California Home Prices Up, Despite Subprime Problems

Despite increasing mortgage delinquency and foreclosure rates in California...
By: Kate Berry and Harry Terris: REALTOR® Magazine Online
The state's median home price shot up 4.8 percent to $591,180 during the year-over-year period ended in May, according to the CALIFORNIA ASSOCIATION OF REALTORS®.

A recent report from the Mortgage Bankers Association showed a subprime delinquency rate of 7.5 percent, versus a prime delinquency rate of 1.22 percent for adjustable-rate mortgages, in California during the first quarter.

University of California-Los Angeles Anderson Forecast economist Ryan Ratcliff believes job gains in the professional services sector could prevent a recession, provided that the state — which the California Association of Mortgage Brokers says accounts for 48 percent of home loans nationwide — is not hit too hard by problems in the subprime market.

Following years of rapid home-price appreciation, PMI Group Inc. Chief Risk Officer Mark Milner says Los Angeles, Santa Ana, Oakland, Sacramento, and San Diego have a more than 50-percent chance of price drops in the coming years.
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Existing-Home Sales Ease Slightly in May

Psychological factors are the biggest drag on the housing market, in addition to a disruption from tighter credit for subprime borrowers, NAR says.
REALTOR® Magazine Online
Existing-home sales eased slightly in May, as potential buyers hold out until they see more signs of stability in the housing market, according to the NATIONAL ASSOCIATION OF REALTORS®.

“I think psychological factors are currently the biggest drag on the housing market, in addition to a disruption from tighter credit for subprime borrowers,” says Lawrence Yun, NAR senior economist.

Total existing-home sales — including single-family, townhomes, condominiums, and co-ops — eased by 0.3 percent to a seasonally adjusted annual rate of 5.99 million units from an upwardly revised pace of 6.01 million in April. Last month’s sales were 10.3 percent below the 6.68 million-unit level recorded a year earlier.

Household formation has slowed dramatically since late 2006, implying that many people are adding roommates or moving in with parents, Yun says.

The national median existing-home price for all housing types was $223,700 in May, a 2.1 percent drop from May 2006 when the median was $228,500. The median is a typical market price where half of the homes sold for more and half sold for less, but there is a temporary downward distortion in the current national comparison because sales have shifted away from many high-cost markets in the past year.

“The market is underperforming when you consider positive fundamentals such as the strength in job creation, economic growth, favorable mortgage interest rates and flat home prices,” Yun says.

Buyers Have Negotiating Power

Higher inventories are helping to offset an affordability impact from higher mortgage interest rates, says NAR President Pat V. Combs.

Total housing inventory rose 5.0 percent at the end of May to 4.43 million existing homes available for sale, which represents an 8.9-month supply at the current sales pace, up from an 8.4-month supply in April.

Meanwhile, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage rose to 6.26 percent in May, up from 6.18 percent in April, according to Freddie Mac. That compares with a rate of 6.60 percent in May 2006.

“Although mortgage interest rates are trending up, they are historically favorable,” Combs said. “The good news is buyers have more negotiating power with a fairly large supply of homes available in much of the country. Buyers who’ve been on the sidelines may want to take a closer look at current conditions in their area —if they wait for sales to rise, their choices and negotiating position won’t be as good as they are now.”

In Detail: Sales, Prices by Home Type and Region

Single-family homes: Sales slipped 0.8 percent to a seasonally adjusted annual rate of 5.20 million in May from an upwardly revised 5.24 million in April, and are 10.8 percent lower than a 5.83 million-unit pace a year ago. Prices: The median existing single-family home price was $223,000 in May, which is 2.4 percent lower than May 2006.

Condos and co-ops: Existing condominium and co-op sales rose 2.6 percent to a seasonally adjusted annual rate of 790,000 units in May from 770,000 in April, but are 6.7 percent below the 847,000-unit level in May 2006. Prices: The median existing condo price was $228,200 in May, down 0.4 percent from a year ago.

Northeast Region: Existing-home sales in the Northeast rose 5.8 percent to a level of 1.10 million in May, but are 3.5 percent lower than May 2006. Prices: The median existing-home price in the Northeast was $282,700, which is 0.5 percent higher than a year ago.

Midwest: Existing-home sales in the Midwest rose 0.7 percent in May to a level of 1.41 million, but are 6.6 percent below a year ago. Prices: The median price in the Midwest was $168,800, which is 1.7 percent below May 2006.

West: Existing-home sales in the West slipped 0.8 percent in May to an annual pace of 1.18 million, and are 16.3 percent below May 2006. Prices: The median price in the West was $341,900, which is 0.5 percent lower than a year ago.

