New Homes for the Holidays!

Construction spending jumps in October, led by more home building

Jim Puzzanghera | SFGate |December 3, 2012 | link

WASHINGTON — Fueled by more home building, construction spending increased 1.4% in October from the previous month and rose to its highest annual rate in more than three years, the Commerce Department said Monday.

Builders spent at a seasonally adjusted rate of $872.1 billion in October, up from a revised $860.4 billion in September. Year-over-year, spending in October increased 9.6%.

The new figures greatly exceeded analysts’ expectations. The median projection by economists surveyed by Bloomberg was for spending to rise 0.5% in October.

The new government data came after Irvine research firm CoreLogic reported Monday that the number of completed foreclosures and homes in the foreclosure process dropped in October.

The two reports provided more evidence that a strong housing sector rebound continued to take hold through October.

The pace of construction spending was the highest since September 2009 but still lagged below the annual rate of about $1.1 trillion that the nation saw during the height of the housing boom in 2006 and 2007.

Private construction spending rose 1.6% in October from the previous month, led by a 3% surge in home building.

Public construction spending lagged the private sector amid budget crunches at all levels of government. Such spending, which includes roads and other infrastructure projects, was up 0.8% in October from the previous month.

Investors are coming back strong…

Investors Like Housing Price Rally – Even Goldman Betting on Subprime

Rob Chrisman | Mortgage News Daily | Nov 30 2012 | link

“If I could rearrange the alphabet, you and I would be together.” Before you roll your eyes at that one, a buddy of mine said that to a gal at a bar twelve years ago and they’ve been married for the last nine. Strange things do happen. (On the other hand, another acquaintance told his soon-to-be ex-girlfriend, “My phone never rings and it’s always you.”)

Lenders and Realtors know that relationships can sometimes complicate things, and the Census Bureau tells us that about 18% of people 18 and older lived in someone else’s household, up from 16% in 2007, prior to the start of the economic recession. Specifically, 41 million adults in 2011 lived in a household in which they were neither the householder, the householder’s spouse, nor the householder’s cohabiting partner. Between 2010 and 2011, the number of these additional adults increased by almost 2 million.


The fabled conforming loan amounts for 2013 were announced by “Frannie” yesterday, with both agencies leaving them unchanged. But if you want proof, here is the site from their conservator, the FHFA.

Every once in a while I try to state something factual, and yesterday the commentary repeated a letter regarding FHA and mortgage insurance. I received several comments, all basically saying, “Regarding the comment about FHA keeping mortgage insurance in place for the life of a loan being a HPA violation, I thought the same thing when I first saw the FHA Announcement.  Then I did a little digging and saw the HPA covers only PMI, private mortgage insurance.  So the law does not apply to anything FHA does with their mortgage insurance.  Here is the link I found.” (II. SCOPE AND EFFECTIVE DATE: The Act applies primarily to “residential mortgage transactions,” defined as mortgage loan transactions consummated on or after July 29, 1999, to finance the acquisition, initial construction or refinancing3 of a single-family dwelling that serves as a borrower’s principal residence.4 The Act also includes provisions for annual written disclosures for “residential mortgages,” defined as mortgages, loans or other evidences of a security interest created for a single-family dwelling that is the principal residence of the borrower (12 USC 4901(14) and (15)). A condominium, townhouse, cooperative or mobile home is considered to be a single-family dwelling covered by the Act. The Act’s requirements vary depending on whether a mortgage is: A “residential mortgage” or a “residential mortgage transaction;” Defined as high risk (either by the lender in the case of nonconforming loans, or Fannie Mae and Freddie Mac in the case of conforming loans); Financed under a fixed rate or an adjustable rate; or Covered by borrower-paid private mortgage insurance (BPMI) or lender-paid private mortgage insurance (LPMI).)

Stable or rising property values are key to secondary marketing confidence by investors in residential (or commercial) loans. For years the press has talked about the housing crisis, about how property values are falling, and about how countless borrowers are underwater on their homes, owing more than the house is worth. But is this cycle coming to an end? The Wall Street Journal recently reported that new household formulation is also the highest it has been for six years. Not only do we have immigration, but the children are finally moving out! These new households will increase demand for rentals and home purchases for years to come, which will increase the tax base of state and local governments. Here is the link.

