The Mortgage Reports Blog

Ignore Annual Housing Data -- It's The MONTHLY Data That Matters To Home Buyers

For the third straight month, at least 15 of the nation's 20 largest real estate markets showed relative monthly improvement in May 2008, according to the S&P/Case-Shiller Home Price Index.

I use "relative monthly improvement" as another way of saying that markets are "less worse than they were" and that's good for the housing market (although you wouldn't know it by looking at the headlines). 

Instead of pulling the positives out from the data, newspapers are highlighting the year-over-year, cliff-diving-like decline in prices. 

Now, it's not wrong to look at annual trends in home prices, it's just a little bit misleading.  Remember: Active home buyers are probably seeing something completely different from what the papers are saying they should be seeoing.

See, year-over-year comparisons are fine for identifying long-term trends, but as it relates to an active home buyer, annual data don't mean diddly.  It's the short-term trend that matters.

The obvious example: If you've been shopping for a home over the last 3 months, you've probably noticed the market slowly slipping away from you, and moving into the sellers' favor. 

When you see "all the good homes" go under contract, or sellers regaining their negotiation power, it's your sign that the market is shifting.

In other words, if you're buying a home now, the real estate market of 12 months ago is irrevelant.  What you're going to pay for a home is based on market activity today, not activity from 2007.

(Images courtesy: Standard & Poor's, The Wall Street Journal)

Why Short-Term Trends In Housing Are Super-Important To Home Buyers

Consumer confidence is registering all-time lows and it's no surprise why.  Americans are bombarded by bad economic news day after day.

• Oil prices reach new highs
• Stock prices reach new lows
• Lenders are getting sued

The weight of the gloom drags down the economy and the press is quick to report on all of it.

When there's good news, though, the stories get brushed aside.  And that's why a housing recovery is not getting the coverage it deserves. 

On Wednesday, we looked at charts from April showing improvement in most major real estate markets.  And we saw the same improvement looking back at March.

So now today, with the Existing Home Sales data showed improvement, we can infer that the trend of improving home prices continued through May 2008.

It reminds of Lou Brown's famous quote:

The Media Could Be Spreading Hope For Housing, But It's Choosing To Sell Fear Instead (Case-Shiller Home Price Index Version)

Look, if you want to highlight the negatives, here it is:

Since last year, home prices are down.

Duh.  But, if you want to look at the positives, take a close look at this chart.  It's doctored up a bit, but taken directly from the S&P/Case-Shiller Home Price Index report.  April is the second straight month we've seen improvement like this. 

The papers want to tell you that the housing market is dismal, but talk to any real estate agent you know and they'll tell you the same thing: The market just feels different right now.  Homes are selling and the media's got it wrong. 

Using Mosaics To Show Why "National Real Estate News" Is Useless

These photos represent six neighborhoods in America and their respective real estate markets.

They are six different neighborhoods with six different feels, each with its own character and flavor.  Some have dogs, some are blue, some are smiling -- some are young, some are old, some are blurry.

Now, look at the photo below.

This photo represents the national real estate market. 

If you look carefully, you'll find the six "neighborhoods" mixed in.  One is in the cheek, one's on the forehead, one's off to the side, for example.  The "Big Picture" is made up from thousands of "Small Pictures" representing our country's streets and neighborhoods. 

These small pictures each have their own unique characteristics, but combine to form a completely different look.

The mosaic is one more reason why we all should look deeper than headlines to get our real estate news.  The Big Picture tells us nothing.

Closing In May, June, July, And August Deserves Advance Planning

Between Memorial Day and Labor Day, home buyers should take special care to schedule their purchase closings with three simple rules in mind:

1. Don't close on a Friday
2. Don't close in the afternoon
3. Don't close on the last day of the month

You stick with that, the rest is cream cheese.

For Truth-in-Housing, You Have To Know Where To Look

Each quarter, the Federal Reserve surveys 84 U.S. banks about demand for loan products and general banking conditions.

It's like "street reporting"; a pulse of what's really happening behind retail bank walls.  Almost always, it paints a different picture of lending from what's being reported on the news.

For example, according to April's survey results, demand for mortgages is picking up and may rebound into positive territory by July of this year.

To hear the media tell it, you'd think that the mortgage and real estate business was DUI DOA.

When mortgage demand spikes like this, we have to at least consider that consumers may be submitting mortgage applications to multiple banks at the same time but the more likely answer is that we're moving into a favorable real estate market.

It's on-the-street surveys like this tell the other side of the housing market story; the one to which business television is oblivious and about which top real estate and mortgage professionals won't stop shouting:  Homes are selling, buyers are buying, and there is a growing demand for home loan products. 

Projected over the next handful of months, the housing market may be positioning for a strong national recovery.

Source:
The April 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices
The Federal Reserve
April 2008
http://www.federalreserve.gov/boarddocs/SnLoanSurvey/200805/

It's Good When The Pittsburgh Steelers Lose In The NFL Playoffs

In their storied franchise history, the Pittsburgh Steelers have won 5 Super Bowls. 

In 4 of those 5 years, national real estate markets have faltered (adjusted for inflation):

• 1975: Housing remained flat
• 1976: Housing gained slightly
• 1979: Housing fell dramatically
• 1980: Housing fell dramatically
• 2006: Housing fell slightly

This year, real estate markets can rejoice.  The Pittsburgh Steelers are out of the playoffs; Jacksonville bounced them on their home turf 31-29.

The Census Bureau Admits That New Homes Sales Data Is Flawed

October's New Homes Sales report showed a modest month-over-month improvement from September.  But that doesn't mean that the market has bottomed. In fact, it doesn't mean anything at all.

