Opposing views on “bubble”

Sometimes the majority of consumers and real estate experts take opposing views on the future direction of the real estate market. A current example is predictions about the bursting of a “value bubble” in housing.

Most seasoned experts are saying there will be no bubble bursting in housing prices on the national scene. There may be lowering values in some areas and definitely a lower rate of value increases, but no bursting of a bubble. However, 71 percent of consumers say it is likely that a housing bubble and collapse of prices could occur nationally within the next year, according to a recent survey by Experian-Gallup. About 24 percent of consumers say such a housing bubble is not likely.

A much smaller number of consumers, 32 percent, expect the collapse of a housing bubble within their own area in the next year. When the time is extended to three years, 42 percent say such a situation is likely in their own area, and 56 percent say it is not. A year ago a similar question found a slightly less pessimistic view with 37 percent of consumers expecting a housing bubble and collapse in their area within the next three years.

It's interesting to note that this year a bit over half of Americans (53 percent) recognize the term “housing bubble” without explanation. That's up from 35 percent a year ago. “While consumers are clearly concerned that housing activity will slow this year, it is somewhat reassuring that they are much less pessimistic when talking about the conditions where they live as opposed to the nation as a whole,” said Ed Ojdana, group president of Experian Interactive. “The relatively small number of consumers expecting significant housing price declines is also a positive sign, given consumer expectations of a housing slowdown.”

The survey also revealed that a third of today's homeowners now have a home equity loan or line of credit. The main reason for taking out an equity loan or credit line was to finance home improvements, according to 43 percent of homeowner respondents. Another 10 percent cited debt consolidation as the reason for such a loan. Credit card debt was the reason for 4 percent of borrowers, followed by an emergency, education expense and medical expenses.

Over the next six months, just over 10 percent of all consumers expect either to borrow money to buy a home or to refinance their home or to borrow money on their current home by either a home-equity loan or line of credit, according to the survey report.

Mortgage refinancing can stop ARM payment increases

Despite rising interest rates, there's good news on the mortgage front. Those rates are still at historically low levels. And borrowers who hold adjustable-rate mortgage (ARM) loans that are increasing in rates and payments can refinance with a secure fixed-rate mortgage at a very favorable rate. And low-rate mortgage financing is still available for home purchases.

On May 1, the average rate for a 30-year, fixed-rate mortgage is 6.58 percent. That's the highest rate for a 30-year fixed-rate mortgage since July, 2002. And it will probably edge higher in coming months. A particularly popular option for borrowers who want to exchange their ARM with a fixed-rate loan is the 15-year fixed mortgage. The average rate for these loans is now 6.21 percent.

“Mortgage rates are drifting upward following the release of the recent Consumer and Producer Price Indexes that came in at the upper end of market expectations for inflation,” said Frank Nothaft, chief economist for Freddie Mac, a major buyer of existing home mortgages. “Even though lenders are offering greater interest rate discounts on ARMs, the rate savings has declined relative to fixed-rate mortgages. The ARM share of applications has dipped to 32 percent. If the Fed continues to raise short-term rates, the ARM share will likely decline further,” Nothaft said.

Another popular option for borrowers wanting more protection from rising mortgage payments but still need a low interest loan is the five-year Hybrid ARM. With these mortgages, the rate is fixed for the first five years, then reverts to a one-year ARM for the remainder of its term. The average rate for these mortgages is now 6.21 percent. The above rates do not include the add-on fees known as points. These now average about 0.5 percent of the loaned amount.

An increasing number of mortgage applicants are refinancing an ARM loan to hold the line on payment increases. The individual needs and capabilities of mortgage applicants vary greatly. It's best to discuss those needs with a knowledgeable mortgage counselor before applying for a specific type of mortgage.

New changes proposed for FHA mortgages

FHA mortgages, loans insured by the Federal Housing Association, have needed to be modernized and generally overhauled for a long time. Finally, HUD (Department of Housing and Urban Development) is doing the job. But not all housing leaders agree with its current proposal. The proposed changes are designed to increase homeownership opportunities for more Americans, according to HUD. And they want to make FHA mortgages a more attractive and important financing option in today's market.

“FHA was created during the Depression to stimulate the housing market at a time when homeownership wasn't a reality for most people,” said Brian Montgomery, assistant secretary of HUD. “FHA has helped over 33 million families become homeowners since that time, but now it needs to be able to adapt to today's marketplace. A new FHA would offer many more Americans a variety of homeownership financing options.”

The recently proposed legislation would create a risk-based insurance premium structure for FHA that would match the premium amount with the credit profile of the borrower, HUD noted. It would also eliminate the currently required 3 percent minimum down payment, reducing a significant barrier to homeownership for many families. And it would increase and simplify FHA's loan limits. Among other changes, it would make it easier for FHA to serve purchasers of affordable housing such as manufactured homes and condos. And it would increase the loan limits to reflect the real cost of manufactured housing today.

