The Weekend Guide! February 15 - February 18, 2007

The Weekend Guide for February 15 - February 18, 2007.
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How Good Are Zillow's Home-Price Estimates?

Since its launch, the Web site has made millions of Americans familiar with computer-generated estimates of home values. But just how accurate is it?
By: James R. Hagerty: The Wall Street Journal Online
In the year since its launch, Zillow Inc. has made millions of Americans familiar with computer-generated estimates of home values, created a new online addiction and become a staple of dinner-party chatter.

But just how accurate is it? A Wall Street Journal analysis of 1,000 recent home sales shows that Zillow's "Zestimates" often are very good, frequently within a few percentage points of the actual price paid. But when Zillow is bad, it can be terrible - off the mark by more than 25% on one in 10 homes. In one case it was off by $2 million.

Zillow, based in Seattle, operates a Web site that offers free estimates and other online tools for real-estate buyers and sellers. It draws revenue from online advertising.

The Journal looked at transaction prices recorded for 1,000 recent home sales in seven states, using data from First American Real Estate Solutions, a data provider in Santa Ana, Calif., and compared those prices with Zillow estimates, which didn't yet reflect the sales. The median difference between the Zillow estimate and the actual price was 7.8%. (That was close to the 7.2% median "margin of error" reported by Zillow itself on all transactions involving homes whose value it has estimated.)

The estimates were about equally split between ones that were too high and those below the mark.

A four-bedroom, five-bath house in Fall City, Wash. Zillow estimate: $661,756 Sold for: $2,690,000

Zillow came within 5% of the price in a third of the transactions studied by The Journal. It was more than 25% off target on 11% of them. In 34 of the 1,000 transactions, Zillow was off by more than 50%.

Zillow had estimated that a four-bedroom, 7,600-square-foot home in Fall City, Wash., was valued at $661,756. The home, built last year, sold in early January for $2.7 million. "If you don't visit the property, you're never going to know that it's in an exclusive, gated part of the neighborhood," says Maria Danieli, who represented the sellers. Ms. Danieli says Zillow may be fine for "cookie-cutter" neighborhoods but "they can't compute" the values of the luxury homes she sells.

Zillow executives acknowledge that the estimates can be way off in some cases. The estimate "is a starting point" for people trying to figure out how much a home should cost, says Amy Bohutinsky, a spokeswoman for the company. "We don't recommend it as the final word."

Sometimes the estimates take big lurches in brief periods as Zillow's computer analyzes the latest home-sales data, updated weekly. "My God!" said Jonathan Miller after he looked up his own house in Darien, Conn., on Zillow last week. "My value has dropped 25% in six months. There's no way - that would be the market collapsing!" Zillow has the house pegged at $1,442,851, down from about $2.1 million last July. Mr. Miller, chief executive officer of Miller Samuel, an appraisal firm based in New York, watches his local market closely and figures his home is valued at around $1.9 million.

Zillow can be quite accurate in some markets, Mr. Miller says, but he argues that the estimates are hit or miss. He suggests that Zillow should produce only an estimated price range rather than an exact figure: "When you go down to the $1 level, you're implying precision." Ms. Bohutinsky, the Zillow spokeswoman, notes that Zillow produces both a range and a precise estimate and says users like both.

Zillow also missed the target for Josh Benton, a management consultant at Kurt Salmon Associates in Atlanta. He sold a home last fall for about 15% more than Zillow's estimate. Still, Mr. Benton says he found Zillow useful for getting a sense of the relative value of houses in a neighborhood. And he liked the site's aerial views of neighborhoods as a research aid. "Overall, it's an excellent site," he says.

El Cerrito, Calif. Zillow estimate: $544,361 Sold for: $80,000

Zillow's estimates come from a proprietary computer program that takes into account sale prices for nearby homes that appear comparable, the size and other physical attributes of the home, its past sales history and tax-assessment data, says Stan Humphries, vice president of data and analytics.

Zillow tends to work best for midrange homes in areas where there are a lot of comparable houses, he says. It is less accurate for low- and high-end homes because there are fewer of those and thus less data available from comparable sales, known as "comps." Values of rural homes are hard to gauge for the same reason. Partly for that reason, none of the Web sites can offer 100% coverage of U.S. homes; Zillow says it has estimates on about 57% of all homes.

Even where there are numerous apparent "comps," computer programs like Zillow's can stumble when vital information is missing. Data fed into the computer, for instance, may not reflect the fact that a house has just been remodeled, destroyed by fire or put into foreclosure. Reported prices can be misleading, too. Sometimes homes are sold between family members for a token price, or sellers offer incentives to buyers, such as help with closing costs, that aren't reflected in the recorded price.

Zillow isn't the only site offering such free estimates. Others include RealEstate.com, RealEstateABC.com and Reply.com. But Zillow's site gets more traffic than those rivals. All of these sites appear to have overestimated the value of a house on Olivant Street in a tough area of Pittsburgh that sold for $700 last year in an auction of foreclosed homes. As of early this month, Zillow estimated the value at about $33,000, RealEstate.com at $57,000, Reply.com at $69,000 and RealEstateABC.com at $86,000. Several nearby houses are abandoned or boarded up, blighting the block - something computer models don't take into account.

Northbrook, Ill. Zillow estimate: $450,565 Sold for: $970,000

Zillow lets users try to correct for things computers might miss. For instance, people can use Zillow's "my estimator" tool to account for the value of remodeling or to choose what they regard as the most relevant "comps," screening out those that aren't really similar homes.

