Friday, February 09, 2007

Media Spin

How much does the media influence our behavior? Could the negative spin surrounding the housing market be preventing potential buyers from buying a home thus forcing prices down? You bet, according to the National Association of Home Builders (NAHB) who has begun to offer their members a public relations kit. According to the NAHB such a need is obvious, the kit “provides a starting point for public relations campaigns to attract home buyers who have been discouraged by negative housing reports in the media.” Not be outdone, the National Association of Realtors recently authorized a multi-million dollar advertising campaign to promote the positive benefits of home ownership in an attempt to overcome all the negative press regarding the housing market.

The declining housing market has been receiving its share of negative publicity over the last year. However, does a 1.7 percent yearly decline in the median home price nationwide, warrant headlines and prime time commentary about the “housing bust”? Isn’t the constant drumbeat on home price meltdowns pure sensationalism?

Our economy continues to expand. Wages are increasing, inflation is under control, population and jobs continue to move to our region, the Federal Reserve is holding short-term interest rates in check, and home builders are putting on the breaks for new construction. Each of these economic indicators should be a strong signal for a good housing market, yet the financial press and Wall Street pundits continue to project fear of collapsing home values. The economic reality is: if the fundamentals aren’t supporting a market decline, then it’s not going to decline for very long.

Evaluating the true condition of the housing market can be confusing. There are too many variables for the casual observer. A few guidelines may help in keeping all the real estate media hype in perspective.

Like politics, all housing markets are local. There is no “national” housing market. Your neighborhood may be important to you but the media isn’t reporting on the housing market on your street. National, state and county statistics will very greatly. New construction sales numbers are usually not included with the multiple listing resale numbers.

Sensational negative headlines attract attention. “Stay tuned to hear about the doubling foreclosure rates”. If the number of foreclosures increases from one to two, they have doubled. Using percentages can be misleading. “Home prices fall ten percent!” From what? Ten percent from last month or last year? Were the homes in Sacramento or El Dorado Hills? Were they new or resale? I have never seen a news broadcast featuring a family who purchased a home and lived there happily but I have seen several interviews about some poor soul who couldn’t afford his monthly payments and was now having difficulty selling his over priced home.

There are 12 months in a year. Housing sales numbers are compiled and released monthly from many different sources. Sales are seasonal and month to month percentages, not surprisingly, decline in the winter and increase in the spring and summer. Housing trends cannot be forecasted based upon a single month or quarter. A more accurate perspective of the housing market should include historical data for the last five or more years. Real estate values are cyclical in the short-term but consistent in the long-term.

Everyone has an agenda. My economics professor used to say, “figures don’t lie but liars figure”. Statistics are subject to interpretation. Affordable housing advocates will look at the same numbers that the building industry reviews and come to different conclusions. National sales numbers and average selling prices have little relevance to the California housing market. It’s good to question the source of any information provided.

The housing market is going through a correction that has been long overdue after five years of record sales and price appreciation. The issue now is whether that correction will be orderly or disorderly. The media has been portraying it as a catastrophe. Their negative rhetoric has been overdone and irresponsible but their “sky is falling” mantra is finally beginning to loose credibility.

The best source for straight housing information is your local newspaper or your neighborhood agent. Both sources live in the community and have first hand knowledge of the real estate market. Large regional newspapers and network broadcasts can become too dependent on outside national sources and third party analysts for their information. They lack the community connectivity found on Main Street or Broadway. By keeping all things in proper perspective, we can make better, less reactive, and more informed decisions.

Affordability is likely culprit

After four years of dizzying housing gains, the California Association of Realtors (C.A.R.) announces that price appreciation and home sales slowed in 2006, due partly to the smallest share of first-time homebuyers buying homes in recent memory. California impacts national figures because one out of every nine people in America lives there.

First-time homebuyers declined from 30.5 percent in 2005 to 27.1 percent in 2006, according to new C.A.R. survey, contributing to statewide declines in sales of existing single-family homes of 23 percent. Price appreciation also slowed dramatically as the year progressed.

