Foreclosure rates are on the rise. / Image: The-Lane-Team/Flickr/CC BY-ND

The price of homes continues to fall in the U.S. as foreclosure rates grow. This is good news for home buyers looking for a bargain. However, if you are looking to sell, it may be advantageous to wait a little longer.

FHFA report shows sharp drop

The Federal Housing Finance Agency reports this week that its home-price index fell in the current quarter faster than at any time since 2008. Prices have fallen 2.5 percent in the last quarter, which is a drop of 5.5 percent from last year. The report, however, covers only homes purchased with mortgages provided by Fannie Mae or Freddie Mac. It excludes cash only sales.

Foreclosures remain a key factor

FHFA acting director Edward DeMarco said, “In many local real estate markets, particularly those hit hard by this cycle, foreclosures and other distressed properties are still a key factor in recorded and anticipated future sales and may be delaying price stability or recovery.” The prices of homes in foreclosure are dropping, according to RealtyTrac. The average sales price was $168,321 during the first quarter, which is a 1.89  percent drop from the previous quarter, and 1.46 percent from a year ago. And because foreclosures lower the value of other homes in their neighborhood, they affect the rest of the index as well.

Fewer foreclosures going to third parties

“While foreclosure sales continue to account for an unusually high percentage of all residential home sales, sales volume is well off the peak we saw in the first quarter of 2009, when nearly 350,000 foreclosure properties were sold to third parties,” reported James Saccacio, the CEO of RealtyTrac. During the first quarter, 158,434 homes in various stages of foreclosure were sold to third parties during the first quarter, which is a drop of 16 percent from the previous quarter and 36 percent from a year ago.

Foreclosures rates vary by state

The percentages of houses on the market because of foreclosure varies by state. In Ohio and Illinois it was 41 percent. California and Arizona had foreclosure rates of 45 percent. In Nevada, foreclosures were 53 percent of the market.

Beware of foreclosure scams

This trend has brought out higher numbers of foreclosure rescue scams. These scams involve upfront fees for promises of foreclosure prevention that never happen, leaving the distressed homeowners high and dry. In February the Federal Trade Commission began prohibiting upfront fees to negotiate mortgage reduction plans.

Sources

Wall Street Journal

DS News

Daily Finance

Pending home sales, or the number of people who have signed contracts to buy homes, increased during the month of March. Image from Wikimedia Commons.

Home sales and similar statistics regarding home sales have not been encouraging for months, but are showing signs of life. Pending home sales, or contracts to buy homes, were observed during the month of March, as spring is certainly the buying season. However, that still doesn’t mean that all is well yet.

Mortgage rates dip but more people sign the dotted line

The national average rate on mortgages took a slight dip recently despite it being the busiest time of the year for real estate, according to USA Today. Freddie Mac noted that average rates on a 30-year fixed mortgage dropped 0.2 percent over the previous week, and the 15-year fixed dropped 0.5 percent during the same period. Interest rates for 30-year fixed rate mortgages have steadily held under 5 percent for months and 15-year loans have similarly held at or around 4 percent. However, pending home sales, or contracts entered into for the purchase of a home, rose by 5.1 percent during the month of March. Analysts were expecting a rise closer to 1.5 percent, according to Bloomberg.

Wait to break out the champagne

Though there are signs of life and pending home sales did beat estimates, this does not mean that it is time to break out the bubbly and toast the end of recession. Pending home sales for March 2011 are 11.5 percent lower than for March 2010. Existing home sales also increased in March, according to CNN, increasing by 3.7 percent from the end of February. However, existing home sales for March 2011 are down 6.3 percent from March of 2010. Lawrence Yun, chief economist for the National Association of Realtors, credits the uptick as being “organic recovery,” or the market working on its own. That said, Yun expects the housing market to take until 2012 to return to pre-2008 conditions. The housing market still faces some challenges.

Job security and credit availability in the way

Part of the problem facing the real estate industry, tipped as being the single biggest factor holding back economic recovery, is both feelings of financial instability and tightening credit standards. High unemployment makes people feel less apt toward buying homes, but that is slowly starting to resolve. Credit standards are definitely tighter than in the past, though. Freddie Mac, according to the National Association of Realtors, noted that the average credit score needed to secure a mortgage had risen from 720 in 2007 to 760. The average credit score needed for a Veterans Administration or Federal Housing Administration loan rose in the same period from 630 to 700. Lawrence Yun has been quoted numerous times as saying that loosening up lending requirements would speed up sales dramatically.

Sources

USA Today

Bloomberg

CNN

National Association of Realtors

HUD is behind due to an influx of foreclosure properties, but a sale shouldn't take five months. (Photo Credit: CC BY-ND/The Backyard Wealth Blog)

The U.S. Department of Housing and Urban Development manages Section 8 programs that provide rental housing assistance to private landlords on behalf of registered low-income households across the country. Unfortunately, buying a HUD home can be difficult, as one Bankrate.com reader named Bea notes. She tells The Real Estate Adviser Steve McLinden that she may lose her $1,000 cash deposit in what appeared to her to be HUD fraud.

Bea’s HUD dilemma

According to Bea, HUD accepted Bea’s $1,000 cash offer on a HUD home in November 2010. However, the sale still hasn’t closed due to what was explained to her as “an expired notary seal.” In order to prevent the deal from dying – and Bea from forfeiting her $1,000 – she must request an extension every two weeks, at her own time and expense. All Bea wants to do is complete the sale and live in the home.

