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Mortgage /
Real Estate Update Report
Homes sales down, mortgage rates
down
By Jim
Woodard
As we move into August, mortgage interest rates are
dropping slightly, responding to rising concerns about a
softening housing market. Sales of new and
existing homes have been dropping sharply over the past two
months. That
sparked a major drop in stock values in late July.
At the
same time, underwriting standards for mortgages, particularly
subprime loans, are tightening dramatically. Many lenders are
exiting the subprime products arena, especially the formerly
popular and risky 2/28 ARM loans – mortgages with a fixed rate
for the first two years before reverting to an adjustable-rate
loan for the remaining 28 years. However, 2/28 and
other hybrid mortgages are still offered by some lenders, but
those lenders are much more diligent in only qualifying
borrowers who are in a financial position to make their
monthly payments after they
increase.
The
average rate for a 30-year, fixed-rate mortgage in early
August is down to 6.69 percent, according to Freddie Mac, a
major government-sponsored buyer of home mortgages. Last year at this
time, the rate for a 30-year fixed mortgage was 6.72 percent –
slightly higher than the current rate. The rate for a 15-year
fixed mortgage is 6.37 percent. For a 5-year hybrid
mortgage, it’s 6.30 percent. The average points
(fees) for all these loans is 0.4 percent of the
loan.
“Mortgage rates are easing on market concerns that a
further weakening of housing demand will delay any recovery in
the sector,” said Frank Nothaft, Freddie Mac’s chief
economist. “For
example, building permits fell last month to the slowest pace
in a decade, and more recent data on sales of existing homes
show a fourth consecutive monthly decline. Several factors are
contributing to the softening in housing markets. In addition to the
tightening of lending standards, especially on subprime loans,
the 40 basis point jump in rates on 30-year fixed mortgages in
June may have deterred potential buyers.
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Family structure changes impacting home buying,
financing
Changing
family structures are impacting home buying and financing
preferences. Many
Baby Boomers are now empty-nesters and are seeing their
parents aging.
Such factors influence decisions on the type and
location of housing they now need and want. “Boomers will drive
housing for at least the next 20 years,” said Tim Sullivan,
president of Sullivan Group Real Estate Advisors. Housing units sold to
or occupied by 55-plus households will account for more than
370,000 housing starts this year, according to a report from
the National Association of Home
Builders.
Households headed by someone age 55 or older
account for 21 percent of new homes sales and 18 percent of
the total new home buying market. Senior-oriented
communities, including both age-qualified and
non-age-qualified, account for about six percent of the total
home buying market.
“There are more elderly people everywhere on earth,”
said Andrew Zolli, a consultant for NAHB. “People are living
longer and having fewer children. The United
States now has the largest
number of older and younger people in its history, creating an
`hourglass’ that will affect the workforce, health care and
culture.”
Increased
longevity means that many people will have to work more years
than they planned, and that companies will see a rise in
older, yet healthy and energetic employees. Boomers will take
advantage of this longevity bonus by creating a whole new life
stage that is neither all work nor all leisure, Sullivan
said. That trend
will influence the home buying and financing decisions of
persons entering their senior
years.
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Status of proposed zero-down FHA
mortgage
The plan
for FHA (the Federal Housing Administration) to introduce a
zero-downpayment mortgage is being questioned by the
Government Accountability Office. In a report to
Congress, they warn that introducing zero-down loan products
at a time of stagnant or declining home prices could increase
the risk of default.
They believe an initial pilot zero-down program would
be advisable.
“Because of the risks and uncertainties, we continue to
believe a prudent way to introduce a zero-down product would
be to limit its initial availability such as through a pilot
program,” a GAO spokesman said. However, The
Department of Housing and Urban Development (HUD)
disagrees. “The
FHA is well prepared to offer a zero-down program and a pilot
program in unwarranted,” said Brian Montgomery, HUD’s
assistant secretary.
A zero-downpayment FHA mortgage would be a positive and
progressive step forward in helping more families become
homeowners. The
offering of this new type of FHA home financing loan would be
consistent with the government’s pledge to encourage a higher
rate of homeownership in the
nation.
In late July, the Senate Banking Committee drafted an
FHA reform bill that cuts the FHA downpayment requirement to
1.5 percent and raises FHA loan limits. We’ll be watching the
development of these proposals. On July 31, the Senate Banking Committee canceled a
mark-up of the Federal Housing Administration reform bill
after key Republicans complained about the process and wanted
more time to work on the
bill.