The monthly New Homes Sales figures are highly suspect and the Census Bureau knows it.  It doesn't try to hide that fact, either. 

On it's Web site, singled out, above the fold, plain as day, begging for attention, the Census Bureau asks:

How does the Census Bureau handle cancelled sales contracts in the published estimates of New Home Sales?

And then it serves up a 309-word statement, summarized below (in bullets):

• A new housing unit is considered sold when a contract is signed and/or earnest money is exchanged
• There is no follow up to verify if the sale was closed, or canceled
• If cancellations are high, New Homes Sales data will be overestimated

It's an admission of guilt, like Colonel Jessup ordering the Code Red.

If we consider that builders are reporting cancellation rates in the 35-45% range, we can conceivably take the 728,000 figure reported and chop it down to 440,000 without feeling bad about it.

But back to the disclaimer.  It also says the following (paraphrased):

A housing unit will never be counted twice so if a previously canceled unit is later sold again, the second sale is ignored.  Therefore, in an improving market, the New Home Sales will be underestimated.

In other words, what's overestimated today will be underestimated tomorrow.  File it under "one more reason to ignore the headlines and look deeper into the data". 

There's always more to the story than the headline.

Americans Say They Want To Buy Homes, But Aren't Actually Doing It

According to the 2007 National Housing Pulse Survey from October, 59 percent of Americans think "now is a good time to buy".

Now reconcile that with these housing-related gems hitting the wires this week:

• Existing Homes Sales dipped to 4.97 million in October, the lowest since 1999
• New Homes Sales counted 728,000, just off its 12-year lows
• The supply of homes on the market is now at 10.8 months

Somewhere, there is a disconnect.  What people say and what they do are two very different animals.

However, you can put me in the camp of "now is a good time to buy".  But not for reasons you would expect.

Yes, home values are relatively low and so are mortgage rates.  But, with mortgage guidelines getting more airtight with each passing week, I am concerned that even strong credit borrowers will have financing difficulty as soon as six weeks from now.

Now is a good time to buy because getting financing may be too challenging for some people very, very soon.

(Image courtesy: Wall Street Journal Online)

No Surprise : Foreclosure Rates Seem To Trend With Real Estate Speculation and Regional Job Losses

RealtyTrac published its Q3 2007 foreclosure statistics today and the data paints an interesting picture about the nature of home loan defaults.

Of the Top 10 MSAs in terms of Foreclosures Per Household, eight represent areas in which real estate speculation was rampant in 2002-2006, and two represent areas whose local economies have been decimated by job loss.

In other words, when it comes to mortgage defaults, sub-prime loans may be a symptom, but they're certainly not the cause.

If sub-prime mortgages caused foreclosure, we would expect that the state securitizing the most sub-prime loans in 2005 would be at least represented near the top of RealtyTrac's list of MSA Foreclosures Per Household. 

Instead, just one Rhode Island city ranked (#82).  Of the #3 sub-prime state (Mississippi), no cities were represented in the Top 100.

Instead, the Top 10 list includes cities like Stockton (which we've highlighted before) and Cleveland.

1. Stockton, CA (1 per 31 households)
2. Detroit, MI (1 per 33 households)
3. Riverside/San Bernardino, CA (1 per 43 households)
4. Fort Lauderdale, FL (1 per 48 households)
5. Las Vegas, NV (1 per 48 households)
6. Sacramento, CA (1 per 48 households)
7. Cleveland, OH (1 per 57 households)
8. Miami, FL (1 per 60 households)
9. Bakersfield, CA (1 per 64 households)
10. Oakland, CA (1 per 71 households)

This data helps to reinforce two ideas.

1. Too much real estate speculation in a given area may subject that region to an excess of foreclosures in the future.  Real estate investors can watch for this pattern and adjust their investment decisions accordingly.
2. If you lose your job, you may lose the means to pay bills.  Therefore, be sure that you are proactive about creating emergency savings.  Banks don't care how much equity you have in your home -- they only care that you make monthly interest payments.

And, lastly -- one last theory to toss out there for home buyers in "rapidly growing" areas.  That small tax bill won't last forever and when it adjusts higher, it may just push your budget into the red.  That is a leading cause of foreclosure, too.

(Image courtesy: REcharts.com)

Flashback 30 Days: The Story Of Existing Home Sales Hasn't Changed

Existing Home Sales bombed today on a national level (surprise, surprise).  But, like the mosaic above, it really doesn't matter. 

Real estate is a local story.

Why The Terrible Housing Starts Number Could Be A Signal Of The Housing Market's Recovery

Once again, newspaper headlines may be misleading you.

Just because Housing Starts plunged last month and the chart looks like The Beast, it doesn't mean that the U.S. Housing Market is any worse off than it was.

On the contrary, things may finally be starting to improve.

Yesterday, the government released September 2007's Housing Starts data for the country. A "Housing Start" is a new home on which construction has commenced. 

• Versus August 2007, starts are down 10.2%
• Versus September 2006, starts are down 30.8%

The headlines are saying that this is bad news for the U.S. economy, proof that the "nightmare" is ongoing. 

I say, "Wasn't taking Econ 101 a basic job requirement to be a business writer?"

If Housing Starts are down, folks, it means that the housing supply will be down shortly, too.  And if there's one thing I keep hearing from real estate agents over and over and over again is that "the real estate market is flat because there's just too much supply right now".

Problem solved.

When builders stop adding new supply to the housing market, it allows the existing demand for homes can catch up, thereby rebalancing the Supply and Demand equation, and placing upward pressure on home values. 