Under new management

McLinden explains that while bureaucracy is the most likely cause of Bea’s trouble, the expired notary seal excuse doesn’t seem right, particularly after five months. In general, closing on HUD homes takes 60 days, while all-cash deals close in half the time. If a paperwork problem produced the notary seal problem, it could easily be remedied.

What Bea didn’t bargain for is that HUD is adopting a new system of management and marketing (M&M), according to McLinden. Pushing out foreclosure inventory is top priority, and this has reportedly slowed down the HUD process considerably. However, real estate agents attest that it still shouldn’t take five months to close, particularly since HUD foreclosure deals are less complicated than standard mortgage deals with Fannie Mae and Freddie Mac.

What to do if HUD has happened to you

Housing and Urban Development have numerous policies that apply to a consumer’s earnest payment – the good-faith cash deposit toward the purchase of a HUD home – that can illuminate how to proceed. Visit the HUD’s REO management page for information regarding transactions in your state, as well as local office contact numbers. If after following standard complaint channels, you believe that fraud may have occurred, McLinden advises emailing the Office of the Inspector General at HOTLINE(at)hudoig.gov.

Sources

Bankrate.com

HUD Fraud Prevention

HUD REO Managment

Wikipedia entry for earnest payment

Wikipedia entry for Section 8 (housing)

Using loan modification programs

Home sales prices are dropping and rental prices are going up. Image: Flickr / brokersaunders / CC-BY

The Standard & Poor’s/Case-Shiller index of property values measures home prices in 20 major U.S. cities. The index numbers for February have just been released, and home prices are once again dropping. At the same time housing prices are facing a double-dip, rental prices seem to be going nowhere but up.

Dip in home prices

The February 2010 index of home values measured average home prices and inventory in 20 major U.S. cities. Compared to January of 2011, home prices dropped by 0.2 percent. Compared to February of 2010, home prices dropped by 3.3 percent. The raw numerical index for February 2011 was 139.27. The lowest number the home price index hit during April of 2009 was 138.26. In short, home sale prices are dipping down to close-to-record lows. This double dip is eroding the gains in home prices that have been made during the economic recovery.

Putting home prices in perspective

The specter of a double-dip in housing prices puts many industry watchers on edge. Comparing average home prices and the Case-Schiller’s 110 years of home price data puts this information in better perspective. Between 1915 and 1949, between World War I and World War II, home prices remained between 75 and 81. After World War II, home prices jumped from a low of 70 to 110 and continued an uneven climb. Between 1998 and July 2006, home prices jumped from 109 to almost 210 with the increased availability of short term loans and other financing options. In short, this 3.3 percent drop continues to put home prices closer to what the trend appeared to have been, rather than below it.

Rent getting expensive

In the last three years, rental vacancy rates have been holding steady at about 10 percent. In the last few months, rental vacancy rates have started dropping severely. Between the first and last quarter of 2010, rental vacancy rates dropped from 9 percent to 7.9 percent. Rental experts estimate that average rent in the United States will spike by double-digit numbers, and top $800 per month. Lower vacancy rates and a higher cost of purchasing a house, thanks to 20 percent down payments, make rentals more expensive. In short, paying for a place to live is going to get more expensive.

Sources

Bloomberg
Census.gov spreadsheet
RitHoltz.com
CNN Money

Increasing a mortgage payment by just $100 a month will save many thousands of dollars over the life of a home loan. Image: Flickr/nancyaurora2020 CC-BY-SA

Mortgage acceleration involves increasing the monthly payment to retire the debt sooner and save money on interest. Advocates of mortgage acceleration contend that it is a risk-free investment in future income. Others say the money is better spent on investments with potentially higher returns. The numbers make mortgage acceleration appear to be one of the best long-term investments available.

The principal argument for mortgage acceleration

Because of interest charged over time, the longer it takes to pay off your mortgage, the more expensive the loan becomes. Interest is calculated on the outstanding principal of the loan. Mortgage acceleration reduces the principal faster and limits the lender’s opportunity to collect interest. Some people consider liquidating stock portfolios or diverting payments from tax-deferred IRAs for the purpose of mortgage acceleration. But for most people, the prudent course is to simply add more to the principal payoff each month to generate significant savings on interest and an early exit from the mortgage.

Pay more now to pay yourself even more later

Many people think that home equity just sits there doing nothing. Taking money that could be applied to other long term investments for mortgage acceleration kills potential returns. But even though it impacts short-term cash flow, an investment in mortgage acceleration guarantees to increase cash flow in the longer term — risk free. Another argument against mortgage acceleration is that it eats into the tax deduction on mortgage interest. But the math for mortgage acceleration may still come out ahead. For example, a household with a federal income tax rate of 28 percent plus a state income tax rate of 5 percent is liable for 33 percent of taxable income. If total mortgage interest is $12,000 a year, deducting 33 percent of that liability leaves a net after-tax interest cost of $8,040. However, the household is still on the hook for 67 percent of the interest cost, which gets lower faster with mortgage acceleration.

How mortgage acceleration pays off

Bankrate.com offers an online calculator that shows you how much you can benefit from mortgage acceleration. Using a $165,000 30-year fixed rate mortgage at 7 percent interest with a monthly payment of $1,097.75, total interest charges until the loan is paid off in April 2041 amount to $230, 190. By paying just $100 extra each month, you can save $60,033 in interest, and the loan is paid off in August 2034. Paying an extra $200 a month puts an extra $93,191 in your pocket, and the loan is gone in September 2030. If you can manage to increase the monthly payment by $300, you keep $114,817 and that last payment of $1,397.75 is made in January 2028. Mortgage acceleration is a smarter and safer investment than you can find anywhere else.

