The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.
How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won't happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.
Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.
Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what's going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.
The boom made housing unaffordable for many American families, especially first-time home buyers. During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much.
Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the bubble to burst.
Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in.
The next question is: Even if home sales pick up, how can home prices stop falling with so many houses vacant and unsold? The flip but true answer: because they always do.
In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.
The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in "months of supply" terms. That's the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high - but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.
Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually.
Inventories will drop even faster to 400,000 - or seven months of supply - by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won't stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.
Many pundits claim that house prices need to fall another 30% to bring them back in line with where they've been historically. This is usually based on an analysis of house prices adjusted for inflation: Real house prices are 30% above their 40-year, inflation-adjusted average, so they must fall 30%. This simplistic analysis is appealing on the surface, but is flawed for a variety of reasons.
Most importantly, it neglects the fact that a great majority of Americans buy their houses with mortgages. And if one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one's income is required to be able to make the mortgage payments on the house. Today the rate on a 30-year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today's house prices to the 1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading.
This is all good news for the broader economy. The housing bust has been subtracting a full percentage point from GDP for almost two years now, which is very large for a sector that represents less than 5% of economic activity.
When the rate of house-price declines halves, there will be a wholesale shift in markets' perceptions. All of a sudden, the expected value of the collateral (i.e. houses) for much of the lending that went on for the past decade will change. Right now, when valuing the collateral, market participants including banks are extrapolating the current pace of house price declines for another two to three years; this has a significant impact on the amount of delinquencies, foreclosures and credit losses that lenders are expected to face.
More home sales and smaller price declines means fewer homeowners will be underwater on their mortgages. They will thus have less incentive to walk away and opt for foreclosure.
A milder house-price decline scenario could lead to increases in the market value of a lot of the securitized mortgages that have been responsible for $300 billion of write-downs in the past year. Even if write-backs do not occur, stabilizing collateral values will have a huge impact on the markets' perception of risk related to housing, the financial system, and the economy.
We are of course experiencing a serious housing bust, with serious economic consequences that are still unfolding. The odds are that the reverberations will lead to subtrend growth for a couple of years. Nonetheless, housing led us into this credit crisis and this recession. It is likely to lead us out. And that process is underway, right now.
Mr. Moulle-Berteaux is managing partner of Traxis Partners LP, a hedge fund firm based in New York.
The past year saw a slowdown in real estate markets across the country. But the term "slowdown" is relative and should be used with care: The vaunted housing "bubble" predicted by many never happened and some areas have seen price increases.
What did happen is what you would expect in any normal market: Local supply and demand determined marketplace trends. You can see this most clearly by looking at the data for 149 metro areas compiled by the National Association of Realtors. Seventy-one areas showed price gains, 73 had declines and five broke even in the fourth quarter.
The localized nature of real estate becomes even more dramatic when you compare individual areas. The Atlantic City and Salt Lake City metro areas both saw annual gains above 20 percent. Alternatively, in Florida prices in the Sarasota-Bradenton-Venice (-18.0%), Palm Bay-Melbourne-Titusville (-17.0%) and Cape Coral-Ft. Myers (-11.7%) all dropped.
Given the localized nature of real estate, it pays to ask if there are any clues which suggest that the market is moving in one direction or another. And usually, if you know where to look, such clues exist.
Here are some of the measures and issues to consider: Population. People have to live somewhere, if the local population is growing that means there is more demand both for owner-occupied homes and for rentals. Check with your local economic development office for specifics.
New Home Starts. While more people create demand, more units create supply. Check with the local home builder's association or the economic development office and ask about construction permits and starts.
Prices. Most communities have local brokers who produce customized pricing data for neighborhoods, HOA and communities. Such information is often available from your local Realtor.
Days On The Market. An important measure of local activity concerns the length of time it takes to sell a typical home -- some will take longer, some will sell faster but there is a general average which gives some sense of market activity. Be careful to compare like periods -- summer versus summer or January versus January -- to get comparable results. For details, speak with your local Realtor.