We’ve also seen a number of house price indicators (we seem to receive a handful every darned week!) increasing. The FHFA reported that U.S. house prices included in its study rose 1.1% in the third quarter. “With significant growth in home prices during the quarter and a modest inventory of homes available for sale, house price movements in the third quarter were similar to what we observed in the spring,” said FHFA Principal Economist Andrew Leventis. “The past year has seen consistent price increases, but a number of factors continue to affect the recovery in home prices such as stagnant income growth, high unemployment levels, lingering uncertainty about the macroeconomy, and the large number of homes in the foreclosure pipeline.” And we had this headline: “Home Prices Rise for the Sixth Straight Month According to the S&P/Case-Shiller,” with the 10 and 20 City Home Price Indexes both climbed 3% in September, marking the sixth consecutive month of growth. The national composite was up 3.6% in the third quarter of 2012.

In October, home prices and sales increased compared to 2011 levels, while inventory remained a concern, RE/MAX revealed in a recent report. The company’s housing data is based on a survey of multiple listing service data in 52 metropolitan areas. The median sales price in October 2012 stood at $158,900, a 3.7 percent decrease from September but a 2.1 percent increase from October 2011. The year-over-year increase is the ninth straight month of annual gains. And out of the 52 metro areas surveyed, RE/MAX reported 48 experienced yearly price gains and 18 posted double-digit increases.

Zillow’s October Real Estate Market Reports show that national home values rose 1.1% from September to October to $155,400. This is the largest monthly increase since August 2005 when home values rose 1.2% month-over-month. October 2012 marks the 12th consecutive month of home value appreciation, further evidence of a durable housing market recovery. On a year-over-year basis, home values were up by 4.7% in October 2012 – a rate of annual appreciation we haven’t seen since September of 2006, before the peak of the housing bubble.  Not that any and all forecasts are “spot on,” but the Zillow Home Value Forecast calls for 1.5% appreciation nationally from October 2012 to October 2013. Most markets have already hit a bottom and 40 out of the 256 markets covered are forecasted to experience home value appreciation of 3% or higher, per Zillow’s prediction.

Granted, not all areas of the nation, nor areas of every state, are seeing this. But then again, others are seeing even stronger appreciation, and fewer listings. Perhaps, for the housing market, the worst is over. And even “the smartest guys in the room” are getting into the game: “Goldman Sachs Group Inc., which survived the U.S. real estate collapse five years ago with the help of derivative bets against subprime mortgages, is promoting the opposite trade to clients as housing recovers. The firm, which teamed with four other dealers to create the ABX indexes, benchmark contracts that offered investors a way to protect against the risks of a crash, said in a Nov. 28 report on its top 10 market themes for 2013 that clients should buy some of the derivatives. Here’s the URL, well written by Bloomberg.

Turning to the markets, no one is complaining about rates. Anyone who is should remember that a dragging economy is something that can push rates lower – and do we really want that? Probably not, and besides the fiscal cliff something to look for in the coming weeks is Federal Reserve officials facing critical decisions at their next policy meeting (December 11-12).  Analysts are pointing out that one of the main discussion points is whether or not to continue the bond-buying programs where the Fed has been purchasing mortgages backed securities (MBS) and treasury bonds. In September the Fed committed to buying $40 billion a month in MBS and that looks to continue into 2013 (hence the great rates for home loans). The more pressing issue could be the $45 billion a month program called Operation Twist (Fed buys long term treasuries and sells short term treasuries) which is scheduled to end in December. The Fed is running out of supply of current short term treasuries and in order to continue the program would need to create new bank reserves (i.e. print new money – something it is already doing by buying MBS).  Critics think that this could be inflationary while Fed officials believe they can manage the new reserves without inflation.