Sources

MarketWatch

Minyanville

Bankrate.com

The people who strategically default may be doing so because of their financial savvy. Photo Credit: Kelseyman749/Flickr.com/CC-BY

People who engage in “strategic default,” purposely defaulting on a mortgage when it’s no longer worth the effort, may be more financially astute than other homeowners in default. A recent study indicates that strategic defaulters have higher credit scores than people who stick out a bad mortgage. However, there are not many people who engage in the practice.

Higher credit scores among those who default on purpose

A recent study by Fair Isaac And Company (FICO) found that homeowners who engage in a practice called “strategic default” usually have higher credit scores than normal defaulters, according to USA Today. FICO found that people who strategically defaulted on their mortgages usually had most other aspects of their personal finances in order and took steps to protect themselves. For instance, only 10 percent of strategic defaulters had maxed out their credit cards and usually would open card accounts with new companies before defaulting. That way, they didn’t have to worry about having to get bad credit loans when a default showed up on their credit report.

Many disapprove of the practice

Not everyone approves of the practice of strategic default. A survey by legal website FindLaw, according to NASDAQ, found that six of 10 people surveyed did not approve of strategic default. However, 34 percent of respondents said that default was acceptable if the mortgage was underwater. People 65 and older were more accepting than those aged 35 to 44, who were the least accepting of strategic default. Strategic default makes sense from a business perspective. Homes are assets, and it doesn’t make sense to pay more for an asset than it is worth on the market. However, people often feel a moral obligation to meet commitments such as making payments on a mortgage, car or personal loans of any sort.

Foreclosures slowing

The rate of foreclosure slowed during the first few months of 2011, according to CNN. RealtyTrac announced that in the first quarter of this year, it observed 681,000 filings, which includes foreclosure filings, evictions and realty auction notices. RealtyTrac also observed 215,046 homes that had to be vacated by the residents. A filing doesn’t mean a family has been kicked out, only that a notice has been filed. Both figures were reduced from last year. Overall filings fell 27 percent from 2010, and evictions fell by 17 percent. Strategic default has increased during the recession, but is only estimated to have made up 35 percent of all foreclosures overall.

Sources

USA Today

NASDAQ

CNN

Jumbo loans, or large mortgages for lavish homes, are becoming harder to get as mortgage lending requirements are changing. Image from Wikimedia Commons.

The mortgage industry is going through a volatile period, and the product known as jumbo loans is about to become harder to come by. Jumbo loans are mortgages for large amounts, usually $700,000 or more, and fewer banks may wind up willing to lend them. Smaller mortgages may also get harder to approve.

Mortgage underwriting requirements changing dramatically

Freddie and Fannie play a huge role in the mortgage industry. When a bank wants to lend a mortgage, Fannie Mae and Freddie Mac often agree to purchase the loan from the bank and sell it to investors as a security. This increases the amount of available loan capital so banks can lend more. The mortgage houses are becoming far more discriminating, and the mortgage products called “jumbo loans” are on the way out. The amount that qualifies as a jumbo loan has been revised, according to Reuters, to $625,000 from $729,750. This means in October, Fannie and Freddie will no longer back loans of $625,000 or more. Home buyers who want jumbo loans are scrambling to get the mortgages approved before the loans can’t be underwritten anymore.

Mortgages for low income people to suffer as well

Banks are more willing to lend to people when Fannie and Freddie will purchase the loans. New lending requirements being proposed by the Federal Reserve may make it harder for low income buyers to get a mortgages. As a result of the Dodd Frank Act, the Federal Reserve has proposed that an “ability to repay” metric be established as a requirement to get a loan, according to MSNBC. Low income borrowers would be affected, as an already skittish mortgage market is not conducive to lending bad credit loans for housing. Lending mortgages to people who couldn’t pay them back, a criticism often leveled at credit card companies and payday loans lenders, has often been pointed to as one of the chief causes of the housing market crash. The Fed is only taking comments, according to the Wall Street Journal, and is handing over authority to the Consumer Financial Protection Bureau over mortgage lending practices when the agency begins operations in July.

Credit to tighten for housing

Many indicators point toward credit within the housing industry tightening significantly. Underwriting and purchasing requirements at Fannie and Freddie are already becoming far more strict. For a Freddie or Fannie affiliated lender to lend money for a condominium, 70 percent of the condo units in the building must already be sold, according to CNN. That requirement was 51 percent in 2009. The Federal Reserve and National Association of Realtors estimate that 25 percent of all mortgage application are currently denied, and fewer banks are willing to lend without federal backing from Fannie and Freddie.

Sources

Reuters

MSNBC

Wall Street Journal

CNN

Thanks to a slumping housing market, home renovation isn't as sure a thing to increase value as it once was. (Photo Credit: Public Domain/U.S. Army Africa/Flickr)

Remodeling to increase the value of a home has traditionally been a good idea. However, the housing market collapse has made big home renovation projects a calculated risk. In parts of the U.S. where the real estate market is more favorable, remodeling projects can still provide good value for the cost. SmartMoney has a few ideas about where to start if you’re looking to remodel your home.

Cooking up a tasteful kitchen remodel

Today, kitchen remodeling is a $12.6 billion industry. Since the lowest point of the housing bubble collapse in 2009, homeowners have spent an average of $27,300 on kitchen remodels, reports SmartMoney. That’s only 8 percent below the average cost at the height of the U.S. housing boom, says Harvard University’s Joint Center for Housing Studies, but there are ways to economize.