Making estimates is particularly difficult in some areas. Some states, including Texas, don't provide public records showing housing transaction prices. To improve its performance in Texas, Zillow last month began tapping sales data from multiple-listing services, databases of property for sale through real-estate brokers.

New York City also is a difficult area for Zillow and other estimate providers because of the large number of cooperative buildings. Tax assessments are made on the co-op buildings rather than individual units, removing one indicator of value. And there is less public information on such things as square footage in individual homes, Zillow says, though the company is finding alternative sources for such data.

Real-estate agents and appraisers tend to sneer at Web site valuations and insist that consumers still need their local expertise to get a true idea of values. Masood Samereie, an agent at Century 21 Hartford Properties in San Francisco, says one of his clients last year lost his chance to buy an attractive home because, relying on Zillow, he made an unrealistically low offer.
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As the Nation Changes, So Do Home Buyers

Single women, financially secure, account for more than twice as many home purchases as single men, minority ownership rising.
RISMedia
Changing American demographics and social norms are altering the real estate landscape: The average home buyer is very different compared with buyers of generations past.

The biggest group of home buyers by far is still married couples, accounting for 61% of all homes bought, according to the National Association of Realtors.

But single women now purchase 22% of all homes. Single men account for only 9% of purchases.

Pat Vredevoogd Combs, the president of the National Association of Realtors, says that shows real change. "Thirty-five years ago, when I started out as a Realtor, a single woman couldn't even get a mortgage," she says.

Part of the reason why women have become so big a buying bloc is that more women are single than ever before. The New York Times recently concluded, after an analysis of Census Bureau data, that 51% of all American adult women now live without a spouse.

Women are more financially independent than ever before, too. They account for about 57% of all college graduates, almost the reverse of the ratio of 40 years ago.

All this has changed not only circumstances for women but attitudes as well.

"Women are more confident and financially savvy than ever before," Vredevoogd says. "Plus there are good mortgage products out there that work well for them."

Vredevoogd says women benefit from many of the nontraditional mortgage choices they have today. These include small cash-down loans that enable recent graduates and divorcées, who may not have a big nest egg available, to achieve homeownership sooner.

Minority homeowners on the rise

The generous assortment of mortgage loans has also helped another emerging demographic: minority homeowners, who now account for 30% of all homes bought.

During the 10 years through 2005, homeownership among African Americans grew from 44% to 48%, according to Vredevoogd. Among Hispanics it grew from 43% to 49% and among Asians from 51% to 60%.

All these groups made significant progress toward achieving the level of homeownership of 72% that the nation as a whole enjoys.

Second-home buyers from abroad

One rising group of homeowners that requires little, if any, assistance consists of buyers from abroad. Just as more Americans are buying vacation homes in foreign countries, so are deep-pocketed foreigners buying second homes here.

Janet Branton, the vice president of business specialties for the National Association of Realtors, says overseas buyers made about $41 billion worth of residential real estate purchases in the United States during 2005.

More foreign buyers hail from Germany than any other location. They account for 13% of the total purchases from overseas. Latin Americans are right on their heels, also at 13%. Other countries at the top of the list include Japan and the United Kingdom, both at 10%.

Many of these overseas buyers, Vredevoogd says, acquire vacation properties in resort areas such as South Florida, Palm Springs, Calif., and the ski resorts of the Rockies and Sierra Nevada.
For more information, visit http://realestate.msn.com/Buying/Article2.aspx?cp-documentid=2780623>1=9124
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Housing Still on Down Slope,

The real-estate market has not reached bottom and will likely not begin to stabilize until the middle of this year, three economists say.
By: Steve Kerch: The Real Estate Journal Online
The U.S. housing market has not reached bottom and will likely not begin to recover until the middle of this year, three housing economists said this week.

The weakness will extend to existing-home and new-home sales and housing starts as well as to home prices, which are likely to show their first full-year decline nationally since records have been kept, the economists told home builders at their annual convention here.

"I don't think we've seen the bottom," said David Berson, chief economist for Fannie Mae. "We're going to see a much bigger drop in investor demand this year. But by the second half of the year the market will stabilize, if investors pull out quickly."

Berson said he expects the home-price index calculated by the Office of Federal Housing Enterprise Oversight will show a nationwide decline in values for 2007, the first time that will have happened since the data began being collected in 1975. Unlike other measures, the OFHEO data measure the price changes on the same homes over time, meaning the index is less likely to be skewed by the types and locations of sales.

"It won't be a big decline, maybe 1%. And the declines will be far more centered in areas that have had the most investor activity," he said. "Real home-price gains, adjusted for inflation, will be negative this year, next year and possibly the year after that."

The biggest problem the housing market faces is "a seriously large inventory situation," said David Seiders, chief economist for the National Association of Home Builders, which is hosting the International Builders Show here this week. Seiders said the housing boom in 2004 and 2005 produced at least 400,000 more housing units than demand could support, and builders are having to push hard to move those homes off the market.

Seiders said, though, that he believes home sales did hit bottom in the fourth quarter and that housing will make a "gradual recovery" over the next two years. He said housing could actually begin to make a positive contribution to economic growth again starting in the second half of this year.

"One of the good things is that the U.S. economy has been able to handle the dramatic correction in housing," he said. "GDP growth, unemployment, the overall inflation situation and interest rates" have all been positive despite housing's woes, he said.

Seiders said he is forecasting housing starts to decline 14% in 2007 to 1.56 million units. Single-family starts will drop 15%, to 1.26 million. Those numbers would compare with a peak of 2.1 million units started in 2005 and represent a return to 2002 levels, he said.