South: Existing-home sales in the South fell 3.4 percent to an annual sales rate of 2.30 million in May, and are 11.9 percent below a year ago. Prices: The median price in the South was $184,000, down 3.8 percent from May 2006.
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Managing Your Money to Keep The Debt Monkey Off Your Back

When it comes to borrowing money, caution is coming into vogue.
By: Jaclyne Badal: The Wall Street Journal Online
Financial advisers have long warned people against taking on too much debt. But as debt loads for companies and individuals climb, a growing number of people - from regulators and Wall Street analysts to home lenders and economists - are picking up the cry.

This growing fondness for moderation is fueled by a multifaceted expansion in borrowing:

• Climbing housing debt, along with a sharp increase in delinquencies and foreclosures.

• Record levels of margin debt, or money borrowed to buy stocks.

• Government figures showing that consumers for the past two years have spent more than they made, something that hadn't happened since the Great Depression.

As a growing number of people get swept up in the borrowing binge, this is a good time to assess your finances and determine how much debt is too much.

Paying with Plastic

Take credit-card debt, which is usually the most expensive (as far as interest rates) and also the easiest to obtain. Consumers often think about their credit-card debt in terms of the minimum monthly payment, and glaze over the balance outstanding. That's a big mistake, says Nigel Taylor, a financial planner in Santa Monica, Calif., because it allows people to underestimate their debt load while balances creep up to unmanageable levels.

Data from Equifax and Moody's Economy.com show credit-card balances in the U.S. at a record $746.74 billion as of March - up 18% from five years earlier.

A good exercise is to periodically tally the balances on all your consumer debt, like credit cards and car loans (but not home loans). Divide the total by your annual gross income. You want that figure below 30%, according to a common rule of thumb.

People on the high side don't need to panic, but they should do some soul searching to determine why they borrow so much and whether they're comfortable with those amounts.

Consumers who take on too much credit-card debt run the risk of hurting their credit scores, which makes it more expensive to borrow money in the future. And they can potentially wind up in bankruptcy proceedings, a process that's more painful and has more rules than it did a few years ago.

On the House

Mortgage lenders have tightened standards recently. But consumers still have the potential to get approved for a bigger home loan than they can afford.

A general rule of thumb is that no more than 28% of gross monthly income should go toward house-related debt (including taxes and insurance). Besides first mortgages, this includes home-equity loans, which allow people to take out a lump-sum loan against the house, and home-equity lines of credit, which allow people to borrow against the house over time, taking out money when needed.

A person who makes $5,000 a month before taxes, for example, wouldn't want the monthly bill for house debt to exceed $1,400.

Note that the 28% guideline has a caveat: Monthly debt payments for everything - house, credit cards, car loans, student loans, etc. - shouldn't be above 36% of gross monthly income. So if you spend 28% of your monthly pay on house debt, you have only 8% left for the remainder of your debt payments. In the example of someone who earns $5,000 a month, 8% would come to $400. Many car payments are more than that.

And those percentages - frequently called debt-to-income ratios - are maximums, not recommendations for healthy living. People who spend 36% of their pay on debt are "teetering on the edge of being financially unstable," says June Walbert, a financial planner with San Antonio-based USAA, a financial-services company that largely focuses on military families.

She counsels clients to limit total debt payments to 20% of pretax income, so they have a buffer for surprise expenses.

One way to keep from getting in too deep is to run a worst-case scenario before taking out any money. Home-equity lines of credit, for instance, often come with variable interest rates, but banks are required to disclose a rate cap in the loan documents. Calculate what the payment would be if you borrowed up to the limit at the highest interest rate.

Financing Stocks

While most people stick to consumer and house debt, a growing number of investors also are borrowing money from brokerage firms to buy stocks or other securities.

Such margin debt for individual investors hit a record $295.87 billion in February, according to NYSE Euronext data. Before this year, the record was $278.53 billion, set in March 2000 near the peak of the high-tech bubble.

Buying stocks on margin magnifies price gains, but also losses. The National Association of Securities Dealers, which regulates securities firms, warned last month that "many investors may underestimate the risks of trading on margin."

Margin debt is regulated by strict rules from the Federal Reserve, the NASD and the NYSE. Investors can't borrow more than 50% of the price of the stock. And their equity in the account can't fall below 25%.

Confused? Let's say a person finances 50% of a $25,000 stock purchase, and the market crashes immediately afterward, so the stock is worth only $15,000. Since the investor still owes the brokerage $12,500, his equity in the account is now only $2,500, or 16.7% of the stock's value - below the 25% maintenance margin requirement.