Therefore, Housing Starts showing extreme weakness is good news for home sellers.  Now, what may not be so evident is that the weakness is also good news for home buyers.  This is for three main reasons:

1. Today's buyers are tomorrow's sellers and they will benefit from rising real estate values
2. Rising home values reduce mortgage lending risk and helps more people get approved for more types of mortgage products
3. Rising home values create wealth in the form of home equity

If home prices aren't being supported by the existing demand, Econ 101 tells us that it's time to cut the supply.  And that's what the builders are doing.  This may not be the bottom for the housing market, but it's absolutely a good sign.

How Kiddie Condos Can Offer A Return On Investment For College Student Room And Board Expenses

I almost wish I found this video sooner; not many colleges are going into session in October.  But... if you have college students in your family and want to increase your exposure to real estate, Barbara Corcoran has some interesting things to say.

Parents buying homes near college campuses is so prevalent now that mortgage lenders have given them a monikor -- "Kiddie Condos".  The loan is not a "typical" home loan but it comes with the same rates and terms.  It's a winning situation for everyone:

• Parents get cheaper housing options than offered by the school
• Students get experience managing property and tenants
• Students get mortgage payments to report on their credit report
• Parents get the option of keeping the property for future rental, or selling for a profit when the functional life of the home ends
• As your accountant will advise, mortgage interest tax deductions do apply

As housing grows scarce at some schools, Kiddie Condos are growing more common in Chicago at DePaul, University of Chicago, Loyola, and many of the city schools even though high housing costs can hinder the long-term return on investment can.

For college campuses in less expensive areas, though, the math can make terrific sense.  University of Cincinnati, Northern Illinois University and Xavier University come to mind.

The liability and responsibility of managing housing for college students is not for everyone, but it may be a better investment than paying a university-determined rate for Room and Board.  That's just paying rent.

Is It Time For National Real Estate News To Go Away?

To borrow (and twist) a phrase from famed politician Tip O'Neill:

"All real estate is local."

So, here we are, another month passes and another series of national home sales reports leaves us wondering about the state of housing in America.

But does the data really tell us anything?

Point #1: New Home Sales only measures the number of new contracts written on homes that are newly-built.  The report doesn't do follow-up to see if the homes actually closed, though. 

With reports of cancellations reaching 40% or more even as far back as November 2006, new homes sales figures are also offset by:

• Tightening mortgage guidelines disqualifying buyers that were previously "pre-qualified"
• Buyers that are unable to sell their previous residences and do not want to carry mortgages on two homes

New Home Sales tells us how many buyers are willing to put down a refundable deposit, but doesn't tell us anything about how many of them actually "bought" the home.  The Census Bureau even acknowledges this in a very strongly worded disclaimer.

Point #2: Existing Home Sales is a national news story but real estate sales is local.

Each month, the National Association of Realtors® releases their report on existing home sales nationwide, including region-by-region breakdowns, a "home supply" calculation, and a national median sale price.

Again, all of this is worthless because the report is looking national instead of local.

All of live on a street and would probably say that our street is a lot different from the street around the corner.  The differences may be in architecture, or proximity to major thoroughfares, or zoning requirements, or anything else that makes a street unique.

It is these small differences set the home values in a given neighborhood and are what makes one neighborhood flourish while another neighborhood flounders.  The homes on your block may be selling like hotcakes but homes a mile away could be showing a 300 DOM.

Now, that's just a neighborhood difference. 

The National Association of Realtors® wants to lump in entire cities, states and both sides of Continental Divide into one big blob of statistics.  That includes the 3,652 miles between Cape Flattery, WA and Key West, FL.  You can see why Existing Home Sales data is irrelevant.

Point #3

Because both the New Home Sales data and Existing Home Sales data have serious flaws in their applicability to everyday living, the data points should be considered irrelevant in determining whether home prices are rising or falling on a micro-level (i.e. neighborhoods).

On a macro-level, however, the data can be useful in predicting corporate profitability and consumer spending patterns.  New home sales lead to new home construction and that creates jobs.  Existing home sales creates a need for furniture and appliances and that drives the economy.

So, on a broader scale, strength in New Home Sales and Existing Home Sales propels the economy forward whereas weakness slows the economy down.

Point Conclusion

Both reports showed signs of weakness in July but neither factored in the credit turmoil that hit at the end of July.  Over the next few months, we may see both NHS and EHS take a dive and -- if that happens -- it will spell weakness for the U.S. economy.

In an ironic twist, that weakness would drive down mortgage rates and create buy-side pressure on homes, perhaps adding some fuel back to the economy.

(Images courtesy: Encarta, Wall Street Journal Online)

A Foreclosure Graphic Is Worth 1,149 Words

A graphic is worth a thousand words.  Therefore, I'll just add a few of my own:

This graphic from The Wall Street Journal illustrates exactly why mortgage rates are rapidly increasing for homeowners with risk in their borrowing profile, but holding steady for everyone else.

Sub-prime, and now Alt-A, are showing signs of major losses to investors.

Rates are higher for new sub-prime and Alt-A mortgage applicants because the former applicants are defaulting at a very high rates.

This is similar to home insurance premiums increasing for homeowners living an area that has flooded in each of the past five years. 

Just by living there -- even if you've never claimed damages -- you'll pay more each month because your neighbors have suffered losses and cost the insurance companies money.

Conforming prime (i.e. healthy credit rating and/or strong assets and/or solid income-to-debt levels) are not yet defaulting like sub-prime or Alt-A and that's why rates for those mortgage applicants remain (so far) unimpacted by foreclosures.

(Image courtesy: The Wall Street Journal)

Would You Pay $6,750,000 To Sell Your Home?

It's an occasional theme around here at The Mortgage Reports: The wealthy follow one set of rules with their finances, so shouldn't the aspiring-to-be-wealthy take notice?

