Archive for February, 2009

The federal government’s housing casino will never play fair as long as there are votes to be bought by cheating

This is my column for this week from the Arizona Republic (permanent link). Since I wrote this on Tuesday, events have overtaken some details, but it remains that few if any borrowers in the Phoenix area will be able to renegotiate or modify their loans under the Obama plan. Everyone who used to have home equity will still get to bear their losses unassisted, however.

The federal government’s housing casino will never play fair as long as there are votes to be bought by cheating

To qualify for a renegotiated mortgage under the plan President Obama announced last week, your new loan can be as much as 105% of your old loan — which sounds to me like curing alcoholism with a good stiff drink.

But the people who are in the worst trouble on their loans bought with 100% financing. Even if there had been no decline in values, they probably could not refinance at 105%, not without bringing cash to cover the closing costs.

But, of course, the typical home in the West Valley is down 50% from its peak value in December of 2005.

Suppose you bought a new home for Christmas 2005, paying $275,000. If you get everything just right, you might be able to sell it today for $135,000. You still owe $275,000, but you can refinance your note at only $141,750 under the Obama plan.

Something’s going to have to give.

But what about the people who were move-up buyers in 2005? They may have put 50% down, which means they’ve lost all their equity, but they probably can’t lay claim on a hardship refinancing. What about the people who paid all-cash? Now we’re talking about people who have actually lost real money — their own money.

Meanwhile, many of the people who end up qualifying for restructuring could easily continue to pay on their notes. We all of us pay on our car loans, even though a car loses half its value when you drive it off the lot.

But we don’t think of our cars, clothing, furniture or appliances as investments. By mucking around in the real estate market, the federal government set up a system of middle class welfare, encouraging us to gamble on our homes as if they were leveraged stock issues — or casino games.

This has turned out to have unhappy consequences. A truly free market in real estate would be a boon to us all — but don’t hold your breath. The federal housing casino will never play fair as long as there are votes to be bought by cheating.

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Are you thinking of buying a home in metropolitan Phoenix? Here’s some good news: FHA loan limits are back up to $346,250

Until this week, if you were shopping for a home in greater Phoenix, if the price got too near $300,000 you were stuck going for a convention loan — 5% or even 10% down, with monthly private mortgage insurance payments.

But as of this week, the limit for FHA loans in metropolitan Phoenix has been bumped back up to $346,250. With 3.5% down, you’re shopping in the $350,000 to $375,000 range, with a purchase price coming in at $358,000 or lower.

And you can buy a whole lot of very wonderful house for $358,000 right now. I just looked. There are 417 homes in that price range within 20 miles of Downtown Phoenix — not counting short sales and lender-owned homes.

For buyers who have been sitting on the sidelines, great homes at all prices ranges are available in abundance. But if you can find a home you can love beneath that FHA limit, you can get a ton of house for just 3.5% down.

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The good news: There are 9,600 pending sales in the Phoenix area

So says Arizona Republic reporter Catherine Reagor. A home is said to be “pending” when it is under contract to be sold, but the sale has not closed.

The bad news? Many of those pending sales are short sales — they are “pending” the lender’s approval — and the contracts will never close. The agents mark the listings as “pending” while the lender deliberates to keep the number of Days on Market from accumulating.

The worst news? The Republic’s Craig Anderson has it that the inventory of unsold homes in the Phoenix area may be as high as 86,000 domiciles.

The implication? If you’re an investor, cash-flow positive rental homes are yours for the picking.

And if you’re a would-be homeowner who is renting now, with a 3.5% down payment you can buy a lot more house than you ever thought you could afford.

But there is a caveat: With this much available inventory, and with the foreclosure pipeline still very full, appreciation in home values may be a distant dream.

Investment homes for income? Doable, but growth may be a long way off.

A very nice home for you and your family to live in for at least five years? Very easily done.

Thinking of selling? You’ll need a strong motivation and a stronger stomach. We’re a long way from being done with this market.