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Problems with `A’ quality mortgage
borrowers
There
have been recent reports from major lenders that significant
payment problems are being experienced by borrowers of “A” quality mortgages,
in addition to the subprime loans. However, it’s seldom
noted that in many cases where high creditworthy borrowers are
encountering problems it’s a second mortgage that creates the
problem – originated in “piggyback” mortgage
transactions.
This is a way many borrowers acquire a home with
minimal downpayment and escape paying for private mortgage
insurance. They
simply apply for two mortgages simultaneously, a first and
second loan. With
such small initial equity and with home values declining in
some areas, it’s inevitable that some of these deals will
result in
delinquencies.
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Opportunity
for condo buyers
A couple
of years ago, condominiums were among the hottest selling
niches in the super-charged real estate market. Today, condo sales are
sluggish, prices have leveled out or dropping in many markets,
and inventories are growing dramatically. Those factors can be
good news for today’s prospective buyers of condos. They now have far more
units to choose from than were available a year or two ago,
prices are dropping to more realistic levels in many markets,
and buyers have more negotiating
clout.
Condo
prices nationwide are dropping at an annual rate of about 0.5
percent, according to a report from the National Association
of Realtors. The number of sales is off nearly 7 percent from
last year. “New
condo markets have been receding largely due to excessive
inventory,” it was noted in a report from the National
Association of Home
Builders.”
One
business is actually benefiting from the tight condo sales
market. More and
more builders and developers of new condos are turning to
auction companies to liquidate their inventory of unsold
units. “It
doesn’t take developers long to figure out what an extra
12-month holding period will cost them,” said Louis Fisher,
managing director at the auctioning firm of Sperry Van Ness
Accelerated Marketing Company.
The same
scenario is being played out in the condo resale market, with
owners being anxious to sell and willing to make concessions
and negotiate prices.
It should be noted that condo prices are not falling in
all markets. Some
areas, particularly in west and east coast communities, prices
are continuing to slowly
climb.
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Reverse
mortgage rules changing
There is
a growing number of senior homeowners applying for a reverse
mortgage – a special type of mortgage for persons over age 62
that uses their home equity to generate an added income. The number of reverse
mortgage borrowers will soon grow dramatically, that is if the
proposed American Homeownership Act of 2007 is passed by
Congress. It
would allow about two million additional seniors to tap into
their home equity to obtain reverse mortgage
payments.
Seniors
who have lived in their current homes for several years or
decades have seen the value of their homes rise substantially
in recent years.
However, in high cost areas, such as the Northeast and
West, home values have far surpassed the mandated cap of
$362,790 for obtaining an FHA-backed reverse mortgage. That limit leaves
millions of seniors without access to such a
mortgage.
The new
Act would make reverse mortgages available to additional
millions of homeowners by raising the FHA’s Home Equity
Conversion Mortgage loan limit equal to the Fannie Mae and
Freddie Mac conforming loan limit. By increasing and
simplifying the loan amount, this change would help seniors
who have homes valued above the current FHA loan limit but
less than $600,000 obtain a reverse mortgage through
FHA.
Seniors should
carefully study and understand the provisions of this mortgage
transaction before making a commitment. There are advantages
and disadvantages.
On the downside are large upfront
fees.
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New homes vs
resale homes
Home
builders are becoming increasingly concerned about rising fees
and regulations being imposed on them by local governments
where they are building homes. This comes at a time
when their prices are being lowered and inventories are
rising. A report
from the National Association of Home Builders notes that each
$1,000 increase in the cost of a new median-priced home forces
another 217,000 prospective buyers out of the new home
marketplace.
“The
NAHB study shows that even modest impact fees can have a
dramatic effect on housing affordability,” said Jerry Howard,
CEO of the association.
“Local governments need to understand that higher
regulatory costs frequently push up the price of housing
beyond the means of many teachers, firefighters, police
officers and other moderate-income
workers.”
This trend,
resulting in rising prices of newly constructed homes, is
turning the focus of many prospective buyers to resale
(previously owned) homes, as opposed to new home
developments.
They are finding, increasingly, that the best values
are in resale
homes.
