Archive for September, 2008

In a declining market, buying a short sale is too tall an order

This is my column for this week from the Arizona Republic (permanent link).

 
In a declining market, buying a short sale is too tall an order

Is it time to kick the stilts out from under short sales?

Right now in most neighborhoods in the Phoenix area, the houses that will draw the most attention from buyers will be either short sales or lender-owned homes. They’ll be in all states of repair, but the prices will be very aggressive.

And of those homes, the lender-owned homes will actually sell. They may be completely trashed, but the people whose job it is to sell those properties are judged by how quickly they can unload non-performing assets. Make an aggressive offer and you’ll get a aggressive deal.

There are downsides, of course. You can inspect all you want, but don’t expect repairs. Because of this, many lender-owned homes will not qualify for FHA or VA financing. And once escrow closes, you’ll have to restore the home to livable condition.

By contrast, a short-sale home might be in better condition. And it might be even more aggressively priced. The trouble is, the price in the MLS listing will be meaningless. The seller can approve that price, but the seller’s lender has to approve it as well. And the people who approve short sales aren’t judged by how quickly they sell the home but by how much money they bring in.

The lender can take from 60 to 90 days to respond to your offer for a short sale home. And the response may be to counter at a higher price. If you counter back, you may wait another 30 days for a response.

Here’s the worst part about this unwieldy procedure: Home prices are still falling in the Valley. You could wait months to get approval on a contract for a house that is now worth tens of thousands of dollars less than what you offered for it.

My take? We need to cut short sales off at the knees. It seems foolish for Realtors to take them as listings, and beyond foolish to encourage buyers to pursue them. Lender-owned homes are offered by motivated sellers. Short sales are a waste of time.

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This endless election season may give the real estate market time to self-correct before new legislation can make things worse

This is my column for this week from the Arizona Republic (permanent link).

 
This endless election season may give the real estate market time to self-correct before new legislation can make things worse

Looking for a silver lining amidst the black clouds of financial news? Here’s one: The fact that we’re in the middle of an election campaign gives us at least a fighting chance of solving our own problems without more government interference in the real estate market.

Everything that’s happened so far has been a triumph for the government approach to what should be free markets. Since the 1930s, the Federal government has been guaranteeing home loans. That made it easier for Americans to buy homes, but it dulled that flinty due diligence we expect in bankers.

Our tax laws favor homeownership with deductions, credits, capital gains exclusions and favorable loan terms. It’s nice to save on taxes, but these incentives induce us to own homes where we might otherwise do something else with our money.

In the recent past, the Federal government decided everyone should own a home, no matter what. After 9/11, the Federal Reserve Bank reduced the cost of money to almost nothing. Hundreds of different arms of government at all levels gave away financial incentives to homeownership. And the U.S. Treasury seemed to hint that American mortgage-backed securities were as safe as houses.

This has turned out to have unhappy consequences. That old-style flinty banker could never conceive of houses losing even 20% of their value, where the Phoenix market has given back twice that much since the market peaked.

Even so, the sky has not fallen. Wealth is not dollars, wealth is the productive power of the American economy. The majority of Americans still have significant equity in their homes, with many of them being owned outright.

What’s happened is that lenders and their financiers and, unfortunately, the American taxpayer, have taken a hit to the wallet. If the Federal government can restrain itself from overreacting, we’ll dig ourselves out in due course. And that’s why we’re blessed by this election: It will be at a least a year before the Feds can marshall any significant new legislation, and, by then, we could be well on our way to solving our own problems.

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Fannie and Freddie fall to foreclosure, but, still, lenders lend

This is my column for this week from the Arizona Republic (permanent link).

 
Fannie and Freddie fall to foreclosure, but, still, lenders lend

I write this column at the beginning of the week, and it appears at the end of the week. My topics are usually timeless, but, if I turn my attention to current events, there’s always the chance that I’ll end up with my foot in my mouth.

Even so, the news that matters most in residential real estate this week is the takeover by the federal government of the Federal National Mortgage Association (FannieMae) and the Federal Home Loan Mortgage Corporation (FreddieMac). These two quasi-private corporations define the lion’s share of the secondary mortgage market in the United States.

What does that mean? If you got a conforming loan for your home, it will have been sold into the secondary mortgage market in short order. FannieMae or FreddieMac would have guaranteed the loan to investors, this so your lender could have had a renewed supply of capital from which to make new loans. Federal Housing Authority and Veterans’ Administration loans would have been guaranteed by those entities, and sub-prime (non-conforming) loans would have been marketed directly to private investors. The secondary mortgage market exists to keep loan originators liquid in a market where very few people keep their savings in banks.