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Are you looking to get a bead on where Phoenix-area home prices are heading? It all depends on where you look…

What kind of price trend can we expect in the Phoenix-area real estate market going forward?

My bet is that the houses that sell in metropolitan Phoenix will tend to sell below $500,000. The reason is that the conforming loan limit for Phoenix is $417,000. Anyone borrowing more than that has to qualify for a jumbo loan, paying at least 1% more in interest. The Obama rescue plan announced last week puts the middle of the market in doubt, but the top of the market — or the upper-middle — will tend to stagnate until the market turns.

When will that happen? My guess would have been this year, perhaps even now, before last week’s announcement. But by buttressing home prices above market demand, the plan the president announced last week seems likely to delay the turn of the market by quite a while.

And as Arizona Republic reporter Craig Anderson points out, FHA loan limits are also putting a squeeze on the middle of the market.

Despite Obama’s promises, this is all pretty bad news for sellers. It should be good news for buyers, but how good depends on which type of sellers those buyers are approaching.

There are three kinds of sellers right now, depending on who owns the home.

Lender-owned homes are easy to get, and easy to get for fairly low prices. They often need help, but there are loan programs that can be used to refurbish a home on the way in.

Homes owned by owners with equity are a crap shoot. If they need to move, they’ll negotiate. If not, they’ll waste a lot of your time. They want the December 2005 price, and they will happily wait until December 2015 to get it.

Homes owned by owners without equity — short sales. These can be very tough to get, since the lender wants to maximize return despite the trend of the market. You can wait four months to get permission to buy a house that is now worth 10% less than what you offered for it.

Those are generalizations. Everything boils down to working house-by-house, figuring out what the situation is and what might make a difference in swinging the deal. Complicating everything, appraisers are as risk-averse now as they were risk-tolerant in 2005. I’ve had two buyers’ houses fail to appraise, despite both offers being deliciously low. In both cases, the buyers got to take even more money off the table, but that’s not a guaranteed outcome.

I used to tell people that they would have to plan to stay in their homes for three years before that could anticipate selling at a profit. In 2004 and 2005, it was possible to move on in three months. By now, my projection is at least five years, possibly longer.

Phoenix should do better on the way up than other markets, as long as it keeps snowing in the Great Lakes. But we don’t know when the market will turn, nor with what velocity, nor do we know what other spanners the federal government will forge to throw into the works.

On the sunny side of the street, homes in and around Phoenix have not been this affordable in many years. Buying the right home at the right price is as close as you can come to a good gamble right now.

So, do you feel like taking a chance on the Phoenix real estate market? I’m at your disposal if you have any questions, or if you’d like to see some homes at first hand. Give me a call at 602-740-7531 and let’s go snag a bargain.

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Obama’s housing rescue plan won’t rescue housing, but it will delay the eventual recovery of the real estate market

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

Obama’s housing rescue plan won’t rescue housing, but it will delay the eventual recovery of the real estate market

President Barrack Obama came to Mesa Wednesday to announce his new housing initiative. The location made for good political theater, given that metropolitan Phoenix is one of the hardest-hit real estate markets.

The president promises millions of refinanced or renegotiated mortgages, at a price tag of $275 billion. The putative beneficiaries are homeowners, who may be able to negotiate their monthly payments down to less than 30% of their monthly incomes. But it is the lenders who will cash in, if the Obama plan works.

How’s that? Obama is hoping to shove a floor under still-declining home prices. Lenders will take a hit on millions of reformulated mortgages, but the hope is that this will save them even more money, in the long run, by stemming the rising tide of foreclosures.

In other words, the Obama plan is a price-support scheme. The market argues right now that homes are overpriced — which in turn suggests that the available supply of homes substantially exceeds existing demand.

That’s important. Prices for premium-quality homes are very low, and interest rates are still hovering at historic lows. Mortgage money is easily available to owner-occupants, and Fannie Mae just loosened its standards for rental-home investors. Even so, the number of homes being offered for sale at current prices still exceeds the number of buyers willing to pay those prices.