As demand has decreased during the recession, some cabinet manufacturers have cut out surcharges for custom work, decorative finishes and highest-quality wood. Don’t be afraid to ask, as it could save you 20 to 30 percent. Unfortunately, the same cannot be said for hand-painted tile, as there aren’t the kind of backlogs that would necessitate driving down prices. A major tip SmartMoney offers kitchen remodelers is not to source materials directly from manufacturers simply to save money. The potential for sizing error increases, which could force you to pay more for return shipping and repairs.

Clean up with a bathroom remodel

Even in a sluggish real estate market, studies indicate that bathroom remodelers recoup 53 percent of costs on average. Prices for high-quality granite have come down by as much as 50 percent since the housing boom years, in part because of increased competition from Asian and Brazilian rock quarries. Similarly, porcelain sinks are down in price by 50 percent because of increased Chinese import activity. Thus, high-end restroom remodeling projects aren’t out of the question.

A bathroom project that makes a lot of sense is a spa shower, suggests SmartMoney. With a shower tower kit, only one water hookup is required to deliver multiple streams of water. Just keep in mind that such kits aren’t adjustable, which can be a problem if people of different heights use the shower.

Backyard projects that sizzle

To target buyers who like backyard cookouts, there are remodeling projects that can increase your potential cash return at resell. Deluxe grills, pizza ovens, refrigerators, warming drawers, wine chillers and cabana roofs have sold well during the recession, says SmartMoney. Rising demand hasn’t affected the price much, experts say. Installation costs are down by as much as 20 percent because of the labor glut, and homeowners have found the recession has made it easier to haggle over landscaping costs.

A “hot tip” SmartMoney offers readers is to consider a gas fire pit instead of a masonry fireplace. Pits are often portable, which offers greater flexibility with décor. Not only that, but gas pits can cost thousands of dollars less.

Sources

Oprah

SmartMoney

Knowing when renovating your home is worth it

Investors are capitalizing on historically low home prices and interest rates while many Americans question the safety of home ownership. Image: Flickr/Georgivar CC-BY-SA

Existing home sales rose nearly 4 percent from January to February, according to the National Association of Realtors. Most of the home buying is being done by investors snapping up cheap houses in regions where high foreclosure rates are driving down home prices. First-time home buyers are staying away in what is being described as a cultural shift away from home ownership as the American dream.

Investors pad home sales stats

Investors throwing down cash on foreclosures and short sales drove up existing home sales last month to an annualized rate of 5.1 million. Foreclosures and short sales accounted for 40 percent of all purchases. Cash deals accounted for 35 percent of all sales, the highest percentage since the National Association of Realtors began tracking cash deals. The bulk of investor activity took place in markets hit hardest by foreclosures, including Phoenix, Las Vegas and Tampa. The 40 percent foreclosure sales figure could be higher; the Realtor group’s data tracks individual investors but not homes sold at auctions and bought by private equity firms. A tell-tale sign of investor activity is a 10 percent year-over-year rise in sales of homes less than $100,000. In the past year, sales of mid-priced homes fell more than 14 percent.

First time home buyers an endangered species

Sales among first time home buyers fell to 33 percent in March. According to the NAR, that figure would be about 40 percent in a healthy housing market. Although real estate is more affordable than it has been in a generation, a survey conducted by Fannie Mae found that at the end of last year, the number of people who said a home was a safe investment fell to 64 percent from 70 percent when the year began. The December figure was the lowest recorded by the survey, which began in 2003, when 83 percent of respondents believed in home ownership. But even during the housing crisis, owning a home was safer than most investments. During the peak of the housing crisis in 2008 the median home price in the U.S. dropped 15 percent compared with a dive in the Standard & Poor’s 500 Index of more than 38 percent. By the end of 2010, about 11 million homes in the U.S. were worth less than their mortgages, according to CoreLogic.

Re-thinking the American dream

A growing number of Americans are giving up on home buying, even though real estate is more affordable than it has been in 40 years, based on NAR data on home prices, mortgage rates and median U.S. income. The median U.S. home price plummeted 32 percent from its 2006 peak to a nine-year low in February 2011 — worse than the 27 percent decline recorded in the first five years of the Great Depression. Borrowing costs have also been historically low. According to Freddie Mac, the average rate for a 30-year fixed mortgage in 2010 was 4.69 percent, the lowest since 1972. According to the Census Department, the U.S. home ownership rate dropped to 66.5 percent in the fourth quarter, the lowest in more than a decade. In March, the percentage of Americans who plan to buy a home in the next six months fell by 23 percent.

Sources

Associated Press

Bloomberg

MSN Money

“Dearest, it's time to start repaying that $7,500 first-time homebuyer tax credit.” (Photo Credit: CC BY-ND/Tiffany Sly/Tiffany Sly and the City)

Taxpayers who claimed the $7,500 first-time homebuyer tax credit two years ago need to be ready to pay come tax day 2011, reports the Philadelphia Inquirer. That’s because the first repayment on stimulus is due with the 2010 tax return on April 18.

How the first-time homebuyer credit worked

A segment of new U.S. homebuyers were eligible to claim a tax credit equal to 10 percent of the purchase price of a home, up to a maximum of $7,500. According to the House and Economic Recovery Act of 2008, married individuals filing their taxes separately were eligible for a $3,750 credit, while unmarried homebuyers filing jointly could divide the tax credit. The credit applied to homes purchased after April 8, 2008, but before January 1, 2009.