Starts are projected to rebound to 1.7 million in 2008. Home prices will also recover in 2008, gaining 1.3% next year, according to the NAHB forecast.

"There is still a little room for sales and starts to weaken," said Frank Nothaft, chief economist for Freddie Mac. "We should hit the trough in the first half of the year. But we're a few years away from the robust levels of activity we saw in 2005."

Sales of existing homes are off about 13% from their peak in the summer of 2005, Nothaft said, but in some markets sales have tumbled 30% or more while in others sales remain robust. Weak markets include California, Florida and New England; in much of the South, with the exception of Florida, sales have remained steady or improved, he said.

Builder discounts build

To cope with the inventory overhang, home builders have been offering incentives to buyers. In its most recent surveys of its membership, the NAHB found that 50% of builders said they cut prices in the fourth quarter and close to 80% said they had either discounted homes or offered some other type of incentive to buyers, including paying loan closing costs, helping with financing charges or buying down mortgage rates for a set number of years, Seiders said.

"They know they have got to get those inventories down," Seiders said.

The biggest publicly traded home-building companies have seen results from their discounting efforts, Seiders said the NAHB surveys show. Big builder sales stabilized in the fourth quarter, Seiders said, as order cancellations - which are not reported in government figures tracking the new-home market - appear to have eased.

The flip side, however, is that home-building companies have watched their profit margins erode. "Margins have been taking it on the chin," he said.
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20% down seems like ancient history

Does anybody remember the old days when home buyers actually made sizable down payments — often 20% or more — when they bought their first house?
By: Kenneth R. Harney: latimes.com
New national survey research reveals just how dated and quaint that concept has become in today's market, thanks to rocketing home prices that have far eclipsed buyers' incomes and savings.

From mid-2005 to mid-2006, according to a statistical sampling of a representative group of 7,548 purchasers, nearly half of all first-time buyers financed the entire transaction, obtaining mortgages in the full amount of the home price. Also, 30% put down 10% or less.

The research was conducted by the National Assn. of Realtors, using information on home transactions supplied by Experian, a major credit and realty data firm. The median down payment of first-time purchasers, according to the study, was just 2%. In other words, the median-sized mortgage for first-timers represented 98% of the home purchase price.

The highest loan-to-value ratios for first-time buyers were in the South, where the median mortgage amount was 100% of the sale price. In the West, the median was 99%, in the Midwest 98%, and in the East, 96%.

By comparison, the typical repeat home buyer nationwide invested a median 16% as a down payment to purchase a replacement home — typically from the proceeds of a prior sale — and financed the remaining 84%.

Where did first-time buyers obtain even the relatively modest down payments they made? Seventy-three percent of the survey respondents said at least part came from savings accounts, and 22% said relatives or friends chipped in as well. One out of 10 said their down payment came from liquidations of stocks or bonds.

The biggest down payment resources for repeat buyers were the profits they made from their prior sales. Sixty-two percent of repeat buyers depended on those resources. But 40% also took money from savings accounts to help swing the deal, and 6% sold stocks or bonds. Just 3% got help from relatives or friends.

Besides high prices, a key reason for the relatively high levels of leverage being used by both first-time and repeat buyers has been the explosion of low-down-payment options .

Before the mid-1980s, the plain-vanilla, 20% down mortgage was virtually the only game in town. Now, 100% financing — often using a first mortgage of 80% or 90% of the home value combined with a second mortgage or credit line for 20% or 10% — is commonplace. So are 5% and 10% down payment conventional loans with private mortgage insurance, and 3% down payment Federal Housing Administration (FHA) loans.

Although all these minimal-down plans have been highly successful in pushing the homeownership rate in the United States to record heights — currently just under 69% — they've achieved this in an atmosphere of steadily appreciating home prices and values. The possibility of low or no appreciation hasn't been a concern for buyers using minimal down payments in most parts of the country since the mid-1990s. That's because if you could obtain a loan that got you into a house with almost no money down, there was no problem: Appreciation — sometimes at double-digit annual rates — would take care of you from then on.

But that's no longer the case. Buyers who made small down payments in 2005 and 2006 face a starkly different prospect: They started with minimal or no equity, and they may still be in the same position. Worse yet, they could be temporarily "upside down" on their mortgages, with a principal balance greater than their current home value.

People who bought in hyper-appreciating markets could be vulnerable financially if they have to sell on short notice because of a job transfer or they can no longer handle the monthly payments.

Bottom line: Leverage in real estate slices both ways. A minimal investment can produce impressive returns if the appreciation tide is rising. But it can also expose you to a negative-equity situation when the tide recedes.

The jury is still out on how well highly leveraged recent buyers from 2003 to 2006 will handle a period of slow growth in their home values. Can they hang on until appreciation returns and raises their equity holdings? The mortgage and real estate industries — to say nothing of the Wall Street bond investors who've financed trillions of dollars worth of these loans — are banking on it.
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Building on the Past

Los Angeles has a reputation as a city that little values its past, often treating its architecture as disposable. But now that’s changing – rapidly and in a big way.
By: DANIEL MILLER: Los Angeles Business Journal online
REAL ESTATE REWARDS: Adaptive Reuse
The old Cinerama Dome anchors a new entertainment center.
Not long ago, downtown Los Angeles was a residential dead zone.

Not anymore.

Over the past several years, more than 10,000 condo and apartment units have been developed, with others on the way – thanks in good part to the movement called adaptive reuse.