Given the federal takeover, has the sky fallen on the secondary mortgage market? No, although things may be a little sluggish as the newly-installed management teams learn the ropes. But as San Diego real estate broker Jeff Brown says, “Lenders lend.” There are still plenty of dollars chasing mortgages, so there will be mortgages chasing dollars. It’s plausible that interest rates could even go down, now that the secondary mortgage market has a rich Uncle Sam to back its loans.

What is not so plausible is the notion that investors will suddenly abandon housing altogether. Things will shake out. The ideal situation would be for a new free-market clearinghouse for the secondary mortgage market to arise. A business like that could cherry-pick the strongest loans, those least likely to go into foreclosure, leaving the more marginal loans to the Feds — the FederalExpress principle.

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August was a great month for real estate sales, but when 40% of buyers are pushed off the playing field, home prices could plummet

This is my column for this week from the Arizona Republic (permanent link).

 
August was a great month for real estate sales, but when 40% of buyers are pushed off the playing field, home prices could plummet

We won’t have reliable numbers for a few days,* but preliminary results leave no doubt that August was a huge month for real estate sales in the Valley of the Sun. Not for prices, alas, which continued to slide by around 1.5% last month. But, of the bread-and-butter suburban tract homes we track, around 200 will have sold, a two-year high.

September promises to be a banner month also, with nearly 280 homes currently under contract. Not all of those homes will make it through the escrow process, but most of them will.

What accounts for all this activity? The single greatest factor is seller-paid down-payment assistance programs like AmeriDream and Nehemiah. An FHA loan requires a 3% down-payment, and these grant programs permit the seller to fund the grant, along with up to 3% more for closing costs. The upshot is that buyers can take possession of the home for “nothing down.”

In recent months, down-payment assistance programs have accounted for as much as 40% of sales of resale homes, and as much as 90% of new-build sales.

Here’s the catch: Under the mortgage relief act recently signed into law, seller-paid down-payment assistance will be forbidden. The restriction takes effect on October 1st, but most lenders have already closed the window on new AmeriDream and Nehemiah loans.

It’s possible these programs will be reinstated by future legislation, but, even if they are not, it’s not the end of the world. It’s no great challenge to find a decent starter home for $100,000. And if buyers cannot manage to save up $3,000 for a down-payment ($3,500 after October 1st), acquiring a huge new debt may not be the best solution to their financial problems.

But the short-run prognosis seems pretty obvious: When 40% of resale buyers are forced onto the sidelines, the downward pressure on prices should accelerate.

The bottom line: If you’re prepared to buy a house in the Phoenix area, either as your residence or as an investment, prices could be very attractive.

 
*Final results for August 2008 are reported in the BloodhoundRealty.com Market Basket of Homes.

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More smokin’ deals on premium Phoenix-area rental homes

Here are some more of the investment properties I’ve been shopping in the West Valley suburbs of Phoenix. These are all potentially premium rental homes. All but one faces North or South. All but one is lender-owned, a much easier way to buy than a short sale. All of them are in premium, high-demand subdivisions.

In other words, I eliminated everything that was less likely to appreciate and rent well. These homes should stay rented to premium tenants while you own them, then sell easily to owner-occupants on the way out.

The prices are all over the map, and they matter not at all. It’s reasonable to treat all of these homes as selling for $70 – $80 a square foot, with the smaller homes going for slightly more, the larger ones for less — this because plumbing is the big money in a house and smaller homes have proportionately more plumbing.

Some of these homes need work to make them rentable, but none of them needs very much — perhaps $5,000 at the most. If it’s possible to pick up one of these for $10,000 less than recent comparable sales, it is eminently profitable to do the repairs on the way in. Paying more for turn-key condition may not be the best strategy. In any case, we can arrange for any needed repairs to be done quickly and economically.

Take a look:

I’ll be writing about this in this week’s Arizona Republic: Seller-paid down-payment assistance is essentially gone from our marketplace. This had accounted for as much as 40% of recent sales, so there are going to be a whole lot fewer buyers chasing a large number of available homes. This should make sellers very interested in negotiating price. We are on the cusp of a perfect storm for investors to pick up premium rental homes at unbelievable bargain prices.

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