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Mortgage / Real Estate Update Report
Interest rates down, existing home sales up
By Jim Woodard
Mortgage interest rates are down, while sales of existing homes are up – a welcome development for consumers and real estate professionals. The long awaited increase in sales is a big and important event, carried by all major news media. At this writing, the average rate for a 30-year, fixed-rate mortgage is 5.85 percent, down from 6.13 percent just a week ago. Last year at this time, the average interest rate was 6.16 percent. Borrowers pay an average of 0.4 points (percentage of loan).
“Mortgage rates fell as various actions were taken to improve market liquidity,” said Frank Nothaft, chief economist for Freddie Mac, a major government-sponsored buyer of existing mortgages. “Also, the inflation report from the Consumer Price Index reflected weaker price increases than expected. It reported no change in February, including food and energy costs. That's the first time the CPI did not report a monthly increase since November, 2006.”
The lowering of rates sparked a sharp increase in the number of mortgage applications for home purchase transactions and refinances, according to a report from the Mortgage Bankers Association. “The Federal Reserve acted to bring stability to the mortgage-backed securities market and we saw an immediate impact with a drop in mortgage rates,” said Jay Brinkmann, MBA's VP of research.
Existing home sales, including single-family homes, townhome's and condominiums, rose 2.9 percent to a seasonally adjusted annual rate of 5.03 million units in February. That's up from 4.89 million units in January. “We're not expecting a notable gain in existing-home sales until the second half of this year, but the improvement is another sign that the market is stabilizing,” said Lawrence Yun, chief economist for the National Association of Realtors. “Buyers are taking advantage of higher loan limits for both FHA and conventional mortgage, thus unleashing some pent-up demand. As inventories are drawn down, prices in many markets should go positive later this year.”
About half of the nation's metro areas are now showing home price increases, with healthy gains in some markets, he added. “In some areas, a recent rapid price decline has induced buyers to come into the market, and sales are now rising. The relationship between home prices, interest rates and income has improved to the point where buyers are more serious about making offers.” Sales of existing single-family homes increased 2.8 percent in February, while sales of existing condominiums rose by 3.7 percent.
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| RESPA rules finally published
After long delays, the proposed regulation on the new Real Estate Settlement Procedure Act (RESPA) was recently published by the Federal Register. The 94-page regulation includes, among other things, a mandatory Good Faith Estimate and a modified HUD form requiring that a “closing script” be read orally at settlement. It also includes enhanced disclosures and new rules concerning volume discounts and average cost pricing. There will a period for public comment on provisions of the regulation before it is finalized. The period, now in effect, expires on May 13.
“The rule implements HUD's proposed efforts to simplify and improve the disclosure requirement for mortgage settlement costs under RESPA and protect consumers from unnecessarily high settlement costs,” it was stated in the summary section of the regulation document.
Persons wanting to comment on the new regulations should mail their communication to the Regulations Division, Office of General Counsel, Department of Housing and Urban Development, 451 7th Street, SW, Room 10276, Washington, DC 20410. Or electronic communications can be sent via the Federal eRulemaking Portal at www.regulations.gov/ .
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| Sales of super-luxury homes robust
Many multimillion dollar homes don't seem to be affected by the highly publicized housing slump. Their prices remain firm or continue to rise, and there's an ample supply of affluent buyers ready and will to buy – many opting for an all cash purchase transaction.
One reason for that strong market niche is that the nation's rich people are getting richer and they want to show their elevated status in the home they live in. Also, an increasing number of super luxury homes are being acquired by very rich foreigners who want a residence in the U.S. and want to take advantage of the weak dollar and relatively bargain prices.
In today's market, the ultra-high-end market means homes above $5 million. Lower priced luxury homes, ranging from $1 through $4 million, are often more difficult to sell and are more likely to reduce their price. This is because the credit crunch is making it more difficult for buyers of these properties to qualify for mortgage financing. That makes it tough on homeowners who want to trade up to a luxury home.
Marketing an ultra-luxury home has become a very sophisticated process. Owners will often require a comprehensive marketing plan from a brokerage firm before listing the property with them. Such a plan will include advertising in strategic media – local, national and international media. Creation of a brochure, sending out direct mail, and promoting the property on Websites are musts.
Producing open house events is usually included. These are “by invitation only” events, and only persons who have the financial capability to buy are invited, or perhaps those who maintain close communication with very affluent individuals. Individual inspection tours of the property are given to people who have been checked out financially in advance.
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Proposal to decrease conforming rate cancelled
The proposal to decrease conforming mortgage loan limits from the current level of $417,000 has been squelched by the Office of Federal Housing Enterprise Oversight. Any amount over that limit is considered a “jumbo” loan, since it is not salable to the major secondary buyers of mortgages thus making them more expensive for borrowers.
Leading real estate organizations applaud the decision to scuttle the proposal. “The decision to reverse the proposal to establish new guidelines that could have resulted in lower conforming loan limits is welcome news for the housing sector,” said Jerry Howard, executive VP of the National Association of Home Builders.