Further evidence that affordability is the likely culprit is the fact that the share of buyers who used a second mortgage climbed from 38 percent in 2005 to 43 percent in 2006, says C.A.R.. That's more than triple the percentage since 2001 and the highest percentage since 1982.
The use of alternative loan products also registered a sharp increase, particularly zero-down payment loans. "Home buyers with zero-down payments increased significantly from 4.5 percent in 2000 to 21.1 percent in 2006," said C.A.R. Vice President and Chief Economist Leslie Appleton-Young. "Two out of five first-time buyers made a zero-down payment on their home purchase, while just one in 10 repeat buyers purchased their home with no down payment."
"The interest rate environment also played a significant role in the housing market of the past few years," she said. "From 2002 through the first half of 2005, interest rates were either expected to fall or remain at attractive levels. When the fixed-rate temporarily exceeded 6 percent in 2003 and 2004, sales slowed. But in each case, market activity accelerated when the rate fell below that threshold. By contrast, when the fixed-rate moved past 6 percent in late 2005, it remained there. Expectations adjusted and anticipated further rate increases, contributing to the slowdown in sales in late 2005 and into 2006."

That means that home sales in California fell in 2006 after four years of record expansion. "The statewide median price saw shrinking gains throughout the year, slowing from a 14 percent year-to-year increase in January 2006 to just under 2 percent as the year drew to a close," said C.A.R. President Colleen Badagliacco. "That's a far cry from the string of double-digit annual percentage gains that prevailed during the first half of this decade."
"Over the period 2003 through 2005, inventories were lean, multiple offers were common, and buyers and sellers alike knew they needed to move quickly to consummate a transaction," she said. "But as the market began to slow in late 2005, buyers sensed that they would get a better deal if they waited, while sellers still hoped to sell their home at a premium. This drove a wedge between buyer psychology and seller psychology, creating more market friction and leading to a slowdown in activity."

Tuesday, February 06, 2007

Good signs for slow market

If you are a homebuyer waiting for even better deals to come along before you sign a contract to buy a home, your wait may be over. It's unlikely interest rates are going back down in the short term but the most important consideration is that other buyers may start driving the market again. Here's why:

· The Federal Reserve has left short-term interest rates (the rates at which banks borrow money overnight) alone since August, following a two-year stretch of rate increases. Last week’s announcement that the FED left interest rates alone again at 5.25 percent suggests that the FED's actions are designed to slow inflation but so much that the economy is stalled.
Inflation (most often gauged by gross domestic product) shows that core prices -- excluding food and energy -- rose 2.1 percent in December, but that's still higher than the FED would like to see it, which suggests that the Fed might raise short-term interest rates sometime in the spring, which will eventually make mortgage loans higher in cost.

A humming economy means more jobs at higher pay, which is why unemployment is expected to remain historically low. With more money to spend, Americans will spend more money on homes, cars and other big-ticket items. Sliding gas prices at the pump to year-ago levels and below doesn't hurt, either.

Mortgage applications are up 1.3 percent, as of this week, possibly in anticipation of higher rates in the spring, says the Mortgage Bankers Association. That's still down six percent year over year but that's not surprising considering home sales were down 8 percent last year. Refinancings picked up 4.9 percent the same week. That's up 11 percent over last year, which suggests that some homeowners are switching to fixed rates, or they're improving their homes. Either scenario could spell fewer homes going up for sale as transaction costs coupled with a flat price environment means these homeowners are hunkering down for the duration.

The economy didn't slow down for the alleged housing bubble while it "burst" in the latter part of 2006. Despite rising foreclosures, the vilification of easy mortgage credit via interest-only and option mortgages, and flattening housing prices that eliminated homeowners' ability to use their homes as ATM cards, people kept spending, growing the economy at a much faster-than-anticipated pace of 3.5 percent in the final quarter of 2006. For all of 2006, including its highs and lows, the gross domestic product (GDP) increased by 3.4 percent. To get some perspective, that's faster than the best year housing ever had in 2005 when GDP improved 3.2 percent.
Homebuilding has receded about as much as it can to absorb standing inventory before builders start hammering again. Builders had a terrible fourth quarter with investment plunging 19.2 percent, worse than the 18.7 drop the previous quarter. For all of 2006, the totals were less ghastly - investment in home building dipped by 4.2 percent, but that's still the largest drop in 15 years. Incentives by builders have moved enough inventory so that the number of homes on the market are headed toward the normal range, which means those free granite counter upgrades will be no more.