We've applied this line of thinking to interest only loans, for example.  The wealthiest are often advised by financial planners to remain diversified and liquid with their investments.  Interest only home loans help them achieve that goal.

Does the "Behave Like The Wealthy" line of thinking apply to selling a home?  Especially as it becomes easier to DIY, or get reduced services for reduced fees?  Yes, you can For Sale By Owner or use a "rebate" real estate company, but is that what the wealthy do? 

It's not an ordinary home, of course, but in the case of the home shown above, the answer is a definitive "no".

Listed at $135 million, this 95-acre estate outside of Aspen was originally built in 1991 for the family of Prince Bandar bin Sultan, the former ambassador to the United States from Saudi Arabia.

Named Hala Ranch, it's currently the most expensive single-family home listed for sale in the United States.  Assuming a 5% commission (and that's just a guess), there's $6,750,000 in fees to broker Joshua Saslove and his company for the successful sale of the home.

Now, the wealthy seller could probably have relied on his own notariety, the home's notariety, and on favorable press to sell the estate without an agent'shelp, but he didn't -- even at a personal cost of $6.75 million. 

I don't care how much wealth you have: that's a lot of candy bars.

Looking deeper, is the sale of this home all that much different from selling your home, aside from the high price tag?  I mean, let's look at the agent's role in selling Hala Ranch:

• Create a complete marketing plan befitting of the property
• Make sure buyers are qualified to actually bid on the home
• Hustle, hustle, hustle to elicit bids from potential buyers

If it sounds like the same process to sell your two-bedroom condo in West Loop, your Lincoln Park townhome, or your single-family residence in Highland Park, that's because it is.

One thing I am repeatedly reminded of is that the wealthy value their time differently from the non-wealthy and that they tend to view time spent selling a high-value asset is time wasted and best left to professional salespeople.

Even at high costs.

(Image courtesy: Christie's Great Estates)

Source
Millionaires need not apply
Kirk Johnson
Chicago Tribune, July 2, 2007
http://www.chicagotribune.com/news/nationworld/chi-house_02jul02,1,3056301.story?coll=chi-newsnationworld-hed

Fall From Grace for $800: This City Led The Nation In Growth In 2001 And Now Leads The Nation In Foreclosures

What is Stockton, California, Alex?

According to RealtyTrac, California was home to six of the leading 10 foreclosure cities in April 2007. 

These cities were (with ranking):

#1 Stockton
#2 Vallejo-Fairfield
#4 Riverside-San Bernardino
#6 Modesto
#7 Sacramento
#8 Merced

Stockton -- as leading foreclosure city in the nation -- registered one foreclosure for every 131 households. 

That is six times the national average.

Now, let's flash back to homestore.com's Top 5 Home Buying Spots story from 2001. 

Using home appreciation as its guide, the story highlighted the five fastest growing cities in the nation.

Recognize any of these city names?

#1 Stockton-Lodi (23.5%)
#2 Modesto (21.4%)
#3 Salinas (21.2%)
#4 Santa Rosa (18.3%)
#5 Vallejo-Fairfield-Napa (17.4%)

I cannot say for sure if there is a direct correlation between the two data sets because they are six years apart, but it's probably more than just a coincidence.

Appreciation starts when demand outpaces supply.  Maybe folks flock to an area because it's affordable versus its neighboring towns/cities.  As values rise, builders recognize the shortage of abodes and they begin to build.

With new supply (and news of demand), investors buy homes in hopes of turning a profit.  Sometimes, they'll hold the property to collect rent; sometimes they sell the home shortly after closing for a small profit.

The investor money incents builders to add more homes.  With higher demand comes higher prices and the original inhabitants are now priced out of their neighborhood.  A large percentage of buyers are now investors. 

Many of the investors are a different type of investor called a speculator.  This is when danger sets in.

Meanwhile, carrying multiple mortgages can be a strain on a person's cash flow and investors are all about cash flow.  Enter the low-payment mortgage that can (a) negatively amortize, or (b) adjust in a period fewer than 5 years.

Over time, the appreciation slows down as an area saturates.  There is little left to borrow against for the investors and the market for selling is extra soft.  It's even tougher because builders still have brand-new homes to get off the balance sheets. 

A "used home" can't possibly sell for as much an identical "new home".  Can it?

Suddenly, investors are maxed out and can't pay their home loans.  Speculators walk away from their properties entirely.  Foreclosures begin and with each foreclosure, of course, the relative value of the neighborhood can decrease. 

More foreclosures follow.

And then, six years after the initial boom, the same area that led the nation in growth is leading the nation in foreclosures.  It's not that far of a stretch.

(Images Courtesy: Foreclosure Deals, Interbasket)

Housing Data Becomes Irrelevant As Sector Decouples From Mortgage Bonds

The National Association of REALTORS has changed their 2007 housing forecast for the worse, as reported by CNNMoney and other news sources.

Four weeks ago, this would have been terrific news for mortgage rates shoppers.  Today, not so much. 

Mortgage rates are only slightly improved on the day.

Why?  Because the housing sector is decoupling from the mortgage-backed securities market. 

Despite ongoing weakness in housing, consumer spending surges ahead.  It's now apparent to markets that housing will not slow down the economy as the Fed had predicted (and communicated) in its four press releases earlier this year.

Just yesterday, in fact, Fed Chairman Ben Bernanke alluded to the monetary policy-setting group's reduced focus on housing, stating that inflation risks "remain to the upside." 

For a succinct breakdown of NAR's second revision to its 2007 forecast, check out Inman Blog's bullet-point comparison.

