Wednesday | July 02, 2008

What is Going to Bring the Housing Market Back

This article from Fortune Magazine hits the nail on the head.  The entire housing market will come back below almost everybody's radar.  Nobody will know where the bottom was until we look back at it.  However the "new affordability" of 1st Time Buyers is creating a stronger market for everybody. 

Anytime home prices have fallen, rental prices begin to rise.  We are seeing that more and more every day.  I anticipate rental rates in this area to raise nearly $100 per month per year for the next 3-4 years at a minimum.  Rents were artificially kept down during the housing boom as it made too much sense just to buy.  This also increased the number of "investors"; I actually believe many of the "investors" were more like speculators.  When these speculators could not sell the house that they contracted to purchase from a builder at a profit when it was completed, they had to do something.  Some of the homes went to foreclosure, while others were rented out at whatever the owner could get in order to avoid having to pay the entire note. 

However that excess rental inventory has been worked out of the system.  The demand for rentals has risen and the supply has dropped.  Thus we have seen a major decrease in days on the market for a properly priced rental property (usually less than 30).  We have also seen the rental rates head up again.  The higher rents and lack of rental availability combined with FHA loans or VA loans have allowed the first time Buyer back into the market.  The entire real estate market is an ecosystem.  Once the first time Buyers come back, everything else will begin to function better and better.  We are seeing this happening more and more every day.  It is impossible to tell where the market has bottomed or will bottom out until after it has happened.  However the signs are there that we have either seen it, or are certainly very close. 

 

When owning is as cheap as renting


When the real estate market comes back, it will not be with a sonic boom. It is likely to be subtle, below the public's radar. The revival will probably begin in the areas hit hardest by the bust: in Florida, Las Vegas, and the honeycombed tracts that flank the broad freeways east of Los Angeles known as the Inland Empire. (Indeed, home sales in Southern California surged 22% from March to April, hitting their highest levels since August.) Why will housing come back? For a reason as solid as floor joists: The entry-level buyer, for the first time in years, is finding that owning a new house is suddenly just as cheap as renting. "Those first-time buyers got locked out by high prices," says John Karevoll of DataQuick, a research firm that assembles data on the U.S. real estate market. "Now the buying activity that was on hold is starting to come back."
 In hindsight, the reason for the current malaise is simple: too few buyers. By 2007 more and more people were frozen out of the market - especially the entry-level buyers, who now account for as much as 30% of new-home sales. They're the twenty something young professionals who rent until they get married or the first child arrives, and then reach for the American dream of homeownership. From 2005 to 2006 some first-timers rushed to purchase homes they couldn't afford with the help of exotic loans. But another big group of young consumers steered clear and are finally looking to buy. Now that prices of new houses have fallen as much as 30% in areas including the Inland Empire and the outskirts of Phoenix, they are returning- prompting a turning point in the housing cycle. Call it the New Affordability.
Posted by Scott Smolen at 18:13:54 | Permanent Link | Comments (0) |

Tuesday | July 01, 2008

10 Markets set for steepest loss

This article was just posted by CNN yesterday.  As you can see, our market (or surrounding areas for that matter) is not mentioned in anyway.  We are fortunate to have the employment in this area to support the house values.  Although real estate is extremely regional in nature, if you watch the news you would believe these type of estimates are forecast for the entire country.  These are mainly vacation destinations that saw prices run up due to wide spread speculation (similar to the price of oil today and the .com bust of a few years back). 
However our market is much more insulated and fundamentally sound as the job growth in the Washington D.C. area is continuing better than almost any other place in the country.  Even in the worst housing markets in the USA, you can see a dramatic forecast difference from top to bottom.  I firmly believe we are nearing the 7th inning stretch if we compare the overall market to a baseball game.  At this time, there are still some great bargains to be had but the increased activity has begun to see this real deals get snatched up quicker and quicker in our region and I expect that to continue.

