Housing approaches the fiscal cliff

by Dan Krell
DanKrell.com
© 2012

Moving forward after the election, there are a number of events and possible legislation that could impact the real estate industry. The most imminent is the “fiscal cliff.”

The “fiscal cliff” is the term that describes the expected economic outcome of the automatic budget cuts (sequestration). Sequestration was part of a budget deal that was passed as the bipartisan Budget Control Act of 2011. Even though it is described as an economy falling off a cliff, some say it is more apt to an economy hitting a brick wall; because the sequestration will make it very difficult for the economy to expand. Others are not as pessimistic about the fiscal cliff; some describe the “cliff” as a gentle slope that may present some impediments to the economy that are not insurmountable.

Regardless of the description, there is a consensus that there will be some economic obstacles. There is an economic truth that the housing market benefits from a thriving economy, as well as suffering when the economy slows.

The Congressional Budget Office has provided warnings that a “fiscal cliff” could cause a recession in 2013 and possibly increase unemployment significantly. As we already know, a recession combined with increases in unemployment will not be good for the housing market. In a Florida Realtors® 2010 study conducted to determine causes of foreclosure in Florida, determined that there is a correlation between unemployment and foreclosure – citing a combination of increased cost of living, unemployment or decreased pay, and other factors.

To address budget deficits and avoid a fiscal cliff, various committees have convened and provided recommendations proposal for improve the budgetary process that included a number of recommendations to lower the budget deficit. One common thread in addressing budget deficits is to either eliminate or further restrict the mortgage interest deduction.

The origination of the mortgage interest deduction is not as extraordinary as you’d expect; however the fact that it has remained through tax reforms during the Reagan administration has been described as rather “remarkable.”

The mortgage interest deduction is often described as a subsidy for the housing industry to encourage participation in market (similar to the first time homebuyer tax credits offered several years ago). Much like social security, it is a political hot potato that elected officials are hesitant to address. Some have argued for many years that the mortgage interest deduction should be eliminated since because they assert the subsidy artificially inflates home prices.

However, a National Association of Realtors® (NAR) December 1, 2010 press release, stated “The tax deductibility of interest paid on mortgages is a powerful incentive for home ownership and has been one of the simplest provisions in the federal tax code for more than 80 years…” The release cited a survey that indicated that the deduction was extremely important or very important to three-fourths of the 3,000 homeowners and renters surveyed (Realtor.org).

Several years ago, the Congressional Budget Office recommended the elimination of the mortgage interest deduction. Additionally, the bipartisan National Commission on Fiscal Responsibility and Reform (more commonly known as the Simpson Bowles Commission) provided recommendations to reducing the mortgage interest deduction benefit from the current $1,000,000 limit to a cap of $500,000.

A resolution to the fiscal cliff may be reached before year’s end; the housing recovery depends on it.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of November 12, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.
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October 10, 2012October 11, 2012

The Presidential housing debate

by Dan Krell © 2012
DanKrell.com

If you watched the presidential debates last week, you may or may not have noticed that neither Presidential candidate specifically spoke about the housing market. And since the debate, some have cried foul that one of the largest sectors in the U.S. economy was given short shrift in a debate about the economy. But then again, why should you be surprised – housing has basically taken a back seat to other issues throughout the primaries and now again in the heat of the presidential race.

The lack of discussion about the housing market is probably not because of disinterest, but rather both candidates are focused on making the fundamentals of the economy thrive. There is an economic truth that the housing market benefits from a thriving economy, as well as being impeded when there is economic malaise.

But if you paid attention, you may have picked up on issues that were touched upon that affect the housing market, such as employment and Dodd-Frank.

Obviously there is a relationship between employment and home ownership. A 2010 study by Neil & Neil indicated that loss of employment is one of the unexpected life events that caused foreclosure.

In response to the recent jobs report, Matthew O’Brien wrote in his October 5th The Atlantic article (“There Is No Jobs-Report Conspiracy: The Jobs Recovery Is Still Meh”): “If we take the same long view over the past few years, it’s clear that not much has changed. Growth is painfully slow, just like before. In 2011 we created 153,000 jobs per month, and so far in 2012 we have created … 146,000 jobs per month. It’s barely been enough to keep up with population growth.”

It should also be obvious that elevated unemployment and economic uncertainty has eroded consumer sentiment towards home ownership. This was suggested in Fed Chair Ben Bernanke’s February speech to the National Association of Homebuilders (federal reserve.gov), when he said: “High unemployment and uncertain job prospects may have reduced the willingness of some households to commit to homeownership.”

Additionally, many in the industry have complained that mortgage lending has been restricted due to increased regulation after the financial crisis. The Dodd-Frank Wall Street Reform and Consumer Protection Act (also known as “Dodd-Frank”) is one of the wide sweeping pieces of legislation that was enacted after the financial crisis to regulate and oversee the financial sector of the economy, as well as offer consumer protections.