Both the National Association of Realtors and the National Association of Homebuilders reported that inventories of homes are finally starting to recede from the flood. In December, new home units hit a 10-month low supply, down to a 5.9-month supply, or what industry watchers says is a balanced market. Existing homes were at a 6.8-month supply in December, down from a 7.3-month supply in November. As inventories evaporate, so does seller desperation.
In a flat-price environment (1.1 percent price increase for new homes) chafed by rising materials costs (4 percent annually,) homebuilders only have one choice if they're going to put more homes on the ground -- build the next generation of homes smaller and with fewer amenities, so they can keep prices low. Buyers who want cavernous living spaces had better step up to the plate now when they can get the most square footage possible for the money.
The Pending Home Sales Index, NAR's index based on contracts demonstrating intent to buy, rose 4.9 percent in December to an index of 112.4 from an upwardly revised level of 107.2 in November. That's 4.4 percent lower than December 2005, but up is still up.

While it would be great to buy at the lowest low and sell at the very top, even the smartest people in the world can't predict the exact moment when it's optimum to buy and sell a home, but the indicators certainly point to good timing for buyers who act now before the spring market.

Monday, February 05, 2007

Pressure on Appraisers to hit the number

Nine out of 10 real estate appraisers say they've been pressured to raise property valuations by mortgage brokers, realty agents, lenders and individual home sellers.
That represents a huge increase over just the past three years, according to October Research Corp., the principal sponsor of a nationally-representative survey of appraisers. Richfield, Ohio-based October Research, publisher of the trade journal Valuation Review, polled 1,200 appraisers from all 50 states plus the District of Columbia and Puerto Rico in 2003 and 2006.
Forty-five percent of those polled in 2003 said they had "never" been pressured to fudge the numbers on valuations, but just 10 percent of those participating in the latest survey said the same.

"Those are amazing numbers," said Alan Hummel, senior vice president and chief appraiser for Forsythe Appraisals of St. Paul, Minn. Forsythe was a co-sponsor of the 2006 October Research study.

Hummel said one key reason for the big jump has been the national real estate sales and price slump, and the heightened importance of every signed real estate contract to the parties involved. "I call it a perfect storm scenario," said Hummel. "You've got a situation where sales are down so everybody in the deal needs it to go through" at the price agreed to by the seller and buyer. When an appraiser comes up with a lower valuation than the contract price -- based on lower comparable sales prices in a depressed marketplace -- the commissions of realty agents and mortgage brokers may be jeopardized.

Some mortgage brokers and lenders, said Hummel, try to avoid such situations by "dialing for values." "They call up appraisers and say, we've got this sale at $335.000 at such and such an address. Can you get to that number?" The practice is also known as "pre-comping."
Appraisers who say they can hit the number get the assignments. Those who say they can't or fail to respond get nothing. Licensed appraisers must conform to a set of national rules known as "USPAP" (Uniform Standards of Professional Appraisal Practice), which prohibit interference with valuations. Hummel says the vast majority of appraisers are ethical and refuse to give into any form of pressure.

A minority of appraisers, however -- primarily inexperienced and poorly-trained newcomers drawn to the field during the housing boom heydays -- allow themselves to be pressured, and they modify their valuations to meet clients' demands, according to Hummel.
What happens when appraisers decline to play the game? The October Research survey found that 75 percent of appraisers reported "negative ramifications" when they declined requests for inflated valuations. Nearly 70 percent said they lost the client altogether, and 45 percent said they never received payment for the work they did.

