Friday, October 29, 2010

The Silver Lining in the Double Dip Recession

Being faced with significant economic and political uncertainty the United States economy and its participants (that's us) have reacted like turtles, hiding in our shells, awaiting better times.

Clearly we are facing challenging times We have been facing low personal income growth, an increasing unemployment rate, uncertainty in the business climate, and a weak housing market.
In particular the weakness in the housing market is marked in six ways:
  1. Record high home foreclosures that, according to Barclay's Bank, will not peak until 2011. These foreclosed properties will continue to flood the marketplace with inventory
  2. A significant increase in strategic defaults, whereby home values have dropped so much that home owners send in the keys and move out, rather than keep owning an overvalued home.
  3. One statistic claims that nearly 20% of all home mortgages are "underwater" because house values have dropped so significantly
  4. Joblessness and economic uncertainty have reduced the demand for new housing
  5. New home construction starts are at record lows. After a 15% drop in May, housing starts fell another 5% in June to a seasonally adjusted annual rate of 549,000. The Commerce Department estimated it to be the lowest level in eight months.
  6. The oversupply of homes in the marketplace has reduced the value of homes in many states as sellers outnumber buyers.
Commercial Investments face major challenges On the commercial side of the ledger, we find that significant increase in business failures and restructuring is resulting in the loss in demand for commercial space nationwide. This has particularly affected:
  • Retail centers,
  • Office buildings
  • Industrial buildings and flex parks This in turn is:
    • Reducing the demand for new buildings – now and for the immediate business cycle
    • Creating challenges for many commercial landlords
    • Reducing the value of commercial assets
Increasing commercial strategic defaults is making debt refinancing difficult. The loss in rental income and market valuation is creating challenges for refinancing of debt for the investors without enough equity or cash to increase their equity positions Highly leveraged purchases made in the real estate hey-days of 2006 – 2008 are the most at risk. At a recent economic symposium Allen Sinai, economist and founder of Decision Economics, voiced his concern: "The challenge is unique: poor and diminishing growth, a sticky unemployment rate, sky-high deficits, and a sovereign debt that makes us one of the most fiscally irresponsible countries in the world." Even more depressing is that more job losses are in front of us. Governors in many states will have to make tough decisions to cut staff as additional federal funds dry up and tax increases will not be warmly received by the electorate. (Note: Most States in the union are facing budget short falls. At Least 46 States have imposed cuts.)

As states have trouble raising revenues, this will in fact also have a trickle-down effect on counties and cities and other government supported organizations that rely on government funds. This in turn will force those agencies to trim staff.

In Oregon, the governor has already implemented a 9% budget decrease and will be implementing an additional 8% cut in order to help balance the budget. This is in addition to increased corporate taxes and use of reserve funds to balance the budget.

This sounds very foreboding but there is a silver lining for those that have a strong cash position.
The silver lining Many companies have right sized their businesses and are making a profit.
I recently had lunch with a business owner of a construction related firm, who cut half of his staff in order to stay in business. But he is now more optimistic and is looking to add staff to help his marketing efforts and re-grow his business. He expects a slow increase in growth moving forward as demand catches up with supply.

At this point, much of the business employment cutting has been accomplished (with the exception of government agencies). As of July 2010, Oregon's official unemployment rate was down to 10.6% from 11.4% in July of 2009. The Federal unemployment rate has been holding steady at 9.4%. Any cuts made by the government agencies may help the economy get stronger in the future.

Real Estate
Unprecedented low interest rates for home purchases:
  • 30 Yr Fixed as low as 4.25%
  • 15 Yr Fixed as low as 3.75%
These low interest rates will fuel demand to purchase homes as the prices drop to a place where average Oregonians can afford them.

Lower rates for apartment property purchases ( currently around 5% compared to the roughly 6.5% for commercial property purchases)
  • Increased residential foreclosures mean lowered prices and opportunities for investors to buy homes as rentals
  • Increased demographic demand for rentals is coming
  • Significant reductions in Apartment vacancy rates are a reflection of the upcoming increased demand. In The Portland Metro area Vacancy rates dropped from 7% to 3.5% from January of 2010 to September of 2010.
  • The "silver-lining" flipside to the unemployment picture is that 85 – 90% of Americans are either employed or in school.
  • SBA financing is available ( at competitive interest rates and with low costs) to help small business owners buy a building for their business
  • They only have to occupy 51% and can rent the rest of it to a tenant until they grow into it.
Other key market place indicators
  • Banks are slowly recovering and have the cash they need to loan and generate income, albeit conservatively
  • Many banks are ending their "pretend and extend" phase and are actively taking back properties and selling them as fast as they can to get them off of their books.
  • Urban areas will recover faster than rural areas, so the risk is lower in urban areas.
  • Oregon has the Urban Growth Boundary (UGB) for cities. This means that land values will come back as the recession winds down and the population increases.
If you have money, you have an excellent 6 – 12 month window to look for real estate opportunities in Oregon.