As we have lived with Dodd-Frank for over two years, critics add to their critique about the Act’s limitations, over reaching, and failures. Some critics point out a failure of one of the main tenets, which is that no institution should be “too big to fail;” under Dodd-Frank critics claim that some of the country’s large financial institutions have become larger; while smaller regional and local financial institutions (which invest in local communities) are increasingly struggling.

Additionally, critics claim that mortgage lending has been stifled by rules devised to ensure those who securitize mortgages have skin in the game. Whether lenders comply with credit retention risk rules or they comply with Qualified Residential Mortgage rules (which requires strict credit underwriting and a 20% down payment), mortgage underwriting has become restrictive.

Make no mistake; the housing market is smack in the middle of the Presidential debate. The issues debated depict different visions for the economy, and of course, a housing recovery.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of October 8, 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

September 6, 2012October 11, 2012

Has the housing market improved in the last four years

Dan Krell, Realtor®
DanKrell.com
© 2012

In retrospect, the beginning of the global recession in late 2007 was the end of the housing boom and may have spawned the foreclosures crisis and the financial crisis of 2008. And although this period of time will undoubtedly become the basis of many future dissertations examining the “Great Recession;” you might ask “how much has the state of housing improved since 2008?”

If you recall, the Housing and Economic Recovery Act of 2008 (HERA) was anticipated to have wide reaching changes in the mortgage and housing industries as well as supposed to have assisted struggling home owners. This multifaceted piece of legislation consolidated many individual bills addressing issues that were thought to either be the cause or the result of the financial crisis. Besides raising mortgage loan limits to increase home buyer activity, the historic legislation was the beginning of changes meant to “fix” Fannie Mae and Freddie Mac, as well as “modernizing” FHA to make the mortgage process easier for home buyers and refinancing easier for struggling home owners. Additionally, this law was the origination of the Hope for Homeowners program to assist home owners facing foreclosure (www.govtrack.us/congress/bills/110/hr3221).

The Federal Housing Finance Agency (FHFA), originated from HERA, has been the “conservator” of the then sinking Fannie Mae and Freddie Mac. Since the FHFA took control, there has been conjecture as to what would become of the mortgage giants: some talked about closing their doors, while some talked about changing their role in the mortgage industry. Since FHFA became the oversight agency, Fannie Mae and Freddie Mac has strengthened their role in maintaining liquidity in the housing market by helping struggling home owners with their mortgages as well as freeing up lender capital by the continued purchases of loans (fhfa.gov)

The inception of Hope for Homeowners was the beginning of a string of government programs designed to assist home owners facing foreclosure, or assist underwater home owners refinance their mortgage. Although there have been individual success stories, there has been criticism that these programs did not assist the expected numbers of home owners. A January 24th CNNMoney article by Tami Luhby (money.cnn.com) reported that “…the HAMP program, which was designed to lower troubled borrowers’ mortgage rates to no more than 31% of their monthly income, ran into problems almost immediately. Many lenders lost documents, and many borrowers didn’t qualify. Three years later, it has helped a scant 910,000 homeowners — a far cry from the promised 4 million…” and “HARP, which was intended to reach 5 million borrowers, has yielded about the same results. Through October, when it was revamped and expanded, the program had assisted 962,000…” (money.cnn.com/2012/01/24/news/economy/Obama_housing/index.htm).

Despite the recent slowdown in foreclosure activity, there is disagreement about the projected number of foreclosures going into 2013. A March 29^th Corelogic news release (www.corelogic.com/about-us/news/corelogic-reports-almost-65,000-completed-foreclosures-nationally-in-february.aspx) reported that there have been about 3.4 million completed foreclosures since 2008 (corelogic.com). And although an August 9^th RealtyTrac® (www.realtytrac.com/content/foreclosure-market-report/july-2012-us-foreclosure-market-report-7332) report indicated a 3% decrease from June to July and a 10% decrease from the previous year in foreclosure filings; July’s 6% year over year increase in foreclosure starts (initial foreclosure filings) was the third straight month of increases in foreclosure starts.

So, if you’re wondering if housing is better off today than it was four years ago, the answer may be a resounding “maybe;” It all depends on your situation.

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This article is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of September 3 , 2012. Using this article without permission is a violation of copyright laws. Copyright © 2012 Dan Krell.

July 31, 2012June 29, 2019

Are appraisals hindering a housing recovery

As the housing market receded, low appraisals seemed to be the rule; lower priced comparables were often to blame. As home sellers and their real estate agents become accustomed to the new market, some within the real estate industry continue to complain that low appraisals are still an issue that interferes with the housing market recovery. Many blame low appraisals for keeping home values down as well as killing pending deals.

A recent article by syndicated columnist Ken Harney (House sales hampered by appraisers who fail to recognize appreciation) brought attention to a growing issue that many claim is impeding a housing market recovery. It is clear that appraisers exercise caution and seek the conservative value, which is to avoid liability for the lender having to buy back a loan that does not comply with guidelines. However, another issue that Harney pointed out was the reliance on appraisal management companies.

