price decline scenario could lead to increases in the market value of a lot of the securitized mortgages that have been responsible for $300 billion of write-downs in the past year. Even if write-backs do not occur, stabilizing collateral values will have a huge impact on the markets’ perception of risk related to housing, the financial system, and the economy.

We are of course experiencing a serious housing bust, with serious economic consequences that are still unfolding. The odds are that the reverberations will lead to subtrend growth for a couple of years. Nonetheless, housing led us into this credit crisis and this recession. It is likely to lead us out. And that process is underway, right now.

Dana McIntosh, REALTOR
800-775-5914 Main | 850-428-0243 Cell


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Short Sales Facts and Myths

Richard EimersQuestion

Does a homeowner have to be behind in payment to start a short sale?


No, they don’t need to be behind, but they should have a valid hardship and be able to show that they will soon start missing payments if the short sale is not approved within a set timeframe. For example if they know they will miss payments in March once their loan adjusts and the bank is not willing to approve a loan modification to keep their rate from adjusting.


Hello is it true that once you open Escrow you have to create a fake offer in order to get the BPO this is what escrow is telling me on 4 properties I just got listed for short sale?


In some cases the answer would be yes, you will need an offer before the lender will order the BPO. We usually submit the file without an offer if we do not yet have one and in some cases they will assume an offer is in the packet and move forward with the BPO. In other cases, we tell the lender the offer will be faxed to them once we get the estimated HUD from escrow but that we think they had better order the BPO because “we have a good offer and don’t think this buyer will wait around for more than a couple weeks”.

It is not good to submit fake offers, but, if you have an investor that will make an offer on any property you list, take advantage of that.


You mention in your seminars that we can negotiate down to 80% LTV on the first and the second should be happy with any thing, and Helocs any where from 25 to 35 cents on a dollar. Now is that off the BPO or appraisal done by the bank or is that off original loan amount?


Those are ‘general rules’ and not gospel at every bank. The loss severities are based off of the ORIGINAL LOAN AMOUNT. For example, an original first loan of $400K would see $320K as an acceptable loss (20% Loss Severity). With the new or current value, the bank will want to see an offer within 5%-15% of
the current market value, depending on the lender.


I am dealing with a short sale w/ Beneficial Bank of CA. Client signed all documents including Do Not Call. I was in negotiations w/ the lender (Beneficial) during that time lender was persistent on a deed in lieu. I proposed the deed in lieu to borrower and she rejected it because of the unknown 1099 amount she
would get hit with.

Today I found out that for the PAST 2 WEEKS, the loss mitigator at beneficial has been in direct contact with the borrower and negotiated a deed in lieu without my knowledge.

Question: Is it legal for a lender to contact a borrower that is represented by a
broker and has the signed the Do Not Call which was submitted to Beneficial?


It is illegal for them to contact the client, but in this case where the client allowed and accepted the continued calls; it is very likely that the homeowner will not complain. I would ask to speak with the AVP or SVP for the department. Tell them call may be recorded (and actually record it) and ask them if they are allowed to contact a client who has notified them in writing not to contact them. Don’t refer to which client, just ask them straight up on a recorded call to see how they respond (remember, you must notify them, per California law, that the call may be recorded) and how they would justify calling a client.
There is not much you can do, unless the client is pissed off at the bank. So, since you are not the client, it is hard to reverse anything.


Can a bank or should a bank send over a counter offer in the middle of escrow? This was a short sale, two weeks from closing.


If you had an approval letter and then they changed the approval prior to the approval expiring or the file closing, that is real bad on their part. Now it becomes a matter of getting to the ‘right’ party to get it resolved quick.


Does the seller have to be behind on payments to qualify for a short sale? My sellers have not missed a payment yet or been late, but they can’t keep it up for long.


No, they don’t have to miss a payment. I am Lee’s partner and I just closed one last month (Dec 07) that never missed a payment. I had to prove to the lender that 1. The offer is close to full market value. 2. The seller has a valid hardship that can not be fixed any time soon and the property will end up in foreclosure within the next year if they don’t sell now. Good luck. The number one reason agents fail is because they talk to the wrong idiot at the bank and they don’t follow up, they wait for the bank to respond. They won’t
respond if you wait patiently. Your file will not move unless you push it.


Could you please clarify when a home is eligible for a short sale. Does it have to be a primary residence? or can an investment property qualify?


Any property is eligible for a short sale. When the value is less than what is owed and the borrower can’t make the payments or must sell for other reasons, the bank will look at whatever options they have. Usually their options are only 1 – accept a short sale, 2 – allow it to go to foreclosure and hope it sells for enough or 3 – sell it as an REO after the auction if it did not sell. Even commercial properties can be short sold.

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Spring Approaches

Lucy Ballenger, REALTORAs spring approaches and we get to enjoy the first warm days of the year, I feel enthusiasm build as I anticipate the activities that have been stowed away for the last few months. Long sunset walks on the beach seem so much more enjoyable barefoot. Watching the endless stream of fishing boats cruising the second sandbar for cobia is an annual sign that my favorite time of the year is upon us.

With water temperatures rising daily the need for full wet suits give way to shorties and finally, thankfully to bathing suits. Wine festivals, outdoor concerts and firework displays are just several of the seemingly nightly events available as the season turns.

This excitement is evident in the real estate market as well. Activity is increasing as prospective buyers look for ways to enjoy Destin not only in the spring, but more as a way of life. The Emerald Coast currently offers many opportunities for those people who need options to diversify their portfolios. With the current state of the economy, purchasing a second home for a long term hold (minimum five years), opens doors for a more financially sound investment plus the added value of using your home for memorable family vacations.

Lucy Ballenger, REALTOR
850-837-8880 Office | 850-830-3234 Cell


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