(Image Courtesy: Strangeland.com)

How "Repair Credits" To The Buyer Can Sabotage Your Home Sale

When buyers and sellers look for common negotiating grounds, it's common for the buyer to request home improvements to be made prior to the sale. 

The request may be phrased in any number of ways:

• "The hardwood floors are warped and we think the seller should pay for it."
• "There is a leak in the plumbing that needs to be fixed to prior to moving in."
• "The roofing reached the end of its life.  It needs to be replaced."

The seller may agree to meet the buyer's demands, but making repairs to a home fixture, such as a roof, isn't convenient while a person still occupies a home. 

And this is how the "repair credit" gets introduced into the contract. 

A repair credit is a dollar amount granted from the seller to the buyer to be used to cover the costs of the requested repair(s).   

For a seller, repair credits offer a way to "pay for" the handyman work without actually going out of pocket; all of the funds for the buyer are taken directly from the home sale's proceeds instead of from a bank account.

Unfortunately, when granting the repair credit, many sellers go about it in the complete wrong way, putting their buyer's ability to acquire home financing for the purchase at risk. 

That's because -- as a rule -- lenders do not allow concessions for home repairs to be line-item credited on the final settlement statement. 

This is for two reasons:

1. The lender has no way of knowing that the repair will actually be made by the buyer
2. The lender has no way of knowing whether or not the repair is actually needed

Put the two together and it raises the red flag we call "Fraud Alert".

The correct way to offer a repair credit is to reduce the home's sale price by the amount of the credit and make that the new purchase price. 

In the end, the seller goes home with the same amount of money.

Why Foreclosures Are More Prevalent In Fast Growing Areas

According to RealtyTrac, one out of every 783 homes in the United States filed for foreclosure in April.

In the Chicagoland area, the breakdown is like this (in order):

• Kendall: One home in every 257 entered foreclosure
• Will: One home in every 303 entered foreclosure
• McHenry: One home in every 320 entered foreclosure
• Kane: One home in every 387 entered foreclosure
• Cook: One home in every 410 entered foreclosure
• Grundy: One home in every 430 entered foreclosure
• De Kalb: One home in every 717 entered foreclosure
• Du Page: One home in every 758 entered foreclosure

Don't be surprised that Kendall, Will, McHenry and Kane are topping this list; or that Kendall County homes are foreclosing more than three times as fast as Du Page. 

It all comes down to growth.

As reported by the Chicago Tribune (and I can't find the original link anywhere), Kendall and Will County were both in the Top 10 counties nationwide for growth between 2000-2006. 

McHenry and Kane counties -- while not as explosive -- have seen their share of growth, too.  As young families leave the city in search of yards, schools and affordability, they are creating a new problem for themselves that may be a leading cause of foreclosures.

Have you seen the typical tax bill in Will County?

Chicagoland's collar counties until very recently were considered rural.  The sudden influx of residents created a need for schools, infrastructure, and public services.  It's typical to see a 2% property tax bill in Will and other counties, based on the value of a home.

By comparison, Cook County taxes may be 1.25%.

Another probable factor relating tax bills to foreclosure is that new construction homes don't have tax bills associated with them until 12-18 months after completion.  So, homeowners that bought new construction along the I-55 Corridor in 2005 and 2006, for example, are only now getting their first real estate tax bills and -- surprise -- it's $400 per month.

Because so many homeowners are in a state of precarious balance between their monthly expenses and their monthly income, the shift in real estate tax payments can upset that balance and create financial stress, eventually leading to a complete inability to meet their monthly obligations.

If the theory proves true -- explosive growth creates larger-than-normal tax burdens for unprepared homeowners -- expect more foreclosure activity in the collar counties over the next 12-18 months. 

Based on that idea, DeKalb should quickly move up the list.

How The IRS Gets Paid On Your Foreclosure Short Sale

In his weekly syndicated column, Kenneth Harney pulled back the curtain on a nasty piece of IRS tax code that can penalize homeowners with foreclosures and short sales.

For those that don't know, a short sale is when a lender accepts a payoff amount that is less than the amount owed on a home. 

Author's note: If you're new to short sales, consider this to be a seminal moment. It's the first of many times you'll hear the term "short sale" bandied about over the next 12-18 months.  You heard it here first, folks.

Here's an example of a short sale. 

• You owe $400,000 on your home
• You are missing mortgage payments and are 90 days late to the lender
• You have no assets or reserves in the bank
• Your home sells for $380,000
• After paying commissions and taxes, you have $365,000
• The lenders realizes that you can't pay them back for everything you owe
• The lender agrees to accept less than the amount owed because something is better than nothing

So, it appears that the homeowner is getting away scot-free on the $35,000 shortfall to the lender. 

Quite the contrary.

According to IRS tax code, when a creditor agrees to cancel a personal debt of $600 or more, it is required to submit a 1099-C, Cancellation of Debt form to the IRS.  And, when the IRS receives this form, it treats the canceled debt as income.

So, when the lender agrees to "forgive" the $35,000 in the short sale example above, it is required to report that write-off to the IRS.  The IRS, in turn, treats the write-off as income for the homeowner.

Assuming the 28% tax bracket, the homeowner added $9,800 ($35,000 * 0.28) of additional tax liability come April 15 -- even he never physically held the cash, or was paid the cash at all.

But the tax code related to Form 1099-C may not last forever.  Several lawmakers on Capitol Hill are trying to modify the tax code related to cancellation of debt. 

The Mortgage Cancellation Tax Relief Act of 2007 would amend the tax code to forgive debt cancellations on primary residences and is currently before the House Ways and Means Committee, the primary tax legislation body of Congress.

My Clients Write A Lot Of Paper, or Manic Monday At Mobium Mortgage

Something in the H₂0 this weekend?