“To meet the needs of underserved families who desire to purchase a home, we believe Congress should grant the FHA broader authority outlined in the Administration's fiscal 2007 budget proposal,” a HUD spokesman said.

Industrial lease rates rising, vacancies down

The vacancy rate in industrial buildings has been falling for eight consecutive quarters, but the rate of decline slowed to just 10 basis points in each of the past two quarters, according to a report from the real estate firm Grubb & Ellis. Vacancy rates were averaging 8.0 percent at the end of the first quarter of this year. That's the lowest level since the third quarter of 2001.

Eight markets recorded sub-five-percent vacancy rates during the first quarter compared to six percent during the previous quarter. Space under construction rose for a ninth consecutive quarter during this year's first quarter. That volume is just 10 percent below the all-time peak recorded in the fourth quarter of year 2000.

Rental rates are finally showing some life, to the delight of landlords and dismay of tenants. The average asking rental rate has bumped up 5.6 percent over the past year, the report noted.

Homeownership: the key to retirement security

Homes are the most reliable source for funding the owners' retirement, even more so than other personal means, like IRAs, savings and working in retirement, according to results of a recent study. As retirement looms for a huge wave of baby boomers, the realization of the need to create a retirement income has those boomers looking to the nation's favorite and most trustworthy financial investment – homes.

“For many Americans, owning a home is a great source of enjoyment and financial confidence,” said Earl Lee, president of Prudential Real Estate Affiliates, the organization that conducted the study. “Today, more than ever, people also consider real estate as an important potential source of retirement income.”

In the study, two-thirds of respondents in a survey said the historically high real estate values in recent years have significantly helped their outlook for a financially secure retirement. By comparison, far fewer people said that job security and increases in the stock market have assisted their retirement preparedness.

About title problems and costs

Title problems are found in about 36 percent of all residential real estate transactions, up from 25 percent in 2000, according to a report from the American Land Title Association. Rande Yeager, ALTA president, said the most frequent curative action taken last year was obtaining releases or obtaining pay-offs for discovered liens. He also acknowledged that homebuyers and regulators have recently questioned the value and cost of title insurance.

There has indeed been a rising tide of complaints about the high cost of title insurance. One report pointed to the low number of claim payments. “Title insurers spend as little as 5 cents to 10 cents of every premium dollar to pay claims. In contrast, companies that sell auto or health insurance typically spend 90 cents or more of every premium dollar on claims,” the report stated.

A preliminary title insurance report by the Government Accountability Office (GAO) was released in late April. In explaining why they did the study, the GAO stated, “Title insurance is a required element of almost all real estate purchases and is not an insignificant cost for consumers. However, consumers generally do not have the knowledge needed to `shop around' for title insurance and usually rely on lenders, real estate agents or attorneys for advice in selecting a title insurer. Recent state and federal investigations into title insurance sales have identified practices that may have benefited some of these professionals and title insurance providers at the expense of consumers,” it was stated in a GAO release.

NEW TREND: Home Raffles

What a deal! You could acquire ownership of a new luxury beach home in Oxnard , California , adjacent to Channel Islands Harbor , for the price of $150. Or, on the other coast, you might own a 2,400-square-foot townhouse residence in Vero Beach , Florida (north of Palm Beach ), for $20.

These are raffle opportunities – a growing trend for fund raisers, using a home to lure ticket buyers. In these cases, the ticket holders not only have a chance at picking up a very valuable residential property for a super-low cost, but also help support a Boys and Girls Club at the same time. It's a fund-raising technique that's working for an increasing number of nonprofit organizations. A home is certainly the most desired of all material possessions.

The home raffle in Oxnard benefits the Boys and Girls Club of Greater Oxnard and Port Hueneme . The home, now under construction, is in a new community being developed by D.R. Horton, Inc., the nation's largest home building firm. In Vero Beach , Florida , raffle ticket drawing is scheduled for December 15. This project benefits the Boys and Girls Club of Indian River County, Florida, one of the most recently formed clubs in that state.

The townhouse is being provided by the builder to the club at about $200,000, covering the builder's cost. A minimum of 20,000 tickets must be sold to acquire the property. If ticket sales do not reach that volume, a $50,000 award will be given to the holder of the winning ticket. Other prizes will also be awarded.

Jim Woodard writes a nationally syndicated newspaper column on real estate news and trends, carried in about 230 U.S. newspapers – along with freelance features.  Reproduction of this report, in part or entirety, is prohibited without the express permission of the author. E-mail: storyjim@aol.com.