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Rising rents
boosts ownership advantages
While
home prices are steady or slightly lowering in some areas,
rents are on the rise.
Many prospective home buyers are opting to hold off on
a home purchase in the hopes prices will be lower and more
affordable in the future. In the meantime, many
of these hold-off folks need to rent their residence, thus
pushing up the demand for rentals and increasing
rents.
“During the housing boom, the `rent vs. buy’ decision
became a buy,” said appraiser Jonathan Miller. “Now the pendulum is
swinging the other way.
As a result, there are fewer vacancies and increased
demand for apartments and other rental units, allowing
landlords to raise their rental
fees.”
For prospective buyers, the increasing rents are
another indicator that this might be a very strategic time to
purchase a home, particularly while mortgage interest rates
are still historically very low and affordable. By analyzing your
finances, including the monthly payout for rent compared to
costs of homeownership, a decision to become an owner may look
very good. Keep
in mind the special ownership benefits, such as tax breaks and
equity
build-up.
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Affluent homeowners are keeping their
mortgage
While
many people are having a tough time making their mortgage
payments and keeping their property out of foreclosure, other
homeowners have plenty of funds in the bank or in securities
to totally pay off their mortgage, but are opting not to do
so. Keeping a
mortgage makes good sense, according to Keith Fenstad, with
Tanglewood Capital, a money management firm. He offers the
following advice:
“Don’t
consider paying off your mortgage unless you’re saving at
least 15 percent of your gross income for retirement. That includes maxing
out your 401(k) contributions at work. Also, before you pay
off your mortgage, pay off short-term debt such as credit
cards, auto loans and other revolving lines of credit. They are likely to
have much higher interest rates with zero tax
benefits.”
Fenstad also
suggested establishing a cash reserve of at least three
month’s expenses in preparation for those unexpected
expenses. You
should have up to six months expenses if you if you’re the
household’s sole earner, he
said.
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Home sales incentives that
work
When
home sales dip and inventories of available properties rise,
some highly motivated sellers come up with creative incentives
to attract buyers and expedite a sale. That’s the situation
in today’s market, with added incentives such as an automobile
in the garage, a large flat-screen TV in the living room, or
perhaps a free trip to an exotic location. However, recent
studies have concluded that these sales incentives seldom
work.
The
incentives that really work in many cases are more substantial
help with finances.
Simply reducing the price of a home can often attract
buyers, or offering to pay the points (fees) of a mortgage, or
assisting in paying the needed down payment or closing costs
will grab the attention of
buyers.
Other success-proven incentives include
paying for a home warranty contract. If the unit being sold
is a condominium, the seller might offer to pay the
association fees for a specified number of
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Consumers wary about mortgage
ads
An
increasing number of consumers don’t trust ads promoting
mortgage products, according to a recent Harris poll. About 66 percent of
adults surveyed said mortgage ads lack in credibility. Only 27 percent of
consumers had favorable perceptions of the lending
institutions that provide mortgages, the study report
noted.
“Given the large proportion of consumers who are riding
the fence these days, now more than ever would be a good time
for institutions to examine their mortgage product advertising
and marketing messages,” said Sanford Brumley, vice president
of Harris Interactive Financial Services
Group.
The study reaffirmed consumers’ positive attitudes
toward fixed-rate mortgages. Also, 52 percent feel
favorably toward home-equity loans, 27 percent feel favorably
toward no- and low-downpayment mortgage, and 25 percent feel
favorably toward reverse mortgages. On the other hand, 53
percent view adjustable-rate mortgages unfavorably, 60 percent
view interest-only mortgages unfavorably, and 68 percent view
balloon mortgage unfavorably, the survey
found. |
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The robust industrial real
estate market
The industrial market rebounded in a big way
during the second quarter of this year. Net absorption
totaling 45 million square feet bested space completions of 31
million square feet by a wide margin, enough to push the
vacancy rate down another 10 basis points to 7.6 percent.
Space under construction has increased 23 percent since
year-end 2006 to 141 million square feet, suggesting that the
vacancy rate is unlikely to fall much further. Asking rental
rates were flat year-over-year for warehouse/distribution
space and up by 10.3 percent for R&D/flex space. This information was
provided by Bob Bach, senior VP at Grubb & Ellis, a major
commercial real estate
firm. |
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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
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