Real Estate Curve

American banks repossessed twice the number of homes in May as they did a year ago as falling house prices trapped borrowers in mortgages they could not afford. A June 13 RealtyTrac Inc. report said lenders took possession of over 73,000 houses during May alone.

The Washington-based Mortgage Bankers Association reports that 2.47 percent of all U.S. homes were in some stage of foreclosure during the first quarter of this year. That percentage rate is 252 percent higher than the 0.98 percent average for the past 30 years. It is estimated that foreclosures may account for nearly a third of national home sales this year.

These figures are causing some to worry that a negative feedback loop will develop in the United States housing market. In such a loop, increasing repossession rates would drive housing prices down. Then declining housing prices would trap consumers in mortgages they cannot afford. Finally, this would serve to increase repossession rates even further and the cycle would continue. The ultimate consequence would be that the housing market would become an increasingly heavy anchor on the economy in general.

The root cause of this escalating problem is consumers purchasing homes that are beyond their means to afford.

From theTrumpet.com

Posted under News

NEW YORK (Reuters) - No one knows when the credit crisis will end.But when it does, U.S home prices may have lost a third of their value, high-yield bond valuations will hit levels close to those seen during the last recession, and what may amount to $1 trillion of Wall Street losses may translate into almost $4 trillion of lost access to capital.

That’s the view of top credit analysts, who say a U.S. housing decline, sparked last year by subprime mortgage debt defaults, will likely last another two years as a wider group of consumers, including prime borrowers, feel the pinch from a tightening of credit.

Peter Acciavatti, a credit analyst and managing director at JP Morgan Securities Inc, said in an interview that Wall Street write-downs and losses totaling at least $325 billion so far may ultimately mean $3.9 trillion in tighter credit conditions.

Moreover, home prices may fall as much as 30 percent from their peak in 2006 and not hit bottom until 2010, with greater drops still in subprime mortgage debt markets, he told Reuters.

“The housing correction is in a down phase,” Acciavatti said during a high-yield bond conference in New York. “We’re now going through a phase of deleveraging and the pulling out of easy money.”

Credit markets also will be under pressure from massive write-downs and losses stemming from consumer debt. The International Monetary Fund has estimated write-downs from global investment banks may approach $1 trillion, while J.P. Morgan forecasts the figure may climb as high as $600 billion.

A senior Fitch Ratings analyst forecast more defaults and delinquencies for U.S. home mortgages, and said the highest default rates are coming from recent mortgages originating in the last few years.

“There are a lot more mortgage defaults to come,” said Glenn Costello, a Fitch Ratings managing director. “We see an ongoing high level of default.”

High-yield corporate bond default rates may climb to 2.25 percent this year and jump to 6.5 percent next year, Acciavatti said in a separate interview. The default rate is now 0.75 percent, up from 0.34 percent at the start of the year, according to JP Morgan data.

Acciavatti, speaking at the New York Society of Security Analysts conference, also said junk bond spreads will push past 800 basis points and may top 900 basis points as the crisis drags out. High-yield bonds now trade at spreads of about 650 basis points over Treasuries, according to Merrill Lynch & Co data.

Tightening credit conditions, high energy prices and weaker growth prospects mean that interest in distressed debt sales and trading may be on the rise, according to Jon Kibbe, founding partner at law firm Richards Kibbe & Orbe LLP.

Other analysts pointed to opportunities in the loan market for high-yield investors looking for value in other markets.

By Walden Siew

Posted under News

OREGON CITY, Ore. — The street was supposed to be the stuff of dreams.

Along South Grasle Road outside Oregon City, six supersize Street of Dreams homes built in 2007 back up to ribbons of Doug fir and a glazed Mount Hood peak.

The builders came to attract future customers, and they were optimistic about selling the show houses that stretched to $3 million. Normally, two or three homes sell during the show and most are sold within a year.

But nine months after the Street of Dreams show, none has sold.

The show opened just as the U.S. mortgage market tumbled, triggering the Portland region’s biggest home price decline in at least two decades.

One Street of Dreams builder tried unsuccessfully to auction his home. Two builders now own their homes and one of them lives in his. Subcontractors who worked on four homes have filed liens to get paid.

“The timing was probably about the worst ever,” said builder Ray Derby, a Street of Dreams veteran who is still trying to sell his $1.9 million home. “We just hit a bad market.”

The idle homes show what can happen to builders who test the market’s limits of luxury, price and location at what turns out to be the crest of a historic boom. When the market slowed, in this case, the builders got stuck holding homes that turned out to be pricier and tonier than the rural Clackamas County market could support.

