Housing Correction Has Further To Run, Realtors Predict

The National Association of Realtors says the correction in the housing market will continue, but prices should rise modestly.
By: Rex Nutting: The Wall Street Journal Online
The housing market correction has further to run, with new-home construction expected to fall another 12% next year, a real estate industry group said Friday in an updated forecast for 2007.

While the market for existing homes will probably flatten out, the new-home market will probably continue to slow through next year, said David Lereah, chief economist for the National Association of Realtors.

Sales prices are expected to rise slightly. "Given the huge gains in home values during the housing boom, and this year's rise in housing inventory, overall price gains this year and next will be modest," Lereah said. Median existing-home prices are expected to rise 1.7% next year, while new-home prices are expected to rise 1.3%.

Housing starts will probably fall about 12% next year to 1.63 million after falling 11% this year, he said. Starts totaled 2.07 million in 2005.

The NAR forecast for housing starts for 2007 is close to the Blue Chip consensus forecast of 1.62 million. The Blue Chip forecast is derived from the forecasts of 54 economists surveyed by the publication Blue Chip Economic Indicators.

New-home sales will probably fall 8.7% next year to 975,000 after plunging about 17% this year, the realtors said.

Existing-home sales will probably fall 0.6% to 6.43 million next year after sinking 8.6% this year, he said, adding that sellers are becoming more realistic.

"We now have the most favorable market for home buyers in several years," Lereah said.
Read more!

Thin credit file? Nontraditional alternatives to the rescue

Picture this scenario: You've lived in this country for the last 15 years, earned a decent wage, raised a family and always paid your rent, utilities, cellphone bills and other expenses on time, month after month.
By: Kenneth R. Harney: latimes.com
But you made little or no use of the conventional banking and credit systems — avoiding bank loans, credit cards and debts in general.

Now you go to apply for a mortgage to buy your first home and get smacked with this sobering news: Sorry, but there is not enough information in your national credit bureau files to score your credit. We've got to either charge you an interest rate well above prevailing ones — 9% or 10% in a 6 1/2 % market — or simply reject you altogether.

That scenario is precisely what large numbers of Latinos face, according to a survey. The 14,000-member National Assn. for Hispanic Real Estate Professionals — Latino and non-Latino realty agents, builders, mortgage bankers and lenders, attorneys and credit counselors — polled 500 of its members and found:

• Nearly one-third said their clients end up paying "subprime" rates on mortgages because their limited credit histories make them appear high-risk when lenders use traditional FICO scores, the dominant credit evaluation method in the highly automated mortgage underwriting process.

• Nearly 80% said that for every Latino household they help put into a home of their own, they're forced to turn away two prospects solely because they can't pass muster under traditional score-based computer underwriting programs.

The Hispanic Real Estate chairwoman, Frances Martinez Myers, said that if mortgage lenders were to use alternative credit-scoring models that factored in rent, utility and other types of payments that are not reported to the national credit bureaus, an additional $200 billion in new home loans could be extended to Latino purchasers.

Felix DeHerrera, incoming chairman of the association, said that under current underwriting approaches, Latinos often get "penalized for being debt-averse, rather than being rewarded for their consistency in meeting financial commitments, even if it is in cash."

But the credit scoring inadequacy problem extends far beyond Latinos. Fair Isaac Corp., developer of the FICO score, estimates that as many as 50 million Americans are impossible or difficult to score because they have minimal information on file at the three national bureaus.

In effect, the credit deck is stacked against them. They often are forced to pay higher fees and interest rates than they deserve.

But there is good news for many of these consumers: Growing numbers of lenders and mortgage brokers understand the "thin file" issue and have begun offering at least one of several alternatives to traditional credit scores.

At the annual convention of the Hispanic Real Estate Professionals earlier this month, a guide was released listing hundreds of brokers and lenders around the country who use the Anthem system of nontraditional credit reports and scores as supplements to FICOs.

Anthem, developed by First American CREDCO, the credit data subsidiary of Santa Ana-based First American Corp., evaluates whatever information on an applicant may exist in the files of the national bureaus — Equifax, Experian and TransUnion. Then it mixes in information collected by CREDCO from other sources. These include regular child-care payments; phone, electricity and other utility payments; current and former rent payments; plus personal credit data from businesses that do not report to the bureaus — small local retailers that extend credit, payday lenders, rent-to-own companies, etc.

This produces an alternative credit file that can then be scored. First American CREDCO says its scores accurately predict borrowers' risk of future default. Better yet, alternative scoring allows lenders to cut mortgage rates, down payments and fees for people with solid — albeit nontraditional — credit backgrounds.

The goal, said Mark F. Catone, CREDCO's senior vice president, is to help "deserving families to secure prime-grade mortgage loans," despite the fact that they score poorly using traditional FICOs.

The Anthem system is just one of several alternatives now available to help "thin file" applicants. Fair Isaac itself offers an alternative-data counterpart to its traditional FICO score known as the Expansion score. Another company is functioning as a national repository for nontraditional credit data. Annapolis, Md.-based PRBC.com specializes in helping consumers build their own alternative credit databases by supplying verifiable rent, utility and other periodic payment information directly to the firm.

Bottom line here: Just because there's not a lot on file about you in the big three credit bureaus no longer means you can't obtain a home mortgage on favorable terms. You just need to ask about — or demand — scoring alternatives from lenders that give you a fairer shot.
Read more!