Whether it is extending flood insurance or dealing with the fiscal cliff, recently Congress seems to always drag its feet. Word comes out today that there is no progress on fiscal cliff talks. The markets will certainly let congress know the severity of falling off.  If they are successful and can come together with a plan, don’t look for this to happen until the last moment. One thing related to residential MBS: gross supply in November has surged to $196 billion from $132 billion in October. This is the highest level since the spring of 2009 when refinancing activity was spurred by lower mortgage rates resulting from the Fed’s $1.2 trillion in MBS purchases through QE1, as well as, programs enacted by Congress following President Obama’s election to help borrowers refinance in the early stage of the housing/finance crisis. As Thomson Reuters points out, the motivating factor in this month’s supply surge was the rush by servicers to close loans before a 10 basis points increase in guarantee fees takes effect on Dec. 1. It took place, however, when refinance applications surged in late September as mortgage rates fell to new lows in response to the Fed’s QE3 program. “While November issuance was well above normal, which is roughly $130 billion currently, issuance in December is expected to be below normal as a result.”

So yesterday MBS prices were unchanged while 10-year notes were marked lower by 1 tick (1/32) and closed at 1.62%. And today, the last day of November, we’ve had Personal Income which was unchanged for October, and Personal Consumption (Spending) which was -.2%, pretty much in line with expectations. Later we have the Chicago PMI (Nov) at 9:45AM EST. In the early going the 10-yr is down to 1.60% and MBS prices are maybe .125 better.

The American investment banker was at the pier of a small coastal Mexican village when a small boat with just one fisherman docked. Inside the small boat were several large yellow fin tuna. The American complimented the Mexican on the quality of his fish and asked how long it took to catch them.
The fisherman replied, only a little while.
The American then asked why didn’t he stay out longer and catch more fish.
The Mexican said he had enough to support his family’s immediate needs.
The American then asked, “But what do you do with the rest of your time?”
The Mexican fisherman said, “I sleep late, fish a little, play with my children, take siesta with my wife, Maria, stroll into the village each evening where I sip wine and play guitar with my amigos, I have a full and busy life.”
The American scoffed, “I am a Harvard MBA and could help you. You should spend more time fishing and with the proceeds, buy a bigger boat with the proceeds from the bigger boat you could buy several boats, eventually you would have a fleet of fishing boats. Instead of selling your catch to a middleman you would sell directly to the processor, eventually opening your own cannery. You would control the product, processing and distribution. You would need to leave this small coastal fishing village and move to Mexico City, then LA and eventually NYC where you will run your expanding enterprise.”
The Mexican fisherman asked, “But, how long will this all take?”
To which the American replied, “15-20 years.”

“But what then?”
The American laughed and said that’s the best part. “When the time is right you would announce an IPO and sell your company stock to the public and become very rich, you would make millions.”
“Millions…Then what?”
The American said, “Then you would retire. Move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siesta with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos.”

As a Realtor, I’ve got your back…

California, Florida Lead in Mortgage Fraud Risk

Jann Swanson | Mortgage News Daily | November 27, 2012 | link

Interthinx reported today that its Mortgage Fraud Risk Index dropped nearly 8 percent in the third quarter of 2012 and is five percent lower than in the third quarter of 2011.  Despite a spike in the second quarter the Index is at the lowest point in two years.
Interthinx indices are based on the frequency with which indicators of fraudulent activity are detected in mortgage applications processed by the company’s proprietary fraud detection software.  The indices include a composite Mortgage Fraud Risk Index which measures the overall risk of mortgage fraud and four component indices:

  • Property Valuation Fraud perpetrated by manipulating property value to create equity which is then extracted from loan proceeds by various means.
  • Identity fraud is frequently used in mortgage fraud schemes in order to hide the identity of the perpetrators and/or to obtain a credit profile that meets lender guidelines.
  • Occupancy fraud is perpetrated by investors who falsely claim the intent to occupy a purchased property in order to obtain a mortgage with a lower down payment and/or lower interest rate.
  • Employment/Income occurs when an applicant’s income is misrepresented in order to meet lender underwriting guidelines for a loan

Each Index is calibrated so that a value of 100 represents a nominal level of fraud risk, a value calculated from the occurrence of fraudulent indicators between 2003 and 2007 in states with low foreclosure levels.  The national composite index level is now 137.