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Good-bad news for today's home buyers
Many homebuyers, particularly first-time buyers, are very happy to see home prices dropping in their local market. However, they now face tougher requirements in finding mortgage financing for their newly purchased residence. Mortgage interest rates have been generally rising, with occasional downward dips as was recently experienced. But they are still very low, compared with past years. That's the good news. But most lenders are now requiring larger down payments and higher credit scores before accepting an application. They don't want to be burned again with more foreclosures.
During the period from July, 2006, to June, 2007, about 45 percent of first-time homebuyers opted for 100 percent financing of their new home, according to a report from the National Association of Realtors. The median percentage that first-time buyers financed was 98 percent of the home's price. Today's borrowers have to verify their income and their financial assets to lenders in most cases. There are very few lenders who accept no-documentation or low-doc mortgage applications, it was noted by Frank Nothaft, chief economist for Freddie Mac, a major government-sponsored buyer of mortgages.
“The FICO credit score of 660 to 680 is now the minimum most lenders will consider to prove a borrower's creditworthiness,” Nothaft said. Some industry leaders now say that a five percent downpayment on a home purchase is normally the minimum amount required in today's market. “First-time homebuyers in many markets will soon need even more money for a downpayment – maybe a minimum of 10 percent,” said Guy Cecala, publisher of Inside Mortgage Finance. “And I think before too long we're going to see the required downpayment up to 15 to 20 percent.”
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Real estate investment opportunities
Investors who like to buy homes and multi-unit structures for rentals are finding that college towns are among the most potential markets. While most property values are declining, those in college towns are generally rising, and there is always an ample supply of renters (students and others) in these areas.
It's more than just a large population of students that makes these areas appealing to investors. Retirees and professionals are increasingly selecting a college town for their residence due it its special lifestyle and availability of cultural activities. One study of these markets found that 17 of 25 college towns outperformed their respective states in terms of home price appreciation last year. In Palo Alto, California, home to Stanford University, median home prices increased 15 percent last year compared with the previous year, while overall real estate prices in California dropped by nine percent. In Austin, Texas, home of the University of Texas, prices increased by six percent, while values in the rest of the state remained flat.
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Another note for real estate investors:
There is an increasing demand for storage condominium units designed to accommodate recreational vehicles (RVs). Many cities are passing regulations prohibiting the parking of large RVs on city streets. The RV market is expanding, while the availability of storage is shrinking. That combination spells higher storage prices and a more viable opportunity for investors. “Up until now, the only alternative to RV storage was to rent a space,” said investor-developer Ted Deits. “We are now offering fully enclosed garage type storage units designed specifically for the storage of RVs that are owned, not rented. Storage rental rates have risen so high, it now makes perfect economic sense to purchase a storage unit.”
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Where mortgage-related problems are most severe
Florida, Nevada and Michigan are the states experiencing the greatest problems with mortgage foreclosures, according to a study and report by the Mortgage Asset Research Institute, LLC, for the Mortgage Bankers Association.
“The current market conditions, compounded by mortgage fraud, are having a detrimental impact on our entire national economy,” said David Kittle, chairman-elect of MBA. “This report provides critical insight for those in the real estate finance industry to better understand the factors contributing to these circumstances.”
The most common type of mortgage-related fraud during the past year was false information on employment history and claimed income listed on applications, the report noted. Overall, last year marked the lowest volume of mortgage loan originations since 2002 and the highest number of delinquencies and foreclosures.
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The marketing value of an Open House
In the vast majority of cases, holding a conventional open house has become an increasingly popular marketing technique. Homeowners often get very nervous when their property doesn't sell quickly. They want action from their broker, often requesting an open house. The many “open house” ads in the weekend newspaper, and “open” signs seen throughout residential neighborhoods on Saturdays and Sundays testify to the popularity of this marketing method.
“The growth we've seen in the last 18 months in the inventory of unsold homes has contributed to an increase in the use of open houses as a sales tool,” said Jim Merrion, a regional director for a real estate franchise organization. “It's an effective way to get the word out in the immediate neighborhood about why a property is appealing. The neighbors can be like part of your sales team in promoting the property. They know people – friends, family, colleagues – who might want to live nearby.
“There's been a shift in the last few years. People are doing more online research, making it easy to find open houses listed. When they like a property that has an open house scheduled, they go to the open house, rather than have their agent arrange a private showing. Then, if they like what the see, they will come back with their agent for a second look.” From the broker's perspective, an open house can generate leads for the sale of other properties. It provides an opportunity to communicate one-on-one with motivated buyers. |
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The real estate impact of divorce togetherness
One little-known reason there are fewer active prospective homebuyers in today's market is that couples are often still living together in the same residence after their divorce. One spouse cannot afford today's home prices or qualify for a mortgage. “There is a whole new aspect of divorce that most couples never had to face before,” said Janell Weinstein, a divorce attorney. “Many couples are forced to live under that same roof because they can't afford to move on until their home gets sold. This can go on for months or years as the real estate market slows down.”
Unfortunately, this situation can lead to more domestic violence and disputes about what the new low selling price should be. It can also spark controversy about rules regarding bringing dates home for overnights even after both parties are divorced, she said. |
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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.
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Licensed by the State of Michigan Department of Consumer and Industry Services
Office of Financial and Insurance Services
MI Lic# FL 2547 and Secondary Registration No. SR0883
    
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