Housing recovery stumbling block: Weak household formation

11-15

What happens to real estate prices if new households don’t form?

It’s an interesting question. One that many economists prefer not to think about.

Jed Kolko, chief economist for Trulia, an online real estate listing site, says the prospects are “alarming.”

Of course, it isn’t just the prospects for pricing that are alarming. There’s an undercurrent of concern about what a lack of household formation means for the larger economy as well.

Let’s start at the top. In a normal year, roughly 1.1 million new households form. There are many reasons households form. Some are recent college graduates who move out on their own. Sometimes families split up, forming two households out of one. There are immigrants who move to this country who, after a period of time perhaps living with relatives, move out to their own home, sometimes purchasing real estate in as little as three to five years after moving to the U.S.

Since the recession, trends have changed. According to the latest Census figures, roughly 380,000 new households were formed in the last 12 months. And worse, the number of young adults living with their parents ticked up as well.

The latter trend is about young people not getting jobs, Kolko explained. “And even if they get jobs, they don’t move out right away,” he added. “You need to save up, to build up a cash cushion and the financial confidence to move out. You need to be able to pass a credit check and have the first and last month rent.”

At this point in recovery, Kolko believes we should be seeing household formation back not only at normal levels but higher.

“All those young people who moved in with their parents over the past few years and didn’t move out during the recession, there should be pent-up demand for household formation. Everyone was thinking once they move out, they will form lots of new households,” Kolko added.

It’s the worst sort of news for the new construction industry, which is still operating at about 50 percent of where it was during the height of the housing boom. Roughly 450,000 new homes are expected to be sold this year, compared with more than 800,000 in a more normal year.

Even if new household formation picks up, it will be awhile before hiring picks up in for new home construction because most of these individuals will rent before they buy. And if there are plenty of foreclosures, short sales, and vacant properties available to buy, it’s possible that the construction industry won’t get a boost for several more years.

It all comes back to young people and their employment prospects, which aren’t great, Kolko said.

“The share of young people working (now) is almost as low as during recession. Wages aren’t really rising. Student debt is up. Young people face tough circumstances today,” he noted.

Unfortunately for the housing industry, those tough circumstances are turning into alarming trends that bear close watch.

(Source: Chicago Tribune)

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U.S. Homes Spending Less Time on the Market

11-14

The housing market is improving every day, and as a result, homes nationwide spent far fewer days listed for sale in September than a year ago — one month less, to be exact.

Homes sold in the U.S. in September spent a median of 86 days on Zillow, down 30 days from 116 days in September 2012.

Zillow calculated the median number of days listings spent on Zillow, at the national, metro and county levels, dating to January 2010. In order to correct for homes that are listed, then removed and re-posted with new prices, Zillow considered multiple listings within 40 days at the same address as one listing. Since the beginning of 2010, homes nationwide have spent a median of 119 days on Zillow before being sold or taken off the market.

“The declining inventory of for-sale homes over the past year naturally creates pressure for buyers to more quickly snap up the inventory that is on the market. This demand has been fueled by huge resets in home prices since market peak, historically low mortgage rates and a slowly improving broader economic climate,” said Zillow Chief Economist Dr. Stan Humphries. “Home shoppers in today’s environment need to be prepared to move quickly, with pre-approvals in place and an established sense of what they’re willing to pay for a home. But even though things are moving fast, buyers should resist the urge to enter into bidding wars or pay prices they’re uncomfortable with. We do expect that this need for speed will abate in the near-term as mortgage rates rise and more inventory becomes available because of new construction and declining negative equity.”

(Source: Zillow)

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Considering a strategic default? Think again.

11-11

Anyone thinking of skating on mortgages owned by Fannie Mae or Freddie Mac may want to think again. As a result of new government reports, the companies say they are going to do a better job of going after scofflaws.

Fannie and Freddie can pursue judgments against borrowers who walk away from their loans even though they have the ability to make their payments. That’s called a strategic default, and many borrowers are taking that step — typically throwing in the towel because their homes are no longer worth as much as they owe.

But when their homes are sold at foreclosure and the proceeds are not enough to cover their outstanding loan balances, it creates a deficiency for which many defaulters either don’t realize they are liable or don’t care.

To date, the two government-sponsored enterprises, which are now highly profitable after five years of running in the red, haven’t done a particularly good job at pursuing deficiency judgments, according to scathing reports from the Office of the Inspector General at the Federal Housing Finance Agency.

But the agency says it is going to make the enterprises clean up their acts. And that should serve as fair warning to those who can pay but fail to do so.