Residentially, we are one of the states with highest foreclosure rate (percentage wise), so there will be opportunities to buy your second home or a couple of investment homes. You can still buy a small home in Bend for $100,000 - $120,000 and many other rural areas around the state. (The Bend area unemployment rate is 17 – 20%, but rentals are showing lowered vacancy rates).

Commercially, there are buildings on the market but, with the exception of SBA loans that require only a 10% down, it is harder to finance commercial purchases unless you have lots of cash.
In my lifetime I have never seen prices this low for residential real estate. There is a market place adjustment occurring, which will reduce the value of residential homes in the near term, but values will go up as jobs and our population increases, especially in Oregon where the UGB limits the amount of land available for growth. Now is the time to invest… and for the turtles among us to start sticking our necks out.

FHA's Rehabilitation Program

If you have your sights set on a home, but fear being able to get financing because it requires a little work, then have no fear. The FHA offers a program that could help you purchase the home and rehab the property.

The Federal Housing Administration's (FHA) 203(k) rehabilitation program is "an important tool for community and neighborhood revitalization and for expanding homeownership opportunities."
How does it work?

With conventional financing, a lender won't close on a loan unless the condition of the property, and thus the value, ensure loan security. This means that a property requiring rehabilitation may be out of reach for many buyers. These properties generally require the buyer to find additional financing for the needed construction and repairs. These loans can involve short term loans with high interest rates. And in a housing market where many new homes are out of reach for buyers, rehab ready may be a good financial choice. The FHA's program should allow more buyers to enter the market, and to help to move a specific segment of inventory.
As an alternative to conventional financing, the FHA is offering a chance for buyers to get just one mortgage loan, at a long-term fixed (or adjustable) rate, to acquire and rehab the property.
To be eligible, a property must be a one- to four-family dwelling that has been completed for at least one year. If a home has been demolished, part of the existing foundation must still be in place.

This program has been in use since 1978. Many borrowers, however, think that only "far gone" properties are eligible.

The house “doesn’t have to be falling apart; it could just be outdated,” said Joseph Latini Sr., the president of Hartford Funding, a lender in Ronkonkoma, N.Y. “It just has to appraise below market value and then at market value with the repairs.”

For more information and requirements, review them at

More Than One In Three Say It's Okay To Walk Away From Mortgage

The majority of Americans, say it's "unacceptable" for homeowners to stop making their mortgage payments and abandon their homes, but more than a third, 36 percent, say "walking away" is okay.

A Pew Research Center study found that 59 percent believe it is wrong for homeowners to deliberately stop paying their mortgages and surrender their homes to the mortgage lender.

Among those who said walking away is okay, 19 percent said it's acceptable outright and an additional 17 percent volunteered that it depends on the circumstances.

Either way, walking away can sink your credit score and come with an extra tax burden, not to mention the potential of a court suit.

The survey, conducted May 11 to May 31, queried 2,967 adults and found more than one-in-five homeowners (21 percent) say they owe more on their mortgages than their home is worth.
The "underwater" situation compels some homeowners to stop making their mortgage payments and let the bank foreclose on their homes.

Many homeowners, who can afford a mortgage payment, have nevertheless stopped making payments in what's called a "strategic default" and that's caused mortgage finance giant Fannie Mae, reeling from mounting losses, to sue them.

Alternatives to walking away, say a short sale, mortgage modification, a refinance (if possible), even an outright sale for less then the home is worth, are probably better ideas.

According to, in August, lenders foreclosed on 95,364 U.S. properties in August, the highest monthly total in the half-decade history of the report.

Nearly half (48 percent) of all homeowners say the value of their home declined during the recession, and as a group they were more likely than those whose home did not lose value to say it's acceptable to bail out on a mortgage (20 percent vs. 14 percent).

The study also found:

• Twenty-five percent of renters said it was okay to walk away.

• Nearly one-in-four adults (24 percent) who say their families are just able to pay their monthly bills or can't meet expenses said it's okay to stop paying a mortgage, compared with 14 percent of those who say they "live comfortably."

• Eighteen percent of homeowners who say their homes are worth less than what they owe, vs. 17 percent those who would break even or make money on a sale said it's okay to stop mortgage payments.

• Among ethnic groups, 24 percent of all Hispanics say it's acceptable to abandon a mortgage, compared with 17 percent of whites and 21 percent of blacks. However, roughly similar majorities of Hispanics (58 percent), blacks (56 percent) and whites (61 percent) say abandoning a mortgage is wrong.

• More liberal Democrats were about twice as likely as more conservative Republicans to say it is acceptable to walk away (23 percent vs. 11 percent).

