Foreclosures up

As many borrowers of adjustable-rate mortgages (ARMs) face substantial increases in their required monthly payment, and with home values declining in some markets, the inevitable is happening – foreclosures of residential properties are on the increase. One in every 363 households nationally (or 318,355 properties) entered some stage of foreclosure during the third quarter of this year, according to RealtyTrac Inc., a company that monitors such data. That reflects a 17 percent increase over the previous quarter – and a 43 percent increase over the third quarter of last year.

“Higher interest rates and a general softening of the real estate market are two key factors contributing to the increase in foreclosure filings,” said James Saccacio, TrealtyTrac's CEO. “What our third quarter research appears to be showing is that the first wave of adjustable-rate mortgages is having a negative impact on the number of homes going into foreclosure. Considering the volume of these loans, this is a trend that definitely bears watching.”

To avoid further increases in monthly payments, many past borrowers with ARM loans are now refinancing them with a fixed-rate mortgage.

Apartment rents up

With more home buying prospects waiting to see if prices will go down further, there is naturally a greater demand for apartment rentals. The nationwide vacancy rate in apartments during the third quarter of this year dropped to 5.4 percent, according to the research firm of Reis Inc. The average rent reached $978 – up by 3.9 percent over last year's third quarter. Rents are much higher in high priced markets, particularly those in west and east coast locales.

“The market is strong enough that landlords are able to reduce the concessions they have been offering to new tenants,” said Sam Chandan, Reis' chief economist. The rising rents are another factor being considered by home buyers who have decided this is a good time to purchase their residence.

`Stated income' mortgages can be risky

A growing number of home buyers are financing their purchase with a “stated income” mortgage – a loan that requires minimal or no documentation about the applicant's income. This type of non-traditional or “creative” mortgage can be risky, but provides a valuable option for some borrowers.

These loans are especially designed for self-employed individuals who gain an income from commissions, tips, investment yields, etc. -- sources of income that is hard to predict in advance. They are usually available only to home buyers with a credit score of at least 720. In many cases, at least 25 percent of the purchase price must be paid in cash.

The problem and risk inherent in this type of mortgage is that many applicants choose this option with the intention of falsifying (inflating) their income. They feel they can borrow more money and purchase a better house by taking this route. As a result, they sometimes acquire a home and mortgage they can't afford. That can potentially lead to a foreclosure and the loss of the home, and of course that can result in a scar on the person's credit record. Also, serious penalties can face mortgage applicants who provide false information.

Many lenders now require certified statements from “stated income” mortgage applicants declaring that the information supplied is correct and complete. Lenders also look at past tax returns, even after the loan has been settled. It should also be noted that stated income, or no-doc mortgages are not free of paperwork. Application forms are still required, along with credit reports and appraisals. Also, various fees in the application process are sometimes higher for this type of mortgage.

The purpose of the stated income mortgage program is to provide expedited processing for creditworthy borrowers. It's not intended as a means to qualify marginal borrowers.

Crack-down on mortgage abuses

Federal regulators are cracking down on abuses related to non-traditional mortgages, but the number of applications for these loans continue to grow, according to the Mortgage Bankers Association. The crack-down is welcomed by most mortgage professionals. About 26 percent of mortgage originations by dollar volume during the first half of 2006 were interest-only loans – mortgages that do not require borrowers to pay down the principal. About 13 percent were “option” adjustable-rate loans, making it possible for borrowers to pick their payment amount from several options with certain limits. The number of such applicants continue to grow.

The lower monthly payments of some non-traditional ARM loans have been particularly appealing to home buyers as prices continue to rise in some markets, although home prices are now dropping in an increasing number of local markets. Regulators are expressing concern that consumers don't understand that payments on the loans can double or even triple, and that if they pay less than full payment toward principal and interest they run the risk of seeing their mortgage balance rise even after years of payments. Stated-income and no-doc or low-doc mortgages have other inherent risks.

“Consumer demand is behind the growth in these loans,” said Doug Duncan, MBA's chief economist. “As expected, consumers respond to changing opportunities in the marketplace, but it looks like these products do serve an important need.”

Affluent buyers looking for second homes

Affluent homeowners are planning to acquire more homes in the near future, according to a consumer trend study recently conducted by Architectural Digest and Sotheby's International Realty Affiliates. The study, titled “Seeking a Luxury Lifestyle,” reveals that more than one in three subscribers to the Digest (36 percent) intend to acquire a secondary or additional home in the next two years.