That movement, given a critical boost in 1999 with a change of city laws, has converted mostly vacant but architecturally significant old office buildings into clean new condominium complexes that can command a small fortune.

“It’s been one of the great municipal success stories in urban planning nationwide,” boasts Ken Bernstein, head of the city’s Office of Historic Preservation and a former Los Angeles Conservancy official. “It has reached such proportions that it should be viewed as a national model in municipal planning.”

The Adaptive Reuse Ordinance, targeted to downtown when it was adopted but expanded citywide in 2003, allows older buildings to be more easily converted to new uses, largely by relaxing city building codes.

But new laws often mean little if they are not embraced. And in the case of adaptive reuse there was no shortage of boosters, from little known bureaucrats to risk-taking developers to huge institutions such as UCLA.

The result has been conspicuous developments, such as downtown’s Eastern Columbia Lofts, the re-imagined Cinerama Dome in Hollywood and even the Vista del Arroyo Bungalows in Pasadena, where, like some other smaller cities, the movement has gained a foothold.

Long known as a city and a region of the present, where buildings are quickly demolished with little care for their history, Los Angeles has changed its way of thinking. And the Business Journal notes that with this issue, honoring extraordinary projects, institutions and individuals.

“It’s made what I do take unexpected and very exciting turns,” said Los Angeles City Councilwoman Jan Perry, whose district includes most of downtown. “Some of the buildings get restorations and rehab work, and you stand back in awe and look at them. It creates so much optimism. It shows vast potential for this area.”

Architectural pioneers

Yet adaptive reuse is not a new concept. There have been other projects elsewhere long before the movement was bestowed an architectural nomenclature.
In the 1980s, Culver City’s Helms Bakery complex was first reused as a furniture district, and in recent years it has expanded to include gallery space and restaurants. Also in the 1980s, the late lawyer and developer Ira Yellin converted downtown buildings into apartments, but it didn’t catch on. His efforts came before urban living became fashionable again.

More recently, the decision by Southwestern Law School in 1997 to move into the restored art deco Bullocks Wilshire building presaged the groundswell that would follow in just a few years.

However, it was the city ordinance that has made adaptive reuse more accessible to a wider variety of developers by making it less costly to bring older buildings up to code. Previously it usually required prohibitively large sums of money.

“Before the ordinance, it took a very large institution with institutional money or substantial public money to get it done,” said Don Spivack, deputy chief of operations for the Community Redevelopment Agency of Los Angeles. “The changes in the code took away a lot of the cost and time in having to meet the pre-existing codes.”

Hamid Behdad, the city’s former Director of Adaptive Reuse Projects, recalls the small group of people who, along with him, attended the April 14, 1999 Council meeting when the ordinance was passed. That included developer Tom Gilmore, who would build the first downtown adaptive reuse project.

“At the beginning nobody could really guess the potential of this thing,” Behdad said.

However, the movement took off quickly. By mid-2000, Tom Gilmore & Associates LLC had opened its first project, the San Fernando Building at Fourth and Main streets. Soon after, developer Izek Shomof’s Pacific Investments LLC would open four apartment buildings at Sixth and Spring streets.

Indeed, in terms of sheer numbers, adaptive reuse has helped transform downtown. Before the ordinance was passed, there were about 2,500 housing units. Now there are 13,550 units, according to CB Richard Ellis Group Inc. About 4,400 are adaptive reuse.

Mark Tarczynski, a senior vice president at CB Richard Ellis Group Inc. who specializes in the downtown market, says that the ordinance was one of the most powerful actions the city has ever taken to increase housing stock in a short period of time.

“Also, it has served to preserve all of those historically significant buildings in the historic core that were scheduled to be razed,” said Tarczynski, who has brokered such projects as the 1100 Wilshire Blvd. condo tower and the Brockman Building at Grand Avenue and Seventh Street.

The new development on downtown streets like Broadway and Main and Sixth streets has had a ripple effect on the urban community: new residents have spurred an increase in retail development, which is only now taking off. But it also has had the unintended, if not altogether unwise effect, of highlighting the growing problems at nearby Skid Row.

“It took certain streets or corridors that had become ghost towns in the 1970s, ’80s and ’90s and brought them back to life,” said Councilwoman Perry.
With a strong supply of housing stock downtown, redevelopment experts say that the area could now begin to experience a second phase of adaptive reuse development that focuses more on mixed-use and retail development.
A key example of this emerging trend is the plan to reuse the 42-story Crocker-Citizens National Bank building at Sixth Street and Grand Avenue.

Carol Schatz, president of the Central City Association, said that what makes the project unique is the plan to include more than 100 “commercial condominiums” – units that businesses buy – in addition to about 400 residential condos.

“The commercial condos (are) the real novelty,” said Schatz. “They will serve the mid-market tenants, not huge users. You own space for a commercial enterprise. That is new and I think we will see more of it.”

Hollywood and beyond

Although downtown has gotten a head start on Hollywood, that historic community has made strides in recent years. Developers in Hollywood have converted several old office buildings and department stores on Hollywood and Sunset boulevards into new residential developments, for example.

Notable projects in the pipeline include Kor Group’s Broadway Building on Hollywood Boulevard and CIM Group Inc.’s conversion of the Sunset & Vine Tower office building.

“It’s been a godsend for us in terms of getting an economic viable use of obsolete structures,” said Kip Rudd, senior planner in the Hollywood office of the Community Redevelopment Agency.