10 Markets set for steepest loss
CNN MONEY.COM 6/30/08
 
Miami, Fla. 12-month forecast: -24.9%

Fort Lauderdale, Fla. 12-month forecast: -22.2%

Orlando, Fla. 12-month forecast: -21%

Phoenix, Arizona 12-month forecast: -18.3%

Las Vegas, Nevada 12-month forecast: -18.3%

West Palm Beach, Fla. 12-month forecast: -17.6%

Tampa, Fla.  12-month forecast: -17.1%

Riverside, Calif. 12-month forecast: -16.9%

Tucson, Arizona 12-month forecast: -16.9%

Stockton, Calif. 12-month forecast: -16.8%


Good news is there may be a bottom in 2009-2010
Posted by Scott Smolen at 12:14:20 | Permanent Link | Comments (0) |

Thursday | June 26, 2008

Home Sales Rise in May

The National Association of Realtors says existing home sales rose 2 percent in May, only the second gain in the past 10 months. Analysts had forecast a 2.2 percent increase.  Although the sales came in a little lower than expected, the increase is certainly good and a sign that the market is improving across the country.

Locally, we saw improved activity throughout the Spring as well.

Posted by Scott Smolen at 10:34:12 | Permanent Link | Comments (0) |

Wednesday | June 25, 2008

So why has oil risen so wildly? The answer...The Fed.

I saw this article come out today and felt it hit the nail right on the head.  I realize that most consumers feel lower interest rates are better for the economy.  However since the Fed took so long to reduce their rate, they were basically forced to overreact when they finally moved on it. 

When the Saudi government agreed to increase oil production over the weekend (not an act of kindness, just them looking out for their long term best interest) the price per barrel did not drop dramatically this week.  That is a clear sign that this is not a supply / demand issue.  There are no gas lines; we do not have to ration fuel.  The supply is fine.  The hedge funds and the weak US dollar have created the high price of oil.  This article does a nice job of explaining this in detail.   


The evidence is too clear to ignore. Let's take a look at where we were before the first Fed cut on September 18th.  The Fed Funds Rate was at 5.25%, Oil was at $73 per barrel and the Euro was $1.35.  Not great, but not bad.  Fearing a recession, the Fed did the right thing to stimulate the economy - they cut.  But cutting rates in the US makes higher rates in Europe appear much more attractive.  So the Dollar began to tank against the Euro and just got worse as the Fed continued to cut.  Now it takes $1.56 to equal one Euro.  That is a huge swing.  And here is where it gets interesting...Oil is priced in Dollars, so as Dollars decline, Oil price per barrel must rise.  Oil has gone from $73 a barrel before the Fed cuts to yesterday's close of $137 a barrel. (Today $134.55)  
Again, oil prices are surging mainly because of the Dollar weakness and the Fed cuts.  Think about it - has demand for oil suddenly skyrocketed in the past 8 or 9 months?  Sure it has gone up, but oil had already doubled in price when it was at $70.  And higher prices for oil hurts everything.  Sure at the pump and for heating, which allows less to spend, but travel, manufacturing, shipping...the list goes on and on.       

Posted by Scott Smolen at 17:35:49 | Permanent Link | Comments (0) |

Tuesday | June 24, 2008

What Today's Buyers Want

I saw this article in the latest National Association survey and thought it was interesting what Buyers are looking for more and more today as opposed to just 3 years ago.

57 percent of homebuyers say oversize garages are “very important,” in a survey just released by the National Association of Realtors® (NAR). The 2007 Profile of Buyers’ Home Feature Preferences says preference for a garage with two or more spaces showed the biggest growth among ranking home features, with a 16 percent increase over 2004 survey results.

According to the survey other priorities that gained importance among homebuyers were air conditioning, master bedroom walk-in closets, hardwood floors, granite countertops, and cable/satellite TV-readiness.
Posted by Scott Smolen at 12:02:58 | Permanent Link | Comments (0) |

Monday | June 09, 2008

DISA to Move to Ft. Meade as Part of BRAC

What is DISA? - Defense Information Systems Agency
The Defense Information Systems Agency is a combat support agency responsible for planning, engineering, acquiring, fielding, and supporting global net-centric solutions to serve the needs of the President, Vice President, the Secretary of Defense, and other DoD Components, under all conditions of peace and war.

DISA headquarters will be moving to Fort Meade by September, 2011.  This means nearly 4,300 DISA, Joint Task Force-Global Network Operations, and tenant positions will transfer to Ft. Meade from Virginia as well according to disa.mil.  Ground breaking for construction took place in April 2008. 

