Update on the Market

Good Morning,
What’s happening with existing home sales? Existing-home sales, including single-family and condo, were down in the second quarter in contrast with record sales set in the same period in 2005. The slowdown in the once-sizzling housing market is spreading, with 29 states reporting spring sales declines, led by big drops in former boom areas of Arizona, Florida and California. Nationally, sales were down seven percent in the April-June quarter this year compared with the same period in 2005.

The five biggest declines this spring compared to the April-June period of 2005 were Arizona, down 26.9 percent; Florida, down 26.7 percent; California, down 25.3 percent; Virginia, down 23.9 percent; and Nevada, down 23.5 percent.
How about new home sales? New construction isn’t looking good either. Homebuilders market optimism sank for a seventh consecutive month in August as a dearth of buyers caused inventories of unsold homes to pile up, an industry trade group survey showed this week. The National Association of Home Builders said its Housing Market Index of sentiment among homebuilders plunged seven points. Its lowest since February 1991 and less than half the level of a year ago.

The NAHB said its gauge of traffic of prospective buyers also fell, by six points to 21, suggesting a steeper decline in the number of people visiting model home units over the past month than in any other period this year. Rising inventories are due to "an increasing number of potential buyers adopting a 'wait-and-see' attitude because of uncertainty about where the housing market is headed," David Sieders, the NAHB's chief economist, said in a statement.

So how are lenders doing? About 60 percent of U.S. banks reported weaker demand for both mortgage and consumer loans in the second quarter of 2006, according to the Federal Reserve Board. The report says this was a “significantly larger net fraction” compared with the first quarter, reported in April. Nearly 30 percent of banks indicated they expect that the quality of the non-traditional residential mortgage products currently on their books will deteriorate, according to the survey.
So how am I doing?………….. Just great! Smart, long-term investors understand that there are buying opportunities in any market. This just happens to be one. That’s why they call this a buyer’s market!

How rich are you?

There are now 8.7 million rich folks in the world. There would be a lot more if the value of their homes were included in the calculation.

According to the 2006 World Wealth Report by Merrill Lynch/Capgemini, we now have 8.7 million "high net worth individuals (HNWIs)" worldwide -- including 2.9 million lucky wealth-holders in North America -- folks with financial assets of at least $1 million. Together, the holdings of the fortunate few totaled some $33.3 trillion in 2005. Even more remarkable, there are the rich and then there are the RICH. The study shows that 85,400 people worldwide now have a personal worth of at least $30 million.

I disagree with the fundamental basis of the Merrill Lynch/Capgemini report. Why? The financial asset wealth measure "includes the values of private equity holdings stated at book value as well as all forms of publicly quoted equities, bonds, funds and cash deposits. It excludes collectibles, consumables, consumer durables and real estate used for primary residences." No personal residences?
Why is the real estate you rent an asset but not the real estate where you sleep? Are the bricks and mortar different? According to the Federal Reserve, the value of personal real estate in the first quarter of 2006 amounted to $22.2 trillion. Other assets included corporate equities ($5.7 billion), mutual funds ($4.5 trillion) and money market assets ($957 billion)

Unfortunately, our U.S. real estate is not owned free and clear. In total, mortgage debt amounted to $8.9 trillion -- meaning the net worth of personal real estate in the U.S. is a "mere" $13.3 trillion.
Why does it make sense to look at individual wealth and exclude the value of personal real estate? That $13.3 trillion is a big number -- bigger by far than stock, mutual funds or money market accounts -- and it's certainly important when people refinance their homes or sign-up for home equity lines of credit. It's important when people sell a home and need to show if any profit is taxable. And it may be significant when an individual dies and estates are valued.

If we assume for a moment that the world has roughly 6.4 billion people and that 8.7 million qualify for millionaire status, then the odds of material success worldwide are 736 to one. The odds of gaining financial wealth are far greater in North America than most other places: In the U.S. and Canada we have about 330 million people and some 2.9 million millionaires -- that means the odds of financial achievement in North America are 114 to one. Actually the odds are vastly better -- but only if we count the roof over your head.

Rainy day fund

When the Federal Reserve decided to leave short-term interest rates untouched last week, homeowners were high on the list of beneficiaries. And the millions of them with outstanding home equity lines of credit tied to the prime rate got the most immediate relief: No increase on their next monthly payments for the first time in two years.
According to bank industry data, rates on outstanding home equity credit lines now average 8.74 percent. Two years ago, by contrast, the average was 4.68 percent. Most equity credit lines are priced at prime plus anywhere from one-half a percent to two percentage points. Prime currently is 8.25 percent. People with high credit scores -- 750 FICOs and higher -- often qualify for equity line rates slightly below prime -- anywhere from prime minus a half to prime minus one point.
But even homeowners among the credit elite have seen their equity line costs nearly double during the past couple of years, putting pressure on household finances. That steady drumbeat of rate hikes has prompted large numbers of borrowers to bail out of their credit lines and move their debts into their principal home mortgages at lower fixed rates.
To accomplish that, they've often refinanced their main mortgages, and cashed-out extra money to pay off their credit lines. Say you had $75,000 outstanding at 8.75 percent on your floating-rate credit line and were growing unhappy with the constant rate jumps. Say you also have plenty of equity in your home -- an existing first mortgage of $300,000 at 6.25 percent and an appraised market value on the house of $600,000.
With 30-year fixed rate conforming mortgages averaging about 6.5 percent last week, you could cash out your $75,000 by refinancing into a new first loan of $375,000 or higher at 6.5 percent. If you were willing to roll your closing costs into the new loan amount, you could do the whole transaction with little or nothing out of pocket and end up with a rate around 6.75 percent. Most important of all: You would have ended your exposure to constant rate increases on your home equity debt.
Enough homeowners around the country have been refinancing into larger mortgages this year that Freddie Mac, the congressionally-chartered home loan giant, says that nearly 9 out of 10 of all new refinancings now involve cashouts. Some borrowers are refinancing to escape rising costs on other forms of adjustable-rate mortgage debts -- especially popular option-payment ARMs heading for rate resets, but most are simply rolling their equity lines into larger fixed-rate first mortgages.
Now that the Fed has put the brake on short-term rate increases, the pressure should be less intense on homeowners with credit lines to convert their debt to fixed-rate through refis. But with the prime sitting at 8.25 percent, will equity credit lines still attract new customers? The deputy chief economist of Freddie Mac, Amy Crews Cutts, thinks so. Even though her firm is not a participant in the national equity line business, Cutts is a big fan of equity lines, but with a twist.
"I think they are a great insurance policy," said Cutts in an interview with Realty Times. "You can take one out for little or no cost and then let it sit there" for use only in a financial emergency.
Some banks pay all closing and origination costs on new lines, but require at least a modest drawdown within the first two or three years. So you can have a $50,000 or $100,000 credit line sitting with a nominal rate of 8.25 percent, but it costs you nothing unless and until you pull out some cash. Cutts's equity-management concept in a nutshell: Credit lines for all households who qualify for them, but only to be used as a form of financial insurance policy. Sort of a rainy day equity tool for heads-up homeowners.