Category: housing

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What can Congress learn from the real estate bubble and bust?

The drama that has been unfolding on Capitol Hill this week is not the usual production that is played out by the theater of Congress. While it seems as if everyone has something to say about debt ceiling issue, it’s no surprise that the National Association of Realtors® (NAR) also issued a statement.

A statement released July 29th by NAR president, Ron Phipps (Realtor.org) urged Congress to resolve the debt ceiling issue. Phipps stated; “…Until a resolution is reached, Congress will be unable to address the myriad issues facing the nation’s families, communities, and economy. The indecision in Congress is paralyzing progress on other fronts, and it is harming home buyer confidence and negatively affecting home sales…”

Although it is a convenient opportunity to point the finger at Congress for eroding home buyer confidence; by many accounts, the housing market has been affected since spring.

Given that June is typically the height of the home buying season, it comes as no surprise that NAR’s June pending home sales report (homes under contract but have not yet settled) indicated a 2.4% increase in nationwide pending home sales. Local June data corroborates a slight increase in pending home sales, however, the number of contracts actually going to settlement is decreasing. Montgomery County single family home sale data compiled and reported by Metropolitan Regional Information Systems, Inc. (MRIS.com) and the Greater Capitol Area Association of Realtors® (GCAAR.com) may reveal that momentum in the local housing market may have been losing steam since April; the number of settlements in April, May and June of this year decreased compared to the same time the previous year.

Much like the bipartisan group who appear to be contrarian to the status quo of a brokered calm after the debt ceiling storm, some housing experts are looking to correct the spinning rhetoric of housing data. The housing status quo was challenged earlier this year when CoreLogic, a real estate data company, called into question NAR’s housing data and methodology as being “overstated.” Naturally, the NAR refuted the allegation and quickly posted answers to their questioned methodology.

Also, akin to the confusion of mixed issues in the recent debt ceiling debate, housing issues also continue to be mixed and confused. Even though the debt ceiling discussion was (appropriately) tied to deficit spending and the national debt, the bigger picture was substituted for a shortsighted thumbnail focused on the status quo. Meanwhile, a fragile housing market continues to languish; albeit bits of positive statistics that are used to spin hope and rationale to buy a home and maintain a status quo. The result is that a new home buying paradigm may be eluding experts; a new approach to home ownership and motivation for buying a home that may be uncovered when the numbers and statistics of arcane housing reports are stripped away.

Since housing is a large sector of our economy, then comparisons may be fitting. The reality that seems lost to some is that just because “you can” buy a home may no longer be the reason to do so. Unlike the characteristic home buyers, who in the last decade, leveraged themselves to the hilt to buy a home; many current home buyers are concerned about an uncertain future and their family’s welfare- and as a result have become austere in the current economic environment.

by Dan Krell
© 2011

This article is not intended to provide nor should it be relied upon for legal and financial advice.  Using this article without permission is a violation of copyright laws.

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Expensive mortgages on the horizon

Owning a home takes work. Soon, it will cost more too. In response to a crippling financial crisis, sweeping changes were established in the mortgage industry to not only stabilize the crippled financial sector of the housing market, but to also to temporarily provide access to credit in an all but frozen credit market. Now that the temporary stop gaps are coming to an end, will private investors make home mortgages more expensive or will Congress bow to housing trade groups to extend current interventions?

Since the increase of FHA mortgage down payments to 3.5% a few years ago, there has been talk of increasing it further to 5%. The move comes at a time when mortgage assistance programs are winding down and reliance on FHA mortgages to refinance underwater home owners is diminishing. Concerns over FHA reserves prompted higher annual FHA mortgage insurance premiums and, of course, also elicited calls to increase FHA mortgage down payments to 5%.

Of course, while some look for a solid FHA mortgage down payment increase, some look to future decreases. H.R. 1977: FHA Reform Act of 2011 (introduced May 24th which has been currently referred to committee) creates the position of “Deputy Assistant Secretary of FHA for Risk Management and Regulatory Affairs,” whose job would be, among other things, to review down payment requirements.

Besides the push for increased FHA down payments, the FHA maximum loan amount is set to decrease in October of this year. Temporarily increased to $729,750, FHA loan limits will revert to those set by the Housing and Economic Recovery Act of 2008 (HERA). Unless Congress acts on maintaining the current FHA loan limits, HUD states that 669 of the 3,334 counties or county equivalents that are eligible for FHA insured mortgages will be affected. In “high cost” areas, such as Montgomery County, the maximum FHA loan limit will be reduced to $625,500 (“Potential Changes to FHA Single-Family Loan Limits…A Market Analysis Brief; hud.gov).