The number of metropolitan statistical areas (MSAs) classified at high risk for mortgage fraud declined from 91 in the second quarter to 70 in the third with California and Florida having the most MSAs (19 and 17 respectively) with that classification.  Other states with multiple high-risk MSAs were Arizona, Colorado, New Jersey, and Oregon.

The MSAs with the highest risk levels were Merced, California (281), Stockton, California (246), Miami/Ft. Lauderdale (233), Yuba City, California (231), and Tampa/St. Petersburg (229).

Property Valuation Fraud Risk declined 11 percent from the second quarter to 203.  This continues a downward trend in this type of fraud that began in early 2010.  This index has declined 23 percent in two years.

The riskiest areas for this type of fraud are Merced which surged 23 percent quarter-over-quarter to a level of 498. Lakeland/Winter Haven Florida also saw a big increase, 21.7 percent, since the second quarter to an index level of 438 while Yuba City, with a more modest increase of 9.1 percent was third at 432.

The Identity Fraud Risk Index was down 1 percent from the second quarter to 145 and is down 24 percent over the last two years.  None-the-less Identity Fraud was up dramatically in several locations.  Midland and Lubbock Texas, Bellingham Washington, and Anchorage all had quarterly increases exceeding 165 percent resulting in scores over 240 in each case.  Iowa City, Iowa has the highest number (134) on this index despite a quarterly decline of 134 percent and San Jose was second at 272 followed by the four cities previously cited.

The Occupancy Fraud Index was down four percent from the second quarter to 63.  Lansing, Michigan had the highest risk of this fraud, 165, following a 143.7 percent quarterly increase.  McAllen Texas was second and Monroe Michigan third after both areas experienced increases of 97 percent and 130 percent respectively.

Employment/Income Fraud Risk was highest in California with MSAs in that state occupying nine of the top ten positions.  Salinas, Oxnard, and Los Angeles were the top three areas with scores all in the high 180s compared to the national level of 109.  Nationally this type of fraud has increased more than 15 percent in the last two years.




Home sales for the holidays!

Pending home sales  rise, beat expectations

Reuters | November 29, 2012 | link

Contracts to buy previously owned U.S. homes rose more than expected in October, a sign the housing market recovery advanced into the fourth quarter despite a mammoth storm and concerns over looming tax hikes.

The National Association of Realtors said on Thursday its Pending Home Sales Index, based on contracts signed in October, gained 5.2 percent to 104.8.

Economists polled by Reuters had expected signed contracts, which usually become sales after a month or two, to rise 0.8 percent last month.

The housing market is steadily healing after collapsing in 2006, supported by modest job gains, increased job security and record low mortgage rates. The broader economy has been constrained by concerns the government’s plans to slash the budget deficit next year could trigger a recession. This has hit business confidence, although consumer sentiment has nevertheless improved since the summer.

“We’ve had very good housing affordability conditions for quite some time, but we’re seeing more impact now from steady job creation,” said NAR chief economist Lawrence Yun.

Yun said the data showed some impact from superstorm Sandy, a deadly storm that slammed into the U.S. East Coast in late October.

More to love about homeownership…

3 overlooked real estate benefits

Tara-Nicholle Nelson | Inman News |  Wednesday, November 28, 2012 | link

<a href="" target="_blank">Suburban home</a> image via Shutterstock.Suburban home image via Shutterstock.

Recently, I took a brief, self-imposed retreat to work on some involved, important and frankly, neglected, projects. I left a tad bit late, which put me right in the worst of the commute-hour, end-of-week traffic, which is particularly bad in the direction I needed to drive.

It turned what should have been a two-hour drive into a three-hour odyssey. But I noticed how, right at the two-hour mark, my route took me onto one of the most scenic of California’s coastal highways. So I spent the last hour (the extra hour that had been tacked onto my trip unnecessarily) watching the sky turn from bright blue to golden, auburn-ey red-oranges and purples as I saw the sun set over the Pacific Ocean.