As the Office of the Inspector General says time and again in the reports, chasing down strategic defaulters can not only cut the enterprises’ losses on bad loans, but also “serve as a deterrent to those who would chose to strategically default on their mortgage obligations.”

Going after strategic defaulters is big money. According to the inspector general report criticizing Freddie Mac’s lax practices, the company has left billions on the table.

The report found that Freddie Mac, which has received some $71 billion in taxpayer assistance since it was taken into conservatorship by the Federal Housing Finance Agency in September 2008, did not refer nearly 58,000 foreclosures with estimated deficiencies of some $4.6 billion for collection by its vendors.

Of course, only a percentage of that amount might have been recoverable, because some borrowers are simply tapped out. But because the bad loans weren’t even considered for recovery, Freddie Mac “eliminated any possibility” for collecting what is owed, the Office of the Inspector General said.

Now extrapolate that to Freddie Mac’s entire holdings and you can see we’re talking some really big money here. As of December, the big secondary mortgage market company had nearly 50,000 foreclosures still on its books, carrying a value of some $4.3 billion. And as of March 31, it held 364,000 mortgages that were 60 days or more delinquent and were, therefore, likely foreclosure candidates.

Fannie Mae’s portfolio of troubled assets is much larger. At the end of last year, it owned more than 105,000 foreclosed properties valued at $9.5 billion and carried a “substantial” shadow inventory of 576,000 seriously delinquent mortgages that were 90 days late or more and likely to end up in foreclosure.

It does a better job than the smaller Freddie Mac, according to the Office of the Inspector General. But in a separate report, Fannie Mae earned a slap on the wrist for not taking any action on nearly 30,000 accounts because statutes of limitations had expired or were about to. For the same reason, the report says, it failed to pursue deficiencies of some 15,000 accounts that already had been reviewed for collection by its vendors.

Several factors influence the decision to pursue deficiency recoveries. But most importantly, state laws dictate timelines for filing claims. Some states do not allow deficiency judgments at all, but they are fair game in about three dozen states and the District of Columbia.

However, 10 have short windows — only 30 to 180 days in which collections are allowed.

But not going after defaulters where it is permissible to do so not only reduces the chances of recovering potentially billions, the reports point out, but also “incentivizes” other borrowers to walk away from mortgages they can afford to pay.

The new reports are a follow-up to one issued a year ago that called the Federal Housing Finance Agency, which oversees Fannie Mae or Freddie Mac, on the carpet for failing to provide enough guidance about effectively pursuing and collecting deficiency judgments wherever and whenever possible.

In September, in response to a draft of these latest reports, the agency set down requirements for both enterprises to maintain formal policies and procedures for managing their deficiency collection processes, establish a set of controls to monitor their collection vendors and comply with state laws in an effort to preserve their ability to pursue collections.


(Source: Chicago Tribune
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How to Compete Against a Cash Buyer

11-08

In many real estate markets today, there’s a lot of talk about cash buyers. These buyers have a reputation for swooping in and “stealing” homes out from under other buyers, simply because someone with cash doesn’t need a loan. Regular buyers relying on credit are often intimidated by what appears to be a “lose-lose” situation. They assume that if they need a loan, they can’t compete.

The truth is, someone buying a home with credit can still compete against cash buyers and win. Do you have a 20 percent down payment? Are you well employed? Do you have cash reserves in addition to your down payment? Do you have very little debt? Do you have good credit? If so, your purchase should be as bullet-proof as a cash buyer’s.

Here’s what you need to do to compete against a cash buyer.

Structure your offer as if it’s a shoo-in

Ask your lender to write not only a pre-approval letter but to verify that you’re a well-qualified buyer. Get your agent or mortgage professional to provide some financial information about you with your offer (if you’re OK with that, of course).

See if your mortgage professional can take it a step further. Have your lender take as much of your loan through the process as possible. Send the lender a copy of the preliminary title report, if available. If you’re buying a condo, find out if a condo questionnaire is available and give it to your lender. If you take any of these steps, let the seller know.

Shorten the loan and appraisal contingencies

Ask your lender how quickly an appraiser can be sent out to the property and how long the loan would take to turnaround. In some parts of the country, loans are being approved in less than 14 days.

Pre-order an appraisal

This may not be as easy with a bigger bank. But smaller banks, direct lenders or mortgage brokers can line up the appraisal in advance. At the time your offer is written, tell the seller the appraisal has already been ordered.

Have the inspection immediately

Along with the quick appraisal and loan contingencies, get your inspector in and out. Shelling out a few hundred dollars and getting the inspections done within days of having your offer accepted shows the seller you mean business.