In reality, prices need to continue to drop until demand matches or eclipses supply. It wouldn’t hurt to convert some housing to other uses, or simply to tear it down altogether.

But forcing an arbitrary floor under prices is unlikely to have happy consequences. Despite his rhetoric, Obama’s plan can only reward our economy’s wasteful grasshoppers, at the expense of its thrifty ants. A price-support will serve to delay recovery, since it will do nothing to solve the supply and demand problem. And, as the worst of all foreseeable consequences, a price-support plus the $8,000 tax credit from last week’s stimulus bill could fuel new building — adding even more supply to an already over-built real estate market.

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Prices for Phoenix-area real estate are very low, but are they low enough to justify a run on the market?

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

Prices for Phoenix-area real estate are very low, but are they low enough to justify a run on the market?

Looking for some rock-solid investment advice? Buy low. Sell high.

That seems obvious enough — except it often turns out to be the opposite of what people do. There are legions of people in the Phoenix market who bought high and are having to sell low.

The trouble is, it’s hard to know which is which until after the fact. Many people bought homes during the boom at what seemed to be high prices, only to sell them a year later for even higher prices.

That was a very fun game to play — until the music stopped and left you without a chair. Many putative experts — I was one of them — thought the boom would go on even longer than it did.

But what about now? Prices are very low, but are they low enough to justify a run on the market?

The technical answer is yes. Phoenix-area home prices are nicely aligned with incomes, and premium rental homes are comfortably cash-flow-positive from the first tenant.

The market’s response is no. So far, there hasn’t been a fire-sale mentality in the marketplace to go along with the fire-sale prices. I’m working with several investors who are picking up multiple properties, often for cash, but there is nothing like the activity we saw in 2004 or 2005.

But all that could change very soon. The Fed continues to hold interest rates very low, and there is talk of forcing the rate for a 30-year fixed-rate mortgage down to 4%. And the so-far-unadopted stimulus plan includes a $8,000 tax credit for first-time home-buyers.

Lenders will find a way to turn that tax-credit into a short-term loan. And $8,000 is a 10% down-payment on an $80,000 home. Putting 3.5% down on an FHA loan, $8,000 is enough to get an $225,000 property.

If owner-occupant buyers soak up all the excess resale inventory, that should cause prices to stabilize or even start to rise. If, instead, new-home builders use the tax credit to build even more homes in our already-overbuilt market, the bottom will be but a distant dream.

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Fannie Mae changes the rules for investor loans: No more than four rental homes? Nope — you’re not done until you get to ten


Fannie Mae, the mortgage-finance company under U.S. government control, will no longer bar real-estate investors from qualifying for its loans if they already own four properties as it seeks to spur housing demand.

The company will expand its limit for investor and second- home loans to as many as 10 properties per borrower, according to a Feb. 6 notice to lenders on Washington-based Fannie’s Web site.

“Bona-fide, experienced investors bringing significant equity to the table will play a key role in the housing recovery,” Brian Faith, a Fannie Mae spokesman, said today in an e-mailed statement.

You still have to qualify, of course. You need good income, good credit, good ratios — and a goodly amount of risk tolerance. But if you have the means to buy two rental homes for cash, you could well have enough in down-payment money to buy eight or ten with leverage.

The implication? Finding cash-flow-positive rentals is easy in the Phoenix area right now. When our markets turn, your appreciation could really add up fast.

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Are you planning on making expensive changes to your home? Make sure they’ll make sense to future buyers

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

Are you planning on making expensive changes to your home? Make sure they’ll make sense to future buyers

I was in a house once where the sellers had spent $20,000 remodeling the kitchen. Black Corian countertops with lime green trim. A black sink with gold-plated fixtures. Black and green marble flooring. And all of it was set off by dramatic spot-lighting, blinding where it hit, gloomy everywhere else.

That kitchen was gauche by Las Vegas casino standards, but the owners could not understand why their house wasn’t selling.