Across the Portland area, homes priced over $1 million are selling about as well as less-expensive homes. But the sweet spot for ultraluxury resides in Portland’s West Hills, West Linn or Lake Oswego, not rural Clackamas County.

Through April of this year, eight homes sold across the Portland market for more than $2 million. Six were in the luxury hot spots. Two were in the Clackamas or Oregon City areas, according to the Regional Multiple Listing Service.

The 2007 Street of Dreams’ troubles reminded builders of the 2001 show. That year, the show opened in Hillsboro just as the dot-com economy busted, leading to sluggish sales. Derby said he needed about 18 months to sell his 2001 show home.

With last year’s bad timing and an out-there location, broker Craig Reger, who tried to sell one of the show homes, called the 2007 show’s conditions “a formula for disaster.”

Builder Sean Foushee has built custom homes across the Portland area for 15 years. “This is absolutely the toughest time I’ve ever seen,” said Foushee, owner of Accent Residential Homes in Tualatin.

Foushee, 37 years old with close-cropped red hair, designed his home, named “Salish Moon,” in early 2007 before the market cooled. His “modern lodge style” — think Aspen — was designed more to make a splash than cash.

“You get caught up in it,” Foushee said. “You’re putting a show on.”

For builders like Foushee, the Street of Dreams is a chance to show off in front of thousands of people, some of them potential customers. It’s also a big fundraiser for an industry group, the Home Builders Association of Metropolitan Portland.

Inside the house, Foushee’s voice bounces off the Glacier stone that lines the front room up to the vaulted ceilings. He’s greeted by sales fliers waiting for a potential buyer.

The house, named Best of Show, has all the touches of an exclusive Street of Dreams home.

There’s a smoking room outfitted with thick drapes and a Robb Report magazine — the “Global Luxury Source.” There’s a massage parlor and a shower the size of a small bedroom. Even the walk-in closet has a Mount Hood view. And how many fireplaces?

“I don’t know,” Foushee said. “Seven or something.”

But all this space requires attention.

Without a buyer, upkeep falls on Foushee and his work crews. “It’s not fun,” Foushee said.

Foushee, a golfer, mows the putting green out back. His crews drain the front-yard pond to sweep out algae. Walking next to the wine cellar, Foushee spots dust gathering on the walnut wood floor. “I gotta get guys in here to clean this up,” he said.

The house is still outfitted with $460,000 worth of furniture from the show. “The couch alone,” Foushee says, “was $38,000.”

He wouldn’t say exactly what his loan payment is, but Foushee said builders for homes in that price range typically must cover a $8,000 to $12,000 monthly payment.

Foushee first advertised the house for $3.2 million.

He’s now listing it at $2.9 million, and he just wants to get the house off the books. “I’d take less than that,” Foushee said. “I’ll take a loss, and it’s fine.”

On the way out, he notices the front-room lights are on. He reaches for the touch screen.

“No sense spending any more on the utilities,” he said.

Just as the 2007 show ended and the housing market started to slide, Greg Heinze learned he’d be the lead developer for the following year.

By then, it was clear to anyone that the housing market was headed for trouble.

Heinze, a Street of Dreams veteran, said he and the Home Builders Association of Metropolitan Portland needed enough builders to attract about 80,000 visitors. But he said they had to look hard to find interested builders.

Some builders already had too many homes to sell. Others found that lenders required more upfront cash equity than they could handle.

They talked briefly about canceling the 2008 show, Heinze said. Organizers for the Seattle version of the Street of Dreams canceled this year’s show, but the group’s statement didn’t specify why.

In Portland, Heinze and the builders association decided to go ahead.

They found four other builders to join in the 2008 Street of Dreams show. One house is already built and occupied. All of the other builders except Heinze have homes that are presold, reducing the builders’ risk of getting stuck with the house.

Heinze, though, remains confident. He scans his half-built 6,400-square-foot Street of Dreams home on Mount Scott’s peak above the coursing traffic of Interstate 205. He points to the view and a downtown skyline that shines through the blue-gray sky. Around him, a framing crew hoists a beam into place, a circular saw whirrs and a nail-gun’s compressor growls.

“Right price. Right plan. Right location. You will sell your house,” Heinze said. “The upper-end market is still there. They’re just pickier. … People who’ve got money will always have money.”

Heinze said he did a few things differently to build his house at a lower cost this year. He went with a truss roof built off-site and a steel foundation to reduce construction schedule and interest costs.