In fact, there has been such wide-scale residential conversion of older office buildings that it has spawned a backlash, with some in the Hollywood community voicing concerns over a shortage of office space. “The ordinance is fairly broad and almost any office building could be converted to residential. We don’t want every office building to be converted to residential,” Rudd said.

Of particular concern in Hollywood is the potential conversion of the Capitol Records Tower, the landmark building that was purchased last fall for $50 million by Argent Ventures LLC. Capitol Records is now a tenant in the tower.

New York-based Argent has said it does not plan to convert the famed Vine Street tower into a residential development, but recent consolidations by Capitol parent EMI Group PLC have observers speculating that Capitol offices could be moved, making the tower available for condo conversion.

Meanwhile, other county cities appear to be catching on: Pasadena amended its building laws in 2005 to make it easier to redevelop old buildings. The historic city has a large stock of beautiful buildings dating back to the first half of the last century. The new laws allow for code variances for setbacks and parking density.

One landmark adaptive reuse there is the United States Court of Appeals for the Ninth Circuit on South Grand Avenue at the former Vista del Arroyo Hotel. The hotel was built in 1903 and was restored for the Ninth Circuit in the 1980s.

Adjacent to the courthouse is a brand new adaptive reuse project – the Vista del Arroyo Bungalows, a housing development that includes historic bungalows that were formerly used as guesthouses by the hotel.
And in Long Beach, another older city, adaptive reuse also has made inroads, particularly in the downtown area, near Pine Avenue. Downtown residential reuse projects include the historic Insurance Exchange Building on East Broadway and the Kress Lofts on Fifth Street, at the former S. H. Kress Department store, among others.

Schatz said that such developments have renewed faith that cities, and Los Angeles in particular, can revitalize themselves.

“Now, anything is possible,” she said.
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Refinancing Adjustable-Rate Loans Becomes Harder for Borrowers

Homeowners are finding it tough to refinance even as rates climb. One reason: prepayment penalties. But others are getting caught short by a changing housing market.
By: Ruth Simon: The Wall Street Journal Online
With rates on many homeowners' adjustable-rate mortgages rising, some who would like to refinance into a new loan are finding they can't.

In some cases, that is because their loan carries a prepayment penalty, which would force them to come up with thousands of dollars if they refinance in the first few years. Such penalties are common with so-called option adjustable-rate mortgages, which typically carry a low teaser rate that rises sharply after an introductory period.

Other borrowers are getting caught short by a changing housing market - one in which home prices have flattened and lenders are beginning to tighten their standards after a long period of making mortgages easier and easier to get. The challenges are greatest for homeowners whose credit has declined since they took out their last loan and for those who have little if any equity. Some of these borrowers are still able to refinance but are finding it more costly than they expected.

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These new challenges come at a time when many borrowers who took out adjustable-rate mortgages are facing higher payments. There are about $1.1 trillion to $1.5 trillion in ARMs that will face rate increases this year, according to the Mortgage Bankers Association. The MBA expects borrowers to refinance as much as $700 billion of those mortgages.

"The decrease in property values, combined with prepayment penalties, is making it very challenging for people to get out of these loans," says Ed Shanks, an executive vice president with U.S. Bank Home Mortgage, a unit of U.S. Bancorp. U.S. Bank is seeing more loans fall through, particularly in markets such as Arizona, California, Colorado and Ohio, where home values have softened. It could be "the tip of the iceberg," Mr. Shanks says.

In recent years, many homeowners refinanced repeatedly - to get a better rate, lower their payment, consolidate debt or pull out cash. Even now, mortgage rates remain relatively attractive, though they have moved up from their recent lows in early December, and most borrowers still should be able to take advantage of them. The challenges for homeowners could increase if lenders continue to tighten standards and the housing market remains soft.

Antonio Papa, a construction worker, took out an option ARM with a 1% introductory rate in 2005 on a second home he owns in Jupiter, Fla. The rate jumped to 5.6% in September 2005 and has since climbed to 7.5%. "I was looking to refinance to have more stability," he says. He has decided to hold off because his option ARM carries a prepayment penalty that would force him to pay six months' of interest if he refinances within the first three years. Mortgage brokers often receive higher payouts for putting borrowers into a loan with a prepayment penalty, says Sandra Barrett, a loan officer in Palm Beach Gardens, Fla., who was working with Mr. Papa.

Prepayment penalties are most common with option ARMs and loans made to borrowers with scuffed credit. Some 84% of option ARM loans made last year carried a prepayment penalty, according to an analysis by UBS AG that looked at mortgages that were packaged into securities and sold to investors.

The challenges facing borrowers are becoming more apparent at a time when opportunities for refinancing are narrowing. Rates on 30-year fixed-rate mortgages dropped to their lowest levels in 14 months in December, but have recently drifted higher. Rates on 30-year fixed-rate loans currently average 6.45%, according to HSH Associates in Pompton Plains, N.J., up from 6.16% in early December.

"The best deals in going from an ARM to a fixed-rate are passing," says Doug Duncan, chief economist at the Mortgage Bankers Association. "If anything, rates are likely to move up rather than down."

Meanwhile, there are signs that some lenders are beginning to tighten their standards. The shift comes after a long period of liberal lending practices that made it easy for borrowers to finance 100% of a home's value or get a mortgage without documenting their income and assets.

In a survey released Monday by the Federal Reserve Board, roughly 15% of domestic banks reported that they had tightened credit standards on residential mortgage loans in the past three months, the highest share since the early 1990s.