DISA is only a small part of the BRAC relocation.  However it is obvious that many of the people transferred will look for homes which will help raise housing values in the Fort Meade region.  BRAC will truly create a need for housing in the immediate area as it begins to take place.  As the demand increases and supplies begin to decrease, it is very likely there will be significant appreciation in home values in this part of the country regardless to what other areas real estate values do.

 

 

Posted by Scott Smolen at 13:13:14 | Permanent Link | Comments (0) |

Wednesday | May 28, 2008

Northeast Will Be First to See Signs of a Housing Upturn

I just received this article today and wanted to make sure I was able to post it for review.  This article was written by Karl Case, Economist and co-founder of the nationally watched Case-Schiller housing index, was quoted in the Boston Harold as calling the housing bottom.  New housing starts fell to 1 mm nationwide a mark that he said has successfully predicted the bottom of 4 of the last 4 housing corrections.  It is important to note that Maryland is listed as one of the first markets he believes will rebound beginning in the 4th quarter of this year.

Although nobody truly knows where the bottom or top of anything is until after the fact, this is a compelling argument that the turn is not too far off in the distance.  Between the combination of built up demand, low interest rates, and the fact that we will know who will be the new President in about 6 months, this may be the best buying opportunity to come along in a long time. 

 

Even though the national housing outlook has continued to deteriorate this spring, which is normally the peak home buying season, housing is expected to start climbing into positive territory before the end of the year in some parts of the country, according to NAHB’s state and top 100 metro housing starts forecast for 2008-2009.
Continuing turmoil in the credit markets and a weakening economy guarantee that “housing markets will face another challenging year in 2008 before any meaningful recovery takes hold in 2009,” the NAHB forecast says.
The credit market crisis alone, which started with last summer’s subprime mortgage meltdown and has since resulted in a broad-based mortgage credit crunch for prospective home buyers, has depressed housing sector activity by an additional 30%, NAHB economists calculate. As a result, housing permits nationwide have plunged to only 37% of their levels at the height of the boom in 2005.
“Anticipation of further declines in house prices in many markets will keep demand soft and additions to supply minimal in the near term,” the forecast says. “Foreclosures threaten to dump additional houses back into markets with already bloated inventories of unsold homes.

“But the level of distress in local and regional housing markets is far from uniform. While the annual figures will be negative for most markets, our forecast is for recovery in a number of areas by the fourth quarter of 2008.”
The Northeast will be the first to emerge from the current housing correction, with several states turning the corner in the third quarter and most by the fourth, according to the forecast.
“While some of these markets experienced rapid price appreciation over the decade, the largest markets — New York, Boston and Philadelphia — avoided the extent of over-building that accompanied the price run-ups in other markets,” the study says. “The absence of large unsold inventories will help to mitigate the downward pressure on prices that will drag out the recovery process in markets that have similarly elevated housing prices but also have large inventories.”
A growth patch for single-family housing starts in the Northeast during this year’s fourth quarter encompasses all of the New England states and extends into New York, New Jersey and Maryland in the Mid-Atlantic region. “Moving away from the eastern seaboard, markets in the western and northern parts of these states experienced more moderate house price appreciation and so are less vulnerable to price corrections and inventory problems,” the report says.
Next in line for a regional housing recovery is the South, with the notable exception of Florida.
“Housing markets in Texas, Atlanta and parts of the Carolinas performed well during the housing boom,” the forecast says, “resisting the excesses that have come back to haunt other markets.” These markets weathered the onset of the cyclical correction in the industry in 2006 better than most, but they did feel the negative repercussions of 2007 and will experience a mild 2% decline in single-family construction in this year’s final quarter before returning to robust growth in the first quarter of 2009.
Most housing markets in Florida will continue to struggle through the middle of next year, NAHB predicts. “These markets have been the most volatile through the boom and bust of this housing cycle and will be the slowest to recover from the heights of speculative excess,” and they have also been hard hit by escalating foreclosure rates.
Pensacola, where prices and production stayed closer to historical norms during the boom years, and Jacksonville, where production surged but price appreciation was more restrained, will experience weakness this year but are expected to display more strength in 2009 compared to other Florida markets.
Although the Midwest on the whole is expected to move into a recovery mode next year, prospects are a bit divided between the region’s eastern industrial states, which are projected to experience further declines in the second half of 2008 as the result of ongoing economic weakness, and the western farm states, which will show signs of improvement earlier stemming from flourishing agricultural commodities.
The West will be the slowest to recover, according to the NAHB forecast.
“This should not be surprising since this region is dominated by Las Vegas, Phoenix and markets in California,” the forecast says. “These markets join the Florida markets as among the most troubled in the nation. Over-production, double-digit house price appreciation, heavy reliance on subprime mortgages and rapidly rising foreclosure rates were staples of these markets through this housing cycle and most of these markets are expected to decline through the end of 2009.”
Levels of excess in western markets where prices have been on the decline are an almost certain indicator of further price erosion, the study says.
Notable exceptions to the relatively gloomy outlook for the region include:
  • New Mexico, where production and price growth have been moderate and subprime mortgages and foreclosures have remained below the national average
  • Colorado, where production and prices remained restrained, subprime borrowing has been high but foreclosures have so far been low
  • Idaho, where production spiked during the boom put price appreciation remained modest, and subprime mortgages and foreclosures have remained low
Posted by Scott Smolen at 15:15:18 | Permanent Link | Comments (0) |