Who applies pressure most frequently? The study found that mortgage brokers are by far the worst offenders -- 71 percent of appraisers identified them -- followed by real estate agents at 56 percent. In the 2003 survey, 47 percent of appraisers identified realty agents as pressure sources, and 60 percent identified mortgage brokers.

Hummel said realty agents are able to retaliate against appraisers they deem uncooperative by telling local lenders or mortgage brokers: "Look, I'm not sending any more (home purchaser) clients to you if you continue to use that appraiser."

Survey on housing market

According to the latest Experian-Gallup Poll survey, nearly half of all consumers (47 percent) say they think a housing bubble and collapse of housing prices is very likely (16 percent) somewhat likely (31 percent) in their local residential real-estate market within the next three years. This is up from the 37 percent of Americans who felt this way in May 2005 and the 42 percent voicing this opinion in April 2006.

Fears of a potential housing price collapse are greatest in the West (52 percent) and the East (49 percent) but lower in the Midwest (41 percent) and the South (44 percent). Consumers with annual household incomes of $75,000 or more are somewhat less fearful of a collapse in housing prices (42 percent) than are those with incomes of $40,000 a year but less than $75,000 a year (50 percent) or those making less than $40,000 a year (48 percent). Renters think that such a drop in housing prices is more likely (57 percent) than do homeowners (43 percent).
“Housing market conditions may not have reached bottom at this point, with 57 percent of renters thinking there is the potential for a price collapse in their local areas over the next few years and 18 percent of all Americans expecting prices to decline during the year ahead,” said Ty Taylor, president of Experian Consumer Direct. “Still, there is reason for optimism given the local nature of the residential real-estate market and the price resilience it creates, as reflected by the 47 percent of Americans who expect housing prices to increase over the next 12 months and the 33 percent who expect them to remain the same.”

About one in five consumers (18 percent) think the average price of houses in their local area actually will decrease over the next year. This is up from just 5 percent who felt this way in May 2005 and 11 percent in April 2006. Expectations for a decrease in average housing prices are greatest in the West (23 percent) and the East (22 percent) — areas experiencing the sharpest run-up in prices during recent years — and less pronounced in the Midwest (16 percent) and the South (11 percent). Twenty percent of consumers with annual household incomes of $75,000 or more say they expect housing prices to decline over the coming year, compared with 18 percent of those with incomes of $40,000 a year but less than $75,000 a year and 15 percent of those making less than $40,000 a year.

One in four homeowners say they have a first mortgage and a home-equity loan and/or line of credit. One in three homeowners under the age of 50 have this combination of loans, compared with 25 percent of those 50 years of age but younger than 65. Only 8 percent of homeowners 65 years or older have a first mortgage and a home-equity loan/line. Thirty-six percent of homeowners with annual incomes of $75,000 or more have a first mortgage and a home-equity loan/line. One in four homeowners (24 percent) with incomes of $40,000 a year but less than $75,000 have this combination of loans. Only 15 percent of homeowners making less than $40,000 a year have such a loan combination.

Thirty-six percent of consumers say they obtained their home-equity loan/line to finance home improvements or repairs — down from 43 percent in April 2006. Conversely, one in six consumers (17 percent) report obtaining a home-equity loan/line to pay off their credit cards and/or to consolidate their debts — up from 14 percent in April 2006. One in five consumers with an annual household income of less than $75,000 a year got a home-equity loan/line to pay off their credit cards and/or consolidate their debt, while 14 percent of those making $75,000 or more report getting their home-equity financing for this same purpose.
“Given today’s inverted yield curve and the comparatively attractive rates on home-equity loans/lines, it makes a lot of sense for consumers to use this type of consumer financing to pay off their credit cards, consolidate their debt and strengthen their personal balance sheets,” said Dennis Jacobe, chief economist for The Gallup Organization. “Still, this degree of consumer debt restructuring combined with the deteriorating conditions in residential real estate and the finding that 22 percent of consumers say they remain uncomfortable with their level of debt suggests that consumer spending is likely to continue to decline during the first half of 2007.”