I had a gaggle of clients write paper on new homes.  I am staying plenty busy today as my team tries to stay ahead of the curve.  We have a pipeline full of refinances to close out before the next major wave of purchase closings begin May 10.

For all the talk that "homes aren't selling" and "the market stinks" across the country, buyers and sellers seem to be the best of friends here in Chicago.  Each week, my list of clients looking for homes shrinks (only to be replaced with a new list of home-searching clients just as quickly).

Purchase activity chugs along in the city by the lake.

Lucky for the buyers under contract as of this weekend, the Fed's favorite inflation measured showed some softness this morning and rates should trickle lower into tomorrow's rate sheets.

Price It Right: Seems Like A Theme Around Here

It must be "Price Fairly Week" here at The Mortgage Reports because here is my third post in as many days about real estate sales...

Maybe you caught a few of the headlines today about Existing Home Sales from March.

• Sales of Existing Homes Plunge Steeply (NY Times)
• Existing Home Sales Plunge In March (Houston Chronicle)
• Existing Home Sales Plunge, Biggest Retreat In 18 Years (Salt Lake Tribune)

Existing Home Sales counts homes that reach the closing table and that actually close.  So, in some respects, it also accounts for "contingent offers" that fell apart, or the buyer's inability to acquire financing. 

With larger home supply than in year's past and with tightening mortgage guidelines, the large drop is not a complete surprise. 

What's odd is that in the wake of the yesterday's Existing Home Sales data, today's New Home Sales for the month of March showed surprising strength.

That's funny "ha ha", not funny like a clown.

For the first time in three months, New Home Sales increased over prior months and beat analysts' expectations. 

Granted, the data only counts the total number of "builder homes" that went under contract and doesn't account for cancellations or botched closings, but it still paints a much better picture than the MSM would have you believe about housing.

It goes a step further, though.

Builders sell homes for a living; ordinary people sell homes every handful of years.  Therefore, a builder is much more in tune with market conditions and can/will readily make any of the following changes to move inventory:

• Drop sales prices
• Upgrade home interiors with granite, hardwood, and/or appliances
• Provide home loan financing incentives
• Offer flexible closing terms

A home seller, by contrast, often can't (or won't) make these adjustments.  Failure to present a comparable "value" can render an existing home less attractive to a new buyer versus a newly-constructed home.  The more wear-and-tear on the home, the less attractive it becomes.

So, what's a home seller to do? 

In the end, as always, it comes down to pricing your property fairly and having it be "showroom ready" for a prospective buyer.  There are still plenty of homes that are selling in days as opposed to months. 

The common trait is that all of them are priced right.  Maybe the builders have figured that out.

How To Price Your House To Sell

If you've ever wondered why some home sell like hot cakes and other languish on the market for months, it's usually because the listing agent of the sold home did an excellent job of setting the home's listing price.

Finding comps is not rocket science, but it is still a skill that can be honed.  Experienced Good real estate agents have that skill.  Unfortunately, there are far too many agents that don't. 

"Proximity" does not a comp make -- a home's comps should have similar characteristics to the home itself.

Unless you live in a townhome complex, or a condominium, it's unlikely that you will find two properties that are exactly the same in a neighborhood, so an appraiser takes similar properties and lists their features on a spreadsheet-like form called a grid.

Then, feature-by-feature, he will make adjustments to each home's relative worth.  A finished basement may add $10,000 of value to a home; a new roof may add $10,000; a higher floor number may add $7,000; a detached garage may decrease a home's value by $15,000.

This adjustment process is called "gridding" and it's all up to the opinion of the appraiser. 

Even as uninterested experts on home valuation, however, the work of an appraiser is almost always reviewed by mortgage underwriters for fraud.  Any one of the following comp-related issues can be red flags that doom an appraisal:

• The comps listed have different number of bedrooms or bathrooms from the subject
• A recent sale that should have been a comp is ignored in the gridding process
• Local market conditions are unaccounted for (i.e. declining values)

When an appraisal is flagged by a mortgage lender, it enter "Appraisal Review" which is a euphemistic way of saying that your appraised value will be cut by some to-be-determined percentage.

Regardless if you are buyer or seller, this is an unwelcome event.  As a buyer, the new value set by the lender may reveal that you paid more for a home than what other similar homes have sold for in the neighborhood. 

More importantly, the lender will base their loan-to-value (LTV) calculations on the appraised value and not the sale price.  This can increase the amount of cash required at closing. 

A $400,000 sale price with 20% downpayment requires $80,000 for a down stroke.  If the home appraises at $385,000, that payment increases to $92,000 ($400,000 - ($385,000 * 0.20) ).

As a seller, if your home doesn't appraise for the purchase price, your buyer may walk away from the deal because they feel "cheated". 

Worse, they may be unable to make their downpayment as in the example above.

The best way to avoid appraisal issues is to value a home appropriately at the start.  If you don't think your agent is doing a good job in determining a price, hire an appraiser on your own to help you.  It may cost $200-500, but that is relatively cheap compared to a home's sale price. 

The peace of mind goes a long way, too, because homes that are priced right sell fastest.

(Image Courtesy: Williams Class, Hawaii Hawaii)

Watch As Home Prices Take You On A Roller Coaster Ride

This video from Speculative Bubble -- aside from inducing vertigo -- really puts home values in perspective.  Watch as the roller coaster ride moves from 1890 to 2007.

At three-and-a-half minutes, it's a much longer rider than the SooperDooperLooper, but stick around for the last 30 seconds -- it's mind-blowing.

Three Housing Headines, Three Misleading Statements

As a consumer, it's very easy to be misled by newspaper headlines.  Today provided a great example, the third in a series of stories about housing.