Friday | May 02, 2008

How Debt Forgiveness Works

With a short sale, the lender has three possible ways to handle the deficiency balance, which is the portion of the mortgage debt not covered by the sale of the home. First, the lender can attempt to collect the deficiency balance from the seller after the property has closed. Second, the lender may require the seller to sign an unsecured promissory note for the deficiency balance as a condition of agreeing to the short sale. If the new note is for less than the balance of the original debt, the difference would be considered canceled, or forgiven, debt. Third, the lender may agree to cancel the entire deficiency balance.

On the surface, option three would be seem to be the best alternative for a seller. However, the IRS considers any canceled mortgage debt ordinary income. This means that the amount forgiven is taxed at the same rate — somewhere between 15 percent and 30 percent — as the sellers’ salaries. In addition, because the IRS requires the lender to file a 1099-C form stating the amount of the canceled debt, Uncle Sam will have a record of the exact amount of the debt that was cancelled. A seller will also receive a copy of the 1099-C to use in filing income taxes. The seller’s home state would also consider the cancelled debt as ordinary income.

4 Exceptions to the Rule

The IRS does recognize four situations in which cancellation of debt will not result in tax liability for the seller. A seller may avoid tax liability:
  • When the borrower receives a bankruptcy discharge and the deficiency was included in the bankruptcy
  • When the borrower is insolvent at the time of the cancellation of the debt. Insolvency would occur when a borrower’s liabilities exceed assets. Note that seller would have to prove this insolvency to the IRS when filing a tax return.
  • When the debt was secured by a nonrecourse loan. Under a nonrecourse loan, the lender does not have the legal right to collect a deficiency judgment from any assets of the debtor not pledged to secure the loan. While most home mortgages are do not fall into this category, purchase money loans on a person’s residence are nonrecourse in some states.
  • When the tax liability from the cancellation of debt on an investment property can be offset against other business liabilities and expenses. This exception does not apply to properties occupied as a residence by the mortgagor.

In many short sales, a seller would be able to qualify under the first two of these exemptions, especially since it was almost certainly necessary to show financial hardship in order to convince the lender to agree to a short sale. However, it is the seller’s responsibility to notify the IRS why the amount in the 1099-C should not be counted as ordinary income. Otherwise, the IRS will consider the forgiven debt as income and penalize the seller for unpaid taxes.
Posted by Scott Smolen at 15:35:19 | Permanent Link | Comments (0) |

Thursday | April 10, 2008

What is a Short Sale?

I am often asked what a short sale is.  This is the same situation as a contract requiring 3rd party approval as well.  I hope this blog post will explain the terminology a little better.  This is from the Buyers’ perspective.  Check back for a post later in regard to the Sellers’ prospective. 