At that point, the investor would face a "margin call." He would need to deposit another $1,250 immediately or the brokerage would have to sell $5,000 of stock. (That would reduce the debt to $7,500 or 75% of the remaining $10,000 stock position.)

The NASD notes that the firm can sell securities without contacting the investor and can set its own "house" limits on margin, which can be bumped up at any time. (For more, go to nasd.com and click on "Investor Alerts" on the right side.)

Investors can get pummeled using margin debt and, unlike with other types of debt, the situation can implode in a matter of days or even hours. "Generally, I don't think it's worth the risk," says Steve Margulin, a financial planner in Albuquerque, N.M.

Before investing on margin, it's a good idea to understand the worst-case scenario. Ask yourself if you're comfortable losing much of what you deposited and borrowed, plus interest and fees. If not, consider backing off.
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Boomers Expected to Age in Place, Stay in Suburbs

Baby boomers will create a new demand for health care, senior housing, and transportation in the suburban areas where they're expected to stay.
By: Camilla McLaughlin: REALTOR® Magazine Online
As baby boomers age in place — especially in the suburbs of slower-growing metropolitan areas — public policies must respond to the new stresses that aging residents will exert on health, transportation, and social-support systems, according to a new study by the Brookings Institution.

After modest gains during the current decade, the U.S. senior population will begin to mushroom when the leading edge of the huge baby boom generation reaches age 65 in the year 2011.

As a result, the so-called “pre-senior” populations are growing rapidly everywhere, especially in the Sun Belt areas previously known for their youth, such as Las Vegas, Austin, Atlanta, and Dallas. While these states are growing fastest, the growth is brisk around the country. In fact, the state with the slowest projected growth in 55-to-64 year olds is New York, where their numbers will still increase by a hefty 33 percent from 2000 to 2010.

Growth is seen mostly from boomers who choose in age in place — usually in their predominantly suburban locales — or move to new homes or rentals in their community, rather than relocate to a new city for their golden years.

“There is little evidence of a widespread ‘back to the city’ movement nationwide among older populations,” the report says. “Suburban areas still gain more pre-seniors and seniors annually than they yield back to cities."

However, that means that many suburbs will have to play catch-up to create social support, affordable housing, and accessible health care for their older residents, the report says.
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Home Prices to Drop Further, But Recovery May Be Ahead

It's still too early to tell exactly when this housing slump is going to end, with house prices just beginning to soften, mortgages at risk of defaulting beginning to hit reset dates and lending standards that are starting to tighten, according to researchers at the Harvard University's Joint Center for Housing Studies.
By: Amy Hoak: The Wall Street Journal Online
One thing's for sure: Before the sun shines again on the housing industry, a good amount of excess inventory will have to be sold, according to the center's "State of the Nation's Housing" report, released Monday. Employment growth will play a role as well in the recovery, as will interest rates, the report said.

In a telephone interview, Nicolas P. Retsinas, director of the center, said the housing industry was going through a "bumpy landing." Yet despite the severe contractions in home sales and starts seen during this correction, home prices have flattened but haven't crashed, and as a result, "we're not seeing a return to affordability," he said.

"If you were an economist, you would think that prices would have fallen precipitously," Retsinas said. Instead, home-price gains have been near flat, relative to the high appreciation rates seen over the first half of the decade - which in many markets amounted to home price gains of 60% or more during those five years, he said.

According to the report, median house prices increased at least 10% in 2006 in 23 of 149 metropolitan areas studied; prices fell in 34 of the metros. Of the 11 metros that had declines of greater than 3%, nine were in economically depressed areas in the Midwest - suggesting local economic trends had a greater influence on markets than national trends.

Home prices should slide further, however, according to the report. As for home sales figures, Retsinas said sales of existing homes could bottom out and begin to recover by the end of this year, with the new-home market following in 2008. The Mortgage Bankers Association also expects the market to hit its bottom at the end of the year, gradually improving from there as homes become more affordable.

And after markets burn through excess inventories, demand for new and remodeled housing will be lifted to new highs, the report predicts. In fact, if it weren't for some of the population trends - including the influx of immigrants into the country - the slowdown could have been much worse, said Moises Loza, executive director of the Housing Assistance Council.

The correction

Records were set for home sales, single-family starts and house-price appreciation in 2005. The next year ushered in contrasting numbers, according to the report.

Total home sales fell 10%, starts fell 13% and house-price appreciation slowed to a few percentage points in 2006. Between the end of 2005 and the end of 2006, the number of vacant homes on the market jumped more than 500,000 units, the report noted -- and that figure might even understate the overhang because some homes including seasonal or occasional-use homes might be brought back on the market when conditions improve.