If you remember, in response to claims of inflated appraisal values due to lender coercion and “undue influence,” the Home Valuation Code of Conduct (HVCC) was implemented for mortgages bought by Fannie Mae and Freddie Mac (then later by FHA). The intention of implementing these new standards of practice was to establish increased accountability and independence in the appraisal industry. One issue that was addressed was to limit communications between the lender and appraiser. As a result, many lenders resorted to using Appraisal Management Companies (AMC) to order and review appraisals.

In rush to meet the new HVCC compliance measures, lenders initially believed they needed to use the AMC to manage appraisals. However, that was not a direct requirement and some lenders have since moved away from using AMCs; subsequently implementing in-house appraisal management systems. Some lenders, however, still rely on the AMC appraisal “middle man” to assign and review appraisals.

Much of the criticism of the AMC is that they are sometimes located quite a distance away from the subject property. Appraisal reviewers who do not have the local experience and data to understand distant markets may make valuation mistakes.

Just as quick as the lending industry moved to comply with HVCC, the pendulum has swung in the opposite direction – there are some reports of appraisers being coerced to “revise” appraisal values down. If the value is not considered within the lender’s “guidelines,” the appraiser may be requested to revise the valuation prior to submitting to the lender.

Testimony provided to the House Committee on Financial Services hearings on “Appraisal Oversight: The Regulatory Impact on Consumers and Businesses” (June 28th), Francois (Frank) Gregoir, for The National Association of Realtors®, stated: “There are a myriad of circumstances and issues working to hinder the recovery of the nation’s housing market. Among them… are those related to the credible valuation of real property…However, in today’s world there are many road blocks in the way of valuing property and, as a result, allowing for a healthy recovery of the broader real estate industry. Because there are many roadblocks there is no one, “silver bullet” solution.”

Regardless of where blame lay for low appraisals, the outcome and effect on the housing market is clear: some pending sales are falling out; some home buyers are paying additional funds to cover differences between a low appraisal and contract price; and some sellers are pulling homes off the market.

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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.

by Dan Krell
Copyright © 2012

July 17, 2012July 18, 2012

The economy, stupid

Is the housing bust over, or is it about the economy (stupid)?

by Dan Krell ©2012
DanKrell.com

Last week’s Wall Street Journal report that the housing bust is over has grabbed everyone’s attention (Housing Passes a Milestone; wsj.com). The WSJ reported that of forty-seven “forecasters” surveyed, forty-four believe that the housing market has bottomed out. There are several factors cited by these “experts” as rationale for the stating the bust is over, as well as asserting that the housing market will not be a further drag on the economy. However, many experts may be missing some data points; as well as not recognizing causality.

Although the U.S. housing bust may be over (for now), as experts proclaim; other regions of the world are struggling. Two of the most influential economic regions, Europe and China, are experiencing real estate slumps.

According to a May 31st report in The Economist (Downdraft: European house prices are finding it harder to defy gravity), global house-price indicators point to increased volatility. Although, Europe’s housing markets experienced similar declines we experienced during the financial crisis; individual countries differed in their housing outcomes. Troubled economies, such as Ireland and Spain, continue to have lagging housing markets. Ireland’s already depreciated home prices are reportedly continuing to drop; while Spain’s home prices are reportedly over valued while prices also continue to drop. However, Germany, France, and Belgium’s housing bounced back relatively quickly and reportedly appreciated through last year.

However, as recession looms and unemployment increases in the Eurozone; The Economist reported that the pace of housing depreciation increased in weaker countries, while housing appreciation stalled in Germany and France.

The other big economy that may also show signs of stalling is China. China’s recent GDP growth was reported to be 7.9%. From a bustling economy that reported GDP growth over 10% in 2010, and GDP growth over 9% in 2011, the shrinking GDP may be a signal. Although overall Chinese housing prices are reportedly flat, some have reported that some provinces have experienced as much as a 30% drop.

Although the Chinese housing market is a bit different than the U.S., (private property ownership is a relatively recent development); albeit volatile, housing is a component of the Chinese economy. A December 2011 report by Patrick Chovanec in Foreign Affairs (China’s Real Estate Bubble May Have Just Popped) indicated that Beijing new home prices dropped 35% in November 2011. Property agencies reported that new home inventories are building and buyers are hard to find.

Additionally, The China Perspective reported in January that re-sale home sales volume dropped about 23%. As a result, real estate agencies are closing offices. It was reported that an average 3.8 offices closed daily in Beijing; while the number of real estate agency offices in Shanghai has been reduced 40% since their housing peak.

As other global housing markets stall, there may be a silver lining. The devaluation of residential real estate abroad has attracted foreign investors to U.S. housing. Although international buyers have bought homes at all price levels, the luxury real estate market seems to be attracting most attention.

But back to what the experts proclaim as the bottom of the market – yes there are some positive signs, but it’s too early to tell if the bust is over. And although these experts proclaim that housing will no longer drag the economy; the reality may be that it’s the economy that’s dragging the housing market.

by Dan Krell DanKrell.com © 2012