Drill Down #1. When looking at general statistics you have to use care. For instance, broad market trends may include both condos and fee-simple properties. It may be that the local market is doing well generally but condo prices have stalled -- or vice versa. Speak with your local Realtor for specifics.
Drill Down #2. Recorded sale prices may not reflect actual transaction values. If a home sells for $500,000 but the owner pays a 3 percent "seller contribution," then the real price to the owner is less than what the records show. To make sense of recorded information you need to speak with the local brokers who actually negotiate prices and terms.
Watch Those Interest Rates. Whether you're a buyer or seller, lower rates are good for real estate while higher rates constrict demand and reduce sales. Today's rates, roughly 6.25 percent, are at the low end of the rates seen during the past four decades -- but such rates are also a full 1-percent higher than what we saw in the summer of 2003.
Check For Jobs. Most people finance the homes they buy and therefore most people need jobs. When local employment is rising that's a good sign for real estate, when the local job count goes down look for fewer sales and moderated prices.
Read The Local Paper. Local newspapers are filled with coverage that impacts real estate. Look for new road openings, planned malls, new factories, school construction and building permits. All suggest where local growth is headed.
It's Not A Sure Thing. Regardless of what the statistics say, real estate demand is in part a by-product of factors which cannot be quantified. Speak with friends and neighbors. Chat with your Realtor. There are lots of shrewd, insightful local people who may have interesting ideas and opinions. Hear what other people have to say, especially people with different views so you can test your ideas.
Economic Stimulus Plan ~ Latest Status on Impact to Maximum Loan Limits
For Conventional Conforming Business
Here's what we can tell you thus far for Conventional Conforming loans... again nothing is final until Fannie Mae/Freddie Mac and HUD make their formal announcements.
Fannie Mae and Freddie Mac need to consider many factors as they determine how to implement the new products. Once they have, they will send a formal announcement with the details. The general target for release by the GSE's is the beginning of April. Because it is a temporary measure, this will not be as quick and easy as past increases to the maximum loan limits that were tied to home price appreciation.
Below are some high level details that Fannie and/or Freddie have provided to date:
The new legislation sets maximum loan amounts based on calculations tied to the HUD Median House Price amounts:
The maximum loan limit will be increased to 125% of the HUD Median House Price based on Metropolitan Statistical Area (MSA) up to 175% of the current conforming limit, never to exceed $729,750 for a single-family property
The new loan limits will not be uniform across the country
HUD is required to publish revised median house prices to implement the legislation within the next 30 days
Product parameters will be more restrictive than conforming products:
Full Documentation and Full Appraisals will be required
660 minimum credit score
90% LTV maximum for primary residence purchases and rate/term refi's (lower LTV limits for investment properties, second homes, and cashout refi's)
0x30 on all mortgage debt in past 12 months
12 months minimum seasoning for cashout refinances since prior refinance
Full project review required on condos
The declining markets policy will be in effect (5% reduction of maximum LTV / CLTV for properties located within a declining market)
Product types will likely be limited to 5-yr ARMs (P&I and IO), 15- and 30-yr fixed P&I products
Full documentation means that variances such as VIP will not be eligible for loans within this product
There will be special Pricing and Delivery requirements
Pricing will not be the same as current conforming product (we expect pricing to be somewhere between current jumbo and conforming pricing)
Because of the special requirements, PHH will release new products to identify these separately
Please note: the abovementioned product parameters are based on preliminary guidance only and are subject to change by Fannie Mae and/or Freddie Mac.
For FHA Business
We have not received any information as to whether or not HUD will impose any additional LTV, credit, or documentation requirements beyond standard guidelines for FHA products. As we become aware of these details, we will let you know.
Regarding HUD Sales Price Limits, the following describes how HUD derives their limits and how this new Law impacts these calculations.
For most areas, FHA limits are set at 95% of the median home price for the area. However, there are Floor and Ceiling limits that are applied to low and high cost areas.