When I checked in, the concierge asked me how my drive was, and I told him, “Longer than expected, but I’m glad that it was because it gave me the chance to see the sunset that last hour driving down Highway 1.” He sort of looked at me strangely and said, “Wow, I’ve never heard anyone say they were grateful about traffic,” shook his head and carried on with his work.

The fact is, I’m rarely unencumbered enough, in terms of obligations on my time, to see a sunset, so I was particularly aware of how fortunate I was. And this is common: Since the time I broke my foot, I’m ecstatic to be able to work out and run. Mark Nepo, a famous poet and one-time cancer patient, has written about how grateful he is to see the lawn keep growing back in order to need mowing — something he once perceived as relentless, and a reason to complain.

All this came to mind when I was having a conversation with a couple of homebuyers recently around the subject of trade-offs. It became crystal clear, during our talk, that they were struggling to reconcile their conflicting wants and needs between themselves, but, more importantly, within themselves, creating an internal war and state of being stuck when it came to committing to a firm direction in which to proceed with their house hunt.

As I explained that everyone compromises (no matter whether they are spending $50,000 or $50 million on their home), it became apparent that these folks really just needed some help seeing the upsides of some of the seeming compromises they were contemplating.

Here are a few of the most overlooked trade-offs and hidden benefits in real estate:

Older construction → maturity of home and neighborhood. Some people like old homes, while others like new ones. My personal preferences tend to run to older homes, but I grew up in an area where no one buys anything but brand new, if they can avoid it.

The advantages of a newer home are pretty obvious: modern conveniences and construction, among them. But most people think older homes are a purely aesthetic indulgence. What they overlook is that older homes and the neighborhoods they are in have already settled, so that their mature state is clear to the buyer to be. That may mean they have already physically settled, surfacing any condition problems so that what is unknown is minimal. And with respect to older neighborhoods, the trees have matured and the nature of the area has as well, so you find less dramatic shifts with older neighborhoods than you do with new ones.

“Inconvenient” locations → quiet and privacy. Living right in the mix of things has obvious advantages, in terms of convenience of commute and nearby amenities, plus the energy downtown runs at a higher vibration than elsewhere. But having lived right in the heart of a bustling quasi-commercial district and having lived in the way-out hills has made clear to me the upsides of living in a less convenient location, namely peace, quiet and privacy.

A buyer’s desire for these qualities can evolve as he moves through the stages of life.

When I first got out of college and apartment living, I craved quiet and was willing to drive a ways to get to the grocery store to get it. After a few years, though, I was ready to be closer to other people and activities.

In any event, it’s critical to understand the multisensory trade-offs of picking a super-convenient, commutable or even highly walkable location or a less convenient locale, in terms of noise and serenity.

Mortgage interest → tax deduction. At the depth of the trough in home values a couple of years back, most homeowners I know busied themselves refinancing their home loans at all-time low rates and appealing the assessed values of their homes to have their property taxes lowered. What many failed to realize until a year later was that these numbers they had reduced were also the basis for their largest income tax deductions: the mortgage interest and property tax deductions. Long story short, as these costs went down, their income tax liability went up.

This is not to suggest that anyone should pay a single cent more than they need to for mortgage interest or property taxes — that would be foolish. However, when the thought of paying mortgage interest or paying property taxes gets you down, it bears reminding that these costs of homeownership are also the basis of the pretty amazing tax advantages that come with this version of the American dream. And that can make signing those checks just a little bit more palatable, sort of like sitting in traffic as you drive down the coast.

Baby steps to owning a home…

Making a lease-to-own sale worth your while

It’s possible for sellers to earn a 10 percent return on investment

Jack Guttentag | Inman News | Wednesday, November 28, 2012 | link

<a href="" target="_blank">Calculator</a> image via Shutterstock.Calculator image via Shutterstock.

A lease-to-own (LTO) transaction is one in which a potential homebuyer occupies the home as a tenant but has an option to purchase it within a specified period at a specified price. In exchange, the potential buyer pays a nonrefundable option fee upfront plus a monthly rent.