• Black homeowners vs. whites (35 percent vs. 18 percent); lower-income homeowners vs. upper-income homeowners (33 percent vs. 15 percent) and middle-aged homeowners vs. younger or older homeowners were more likely to be underwater.

Understanding the Foreclosure Debacle

It has been a month since GMAC Mortgage suspended sales of foreclosed homes to review its paperwork procedures. While the company has lifted the freeze, the mess it unleashed has no end in sight.
A White House financial-fraud task force, which includes the Justice Department, is investigating how mortgage companies handled their documents. All 50 state attorneys general are hunkering down for their related probe, which also is at an early stage.
Courts are in chaos as banks cancel foreclosure hearings, review documentation for loans on houses heading for the auction block until they were detoured and replace questionable affidavits prepared by "robo-signers."
Some experts predict that the only way out of the debacle is a huge settlement in which home-loan servicers modify the terms of billions of dollars of mortgages. Depending on how a settlement is structured, the potential losses could hammer banks. Investors who bought securities created out of pools of mortgages now in trouble are worried they could be stuck footing much of the bill.
The number of foreclosures, length of time that borrowers typically get to stay in their home after missing loan payments and foreclosure-sale processes vary widely by U.S. state and mortgage-servicing company.
Here are some basic questions and answers:
How many payments has the average borrower in foreclosure missed?
The foreclosure process typically begins no sooner than 90 days after the borrower begins missing payments. But of the 2.1 million mortgages in foreclosure as of Sept. 30, the average loan is 484 days—or about 16 months—past due, according to LPS Applied Analytics. That is up 93% from 251 days in January 2008.
In New York, the average borrower in foreclosure hasn't made a payment in roughly 20 months. The shortest foreclosure timelines occur in Nebraska and Wyoming, where the average is 358 days, according to LPS.
The process tends to move slower in the 23 U.S. states where foreclosures are handled in courts. Some states and cities imposed temporary curbs to give borrowers more chances to work out a compromise with their lenders.
With so many borrowers so far behind, why did the controversy just erupt?
GMAC, a unit of Ally Financial Inc., which is majority-owned by the U.S. government, suspended foreclosure sales one week after several Florida law firms representing lenders in GMAC-related foreclosures withdrew their cases against borrowers.
The move drew scrutiny from state attorneys general, judges, lawyers representing borrowers and other mortgage servicers, who began reviewing their own foreclosure procedures.
"In a judicial foreclosure state, you are using the power of the state to take away someone's home," says Patrick Madigan, assistant attorney general for Iowa, which is leading the nationwide review. "This is about protecting property rights and about the rule of law."
How often do lenders and servicers pursue foreclosures?
At Provident Funding Associates LP, about 2.8% of mortgages serviced by the Burlingame, Calif., company are delinquent or in foreclosure, according to Inside Mortgage Finance, an industry newsletter. That is the lowest percentage among the largest mortgage servicers.
In contrast, about 42% of loans handled by Ocwen Financial Corp., West Palm Beach, Fla., are delinquent or in foreclosure. Differences reflect "the hand they are dealt," says Guy Cecala, publisher of Inside Mortgage Finance. Ocwen often is called in on defaulted loans, while Provident services "the cream of the crop," he says.
A four-month probe by the Obama administration into five of the biggest mortgage servicers concluded that some are far more skilled at handling foreclosures than others are. Laurie Goodman, a senior managing director at mortgage-bond trader Amherst Securities Group LP in New York, says some servicing firms also "move the process along more aggressively than others."
Aren't many foreclosed-upon homes already empty?
In a conference call with analysts Tuesday, Bank of America Corp. said 33% of its foreclosures in the first eight months of this year involved vacant properties. J.P. Morgan Chase & Co. recently said 35% to 40% of homes are empty when a foreclosure sale occurs.
Some government officials and borrowers' lawyers say the figures should be viewed with caution. Some borrowers move out when they receive notice that their home will be sold if they don't catch up on their payments.
In addition, some mortgage companies rely on outside contractors to determine if a house is occupied or vacant. "I've had clients where someone has hung a note on the door saying they've determined the property is vacant, and it's not," says Margery Golant, a Boca Raton, Fla., lawyer who represents borrowers in foreclosure.
Why can't borrowers who are essentially living rent-free just get back on track?
Unpaid loan amounts typically are added to the loan balance. And with home values down sharply across much of the U.S., a ballooning balance increases the likelihood that borrowers will owe more than their homes are worth.
Many borrowers struggling to keep their homes have run into trouble because of the weak economy. Bank of America has said half of its delinquent mortgage borrowers were unemployed or had a significant loss of income.
Why has the number of days borrowers are in foreclosure increased so much?
Sheer volume is a big factor. Mortgage companies are straining to keep up with the surge in delinquencies. Some servicers have said they were too slow to beef up staffing levels.
"The system was never designed to handle more than a few hundred thousand [troubled loans] at a time," says Mark Zandi, chief economist of Moody's Analytics.
Efforts to keep people in their homes have also slowed the process. Mortgage companies have struggled with the Obama administration's housing-rescue plan. But some borrowers complain that banks and servicers keep losing their loan paperwork, stretching out the time it takes to complete a loan-modification review.
Any foreclosure moratorium also triggers delays. Bank of America has temporarily halted foreclosures or foreclosure sales at least four times, a company spokesman says. Two of those halts lasted a combined five months.