This month, Wells Fargo & Co. will begin reducing by 5% the maximum amount it will lend to certain riskier borrowers in "declining" markets. Those markets, covering more than 150 counties in two dozen states, include parts of California, Florida, Michigan and Ohio.

The change "reflects the tighter requirements of our investors," a Wells spokesman says. "I think all lenders are experiencing this kind of tightening of credit standards." Investors who buy mortgage-backed securities have been growing more concerned about credit quality as defaults have increased.

CitiMortgage, a unit of Citigroup Inc., last month began requiring that borrowers who take out a "stated-income" loan sign an affidavit attesting to the fact that information about their income in the application is accurate and hasn't been modified by their mortgage broker or loan officer. The change is designed "to protect the borrower as well as the lender," because borrowers may have trouble repaying the loan if their income is overstated, a company spokesman says.

On Jan. 30, Fannie Mae, the government-sponsored mortgage finance company, tightened its standards for so-called interest-only loans, which let borrowers pay interest and no principal in the loan's early years.

Other homeowners are being flummoxed by lower appraisals. Those most likely to be affected bought a home or refinanced in the past year or two and have little, if any, equity. "The block to refinancing is mainly located in those areas of the U.S. where there is little or no appreciation," says Peter Lansing, a mortgage banker in Denver.

Michelle Thompson, a medical-claims associate in North Glenn, Colo., pulled out $30,000 when she refinanced her mortgage last year, boosting her loan to $183,000. She would like to refinance again in order to lower her monthly payment, but when she went to apply for a new loan, she discovered that her mortgage debt exceeded the home's value.

Some borrowers are trying novel strategies. Charlotte Keyes, a program/project manager in Shawnee, Kan., refinanced her mortgage two years ago, pulling out $32,000 to consolidate her debt. With the rate on her loan set to rise to roughly 10%, Ms. Keyes is looking to refinance. Because she owes more than the home is worth, she plans on taking out a $13,000 auto loan and using the funds to pay down her mortgage.

With ARMs, "the tag line you always hear...is you can refinance with no problem," says A.W. Pickel, a mortgage banker with LeaderOne Financial Corp. in Overland Park, Kan., who is working with Ms. Keyes. "But it is a problem." The appraisal for Ms. Keyes's last loan was inflated, he adds.

Mitch Ohlbaum, a mortgage broker in Los Angeles, says some of his customers have had to tap the equity on their primary homes in order to pay down a portion of the debt on an investment property and be approved for a refinancing. Other borrowers have had to take a mortgage with a higher interest rate because their high debt load makes them a less attractive borrower.

Some borrowers facing prepayment penalties are sitting on the sidelines for now. David Lorentz, a high-school teacher in San Francisco, recently tried to refinance the option ARM on a four-unit apartment building he owns as an investment. He wanted to pull out cash to pay for renovations and college tuition for his children, but found he would have to pay an $18,000 prepayment penalty. "I guess I didn't get a good loan," says Mr. Lorentz, who plans to refinance in August when the penalty period expires.
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Housing reality: neither bubble nor bottom

Mortgage market commentary
By: Lou Barnes: Inman News
Mortgage rates have risen again, sharply, beginning to push 6.5 percent for low-fee, 30-year loans, and big-media "news" won't discover the jump until late next week because of lags in national surveys. It's real, though, right now.

The definitive 10-year T-note has blown up to 4.88 percent from 4.45 percent only six weeks ago, the damage caused by a colossal bond-market error in economic forecasting. It was just certain last summer and fall that a slowing housing market would tip over the economy, and the Fed would begin to cut its 5.25 percent overnight rate in 2007.

As completely mistaken as mistaken can be.

The effects of this error are going to ripple for months, mortgage rates continuously vulnerable unless we are saved by a delayed appearance of general economic slowdown. Here's a great thing for the housing sector: if you want lower mortgage rates, you've got to hope for a deeper housing crater. Fire or ice. The same is true for fans of the stock market, which has had an ugly week as a voyeur at the bond-market wreck.

Mortgages could quickly run close to last year's highs, just below 7 percent, in high-volatility trading. It's been a long time since we've had quarter-point, over-the-weekend moves, wockety-tong up and down the stairs, but the correction following a mistake as big as this tends to break all the technical rules of trading. Support, resistance, oversold ... do not apply.

From the straightforward (UP!) to the economics of a new forecast and bond market adaptation, there is a lot in play. First, the health of the economy is unequivocal: today's news of a 2.3 percent jump in December orders for durable goods is too strong for argument. Everyone knew that job data was running above expectation, but many dismissed that strength as a lagging indicator, convinced that weakness would ultimately appear, and the Fed would ease. They were wrong.

The newest housing market data has the Street completely confused. The Wizards of Wall bought bonds and mortgages last year on housing weakness, and this week dumped them in belief that housing has bottomed -- huge sales on thin and ambiguous data. Inventories of homes for sale fell by a half-month supply in December, interpreted as bottoming, even though resales dropped again. The Wizards don't know what every Realtor does: a decline in listings in the winter doesn't mean anything. A December gain in sales of new homes had traders hitting "sell" again today, but thin markets in a weird-warm winter ... meaningless.

The housing reality: neither a blowing bubble nor a bottom. Housing and its effects on the whole economy are going to take years to resolve. A jump in long-term rates is a shove from behind that will certainly worsen conditions in the bubble zones, and will also begin to close the escape hatch for ARM-reset procrastinators.