Needless to say, this first-time homebuyer tax credit proved to be wildly popular. But calling it a “credit” was always problematic, as it was actually an interest-free loan. For the next 15 years, first-time homebuyers who claimed the tax credit will be repaying the government in equal installments each year. A $7,500 first-time homebuyer tax credit will break down to $500 per year, unless the home is sold before the total amount is paid off. At that point, the entire remaining amount comes due immediately.

More tax breaks for homebuyers

In addition to the first-time homebuyer tax credit, Congress extended two other tax credit opportunities to U.S. consumers. The first offered an $8,000 credit to first-time buyers who signed contracts between January 1, 2009 and April 30, 2010. As long as the contract had been signed by April 30, the sale could be completed by September 30, 2010, and the taxpayer could qualify for the credit. The second (for $6,500) applied to long-term homeowners who bought a new or existing home between November 7, 2009, and April 30, 2010.

Both of these additional tax credits require that homebuyers repay the entire amount – either $8,000 or $6,500 – if the home is sold within three years of the purchase date or the property becomes a secondary a secondary residence within the same time period. However, there’s a bit of an escape hatch if the property is sold within three years. If the profit on the sale (when compared with the original purchase price) is less than the amount of the tax credit, then homebuyers only need repay the amount of the profit.

IRS having trouble processing returns

Numerous glitches that affected tax refunds for married couples filing joint returns have caused frustration for the IRS, writes the Inquirer. Taxpayers who submitted Form 5405: “First-Time Homebuyer Credit and Repayment of the Credit” before February 22, 2011, forced the IRS to process their returns manually, creating slowdowns.

IRS projections indicate that about 1 million U.S. households will be repaying the $7,500 first-time homebuyer tax credit. Those taxpayers who haven’t gotten their refunds yet can check IRS.gov and click the “Where’s My Refund?” link for more information.

Sources

Housing and Economic Recovery Act of 2008

IRS.gov: First-time homebuyer credit

Philadelphia Inquirer

How Canada helps first-time home buyers

Plummeting home values are attracting cash buyers who outcompete mortgages with lower offers. Image: Flickr/Show Appeal Realty CC-BY-SA

The depressed housing market is attracting more people who buy homes with cash. In turn, home buyers who need a mortgage are finding it tough to compete with cash buyers. Yet mortgage buyers can match up better against cash by being better prepared when they make an offer.

Cold, hard cash is king

Deals made for cash comprised more than a third of home sales in February, an all-time high according to the National Association of Realtors. Cash buyers have become formidable opponents for many home buyers financing their deal with a mortgage loan. More home buyers are paying with cash because plummeting home values have made real estate a more attractive investment than the volatile stock market. People are also pulling their money out of the market and investing in rentals that net a greater long-term return than stocks.

In 2010, 59 percent of home buyers purchasing as an investment paid cash. Cash has an advantage over a mortgage because the seller knows a closing is unlikely to be derailed by contingencies. That convenience is often enough for the seller to accept a lower offer than one a financing buyer would make. Cash usually wins when the bank is the seller. Eager to get foreclosures off the books, banks will go with the safest option.

How to compete with cash

Foreclosures accounted for 25 percent of all home sales in 2010. Fannie Mae saw a 128 percent increase in short sales last year as well. But financing buyers have a more even chance over cash with sellers who have equity. Equity holders aren’t under pressure to take whatever they can get and will wait for the best offer. Financing buyers can also compete with cash by getting pre-approved for a mortgage. Being prepared with a high down payment also evens the odds. Listen to what the seller wants and be willing to do whatever it takes. Treat them with respect and have a detailed contract ready that makes the deal clear. When the time comes, act quickly. If none of these strategies work, financing buyers need not give up hope. Sometimes cash deals fall apart, too.

Cash deals versus mortgage financing

In addition to getting a better deal, paying cash to buy a home has several advantages. When mortgage rates are higher than available returns on other investments, the money saved on interest puts a buyer ahead of the game. Plus, with no leverage, if the value of the house falls, the buyer only loses what they put in. For a mortgage with 20 percent down, if the value goes down 10 percent, the home buyer loses 50 percent of the down payment.

But mortgages also have advantages over cash. Buying a home with cash leaves less liquidity for other investments. And leverage works both ways. If the value of the home goes up, the mortgage holder gains a higher percentage than the cash buyer. Plus, mortgage interest is tax deductible, which lowers the cost of the loan.

Sources

MarektWatch

WiseBread

Short Sale Daily News

The CEO of Chase disclosed that the federal probe into the robosigning scandal reached a settlement. Image from Wikimedia Commons.

A settlement is soon to be announced regarding the robosigning foreclosure controversy. Some of the nation’s largest mortgage lenders rubber-stamped foreclosure documents without looking at them and may have foreclosed on some people who didn’t deserve it. A legal probe into foreclosure practices has reportedly reached a settlement with those lenders.

JPMorgan exec discloses deal with some federal agencies

Chief Executive Officer of JPMorgan Chase Jamie Dimon recently disclosed that the government probe into the robosigning controversy had come to an agreement with the mortgage lenders being investigated, according to Reuters. Dimon confirmed that no fines had been levied yet, but they are likely to come. The nation’s largest mortgage lenders and servicers were the subject of a sweeping investigation by nearly a dozen federal agencies and the attorney general of every state in the union. The agreement is not complete; it is only the settlement between the financial institutions involved and the Federal Reserve, the Office of the Comptroller of the Currency and the Office of Thrift Supervision. A settlement with all 50 state attorneys general has not been reached.