Floor: The 1-unit "Floor" will now be $271,050 (currently $200,160)
The "Floor" is derived from calculating 65% of the conforming limit for 1-unit properties (previously calculated using 48%)
The "Floor" is used for areas in which 95% of the median home price is less than $271,050
Ceiling: The 1-unit "Ceiling" will now be $729,750 (currently $200,160)
The "Ceiling" is derived from calculating 175% of the conforming limit for 1-unit properties (previously calculated using 87%)
The "Ceiling" is used for areas in which 95% of the median home price exceeds $729,750
As is the case for GSE eligible loans, exact limits per MSA cannot be determined until HUD releases the latest Median Sales Prices per MSA and confirms each MSA's maximum loan limit.
New Tax Breaks To Aid Some Homeowners By Tom Herman From The Wall Street Journal Online Before filing your federal income-tax return, check to see if you're eligible for a few new breaks. Among them is a deduction for private mortgage insurance premiums. Claim it on Schedule A, line 13. The insurance must be "in connection with home-acquisition debt," the IRS says. Premiums paid on a contract issued before the beginning of 2007 don't count. Also, there are income limits that prevent upper-income taxpayers from qualifying. The deduction begins to disappear once your adjusted gross income exceeds $100,000 ($50,000 if you're married and filing separately), according to analysts at Thomson Tax & Accounting in New York. If your adjusted gross income is more than $109,000, or $54,500 if married filing separately, you can't deduct any mortgage-insurance premiums. For more details, see IRS Publication 936, available on the IRS Web site (irs.gov). Separately, a much needed new break could help homeowners with mortgage debt that was forgiven, either partly or entirely, by lenders, says Fred Witt of Deloitte Tax in Phoenix. It's easy to overlook this change since it was enacted so recently -- and it's tricky. Here's the gist: Normally, if a lender forgives your debt, that's considered taxable income to you (although there are several exceptions to this general rule). Under a law enacted Dec. 20, known as the Mortgage Forgiveness Debt Relief Act of 2007, taxpayers may exclude from gross income debt that was forgiven on their principal residence for "qualified" mortgage debt up to $2 million (or $1 million for a married person filing a separate return), Mr. Witt says. This exclusion applies to debt forgiven during 2007, 2008 or 2009. There are many complex details. For more information, see IRS Form 982 and the instructions.
First-Time Home Buyers: NAR Survey of Home Buyers & Home Sellers By: Karen Deis
Around this time every year, the National Association of Realtors® publishes a report on the home buying and home selling habits, ethnicity, age, income and demographics of different areas of the country.
This survey has been published for over 12 years (that I know of) and while it is written specifically for the real estate industry, the information is invaluable for both loan officers and agents because it helps identify niche markets and trends, so you can target where it might be best to spend your marketing efforts and advertising dollars.
I can also assure you that not many people even know that this survey exists. This article gives you all the facts but more importantly, interprets them for you, so you know exactly what to do next.
Over the past twelve years, first-time homebuyers were responsible for buying 42% of all the homes purchased in the US. In 2006 that number dipped to 36% but in 2007 it again increased to 39%. Overall, 12% of first time buyers were NOT born in the United States, versus 8% of repeat buyers. And 70% bought a home because they wanted to own real estate and establish a household.
The National Association of Realtors® mailed 150,000 questionnaires and received 9,966 responses. They obtained names and addresses from Experian, who maintains a database of recent buyers derived from county records.
First-time homebuyers made 39% of all home purchases.
If you don't have a system to attract first-time homebuyer prospects, you are missing almost 40 percent of the purchase market. Yes, you can have more than one niche, however, your marketing, seminars and the way you sell to FTHB has to be unique and different.
Living Arrangements Prior to Buying their First Home
75% rented an Apartment or Home prior to purchasing
18% Lived with Parents
Now you know where to find them. Over three-fourths are living in apartment complexes or renting single-family homes.
For 18% who are living with parents, consider marketing to your database of clients, who have children within the 24-35 age group. Parents will recommend people they feel comfortable with and have a big influence on whom they choose.