In addition to changes in FHA mortgages, conforming loans (mortgages that conform to Fannie Mae and Freddie Mac guidelines) will also change. October 2011 is also when the maximum conforming loan limits will revert to those established by HERA, as stated in a May 26th release from the Federal Housing Finance Agency (FHFA is the oversight agency for Fannie Mae, Freddie Mac, and Federal Home Loan Banks). Although the new loan limit will not differ from the current amount in a majority of regions, FHFA estimates that 250 counties or county equivalents will be affected. The maximum conforming loan limit for “high cost” areas, such as Montgomery County, will also be reduced to $625,500.

Although the current FHA and conforming loan limits were temporary, housing trade associations have warned about possible effects of reverting to lower mortgage limits on an unstable real estate market. Both the National Association of Realtors and National Association of Home Builders have commented on the imminent changes and have called on Congress to make the temporary changes permanent.http://www.blogger.com/img/blank.gif

Recent government interventions in the housing market may have been necessary but they were intended to be temporary. Continued intervention may continue to allow “lower cost” mortgages for some home buyers, but some have warned against maintaining the temporary stop gaps because it hinders private investors from entering the housing market as well as the possibility of artificially inflating housing prices.

by Dan Krell
©2011

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.

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Can timing the real estate market help you get a better deal?

If you’re trying to time the market before buying or selling your home, you may decide to wait a little longer after hearing the recent housing data; however, you could also change your mind when you consider some recent research.

First, a recent housing report released May 8th by Zillow.com indicates further erosion of home values. According to Zillow.com’s chief economist Stan Humphries, home values continue to slide nationwide – except for the metro areas of Honolulu, HI (there was a slight increase in home values in March 2011 compared to the same time last year) and Pittsburgh, PA (where home values have been determined to be flat for the time period) (Zillow.com).

Even the Washington, DC metropolitan appears to have taken a hit. According to Zillow.com, area home values declined 0.5% in March 2011 compared to February 2011; and declined 7% in March 2011 compared to March 2010.

Humphries further stated that housing demand continues to be “fundamentally weak;” while housing supply is and will continue to be affected by distressed properties due to higher than normal delinquency rates (which are expected to continue into the near future).

Given the less than rosy picture of the housing market, those doubting the long term value of home ownership may continue to wait out the market. But a recent research article by Anderson & Harris (2010. Timing the market: You don’t have to be perfect. Real Estate Issues 35, (3) (10): 42-42-50) may indicate that you don’t have to be perfect when timing your purchase and sale of your home.

Anderson & Harris studied various strategies of purchasing and selling commercial real estate to determine if there is a significant difference in return. Their strategy simulation provided these results: the typical “buy and hold strategy” over a thirty year period results in an annualized return of 8.18%; however, buying when a recession has ended with a predetermined sale period yields a wide range of return that ranged from 13.38% to 1.42% annualized total return. Alternatively, timing your purchase and sale with the overall peaks and valleys of the market could be more effective than trying to be exact; although they concede that peaks and valleys are realized in hindsight.

Although their data analyzed commercial real estate investor behavior, the results may have implications for the housing market. As the data suggests, attempting to exactly time your purchase and sale can yield a wide range of unpredictable results; while a long term strategy appears to be more stable. Additionally, they caution that market timing can also be affected by macroeconomic factors as well as your personal financial picture; which can reverse positive returns, even if your timing was perfect.

Anderson & Harris’ data may indicate that attempting to time your purchase may not yield the results you might expect; long term home ownership can be as good, if not better, than speculating on the exact bottom or top of the housing market. Likewise, home sellers waiting for the housing market to rebound before making a move may be missing an opportunity as well.

Obviously, you should consult financial professionals before making any financial decision; as well as consulting a Realtor® to assist you in analyzing local and neighborhood sale data. However, if you’re trying to time the housing market, consider a long term approach before making your decision.

by Dan Krell
© 2011

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.

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Has the market hit bottom yet?

I have to admit that after offering definitively optimistic analyses about the housing market after the meltdown, I now answer housing market questions tentatively. The tentative answer is not for a lack of optimism (the local market has shown strength in the last year where other regions continue to languish at best); however current analyses are tentative because rather than making a decision to buy or sell a home strictly on the strength of the market, consumers also need to be aware of personal goals and preferences.

Sure, if you look at some of the housing market indicators, such as the S&P/Case Shiller Home Price Index and the National Association of Realtors® (NAR) existing home sale report, national data are conflicting and may not yet indicate a solid recovery (although the Washington, D.C. regional data has shown strength).

The last S&P/Case-Shiller Home Price Index (standardandpoors.com) data that was released March 29th indicated that national home prices have not fared well for January 2011. However, it must be pointed out that as home prices slid across most of the country, the Washington, D.C. region’s home prices revealed an annual increase of 3.6%.