The study also found that among subscribers who already own three or more homes 49 percent plan to acquire an additional home within two years. And of those who now own a second home, 35 percent plan to acquire a third home within two years. It's interesting to note that 44 percent of the survey respondents were under age 45.

Lifestyle amenities are becoming increasingly important to affluent home buyers. A third of the Digest subscribers were very specific in describing the characteristics and amenities they desire in their next home. Respondents with household incomes under $400,000 (38 percent) are more likely than their wealthier counterparts to indicate they would search in a number of locations to find the house that meets their amenity preferences.

Finally, the study finds that waterfront property (75 percent) is the most desired amenity when buying a second (vacation) home. It might surprise you to learn that gourmet kitchens and swimming pools were among the least significant amenities listed by the survey respondents.

Purchase of fractional ownership units becoming popular

Fractional ownerships in resort-type residential properties are becoming more popular. It's similar to a timeshare ownership, but for a longer use period each year. Some of the new fractional offerings are quite innovative. For example, you can now purchase a fractional ownership of a unit on a cruise ship that circumnavigates the globe every two years. The Magellan offers two- to four-bedroom private residences including a penthouse.

If you'd prefer living under the sea rather than on its surface, you might be interested in a unit at Poseidon Undersea Resorts. It's a resort development on the sea floor to be accessed by a unique escalator, now in the planning stage. Or you might opt for a unit on a luxury vessel parked offshore that affords views both above and below the sea. UnderSea Resort and Residences are planning 12 such sites worldwide.

No slump in commercial real estate activity

Even though the residential real estate market is experiencing fewer sales and slightly lowering values in most areas, that is not the case with commercial real estate.

“Commercial real estate is a business investment, rather than a personal investment, and is driven by the economy,” it was pointed out in a recent study by Deloitte & Touche USA . “Commercial real estate continues to be a solid investment. It seems the only thing commercial and residential real estate have in common right now is the fact they both end in `real estate'”

Broker competition is impacting commission rates

Competition is growing between real estate brokers who want to maintain the long-established 6 percent commission rate and the increasing number who offer their services for a lower (discounted) rate. Various techniques are being used by higher commission firms to discourage discount brokerage in local markets – one being to limit exposure of listed properties by discount firms on public Web sites.

Five multiple listing service (MLS) groups recently entered into consent agreements with the Federal Trade Commission to stop anti-competitive practices that prevent discount brokers from featuring their properties on certain real estate related Web sites. The FTC alleged that real estate brokerage groups use MLS services to discriminate against low-cost brokers to prevent competition.

“Buying and selling a home is one of the biggest financial transactions most consumers ever make,” said Jeffrey Schmidt, FTC director. “That makes it all the more important that consumers have a full range of options to pick the level of real estate services that meet their needs.”

Home staging: a growing marketing technique

Home staging is becoming increasingly important to home sellers in the wake of slowing sales, growing inventories of available properties, and longer periods required to consummate a sale. The term refers to making the appearance of the home more appealing and marketable to prospective buyers.

“Reducing clutter and rearranging existing furniture is an important part of staging,” said Dana Dickey, vice director of Interior Redesign Industry Specialists, an organization for interior redesigners and home stagers. “It's a fairly simple process and very cost-effective. Homeowners I work with are amazed at how the look of their home can dramatically improve with a little assistance.

“We want to give each home that `wow' factor, especially in today's housing market. Home buyers largely make their final decision based on emotional factors. It's important that a house make a good first impression,” she said. In addition to speeding the marketing process, effective staging can also help boost the home's asking price, she noted. Many Realtors focus their attention on two rooms in particular – the kitchen and bathroom. Due to the high level of traffic through these rooms, each tends to collect clutter and become a source of messes. “It's not that people don't want to pick up. It becomes a situation where the homeowner just naturally looks past something without even noticing it,” Dickey said.

Staging is indeed important in today's home selling market. It can be accomplished by the owner who has the ability to visualize how the home would look to a person walking into and through it for the first time. It's almost like an actor who mentally becomes his assigned character in a play. This time he's taking on the role of a prospective buyer inspecting his house.

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.