The big shoe whistling down: mortgage credit quality is deteriorating rapidly. The Wizards think that rising loan defaults will be limited to 2006 originations, and they are mistaken about that, too: older paper will soon begin to tank. As it does, credit standards for new loans will begin their inevitable tightening, and diminish the supply of buyers. Nobody knows how that spiral will play out; it's just beginning.

The Fed on pause at 5.25 percent must feel like the audience at a Keystone Cops flicker during one of the side-to-side chase scenes. Last year, low and falling long-term rates stimulated the economy while the Fed was trying to slow it. Now, rising long-term rates will brake the economy, just as the Fed began to think it had to tighten some more.

Fed Chairman Ben Bernanke's pause is either a sign of trans-Greenspanic wisdom, or he's the luckiest man since Ringo Starr.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
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More Latinos Find American Dream

More Latinos, nationally are fulfilling the "American Dream" by buying a home, real estate professionals said.
RISMedia
Between 1995 and 2005, the number of Latino owner-occupied homes increased by 3.1 million, reaching 6.9 million. That's an 81% increase compared to a 19% increase for all other non-Latino owner-occupied homes, according to the National Association for Hispanic Real Estate Professionals' Web site.

In the next 20 years, Latinos are expected to make up 40% of all first-time home buyers, according to the Web site.

Of the top 10 home buyer surnames for 2005, eight were Hispanic surnames, according to the California Association of Realtors.

"The Latino buyers for us has been a market that has been increasing," said Henry Nunez, owner of Arcadia-based Henry Nunez Real Estate Co. "Immigrants- especially Hispanics-have a very strong desire to own their own properties."

Latinos have made great economic strides, and coming to the United States and buying a home represents success, he said.

"It's part of the American dream," he said. "That's what it really is, part of the American dream."

As home sales slow, more real estate companies are catering to immigrants, Nunez said.
Lenders have created specific loan programs to make it easier for immigrants to qualify for a loan, he said.

Nunez's company has 65 employees, and nearly three-quarters of them are minorities and can speak in at least two languages, including Mandarin, Farsi, Spanish, Tagalog and English.

"This helps our firm to service minorities in their native language," Nunez said.

The market slowdown has resulted in more inventory, he said.

"Buyers can take more time to make a decision in buying, so prices dropped a little bit," he said. "It made the market more available to people. That's why we have a focus on minority homeownership to promote that."

When the market was hot, real estate agents would instantly receive offers for a new listing, said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp.

"Now you have to work harder at it, and given that the Latino community is the largest ethnic community in Los Angeles County, it represents a rich market," he said.

Homeownership improves communities, he said.
"When somebody buys a home, they're taking a stake in the community," he said. "They're going to be concerned with public safety and school quality. It's important to connect to the local community."

Owning a home is important because no one is dictating what your rent will be, said Marty Rodriguez, owner of Century 21 Marty Rodriguez in Glendora, California.

Half her staff is bilingual and they deal with a lot of Latino buyers, she said.

One belief her father instilled in her was "we're Americans first before we're anything," she said.

"We live in a great country that has so much to offer," Rodriguez said. "That's why people want to come here. They want to be Americans."
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Economy dashes hopes of a Fed rate cut

Mortgage market commentary
By: Lou Barnes: Inman News
Long-term rates are about where they were last week - the 10-year T-note 4.82 percent, mortgages 6.375 percent - but if anything they look increasingly vulnerable to a continued rise.

Wall Street is loaded with ancient wisdoms, mostly useful for rear-view bragging, or inscription on tombstones. One of the few good ones applies to this week's bond trading: "A market that won't improve on good news is soon going to hell."

We got the best we could have hoped for, brand-new January data slipping off-trend: the purchasing managers' index fell into contraction at 49.3 percent, and payroll gains at 111,000 jobs were two-thirds the forecast, also slim on wage gains. Long Treasurys broke below 4.8 percent on each item, and then snapped right back above.

Fourth-quarter Gross Domestic Product (GDP) arrived at a 3.5 percent gain, at least double the forecasts prevailing on Dec. 1, finishing off any prospect of a Fed rate cut. However, the Fed's situation looks good: the inflation figures buried in the GDP report are all gradually going the Fed's way. It concluded its meeting this week with a bias to raise the overnight cost of money, concerned as it should be with an overtight job market, but a continuing rise in long-term rates will tap on the brakes for the Fed.

Markets don't often get their forecast so wrong. The bet was obviously on housing as the agent of slowdown and Fed ease, and the odd part of the 2006 outcome is that housing did have a slowing effect: were it not for the housing recession, GDP would be growing in the 4.5-5 percent range. Despite that drag, and the dismantling of American-owned auto manufacturing, the economy appears to be in fine shape.

A few peculiarities remain. In the 1994-1999 interval, the Fed's cost of money was about as now, in those years 4.75-5.5 percent. The labor market was not as tight, and tech-led productivity gains were somewhat higher, both offsetting the inflation threat from somewhat faster GDP growth than now. However, long-term rates averaged at least a percentage-point higher than now.

By now, everyone should understand that the "yield curve inversion" (bond yields below Fed cost) dating to 2005 is the first ever to be an economic stimulus instead of signal of distress. The cause of subnormal long-term rates, in rough order of priority: a shortage of high-quality bonds (Yes! Federal deficit down to $172 billion, mortgage issuance off by half) versus demand from recycled Asian and OPEC trade surpluses, investors desperate for yield, and equal desperation for long-dated assets among insurance and pension providers.

The question: Is this excess of demand for long IOUs stable? I don't know why not. Risk premia are too low, and there will be a lot more Treasurys for sale in the next decade than this, but any rise in long rates can be offset by Fed easing and restoration of a "normal" yield curve.