If you’re going to spend money improving your home, be sure your work results in real improvements.

Updating kitchens and bathrooms can be a good idea, but make sure your design decisions fall somewhere in the middle of the bell curve. A bathroom pleasing to a king — or to a gangster — might suit your tastes, but it could make your home hard to sell.

Adding a second story to a ranch home is usually a pretty terrible idea. Like them or not, ranch homes are what they are, and if you violate the low, sleek lines of your home, you may end up with something that looks like the neighborhood goiter.

If you decide to convert that patio into living space, do it in a way that makes architectural sense. A huge family room leading, through the removed double-doorway to yet another huge family room won’t make sense to future buyers. And whether you call it an Arizona room, a Florida room or a Lanai, if it’s not ducted to the main HVAC system and insulated to the same rating as the rest of the home, appraisers will not count it as livable space.

Likewise, a converted garage can be a great way to get a overgrown teenager to move out, but it’s not really a bedroom. The garage is probably worth more as a garage, on resale.

Here’s a useful question: “Would this make sense to me if I were buying this house?” If the answer to that question is not an obvious yes, don’t make the change. No matter what you might want, if your house doesn’t make sense to buyers, it won’t sell.

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Downtown living for less: Renaissance Park puts you within easy walking distance of everything downtown without leaving you broke

There are a lot of cool places to live in Downtown Phoenix, but few that fall within the financial reach of mere mortals. Renaissance Park, a condo community on 7th Street just north of Washington is the exception.

Check it out:

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You’re seconds from the Diamondbacks and the Suns, right across the street from the Science Museum, and you’re just a skip away from the Herberger Theater, Symphony Hall and Arizona Center. Plus which, you’re new home is right on the brand new Phoenix Light Rail line. You can’t get any more downtown than this for less than half-a-million bucks.

Even so, you’re not sacrificing luxury. Renaissance Park is a sweet place to live, with shady, verdant grounds:

Refreshing pools and spas:

And all the comforts of home:

The unit you’re seeing here, #142, is being offered by Elite Desert Realty for $185,900. There are several others for sale, also at very aggressive prices. The language of real estate is photography, so see more of Renaissance Park by clicking this link.

And if you’re dying to live downtown but didn’t think you could afford it, give us a call at 602-740-7531 and we’ll take a closer look at Renaissance Park and some other Downtown living options you may not have considered.

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Remodeling your home — if you do it right — can add to your enjoyment now and to your resale value later

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

Remodeling your home — if you do it right — can add to your enjoyment now and to your resale value later

Removing interior walls and low ceilings can make your house feel more open — and more modern. Combined with other improvements — kitchen and bathroom remodeling and energy-efficient windows — opening up your floorplan can add substantially to your enjoyment of your home now, and to its resale value later.

Simply opening the kitchen up to the living and family rooms can make a huge difference. Modern homes are built around the “greatroom” concept, where the kitchen leads to an island which in turn leads to the entertainment space. Whether people are cooking, hanging out or watching television, family and guests are all together, rather than being isolated into separate spaces by function.

A common upgrade people will make to older homes is converting the carport into a garage. This is not a difficult change to make, but there are safety considerations: The door leading from the garage to the house should be fire-rated and self-closing to keep exhaust fumes out of the home.

People also try to convert carports to livable space, often to the home’s detriment. When you step down off the slab, you are stepping out of the house. If you want to convert a carport — or an existing garage or a patio — to livable space, you should start by pouring new slab to the same level as the rest of the home. This is not just a cosmetic issue. You need a better footing for the extra weight the slab will have to bear.

But that’s just the beginning. The walls will need to be built to the same insulation factor as the other exterior walls of the home. And the roof will need reinforcement — and insulation.

It’s not uncommon to see homes that have doubled in square footage by means of converting outdoor spaces to indoor spaces, sometimes with one vast converted patio leading to another. But if these additions are not built to the same standards as the rest of the home — and if they are not ducted to the central heating and air conditioning systems — appraisers will not evaluate them as livable space.

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