"New-Home Sales in U.S. Fell 3.9% to 848,000 Pace in February"

This would normally be bad news except that the Margin of Error in the survey was 17.4%.  That means that the data read could have just as easily been -21.3% as it could have been +13.5%.

The Commerce Department doesn't try to hide this, either.  At the bottom of Page 1 of their report -- not obscured in the least bit -- it's written that there is insufficient "statistical evidence to conclude that the actual change is different from zero".

Because the Margin of Error exceeds the measurement, the data measured is worthless.  The headline could have read "13.5% Gain In New Home Sales" and that would have been "true", too.

(Author's Note: If you want to know more about how Margin of Error works, check Google and find an answer that suits you.  Or, just trust me on it.)

So, today's data is misleading.  But, did you see happen to see last Friday's headlines?

"Sales of Existing Homes Up 3.9% For The Biggest Monthly Gains In Three Years"

Missed in the headline (again) was that total inventory rose, too, by 5.9%, adding more supply to the market than for which there is demand.  More supply pushes prices down and -- voila! -- the median sale price was down 1.3% from February 2006.

The headline spins positive, but the real data is neutral.

And, because things always happen in threes, did you see last Monday?  This headline made it to your preferred news source, I am sure:

"9% Jump in New Home Construction". 

The headline was then followed by an article highlighting strength in the housing sector because more homes are being built. 

What was not in the article?  That the Housing Starts survey's Margin of Error was 10.2% and that rendered this data worthless, too.

Housing may be strong or housing may be weak.  But, most likely, housing is both of these things.  It all depends on your particular street because all real estate is local.  Either way, look deeper than the headlines -- there's always more to the story.

The Headlines Say Housing Jumped 9%, But Did You Catch The Margin Of Error?

If you only looked at the Housing Starts headline today, you probably missed something important.

A few sample headlines read:

• U.S. Housing Starts Jump 9% (WSJ)
• U.S. February Housing Starts Rise More Than Forecast (Bloomberg)
• Home Construction Rebounds in February (Forbes)

And this much is true.  Housing Starts -- -- defined as the number of units for which construction began -- surprised to the high-side in February.

And, not only did the figure beats consensus estimates, it also represented a 9% increase over January's numbers.

Normally, that would be a signal of strength.

But, let's look deeper.

Housing Starts data is collated and released by the Census Bureau.  In PDF format, the report is six pages long and contains all sorts of interesting data, broken up by region and time period.

Of all the data, here is the key excerpt upon which I want to focus:

Privately-owned housing starts in February were at a seasonally adjusted annual rate of 1,525,000. This is 9.0 percent (±10.2%) above the revised January estimate of 1,399,000.

I added the boldface for emphasis. 

In other words, the Margin of Error on the measurement was larger than the measurement itself, rendering the result worthless. 

Based on Margin of Error, Housing Starts could have just as easily been a negative number and that would be statistically acceptable.

Just one more reason to read deeper than the headlines, folks.

How A Homebuyer Can Save An Extra $4,250 In 5 Years

It's just good luck for post-Super Bowl home buyers this week.  On the heels of less-than-hawking testimony from Fed Chairman Ben Bernanke, mortgage rates have dropped by about 0.25% across the board.

The impact of lower rates is palpable.  A $300,000, 30-year fixed mortgage is now $49 less expensive per month and a similar 5-year ARM with interest only option is $62.50 less expensive per month.

Savings add up over time.  At a 5% rate, $62.50 grows to $4,250 in 5 years.

The best part is a lot of folks are going to benefit from the drop -- purchase contracts are arriving in our office at a dizzying clip right now.

Now, the key is: just because rates dropped doesn't mean you should buy a bigger home.  Treat lower rates like a reverse form of "found money" and maybe one day that money will find you -- in need of $4,250.

Vacant Homes Hurt Homeowners More Than Builders

The Wall Street Journal ran a piece today that will put smiles on the faces of home stagers everywhere.  Says author Michael Corkery, the number of homes being shown as "vacant" is at its highest point ever. Vacant homes fall into one of two camps.  They either belong to builders that are trying to sell excess inventory, or they belong to homeowners trying to sell their former residences (and likely carrying mortgages on two separate homes). 

A vacant home is exactly what it sounds like -- a home for sale in which nobody is living. 

The total of number of vacant homes is estimated to be 2.1 million and that represents 2.7% of all homes listed for sale.  Compared to the year ago level of 2.0%, this little-known report is now catching the eye of analysts looking for insightful housing market information.

It's the latter group that concerns me because individuals have far fewer resources to carry extra payments. 

Unfortunately, most homeowners with vacant homes didn't expect to be in the pickle that they're in.  Because the soft housing market re-introduced the "home sale contingency offer", purchase agreements can be unwound because the contingency is not being met.

If the buyer can't sell his own home, he is not longer obligated to buy the seller's home.  If the seller didn't make a similarly structured contingent bid, he may be stuck.

This has happened to two of my clients in the past 3 weeks and both now own two homes -- their new home and their former (and vacant!) residence. 

In addition to making mortgage payments on two homes each month, they both have a substantial amount of equity tied up in the former home.  That money could have been earmarked for any number of things -- downpayment, furniture, landscaping, et cetera. 

Instead, the equity just sits there, waiting for a buyer to come in and free it.

Without knowing how the Vacant Home statistics split by owner-type (i.e builder, homeowner), it's difficult to assess its impact on the United States economy.  But, for people that have moved to new residences and left an empty home behind, the impact on their personal economy is not so muddled.