Pay extra

Paying more money to beat a cash offer may sound counter-intuitive, but cash buyers nearly always expect a discount from the seller simply because they’re offering cash. As a result, the cash buyer will often make a lower offer. To increase your chances, top the cash offer.

If a seller is faced with a few thousand dollar difference, the seller probably wouldn’t risk it. But what if your offer is 5 percent higher than the cash buyer’s? The seller, perhaps wanting the best of both worlds, may ask the cash buyer to raise his or her offer. Some cash buyers will come up, but not always enough to match.

Bottom line: Stay in the game and know your limits. Do you plan to live in the house for many years and it’s the home of your dreams? Overpaying isn’t the end of the world, so long as you’re within a reasonable range.

Make yourself known to the seller

Some buyers write “love letters” to the sellers, hoping to appeal to their personal side. Does this work? Sometimes. If you’re competing with a cash buyer, particularly an investor who plans to rent the home out, it can’t hurt to get a little personal.

When a seller’s agent presents an offer, the seller always wants to know more about the potential buyer. Ask your agent to write a cover letter and an introduction. Let the seller know who you are, why you like the home and what your intentions are. It usually works.

But not always. Sometimes a seller just doesn’t want to take a risk with someone getting a loan, and nothing you do — aside from paying all cash — will change that. So do the best you can and be realistic. Make sure your financial “‘house” is in order. Work with a good local real estate agent and start working with a local mortgage professional well in advance. Structure your offer to show that you’re ready to roll. And who knows? It just might go your way.

(Source: Zillow)

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How HARP Can Put Money in Your Pocket

11-07

Is your house underwater? Did it lose value during the last recession? Could you use a few extra thousand dollars next year?

If you said “yes” to one or more of these questions, then you probably haven’t taken advantage of the Home Affordable Refinance Program (HARP). The federal government launched HARP in 2009 to help eligible homeowners with mortgages owned by Freddie Mac or Fannie Mae save money by refinancing into low-interest loans despite a drop in the value of their home.

As of August 2013, HARP has saved approximately 2.9 million homeowners as much as $12 billion a year on their mortgage interest payments. It’s estimated that new HARP borrowers who refinanced into Freddie Mac mortgages during the first nine months of 2013 reduced their mortgage interest rates an average of 2 full percentage points, from about 6.1 percent to 4.0 percent. (In some states, such as Texas, the average HARP borrower’s interest rate fell by 2.7 percentage points.)

HARP borrowers average $4,300 in annual savings

As a result, Freddie Mac estimates the average homeowner will save $358 a month — $4,300 in the first year — after refinancing through HARP. Other analysts put annual HARP savings for borrowers anywhere from $1,200 to as much as $6,000. (If approved, your specific savings will depend upon the terms — duration, interest rate — of your new HARP loan compared with your current loan.)

There are two ways HARP can help you save money.

First, you can use HARP to lower your interest rate on a loan with the same maturity, say 30 years. Or you can refinance a long-term, fixed-rate mortgage, or a loan with a variable rate, into a fixed-rate loan with a shorter term, such as 15 years. A shorter term coupled with a lower interest rate could help you increase equity faster and save a considerable amount of interest over the life of your loan.

Either way, the extra cash you may save through HARP can put you in better position to pay down debts, build up your savings and free up cash for new purchases.

HARP changes aim to help more underwater borrowers

Despite HARP’s saving potential, it’s estimated that as many as 1 million to 2 million potentially eligible borrowers with Freddie Mac or Fannie Mae loans could save money through HARP, but have yet to apply for a HARP loan. Specifically, if these homeowners had refinanced at the October average mortgage rate for a 30-year, fixed-rate loan of 4.2 percent they could have reduced their principal and interest payments by at least 10 percent.

So why haven’t these potentially eligible borrowers applied? Some recent online surveys indicate many borrowers are still unaware of HARP. One from loanDepot.com suggests borrowers who didn’t qualify when HARP was first announced are unaware that HARP was significantly enhanced to expand eligibility to more borrowers, especially in markets where home prices fell sharply during the recession.

For example, today HARP has no loan-to-value limits under Freddie Mac and Fannie Mae rules. This gives lenders more leeway to adjust their own rules to help more borrowers qualify for HARP. So, even if your home’s value is a fraction of the size of your current mortgage or you owe more on your home than it is worth – you may be eligible under the expanded rules.

Which brings up one last question for homeowners who haven’t applied for HARP: What are you waiting for? Get started now by calling your mortgage servicer, or visiting HARP.gov, and find out how HARP may benefit you.

 

(Source: Zillow)

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