While a short sale may be a last resort for many homeowners facing foreclosure, it also can represent an opportunity for potential home buyers and real estate investors.  A short sale is a legally-binding agreement to allow a home to be sold for less than the amount that is owed to the lien holder(s).  And, while short sales are not by any means common or easy (they take a very long amount of time in order to get bank approval – usually at least 6-8 weeks). 
Due to the increasing inventory levels and foreclosures in some parts of the country, lenders are much more eager to negotiate with borrowers who are having trouble paying their mortgages that want to sell their homes. For potential home buyers and real estate investors, a short sale also offers an opportunity to purchase a property (sometimes below market value).  Since short sales are negotiated by the lenders, a Buyer should expect to purchase the home in its “as-is” condition. 
The most important aspect to keep in mind when looking at homes that are short-sales or require 3rd party approval is that you need to be extremely patient with the process.  If you need to be in your next home within 2 months or less, I would advise trying to avoid this type of scenario all together.  If you have plenty of time, then it may present a good opportunity.  I also recommend continuing to watch the market, while you are waiting for the 3rd party approval.  The last thing you want to do is stop looking and then find out 2 months later that the bank(s) is not willing to approve the sale and possibly lose out on other homes that may have been a better fit.

Posted by Scott Smolen at 15:07:22 | Permanent Link | Comments (0) |

Monday | April 07, 2008

New Laws in Maryland Pertaining to Foreclosures and Loan Fraud

The Governor signed some new legislation last week that changes both the way foreclosures are handled in the state and also addresses mortgage fraud among lenders and brokers.  I am not exactly sure how this may impact the market in the immediate future, however I believe the idea of making mortgage brokers more accountable is long overdue.  In the past, when we have run into trouble with lenders there has been very little that can be done.  I believe the tougher laws will be better for both Buyers and Sellers alike.  When the market began to correct in 2005, it naturally has weeded out many of the bad apples in the profession.  However stronger laws are always welcome to make sure that those who are in a position where integrity and responsibility are a must as it will help to eliminate those who do not conduct their business properly.

ANNAPOLIS, MD (April 3, 2008) – Governor Martin O’Malley joined with Senate President Thomas V. Mike Miller Jr., House Speaker Michael E. Busch, Lieutenant Governor Anthony G. Brown, community advocates and other officials today to sign emergency legislation that would help thousands of Maryland homeowners who are at risk of losing their homes and to prevent future generations of homeowners from losing their homes due to foreclosure.   

“I want to thank President Miller and Speaker Busch for working with the Administration during this session, as we put forward a legislative package to protect homeownership in Maryland,” said Governor O’Malley.  “The financial security of our families as well as the strength and health of our communities depends on our ability to help preserve and sustain homeownership in our State.  These bills help ensure that we keep people in their homes.”

The emergency bills signed today include:

  • The Real Property – Recordation of Instruments Securing Mortgage Loans and Foreclosure of Mortgages and Deeds of Trust on Residential Property bill.  The legislation significantly lengthens the foreclosure process from 15 days to approximately 150 days making it fairer for homeowners and providing them with more time and notice before a foreclosure sale.  It requires a lender to wait 90 days after default before filing the foreclosure action and to send a uniform Notice of Intent to Foreclose to the homeowner 45 days prior to filing an action. It also requires personal service to notify a homeowner of impending foreclosure action and requires that a sale may not occur for 45 days after service. A lender must produce proof of ownership when filing a foreclosure action. The bill codifies the right to cure, which will allow a homeowner to stop foreclosure by paying what is owed up until one business day before the sale.
  • The Real Property - Maryland Mortgage Fraud Protection Act is a comprehensive criminal mortgage fraud statute that makes mortgage fraud a crime for anyone involved in the mortgage transaction. The bill provides for significant fines and imprisonment for violators, and it also gives the court authority to order restitution and forfeiture and enhanced penalties for cases involving vulnerable adults. The bill also authorizes the Attorney General, a State’s Attorney, and the Commissioner of Financial Regulation to take action to enforce the statute. The bill allows victims of mortgage fraud to bring private action against violators. 
  • The Protection of Homeowners in Foreclosure - Prohibition on Foreclosure Rescue Transactions – Enforcement is an emergency bill that bans foreclosure rescue transactions that scam homeowners out of their homes and the equity they’ve built. The bill as passed also provides additional consumer protections for people who are trying to sell their homes because they are in default.

 

Posted by Scott Smolen at 12:50:10 | Permanent Link | Comments (0) |