Source
Vacant Homes For Sale Cloud Economic Hopes
Michael Corkery
The Wall Street Journal, February 5, 2007
http://online.wsj.com/article/SB117064480990297820.html

Like A Locomotive, Mortgage Rate Increases Are Picking Up Steam

Existing Home Sales showed weaker-than-expected numbers this morning, but that hasn't stopped the recent slide in mortgage-backed securities.  This is a counter-intuitive so let's take a deeper look.

First, the supply of homes dropped from 7.3 months to 6.8 months.  With less supply, there is a tendency for home values to stabilize and that is exactly what is happening.  Median home prices are turning flat versus the year-over-year declines during the last quarter of 2006.

Additionally, there is a growing feeling that the housing market has already bottomed-out and that the worst is behind us.  A re-energized housing market will fuel additional economic growth in 2007.

Markets are slowly convincing themselves that inflation is seeping back into the economy and they expect that the Fed's rate-setting Open Market Commitee will confirm that for them at their meeting next week.

Because of those inflation expectations, between now and the FOMC's adjournment January 31, mortgage rates can only stay flat or move higher.  It would behoove rate shoppers everywhere to lock their mortgage rates as soon as possible.  The more traders that place bets on inflation, the more likely that mortgage rates will head higher in the interim.

Already today, mortgage rates are moving with gusto and may be subject to worsening mid-day repricing if momentum trading picks up any steam.

Home Sales Pick Up Prior To The Super Bowl

Since Monday morning, Mobium's offices have been buzzing.  Phone call after phone call from clients about their brand-spanking-new purchase contracts.  I have conducted more Mortgage Planning sessions with clients in the past three days than I did in the three weeks prior!

Homes are selling in Chicago, folks, and I'm just not sure why it's happening now.  The Bears played last Sunday and bars were jammed all day long -- that doesn't leave much time for home shopping.  And, to boot, the weather wasn't even especially good.

And yet, it's happening.  Purchase contracts are being signed all over the city.

Thursday morning, the market will get to see the December's Existing Home Sales data in what I am viewing as a no-win situation for markets.  If the data is flat or weak, markets will brush it off and wait for Friday's New Home Sales data to show strength, holding rates steady.  If the data is strong, markets will hop on the Inflation Bandwagon and will push mortgage rates higher, citing that housing will force the Fed to raise the FFR in 2007.

It's only a few hours away.  And so we wait...

What 76% of Traders Are Nearly Certain Of. Until Tomorrow, At Least.

The graph above (courtesy of the Cleveland Federal Reserve) shows why mortgage have trended higher over the last 30 days. 

The blue line labeled 5.250% represents the current Fed Funds Rate.  As we move farther to the right, the line changes to reflect the where traders believe the FFR will be after the Fed's May meeting.

More importantly, each line represents inflation expectations in the markets.  The FFR does not control mortgage rates because it is the ultimate short-term interest rate versus the 30-year pricing model of mortgage bonds, but inflation is impacting them both right now. 

If the Fed attempts to slow down the economy by raising the FFR, it will also cause mortgage rates to increase because the future value of the dollar will be expected to erode.  Traders, therefore, will demand a premium to buy bonds priced in U.S. Dollars.  "Premium" = "higher yields on bonds" = higher mortgage rates for homeowners.

If that doesn't make sense, just ask yourself: Would you want to hold an asset whose value is deteriorating?  I'll answer for you.  No, you wouldn't.  Unless somebody paid you extra to compensate for the added risk.

So, now we can see how inflation expectations relate Fed's next move to mortgage rates.  If the Fed sees the risk of inflation, it will raise the FFR and that signals a devaluing of the currency which leads to more risk for investors.

Because the chart shows a trailing 30 days, we can see the change in expectation from mid-December, though the strong housing numbers released in late-December, through the unexpectedly strong jobs report two weeks ago, and finally, leading up to today's CPI and housing reports.

Because both figures surprised higher, we can expect the probability of a 5.250% FFR in May to increase, sustaining the upward pressure on rates.

Why "Vacation Weeks" Can Be Bad For Rate Shoppers

After Thursday's data releases showed strength, mortgage rates are heading into the last trading day of 2006 up more than 0.375% on the week.  That's a lot for a normally sleepy week.  The broad shift in rates is a more a function of market liquidity than of economic fundamentals.

Tuesday's blowout New Home Sales figures were buoyed by Thursday's similarly strong Existing Home Sales figures.  In addition, Consumer Confidence registered its highest value since April, right before gas prices began their push towards $3.50 per gallon.

The third surprising number was a manufacturing index that rebounded from a three-year low to surprise markets by blowing out November estimates. 

In isolation, each of these reports has the power to shift mortgage rates.  But, all three released within hours of each other (as it was yesterday) can really make a difference in weeks like this.

With so many traders on vacation this week, there are fewer buyers and fewer sellers at any given price point for mortgage bonds.  Therefore, it is much less likely that a person who wants to buy at a certain price will find somebody who wants to sell at a certain price. 

This is the concept of liquidity and it's easier to understand in the context of eBay.  The more people that use eBay, the more valuable it is for everyone that uses it because there is a much greater chance that there will be a buyer for every item listed at every given price.  Both the buyers and sellers benefits. 

With an already-fragile market psyche, the market's lack of liquidity because of vacationing traders is causing what looks like an over-reaction to economic news, but is really just market forces at work.  There just aren't as many sellers willing to sell at the given prices that buyers want to pay.

This forces prices for mortgage bonds move wildly and is the reason why rates have moved so much this week.

Markets are closing today at 1:00 P.M. EST which means that even fewer traders will show up at the office.  Expect continued volatility.

Why New Home Sales Doesn't Tell The Story

Just yesterday, I talked about New Home Sales and why it can push the economy in every which direction.  Now, we're going to see how traders react on headlines instead of hearing the whole story.

We