The NAR’s February existing home sale report released March 21st indicated a further decline for the number of homes that sold compared to the same time the previous year. However, the Washington, D.C. region was reported to have increased in home sales but decreased in home prices compared to the same time the previous year. We are anxiously waiting for this month’s report, which is scheduled to be released this week (realtor.org).

Additionally, the April NAHB/Wells Fargo Home Market Index (HMI) fell to 16; as reported in the April 18th press release by the National Association of Home Builders (nahb.org). The HMI is a scale from 0 to 100 that rates builder sentiment across the country (the lowest index reported was 9 in 2009; the highest index was 77 reported in the late 1990’s). NAHB Chairman Bob Nielsen was reported as saying in the press release, “While builders in some areas are starting to see a pickup in traffic of prospective home buyers, many consumers remain skittish about the health of the housing market and overall economy, particularly in view of recent legislative and regulatory proposals that could make it much harder to get a mortgage…”

Economists and other housing experts remain conflicted about sources for the continued issues facing the national housing market. Some point to continued problems with distressed home sales, which include foreclosures and short sales; while others continue to point to unemployment. The reality is that these economic factors are just a part of a larger puzzle. Other economic forces that can affect consumer sentiment and the housing market can range from mortgage regulation (as recognized by Bob Neilson of the NAHB) all the way to energy shocks and policy (one of Shell’s energy scenarios named “Scramble” predicts major global economic difficulties as early as 2020 unless serious energy policies are undertaken).

Has the housing market bottomed out? Macro-economic factors may indicate that housing could continue to manifest symptoms of a labile global economy; while micro-economic factors might indicate a completely different picture. For someone contemplating buying or selling a home, the answer is probably more of a personal reflection combined with local and hyper-local housing data.

By Dan Krell Copyright © 2011

This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.

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What’s Next for Housing Finance Market Reform

No one said change is easy, however it’s necessary. That thought is reflected in the Treasury Department’s (Treasury.gov) white paper entitled, “Reforming America’s Housing Finance Market.” The white paper, released last Friday, is an assessment of the housing market and offers proposals for reforming the mortgage markets. Being the most significant reform of the housing finance markets in 80 years, the main points for this reform are to create a robust mortgage market by “winding down Fannie Mae and Freddie Mac” and “increase the role of private capital.”

Although it was admitted that housing finance reform “will make credit less easily available than before the crisis,” experts agree that reform is necessary. However, that’s where the consensus ends; for you see, there is disagreement about what kind of reforms are to be realized. Industry groups such as the National Association of Realtors® (Realtor.org) and the Mortgage Bankers Association (mortgagebankers.org) hail mortgage market reform, but offer slightly different solutions.

Two extreme positions of reform are complete privatization and nationalization; the white paper contrasts each with the notion that actual reform would be somewhere between the two. A complete privatization of the mortgage market would limit access to financing as well as increasing financing costs; while a nationalization of the mortgage market would increase taxpayer risk and market distortion.

As possible solutions, the white paper weighs several proposals against four criteria: access to mortgage credit; incentive to invest in the housing sector; taxpayer protection; and economic stability. The best path is described as a “balance of [these] priorities.”

The options discussed are several versions of option 1, which is: “privatizing housing finance but with government insurance limited to FHA, USDA and Department of Veterans’ Affairs for a narrowly targeted group of borrowers.” The stated benefits of this option include minimizing market distortions and limiting “moral hazards” within the lending industry. Although this option would reduce risk in private markets, there is concern that it may cause capital to retreat from housing into other economic sectors (which could have an undesirable effect on home prices). Additional concerns include increased mortgage costs, restricted access to the 30-year pre-payable mortgage, and the inability for the government to quickly respond to a credit crisis.

Option 2 is the same as option 1, but with a guarantee mechanism that would engage in a crisis. This would address the inability of a swift government intervention in option one; however there is a risk of increased moral hazard.

The 3rd and final option proposed in the white paper is same as option 1, but with catastrophic reinsurance behind significant private capital. (Reinsurance is the purchase and re-issue of mortgage insurance from mortgage insurance companies, which transfers the risk of the loans). This option has the government role as reinsuring mortgage securities, which is thought to reduce financing costs by increasing the flow of capital to mortgage markets. Although the Stated benefits of this option include affordable 30-year pre-payable mortgages for the average home buyer, as well as allowing small lenders to participate in the mortgage market; there are some concerns, which include the possibility of creating another housing bubble by artificially inflating housing prices due to the increased investment flowing into the housing sector.

Although it’s inevitable, there is no clear path to housing finance market reform; which means that the road ahead may be bumpy.

By Dan Krell.
Copyright © 2011

Comments are welcome. This article is not intended to provide nor should it be relied upon for legal and financial advice. Using this article without permission is a violation of copyright laws.

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