Monday, October 18, 2010

30-Year FRM Under 5 Percent for 23 Consecutive Weeks

McLean, VA – Freddie Mac (OTC: FMCC) today released the results of its Primary Mortgage Market Survey® (PMMS®), which found that the 30-year fixed-rate mortgage rate fell again to break the survey’s all-time low; the 30-year FRM has been under 5 percent for 23 weeks in a row. The last time 30-year FRM rates were this low was April 1951 (based on a data series of FHA rates going back to 1948). The 5-year ARM tied the all-time survey low set last week.

30-year fixed-rate mortgage (FRM) averaged 4.19 percent with an average 0.8 point for the week ending October 14, 2010, down from last week when it averaged 4.27 percent. Last year at this time, the 30-year FRM averaged 4.92 percent.

15-year FRM this week averaged a record low of 3.62 percent with an average 0.7 point, down from last week when it averaged 3.72 percent. A year ago at this time, the 15-year FRM averaged 4.37 percent.

5-year Treasury-indexed hybrid adjustable-rate mortgage (ARM) averaged 3.47 percent this week, with an average 0.6 point, tied with last week when it also averaged 3.47 percent. A year ago, the 5-year ARM averaged 4.38 percent.

1-year Treasury-indexed ARM averaged 3.43 percent this week with an average 0.8 point, up from last week when it averaged 3.40 percent. At this time last year, the 1-year ARM averaged 4.60 percent.

Frank Nothaft, vice president and chief economist of Freddie Mac, notes, "September’s employment report held no big surprises to financial markets, allowing long-term bond yields and fix mortgage rates to continue to ease. As a result, both the 30-year and 15-year fixed mortgage rates hit all-time record lows for the third consecutive week."

"Historically low rates have spurred yet another refinancing wave. Conventional mortgage applications for refinance jumped 24 percent over the week of October 8th to the strongest pace since mid-April 2009, according to the Mortgage Bankers Association . The Bureau of Economic Analysis estimates that homeowners held an average effective mortgage rate of 6.07 percent in the second quarter of 2010. By refinancing into this week’s 30-year fixed-rate mortgage, the average homeowner could save over $230 a month in principal and interest payments on a $200,000 loan balance."

Monday, October 11, 2010


Phoenix Real Estate Market Report Summary

The comparisons of current active listings are based on the current inventory as of September 16, 2010. This data includes single family detached homes, patio homes, condos, and townhomes provided by the Arizona Multiple Listing Service. The monthly charts above are based on trailing twelve monthly averages from September 2009 to August 2010 which shows the total activity in the Phoenix Metropolitan real estate market over a twelve month period. The yearly charts above are based on a yearly average for 2005 to 2009 but a trailing twelve month average from October 2009 to September 2010 for the year 2010. Without the trailing twelve month average for the year 2010, the charts would be substantially skewed and would not portray an accurate view of the market on an annual basis.

Since the expiration of the first time home buyer tax credit on April 30, 2010, the real estate market has decreased in the average sold price and number of transactions. Since April 2010, the average sold price has decreased approximately -9.7%, the average days on market have increased approximately +11.7% and the number of transaction has decreased approximately -25.0%. Since the beginning of January 2010, the average sold price has decreased approximately -9.2%, the average day on market has increased approximately +16.7% and the number of transactions has increased approximately +17.5%, despite the decrease from the tax credits. Based on this information, it appears that demand in the market is weak since the expiration of the first time home buyer tax credit, which is expected when the government withdrawals stimulus from the market. As we go into the holiday season, the market is expected to see a continued decrease in the average sold price and number of transactions and a continued increase in the average days on market.    

The number of Notice of Trustee Sales is currently on the rise but according to the historical charts for 2006 to 2007 the number of notices start to increase around June and July. The number of notices is currently below the number for 2009 but if the number of notices continues its steep progression upwards, then it will surpass the figures for 2009. The number of trustee’s deeds issued at the trustee auctions is rising which means the competition for trustee properties are at an all time high. There is a large amount of properties sold at the court house steps but there is still a large amount of REO properties sold through the MLS. Although a large amount of foreclosures are being absorbed, the market will continue to see more and more foreclosures until the economy improves. According to the above market statistics, the demand for foreclosures is rising as the average sold price continues to decrease. A lot of investors and buyer have realized that now is the best time to buyer while prices are low.