State settlements to come

The controversy stemmed from the discovery that a lot of foreclosure proceedings started when paperwork to begin foreclosures was approved in a robotic fashion, or “robo-signed,” without proper review. The resolution of the robosigning foreclosure debacle is important, as foreclosure practices may change. JPMorgan, for instance, expects to hire at least 3,000 more employees to ensure compliance with the settlement agreement, according to Bloomberg. In other words, there will be an increased amount of regulation in the mortgage industry when it comes to foreclosures, which means it will cost the lenders in the mortgage industry more to lend and service a loan. Those costs will be passed on to the consumer at some point, likely in the form of requiring more money up front to get a loan. There is also a backlog of foreclosures on the books at these banks, as they have become more skittish about foreclosing on borrowers who are delinquent in paying their mortgage.

Mortgage modification failed participants

One failure of the Obama administration and the various stimulus programs was the various mortgage modification programs that were made available through the federal government. People who were behind on their mortgages or facing foreclosure could apply for a modification. The distressed homeowner’s lender would receive an incentive payment from the government if it modified the borrowers’ mortgage on a trial basis. However, according to USA Today, not many people were helped. The goal was to keep 3 million to 4 million people in their homes; instead only about 630,000 people had their mortgages permanently modified.

Sources

Reuters

Bloomberg

USA Today

Despite the downturn of the past few years, Americans still believe in housing as a great investment. Image from Wikimedia Commons.

A recent survey indicated that most Americans think real estate is a good investment. The value of the average house has dropped by nearly a third since the housing recession began in late 2007, and nearly a third of all homes are worth less than the amount that is owed on them. Housing prices will eventually begin to appreciate, but the process will take a while.

More than 80 percent of Americans have confidence in real estate

A recent survey revealed that despite the economic downturn, most Americans still have confidence in real estate as an investment. The Pew Research Center, according to Reuters, found that 81 percent of Americans felt real estate was still the best long term investment. More than 2,000 adults were surveyed by phone by the Social and Demographic Trends project, part of the Pew Research Center, and 37 percent “strongly agreed” that a house is the best long term investment, and 44 percent “somewhat agreed.” Most people believe that housing values will recovered within three years, but 23 percent said that they wouldn’t have bought their house if given the choice again.

April showers and May flowers

Realtors, according to MSNBC, are hoping that sales pick up during the spring and summer of 2011 and the current trend of slowing sales is reversed. Realtors and real estate industry analysts are concerned that the number of underwater homes and lower demand will keep home sales and home values down for some time. However, the National Association of Realtors is expecting an increase in home sales of 7.4 percent this year. One of the biggest complaints from the real estate industry has been that lenders are being too stingy, and standing in the way of the recovery that would benefit them by being too conservative with loan capital.

Downturn fuels skeptics

Skeptics and critics of the real estate industry have intensified their stance against home ownership, a cornerstone of the American Dream. An article on the USA Today website quoted Robert Shiller, co-founder of the real estate tracking Case-Shiller Index, as saying that people buy houses for security or lifestyle reasons. Another economist in the same piece found that a house only yields a 6 percent return on average. With depressed prices, along with agent fees and other closing costs, it may be far lower than that for many people.

Sources

Reuters

MSNBC

USA Today

Mortgages are becoming much tougher to get for those who are self-employed. Image: Flickr / Alan Cleaver / CC-BY-SA

In the United States, new regulations on mortgage lending are slowly coming into effect. The latest regulations are focused on limiting the risk of mortgages. The regulations, however, are hitting self-employed individuals the hardest.

New lending rules

As a way of limiting the amount of risk, mortgage loan officers are required to disclose the amount of money they will make off a mortgage deal. Banks will be required to maintain at least a portion of the mortgages and loans they underwrite. If a loan has a 20 percent or higher down payment (twice the current standard), banks would be able to avoid the risk-retention requirement. Finally, low-documentation or no-documentation loans would face even stronger underwriting standards. Industry experts estimate that, together, these standards could easily increase the standard down payment to 20 percent or more while making low-documentation loans very scarce.

A place for low-doc loans

Low-documentation or no-documentation loans got a very bad name after the mortgage crisis. These so-called “liar’s loans” were often used in combination with zero-down mortgages to help borrowers qualify for bad credit loans that they would not have otherwise been able to get. These zero-down loans were often the first loans to start going into foreclosure when the crisis hit. This was not the intention of low-doc loans, however. Low- or no-documentation loans were originally intended as a way for self-employed individuals or non-traditionally employed borrowers to qualify for mortgages. Self-employed individuals often have a difficult time meeting traditional underwriting standards. Without pay stubs and with full tax documents only filed once a year, proving income can be very tough.

New options for self-employed

Though the new limits on mortgage underwriting are making mortgages tougher for self-employed individuals to get, funding is available. New small small business lending programs are increasing the amount of funding available for entrepreneurs. Small business loan guarantees through the Small Business Jobs Act are helping increase lending to businesses. When these business owners want to purchase a home, however, they will likely end up having to put more on the down payment and pay a higher interest rate to compensate for the higher risk of lending.

Sources

LA Times
Market Watch
Financial Times

The International Monetary Fund suggests the federal government encourage more rental and less home ownership. Image: Flickr / ella_marie / CC-BY

The International Monetary Fund is responsible for overseeing the global financial system. A review of the recent recession by the IMF has led to several recommendations for improving the stability of the global financial system. Top of the list is that the U.S. government should go all in or get out of mortgage finance.

Current U.S. mortgage lending involvement

The way the current mortgage market in the United States is structured, the government has a partial hand in most mortgages. Fannie Mae and Freddie Mac own almost 90 percent of the secondary loan market. These two companies are in government conservatorship and have long been government-backed. Combined, this means that the federal government has a significant hand in the country’s mortgage market.