During the 2006 housing boom, Heinze said he might have asked $2.25 million.

Now, he’s thinking less than $2 million.

“It’s primarily market driven,” he said. “You’re absolutely insane to go over $3 million. You’re pretty crazy to go over $2 million.”

 By RYAN FRANK, The Oregonian

Posted under News, Seller

It’s A Terrible Time To Buy

It’s still much cheaper to rent than to own the same thing. Yearly rents are less than 3% of purchase price. Mortgage rates are 6.5%, so it costs more than twice as much to borrow money to buy a house than it does to rent the same kind of house. Worse, total owner costs including taxes, maintenance, and insurance are about 9%, which is three times the cost of renting. Buying a house is a very bad deal for the buyer.

1. Salaries cannot cover current house prices. This means house prices must keep falling or salaries must rise much faster. You probably noticed that your salary is not rising much, and that inflation in food, energy, and medical care has been much higher than the government reports. This leaves less money available to pay for housing. A safe mortgage is a maximum of 3 times the buyer’s yearly income, but most mortgages are well beyond that. Anyone who buys now will suffer losses immediately, and for the next several years at least, as prices keep falling.
2. Prices disconnected from Gross Domestic Product. The value of housing in the US depends a lot on the value of what the US actually produces.
3. Buyers borrowed too much money and cannot pay the interest. Now there are mass foreclosures, and senators are talking about taking your money to pay for your neighbor’s McMansion, even though no one in the US has been made homeless by foreclosure. In fact, forclosed owners end up far better off: they go reap large savings every month, since it costs less than half as much money in rent as they were paying to “own” the very same thing.Banks happily loaned whatever amount borrowers wanted as long as the banks could then sell the loan, pushing the default risk onto Fannie Mae (taxpayers) or onto buyers of mortgage-backed bonds. Now that it has become clear that a trillion dollars in mortgage loans will not be repaid, Fannie Mae is under pressure not to buy risky loans and investors do not want mortgage-backed bonds. This means that the money available for mortgages is falling, and house prices will keep falling, probably for 5 years or more. This is not just a subprime problem. All mortgages will be harder to get.

   A return to traditional lending standards means a return to traditional prices, which are far below current prices.

4. Interest rates increases. When rates go from 5% to 7%, that’s a 40% increase in the amount of interest a buyer has to pay. House prices must drop proportionately to compensate. The housing bust still has a very long way to go.For example, if interest rates are 5%, then $1000 per month ($12,000 per year) pays for an interest-only loan of $240,000. If interest rates rise to 7%, then that same $1000 per month pays for an interest-only loan of only $171,428.

   Recent lower Fed inter-bank lending rates do not directly affect mortgages rates, nor do extra Fannie or FHA guarantees. The 30-year fixed mortgage rate actually went up after the Fed’s rate cut, because rate cuts cause higher inflation.

   Also note that unlike the last few years, most lenders now require a 20% downpayment. That will eliminate many buyers from the market, driving down prices.

5. Extreme use of leverage. Leverage means using debt to amplify gain. Most people forget that losses get amplified as well. If a buyer puts 10% down and the house goes down 10%, he has lost 100% of his money on paper. If he has to sell due to job loss or an interest rate hike, he’s bankrupt in the real world.It’s worse than that. House prices do not even have to fall to cause big losses. The cost of selling a house is 6%. On a $300,000 house, that’s $18,000 lost even if prices just stay flat. So a 4% decline in housing prices bankrupts all those with 10% equity or less.
6. Shortage of first-time buyers. High house prices have been very unfair to new families, especially those with children. It is literally impossible for them to buy at current prices, yet government leaders never talk about how lower house prices are good for pretty much everyone, instead preferring to sacrifice American families to make sure bankers have plenty of debt to earn interest on. If you own a house and ever want to upgrade, you benefit from falling prices because you’ll save more on your next house than you’ll lose in selling your current house. Every “affordability” program drives prices higher by pushing buyers deeper into debt. To really help Americans, Fannie Mae and Freddie Mac should be completely eliminated, along with the mortgage interest deduction. Canada has no mortgage-interest deduction at all, and has a more affordable housing market because of that.The government keeps prices unaffordable through programs that increase buyer debt, and then pretends to be interested in affordable housing. No one in government except Ron Paul ever talks about the obvious solution: less debt and lower house prices. The real result of every “affordability” program is to keep you in debt for the rest of your life so that you have to keep working. Lower house prices would liberate millions of people from decades of labor each.
7. Surplus of speculators. Nationally, 25% of houses bought the last few years were pure speculation, not houses to live in, and the speculators are going into foreclosure in large numbers now. Even the National Association of House Builders admits that “Investor-driven price appreciation looms over some housing markets.”
8. Fraud. It has become common for speculators take out a loan for up to 50% more than the price of the house he intends to buy. The appraiser goes along with the inflated price, or he does not ever get called back to do another appraisal. The speculator then pays the seller his asking price (much less than the loan amount), and uses the extra money to make mortgage payments on the unreasonably large mortgage until he can find a buyer to take the house off his hands for more than he paid. Worked great during the boom. Now it doesn’t work at all, unless the speculator simply skips town with the extra money.
9. Baby boomers retiring. There are 77 million Americans born between 1946-1964. One-third have zero retirement savings. The oldest are 62. The only money they have is equity in a house, so they must sell.
10. Huge glut of empty housing. Builders are being forced to drop prices even faster than owners. Builders have huge excess inventory that they cannot sell, and more houses are completed each day, making the housing slump worse.
11. The best summary explanation, from Business Week: “Today’s housing prices are predicated on an impossible combination: the strong growth in income and asset values of a strong economy, plus the ultra-low interest rates of a weak economy. Either the economy’s long-term prospects will get worse or rates will rise. In either scenario, housing will weaken.”