Falling interest rates and unprecedented house-price appreciation started the boom, inspiring more Americans to become homeowners and more investors to buy with the intention of flipping their properties to make a quick profit. Builders tried to meet the demand, but lag time between predevelopment work and completions brought about bidding wars. "Affordability" products with lower initial payments helped more people jump into homeownership.

The study pegs the turning point of this boom in late 2005, when rising mortgage interest rates and higher home prices started forcing out buyers. Indeed, affordability remains an issue for many low- and middle-income Americans, the report pointed out, calling for a combination of structural and public policy shifts to address it.

"In just one year the number of households spending more than half their income on housing increased a startling 1.2 million to 17 million in 2005," Rachel Drew, research analyst for Harvard's Joint Center of Housing Studies, said in a news release.

Now, too, stricter standards of some lenders are having an effect on the ability of some would-be homeowners to get into the market, said Jonathan Kempner, CEO of the Mortgage Bankers Association. While products such as subprime and Alt-A loans were "controversial for some people," they did address the affordability issue for many Americans.

"Some people will have to wait longer on the margin," delaying their home buying, he said. Already, evidence of that wait is showing up in new and existing home sales, he added.

A look ahead

The report also points out the persistence of a wealth effect in 2006, which kept Americans borrowing more against their equity to support their spending. The amount of home equity cashed out set a record last year, as the volume of refinances dropped. The effect of the housing slowdown on consumer and remodeling spending hasn't been seen yet, according to the study.

Look farther ahead, however, and the outlook for housing is bullish.

For one, the baby boomers will continue to move into the age where second-home ownership is at a high. Evidence of this demographic trend has already been seen, with the sale of vacation homes hitting a record in 2006, according to the National Association of Realtors. Read more.

At the same time, children of the baby boomers will continue to move into the ranks of homeownership, boosting housing demand.

In addition, immigration is expected to hit a record 12 million between 2005 and 2015.

The upcoming growth in new households puts estimates for new-home demand at about 19.5 million units from 2005 to 2014, surpassing the 18.1 million units added between 1995 and 2004, according to the report.
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Home Sales Expected to Take Gradual Upturn

Home sales are projected to move in a relatively narrow range with a gradual upturn becoming more pronounced by the end of the year, according to the latest forecast by the NATIONAL ASSOCIATION OF REALTORS®.
REALTOR® Magazine Online
“Overall housing levels are historically strong, but sales remain sluggish compared to the recent boom,” says Lawrence Yun, NAR senior economist. “It’s important to keep in mind that all real estate is local, and many markets are expected to have higher sales and strengthening prices during the second half of this year.”

What to Expect

NAR makes the following projections on the housing market:

    • Existing-home sales: projected to total 6.18 million in 2007 and 6.41 million
      next year, in contrast with 6.48 million in 2006.
    • New-home sales: forecast at 860,000 this year and 901,000 in 2008, down from
      1.05 million last year.
    • Housing starts: likely to total 1.43 million units in 2007 and 1.49 million
      next year, below the 1.80 million recorded in 2006.

Meanwhile, the 30-year fixed-rate mortgage is likely to increase to 6.6 percent in the third quarter and then hover at that level through 2008.

The national median existing-home price should ease by 1.3 percent to $219,100 in 2007, before rising 1.7 percent next year. The median new-home price will probably fall 2.3 percent to $240,800 this year, and then grow by 2.6 percent in 2008.

“We continue to experience a temporary distortion in comparing median existing-home prices,” Yun says. “Because the sales volume has shifted from many high-cost areas to moderately priced markets, we’re not getting a true apples-to-apples comparison. When you look at other measures, such as this week’s price index from Freddie Mac which is based on repeat sales, overall home prices are rising slowly.”

Other factors to take into account that affect housing include:

    • Gross Domestic Product: growth in the U.S. GDP is estimated at 2 percent this
      year, lower than the 3.3 percent growth in 2006. Yun forecasts GDP to grow 3
      percent in 2008.
    • Unemployment rate: projected to average 4.6 percent in 2007, unchanged from
      last year.
    • Inflation: expected to decline to 2.5 percent this year, down from 3.2 percent
      in 2006. Inflation-adjusted disposable personal income is likely rise 2.8
      percent this year, compared with a 2.6 percent increase in 2006.

Buyers Need to Change Perspective

Buyers today need to have a traditional view of housing as a long-term investment, Yun says. “That investment generally will build a nice nest egg over time, especially if they use a traditional mortgage instrument that reduces debt,” Yun adds.

“Because of reductions in home sales and new home construction, the economy will expand at a subpar pace in 2007,” Yun says. “As housing market conditions improve going into 2008, the economy will reach back to its growth potential next year.”
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