The marital status of first time home buyers is:
51% Married Couples
11% Unmarried Couples
25% Single Female
11% Single Male
Holding first-time homebuyer seminars is another method to attract prospects interested in purchasing a home. However, buyers who are single, have different issues and concerns than married couples. Consider holding "Women-Only Home Buying Seminars" or "Couples-Only" events instead of trying to be all things to all people.
Medium Age of First-Time Home buyers.
52% were age 24-35 years old
21% where age 35-44 years old
Ages 24-35 are considered Generation X. In Joe Burslem's blog called "Meet the New Real Estate Customer" he says that they've grown up with computers and understand technology better than Generation Y. 87% shop online and 50% do all their banking online. Since they were raised with little or no supervision (both parents worked) they are fiercely independent, blunt and skeptical. They've been bombarded with marketing messages since birth so they have sophist acted BS radar.
A majority of them are planning for their financial future. They have always had easy access to credit and have been warned about Social Security not being around for them. They don't expect a free ride and have been investing at an early age.
When planning your marketing tactics, an awesome website is critical but you need to "tell it like it is" or they will move on!
The Average Income For First Time homebuyers
$68K Married
$68K Unmarried Couple
$44K Single Female
$52K Single Male
While this is the medium income reported, the income earned versus the price of a home in your area will vary greatly. Single females earn an average of $8,000 less, but purchase 14% more homes than single males.
Ethnic Distribution of First Time Homebuyers
76% White/Caucasian;
10% Black;
8% Hispanic
6% Asian/Pacific Islander
(88% were born in the US and 12% were not born here)
The responders were permitted to select as many races and ethnicities as they felt applied, so the sum exceeds 100%. When developing your marketing pieces, consider creating them in different languages, especially for the Hispanic and Asian market! You can find websites who will translate your word docs into another language but be sure to have someone review it to make sure the translation applies to the real estate and mortgage industry.
Purchase Price Range of First-Time Homebuyer
38% purchased a home in the price range of $100K to $175K
Some areas of the country are more affordable than others. If your MLS statistics indicate that your housing prices are out of the buying range of first time homebuyers, you may not want to add this niche to your marketing plans.
Expected Length of Time to Buy Another home
28% plan to move within 5 years
In fact, 8% of those first timers plan to move within 2-3 years. If you keep in touch on a regular basis, you stand a good chance of both listing their home and selling them another one.
Only 17% of repeat buyers plan to move within 5 years! In working with first time homebuyers, they will buy another home within a shorter period of time than a repeat buyer, who moves every 7 to 10 years.
Information Sources For First Time Homebuyers
87% used the Internet to gather information
49% Used Newspaper Ads
44% Open Houses
30% used Home book or magazine
29% found they home they purchased on the Internet;
56% did a virtual tour online
9% TV
Unless you can say without a doubt that you get most of your leads by advertising in the local homes magazine, you may want to consider switching your marketing dollars to developing an awesome website. Be sure that you have a first-time homebuyer toolbar and plenty of resources for them to read and download. Use your marketing dollars to drive eyeballs to your site through traditional marketing, business cards, ads, etc.
How First-Time Buyers Found Agents to Work With.
54% relied on family, friends to help them find a real estate agent
32% interviewed 2 to 3 agents before choosing one to work with.
9% found their real estate agent on the Internet
1% Thru Newspaper and Home Magazine Ads
The name of the game here is networking and developing a referral-based business. For repeat buyers, only 68% of people would DEFINITELY use their agent again, meaning that 32% are asking others for referrals all over again.
Financing the Home Purchase
73% used own savings as down payment:
22% received gift funds
98% used a mortgage to finance the purchase
81% chose a Fixed-Rate Mortgage
Single males accumulated more of their down payment from savings than single females. Single females relied on gifts of money. The third source of down payment funds was from the sale of stocks and bonds. It's important to consider this information when creating the content for first time homebuyer seminars, your website and print ads.
The information has been obtained in part from the NAR's "Profile of Home Buyers and Sellers 2007". You can purchase the entire survey online at Realtor.org