By Patrick Killelea

Posted under Buyer, News, Seller

Real estate related businesses disagree, because they don’t make money if buyers do not buy. These businesses have a large financial interest in misleading the public about the foolishness of buying a house now.

1. Buyers’ agents get nothing if there is no sale, so they want their clients to buy no matter how bad the deal is, the exact opposite of the buyer’s best interest. Agents take $100 billion each year in commissions from buyers. Agents claim the seller pays the commission, but always fail to mention that the seller gets that money from the buyer. Think about it: who brings the money to the table - the seller or the buyer? All money comes from buyers. No buyer, no money.If a stock broker were to charge 6% on the sale of stock, he would quickly go out of business. Real estate brokers don’t do much more than stock brokers, so why should you give up nearly two years of your working life earning money to pay a realtor for the few hours they may put into helping you buy or sell a house? 6% of the 30 years it takes to pay off a house is 1.8 years of donating your working time to your realtor.There are good buyer’s agents who really believe they are helping the buyer, but they’re in denial about their conflict of interests. Author Upton Sinclair had a great explanation for this: “It is difficult to get a man to understand something when his salary depends on his not understanding it.”
2. Mortgage brokers take a percentage of the loan, so they want buyers to take out the biggest loan possible. Even worse - mortgage brokers get paid according to how BAD the deal is for the buyer. The worse the deal is (higher interest rate, points, fees, etc) the more the mortgage broker gets!
3. Banks get origination fees and then sell most mortgages, so they do not care about the bankruptcy of borrowers. They will lend way beyond what buyers can afford because they lose nothing if the buyer defaults. Banks sell most loans to the government agencies Fannie Mae or Freddie Mac. The conversion of low-quality housing debt into “high” quality Fannie Mae debt with the implicit backing of the federal government is the main support for the housing bubble. That is ending as Fannie Mae shrinks.The other way for banks to dump the risk of loan default has been the Wall Street market for mortgage backed securities. Now that mass foreclosures have eliminated the subprime portion of the loan-resale market, banks are under pressure to increase loan quality.
4. Appraisers are hired by mortgage brokers and banks, so they are going to give the appraisals that mortgage brokers and banks want to see, not the truth. Appraisers that kill a deal by telling the truth do not get called back to do other appraisals.
5. Newspapers earn money from advertising placed by realtors, lenders, and mortgage brokers, so papers are pressured by that money to publish the real estate industry’s unrealistic forecasts, and to avoid the fatal words: “prices are falling”. Instead, we may sometimes hear about “softening” or “easing” prices, which sounds so pleasant. At worst, you may hear about a “housing slump”, but you will never hear the mainstream press talk about a crash in prices.Worse, realtors have a near-monopoly on sale price information, and newspaper reporters never ask realtors hard questions like “how do we know you’re not lying about those prices?” The result is an endless stream of stories reporting that the National Association of Realtors (NAR) says it’s a good time to buy. Asking the NAR about housing is like walking into a used car dealership and asking the salesman if today would be a good day to buy a car.
6. Owners themselves do not want to believe they are going to lose huge amounts of money.

By Patrick Killelea

Posted under Buyer, News, Seller