In a recent article, I noted the intense interest in LTO deals today by wannabe homebuyers who can’t qualify for the mortgage they need to make a purchase now.

Despite the large demand, not many LTO deals are being done. They are very complicated, and most potential buyers and sellers don’t know where to go to get help. Further, most sellers view the LTO as a last resort rather than as a potentially profitable investment. In addition, there is no marketplace where potential buyers and sellers can connect.

To deal with these problems, I developed a three-part plan. Part 1 focusing on contractual complexity was to develop with Jack Pritchard a checklist of all the major provisions that might be included in an LTO, explaining the implications of each for both buyer and seller.

The checklist can be used as a negotiating platform for the two parties, who can turn the results over to a local lawyer for conversion into a contract. This list is on my website at Lease-to-Own Home Purchases: Huge Demand But Few Deals.

Part 2 focusing on seller reluctance is an LTO calculator developed with Chuck Freedenberg, and is the subject of this article. The calculator allows potential sellers to view an LTO deal as an investment generating an attractive rate of return, relative to what the seller could obtain by selling at the best price obtainable in the current market.

The investment return is net of the costs of ownership during the option period, including mortgage interest payments, property taxes, homeowners insurance and other expenses of ownership.

Viewing an LTO as a profitable investment should make it a more attractive option to sellers. The potential savings on real estate sales commission, not included in the return on investment, would be icing on the cake.

Here is an example. The seller could get $100,000 if he placed the house on the market today. The balance on his 6 percent mortgage is $60,000, giving him homeowner equity of $40,000 if he sells now. If he does an LTO, the costs of ownership during the option period sum to $610, which includes a $500 mortgage payment, but he is paid an option fee and a monthly rent. In addition, the option price may be higher than the current market price.

The calculator shows the following combinations of option fee, monthly rent and option price that will generate a 10 percent yield over a 12-month option period:

  • Option fee of $1,000, monthly rent of $610, option price of $100,660.
  • Option fee of $1,000, monthly rent of $501, option price of $102,000.
  • Option fee of $654, monthly rent of $610, option price of $101,000.

Of course, the prospective buyer may not find any of these options desirable; among other reasons, she might need a longer option period than 12 months.

A seller and a buyer negotiating a deal can use the calculator together to find the best set of terms that are satisfactory to both.

Negotiations between buyers and sellers at the outset will probably focus on the rate of return, which is based on an estimate of current property value used to calculate it. In setting the current value, we recommend that the two parties agree to accept the judgment of an appraiser.

Part 3 of my plan to develop an LTO market is to provide an online forum where potential buyers and sellers can interact. Sellers would take the initiative in presenting information about the house for sale, and would provide a range of options acceptable to themselves from which potential buyers could make a selection. The table illustrates this approach. Stay tuned.

Option price for different combinations of option fee, option period and monthly rent that yields 10 percent to the seller, with option exercised, on a home salable for $100,000 today

Option Fee Option Period in Months
6 12 18 24 30 36
Rent $500
$1,000 $100K $102K $104K $105K $107K $109K
$2,000 $99K $101K $103K $104K $106K $108K
$3,000 $98K $100K $101K $103K $105K $107K
$4,000 $97K $99K $100K $102K $104K $106K
Rent $610
$1,000 $100K $101K $102K $103K $104K $105K
$2,000 $99K $100K $100K $101K $103K $104K
$3,000 $98K $99K $99K $100K $101K $102K
$4,000 $97K $97K $98K $99K $100K $101K
Rent $700
$1,000 $99K $99K $100K $100K $101K $101K
$2,000 $98K $98K $99K $99K $100K $100K
$3,000 $97K $97K $98K $98K $98K $99K
$4,000 $96K $96K $97K $97K $97K $98K
Rent $800
$1,000 $99K $98K $98K $98K $98K $97K
$2,000 $98K $97K $97K $97K $96K $96K
$3,000 $97K $96K $96K $96K $95K $95K
$4,000 $96K $95K $95K $94K $94K $94K