International Monetary Fund’s view of mortgages

Upon reviewing the U.S. Mortgage market, the International Monetary Fund suggested multiple changes. First, the IMF suggests that the U.S. government either put the mortgages it owns fully on its balance sheets or gets out of the mortgage market entirely. Since the Great Depression, the U.S. government has instituted programs intended to encourage home ownership. Tax deductions for mortgage interest, government-supported mortgages and low interest rates all contribute to making recessions worse. The IMF study also highlighted that high loan-to-value ratios and debt-to-income ratios cause overly complex mortgage products that are unnecessarily risky.

Options for housing

In short, the International Monetary Fund believes that the United States government’s policy of encouraging home ownership is misplaced. In many European countries, mortgages are often variable rate and require higher down payments. These factors, combined, keep home ownership rates down and help limit the damage of heavy recessions. In the United States, the IMF believes that mortgage products should be simplified and well-built and affordable rental housing should be encouraged above home ownership.

Sources

Business Week
RTE News

More people are choosing to rent rather than buy, causing nationwide rent rates to rise. Image from Wikimedia Commons.

There is always debate on whether to rent or to buy, and the cost of renting is going up. More people are electing to rent apartments, and vacancies have plummeted nationwide among rental properties. Landlords have also begun charging current tenants more.

Rental vacancies falling as more people turn to rentals

The number of rental property vacancies has been steadily falling for more than a year, according to Bloomberg. The vacancy rate, or percentage of rental properties sitting unoccupied, recently reached 6.2 percent nationwide. Reis Inc., a company that specializes in tracking nationwide real estate data, observed an 8 percent vacancy rate in April of 2010, which fell to 6.6 percent by the fourth quarter. The increased demand is thought to be mostly due to people in the 20 to 34 age group, according to Reuters. More people are being hired and need housing but aren’t in the market to buy. With disappearing vacancies, finding a new apartment may take more time depending on where a person is looking.

Rent is rising

As fewer apartments and other rental properties are available, the cost of those properties goes up. The nationwide average for rent is rising, according to the same Reis Inc. survey. The national average effective rent, which is what people pay every month, is $991 per month, an increase over $967 a year ago. The asking rent, which is what landlords advertise that they charge, rose from $1,027 this time last year to $1,047. That’s a $24 increase in actual rent and $20 increase in advertised rent. New construction on rental properties like duplexes and apartment complexes is slowing as well, which means that until more units are built, landlords may be able to ask for higher rent.

Less incentive to buy

American have less incentive to purchase real estate these days. Values are low, and so are interest rates, but financing is very difficult to obtain. The Federal Reserve, according to CNN, observed that close to 25 percent of all applicants are turned away, and Fannie and Freddie will not back any loans to borrowers with a credit score of 760 or less. Banks are asking for larger down payments as well, and a 20 percent upfront payment on a $200,000 home is not easy for many people.

Sources

Bloomberg

Reuters

CNN

Condo ownership provides a halfway point between renting an apartment and owning a single-family home, yet many owners are now stuck in tough situations. Image: Flickr / danebrian / CC-BY-SA

On March 1 of this year, new rules about the types of mortgages the government can purchase went into effect. There are also rising rates of default on condo fees. Combined, these two factors are making condo ownership one of the least attractive options for new home buyers.

New mortgage rules for condos

In order to underwrite mortgages or a short term loan on a condominium, banks will have to consider a new set of rules if they want to sell their mortgages to federal entities. The rules dictate that condo buildings must not have too high a percentage of renters, must not have pending litigation regarding the safety or habitability of the building and must have less than 15 percent of homeowners delinquent on their condo fees. The FHA is also requiring that apartment buildings that have been turned into condos be inspected, which costs $1,200 per building plus $30 per unit.

The new delinquency problem

During the housing boom, condos became a very popular option for new home buyers. Rather than handle the maintenance of a separated single-family home, condos offered the option of paying a monthly fee and having most maintenance taken care of. Most condo associations assume that between 2 and 5 percent of fees will go unpaid. In many associations, delinquency rates are approaching 40 percent or more. The average delinquency rate in the last year has gone up to 15 percent. This problem is forcing many condo associations to do what many homeowners are already doing — making hard choices about what to pay and what to defer.

Many condos left in limbo

Many condo associations are being left in an odd sort of limbo by these new regulations. Owners in these buildings are often blocked from re-selling their units because buyers cannot get financing or the association requires a certain percentage of units to be sold. Left unable to pay their rising association fees and, at times, their mortgages, condo owners also have no way to sell their property. This leaves strategic default and renting out the property they own, while paying for yet another place to live, two of the few options for condo owners.

Sources

MSN Real Estate
Chicago Tribune

It might be getting easier for some to pay the mortgage, but more foreclosures are on the way. Photo Credit: Brendel/Wikimedia Commons.

Fewer people are struggling to pay the mortgage, but the housing market is still in trouble. Recent improvements in the employment outlook bode well for struggling homeowners who have been hoping to get jobs, but the housing market is still in dire straits.

Number of underwater homes thought to be receding

A recent Harris Interactive poll, according to Daily Finance, revealed that, compared to last year, fewer survey subjects believed that their homes were underwater. Approximately 21 percent of the more than 3,000 respondents believed their homes were worth less than what was still owed on the home, compared to 24 percent in the same poll conducted at the same time last year. Additionally, 22 percent of respondents in the Harris poll were struggling to make mortgage payments, compared to 29 percent last year. However, 3 percent fewer people in the poll said they had a mortgage. The unemployment rate recently began to recede, which means fewer people will have to take out installment loans to cover the mortgage.