Only fly in the excess-capital flow: spooky signs of asset bubbles. But, the "B" word is so ... so ... done that. Tech blew, ages ago, but housing just hissed, no bang.

It is possible that housing's biggest effects are merely delayed, especially the contraction in consumption as equity extraction falls to nil. To date, the housing drag on GDP is mostly in declining capital expenditure, the job losses minor (relative to total labor force), limited to ex-employment within the industry itself.

It's also possible that the whole housing thing is behind us, but I don't believe that. The worst will not be over until all of the borrower/scheme weakness is exposed, and mortgage credit standards inevitably tightened - but that has not yet even begun. Housing will likely be a continuing drag.

Meantime, it is hard to complain too much while long rates rise: they are going up for the best of all reasons. The economy is doing very well.
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'Good year' Ahead for U.S. Economy, Kohn Says

The U.S. economy should experience a "good year" in 2007 with moderate growth and lower inflation, said an influential Federal Reserve official on Monday.
RISMedia
"Conditions appear to be in place for a good year for the U.S. economy, one market by growth that is moderate and sustainable and by inflation that will be lower than last year's," said Donald Kohn, the Fed's vice-chairman.

Kohn's views on the economic outlook are considered important by other top Fed officials. Kohn has spent his entire career at the central bank, rising to become a top Fed staffer under former chairman Alan Greenspan before he was appointed to the board.

In October, Kohn first said a soft landing appeared likely, even though it "seems too good to be true."

With two months more economic data in hand, Kohn stuck to his soft-landing forecast.

"The economy appears to be weathering the downturn in housing with limited collateral effects and inflation appears to be easing with the aid of lower energy prices, well-anchored inflation expectations, and competitive labor and product markets," Kohn said in a speech prepared for delivery to the Atlanta Rotary Club.

Kohn stressed it was too early for the Fed to lower its guard against inflation, suggesting the central bank will retain its hawkish inflation language after its next meeting on Jan. 30-31.

"Despite the recent favorable price data, I believe it is still too early to relax our concerns about whether the run-up in price pressures in the spring and summer of last year is truly unwinding and whether it is unwinding rapidly enough to forestall a pickup in inflation expectations," Kohn said.

Kohn said he expects a very gradual decline in inflation, but cautioned that this outcome was "by no means assured."

Economic outlook
In his outlook for the economy, Kohn said that economic weakness in the second half of 2006 was largely due to housing and autos and forecast that these dampening effects would dissipate over the first half of the year.

"When this process is completed, the rate of economic growth should pick up to something in the neighborhood of the growth rate of the economy's potential," Kohn said. Economists generally put the economy's potential growth rate around 3% real GDP growth.

Kohn said he saw some "very tentative signs" that the decline in housing activity will not spill over and reduce other forms of consumer spending.

But Kohn acknowledged that uncertainty about "where we stand in the housing cycle remains considerable."

"In my own judgment, housing starts may be not very far from their trough, but the risks around this outlook still are largely to the downside," Kohn said.

Kohn dismissed fears that recent weakness in the factory sector was the leading edge of a recession.

"In my view…what we are seeing in the recent information on factory output and capital spending is not the leading edge of general economic weakness but instead an adjustment to a sustained pace of expansion, that, necessarily is less rapid than that from mid-2003 to mid-2006," Kohn said.

Greg Robb is a senior reporter for MarketWatch in Washington.
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Grand Avenue Project Wins CRA Approval

The $2.05 billion Grand Avenue project won unanimous approval from the Los Angeles Community Redevelopment Agency despite concern over public subsidies.
Los Angeles Business Journal Online
The agency's board did not directly address reports the massive development plan, which calls for retail, housing and green space along the major downtown thoroughfare will likely need public funding of up to $200 million.

Speakers packed the meeting to praise the project.

"This is a project of regional, if not international, significance," said Carol Schatz, president and chief executive officer of the Central City Association of Los Angeles.

Grand Avenue Committee Chairman Eli Broad has said that the project could be completed without taxpayer money. But County Supervisor Michael Antonovich has estimated the project will require subsidies.
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Pending Home Sales Jump 4.9% in December

The increase is the largest gain in nearly three years, the National Association of Realtors reports. There should be modest sales gains throughout 2007, NAR's chief economist says.
By: Rex Nutting: Real Estate Journal Online
Seasonally adjusted pending home sales jumped 4.9% in December, the largest gain in nearly three years, the National Association of Realtors reported Thursday.

The pending home sales index was at its highest level since June and was down 4.4% compared with December 2005.

"Some of the monthly gain may be weather related, but it appears buyers are becoming more comfortable, sensing the timing is good and that their local market has bottomed out," said David Lereah, chief economist for the realty trade group, in a press release. "I expect modest sales gains throughout the year, with what I believe are sustainable levels of activity."

This past December was one of the warmest Decembers on record. Temperatures were particularly mild in the Midwest and Northeast. Mortgage interest rates were also favorable in December, with 30-year loans averaging 6.14%.

The pending home sales index measures signed sales contracts. A separate report on existing home sales measures sales when they close, typically a month or two after the contract is signed. Existing home sales were down 10.8% year-on-year in December.

Pending home sales increased in all four regions. Pending sales rose 8.1% in the Northeast, 5.3% in the West, 4.3% in the South and 3.2% in the Midwest. On a year-over-year basis, pending sales are down between 4% and 5% in all four regions.
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