Distressed homes flooding the market

According to USA Today, analysts have been concerned with the number of distressed properties, which can keep prices down. It was estimated that, as of January, there were 1.8 million distressed houses or homes for which owners have gone 90 days or more without making payments. The price of a distressed home always is at least 20 percent lower, which makes them attractive to bargain hunters and real estate investors. Unfortunately, a large supply keeps home prices lower nationally. To make matters worse, the number of foreclosures is sure to begin rising in coming months as major mortgage lenders who had put a moratorium on foreclosures will resume foreclosing on homeowners, according to Reuters. Many of the nation’s largest mortgage lenders, including Bank of America and Wells Fargo, had to suspend foreclosures as questionable foreclosure practices at those institutions were being investigated by the government.

Cheap homes for those who can take advantage

It has been a buyer’s market for some time in real estate, and it is likely to stay that way. Home prices are anticipated to keep falling for at least the next few months, according to MSNBC. Mortgage rates are still coming off record lows several months ago, and people who can get the financing may never have to run out for same day loans to cover the mortgage payment if a low rate can be locked in. However, lenders have been fairly skittish in an uncertain climate.

Sources

Daily Finance

USA Today

Reuters

MSNBC

Construction spending is at historic lows, another consequence of a housing market that drags on economic recovery. Image: CC Garreth & MaryJ

For the past three months, construction spending — a key economic indicator — has been plummeting. The construction sector has gotten so weak that spending in February reached its lowest level since the fall of 1999. New home construction, dragged down by foreclosures and short sales, was even worse, dropping to the lowest level in recorded history.

Construction: February is the cruelest month

Builders broke ground on fewer homes, apartments and government projects in February than they have in more than a decade. Construction spending in February dropped 1.4 percent; it was the third straight month of decline. The seasonally adjusted annual rate of construction spending in February hit $760.8 billion, the weakest level since October of 1999. While other sectors of the U.S. economy have been showing signs of life, construction has been holding back a more robust economic recovery. Lingering effects of the recession, including depressed demand for commercial projects such as office buildings, hotels and shopping centers and tight lending standards, continue to cause problems for the construction sector. February construction activity fell to about half the $1.5 trillion level economists figure is needed for a healthy construction sector. It has been estimated that construction won’t recover from the housing bubble that triggered the recession for another four years.

New home construction burst along with housing bubble

Private residential construction fell 3.7 percent in February to an annualized rate of $228.5 billion. Single-family and multi-family construction both dropped due to a glut of unsold homes and record foreclosure levels. Until housing inventory can be cleared, new home construction will continue to languish. According to the National Association of Realtors, existing home sales fell about 3 percent in the last year, but new home sales have dropped 28 percent. In February alone, new home sales dropped 16.9 percent, from an annual rate of 301,000 to 250,000 — the lowest level since the government started tracking the numbers in 1963.

New home sales: no buyers, no builders

In the construction sector, new home sales drive the growth that affects the bottom line in GDP. But new home sales currently cost about 29 percent more on average than existing homes, about double what is considered normal, according to the National Association of Realtors. The existing home market continues to be devalued by foreclosures and short sales, which made up almost 40 percent of all home sales in February. Until the foreclosures on existing homes are cleared and the inventory of new homes falls, home builders have essentially taken a time-out. Before the recession, 80 percent of builders sought financing. According to the National Association of Home Builders, only 20 percent now are looking for construction loans.

Sources

Associated Press

MarketWatch

CNNMoney.com

Statistics of the national vacancy rate may cause people to think that ghost towns are popping up, but that is not the case. Photo Credit: Vivaverdi/Wikimedia Commons/CC-BY

It has been reported that the national rate of vacancy, or the number of houses sitting empty, has reached a 13 percent, but don’t panic. That figure does not mean it is time to begin constructing a bomb shelter and making hats from tinfoil. The housing market is depressed, but signs of life are still there.

Wealthy buying fewer homes in vacation hot spots

The media report a number of economic indicators, and statistics regarding real estate can cause a sense of doom on the horizon regarding the housing market. For instance, CNN recently published an article that said up to 13 percent of homes sit empty in America. That is a misleading statistic; CNN points out that many of the vacancies are in areas like Maine, Arizona and Florida — popular places for vacation homes. Furthermore, vacancies have gone up less than 1 percent, from 12.1 percent to 13 percent, in four years.

Pending sales increasing

Pending sales, homes that are being officially in the process of being sold, increased by 2.1 percent over February, according to Bloomberg. The dip in home sales over the past few months was attributed partially to frigid winter conditions, as no one wants to go house hunting in the middle of a blizzard. However, pending sales for February 2011 were also 8.2 percent lower than for February 2010, as the housing market is still sputtering. Lawrence Yun, chief economist for the National Realtors’ Assocition, anticipates existing home sales will pick up over the rest of 2011, according to Reuters, as older homes are selling at a faster pace than newly built homes. Newly built homes are usually more expensive than older homes.

Reality of realty

Most news about the housing market makes it seem as though a second crash is imminent, and it may be. The reality is that sales are slow, houses are not worth as much as they used to be, and banks may be less willing to lend. Prices are likely to stay low as long as fewer people are willing or able to buy houses, and lenders are skittish about lending in the current economic climate surrounding real estate. The good news is that anyone with the means to buy right now will get a great deal, and people who already own are likely to see the value of their property rise in the next few years.

Sources

CNN

Bloomberg

Reuters