Slow Market, Election Shakeup Present Opportunity

Unlike in housing downturns of the past, today's consumers have job stability and the financial wherewithal to purchase a home.
By: Kelly Quigley: REALTOR® Magazine Online
Despite a softening real estate market, the sky isn’t falling. In fact, today’s market conditions are ideal for buyers, who can choose from a wider selection of homes, find better deals, and still take advantage of low interest rates.

“The media isn’t telling the story. These are perfect conditions for the buyer,” said Tom Stevens, president of the NATIONAL ASSOCIATION OF REALTORS®, at the Member & Director Update on Thursday evening.

To help consumers cut through the negative media messages and realize that now is the right time to buy, NAR is running full-page ads in major national newspapers, including The Wall Street Journal, USA Today, and the Los Angeles Times. The ads are the start of a larger NAR campaign, which also will include radio and network TV commercials.

“A price correction is not something we should fear,” added NAR Chief Economist David Lereah. Buyers who had been on the cusp of affording a home will have the opportunity to jump into the market, he said.

And unlike in housing downturns of the past, which were spurred by job losses and high interest rates, today’s consumers have job stability and the financial wherewithal to purchase a home, Lereah added. He also noted that 74 percent of housing markets are now on an upward swing.

What's Happening On Capitol Hill

While NAR’s “Buy Now” campaign is getting its message across in the media, the association is working hard on Capitol Hill to pass key legislation in 2007, despite the shakeup in Washington, D.C., said Jerry Giovaniello, NAR’s chief lobbyist.

Although Democrats control the House and the Senate, NAR is well-positioned to gain the congressional support needed to create affordable small-business health insurance coverage, protect the mortgage-interest deduction, and to keep banks from entering the real estate business.

“Our issues are bipartisan,” Giovaniello said. “We have supporters on both sides of the aisle. Our loyalty is to the REALTOR Party.”

Task Forces Gear Up

On other fronts, one NAR task force is considering changes to the way association leaders are elected. Proposed changes, which will be discussed during 2007, include expanding the size and representation of the Nominating Committee and starting a Leadership Academy to encourage greater member participation in leadership roles.

The Disaster Planning and Mitigation Task Force has proposed that NAR create a disaster response “strike team” to determine if and how REALTORS® should provide recovery assistance as well as develop programs that will assist REALTORS® in preparing for natural disasters.
Read more!

In Face of Housing Slowdown, Homeowners Remain Optimistic

Despite news that the market is slipping, just 6% of those surveyed in August said they think their home's value will decline in the next 12 months.
By: Andrea Coombes: The Wall Street Journal Online
Homeowners are either remarkably stable people with their financial houses in order or they've got their heads in the sand. Despite news of late that the housing market is slipping, just 6% of homeowners in a survey in August said they think their home's value will decline in the next 12 months.

Ten percent expect their home's value to increase a lot in that time, 53% expect it to increase a little and 27% expect it to stay the same. Another 4% weren't sure where home values would go, according to the survey of 1,361 homeowners nationwide conducted for Wells Fargo and released Monday.

The survey predates a fair amount of negative reports on the housing market, such as the recent news that U.S. home builders in September slashed prices at the fastest pace in 36 years.

And even the experts don't agree on just how bad the housing market will get.

For homeowners who aren't planning to sell, the market likely looks just fine.

"If people are planning to stay in their home for more than the next 12 to 18 months, I don't think they're feeling the nervousness," said Doreen Woo Ho, president of Wells Fargo's consumer credit group.

"It's always the people who are facing the issue to sell - they're moving, they may have some other changes in their life, divorce - those things cause more anxiety around home values," she said.

Plus, many homeowners are likely still enjoying recent gains. "Even with a dip in market values, they're probably still finding positive equity gains over the last few years. From that standpoint, it's still a very positive feeling," Woo Ho said.

"What we've always noticed is it takes consumers a while to perhaps understand what's really going on in the market. When rates were rising with the Fed, we didn't see much reaction and people were still taking out lines of credit. After about six months of rising interest rates, all of a sudden it hit them," she said.

By the time some consumers see the housing market in a negative light, it may be time to change their minds again, according to Wells Fargo's forecast that the housing market will only see a slight dip.

"The economy is not very strong, but if it continues with some positive growth and if interest rates stay stable over the next year or so, we will see the housing market towards the end of 2007 start appreciating again. Not very much, but it could start appreciating again. The danger is in this next 12-month period. There are a lot of what-ifs: What will happen with inflation, in the job market," Woo Ho said.

My home is my asset

Homeowners these days see their home as a valuable asset, with 72% of those surveyed saying their home equity is their most important investment. That's a perception that's emerged in recent years, Woo Ho said.

"We've seen a shift in homeowner attitudes. Initially, five years ago, we talked to consumers, they thought of their home as a liability, as an enormous mortgage payment they have to make," she said.

"As we've seen the housing market go through appreciation and a high growth trend, there's been a shift in attitude toward seeing the home as an asset...they think of their home as more than just a place to live, more than just a mortgage payment, but as a smart financial investment."

Adjustable-rate outlook

While homeowners overall are optimistic about the housing market, those with adjustable-rate mortgages - 14% of those surveyed had an ARM as their primary mortgage - did express concern: 79% of homeowners with an ARM said they're worried about rising interest rates.

Still, while a good portion of these homeowners expressed concern, 21% said they will not take any action when their rate adjusts. Of those who do plan to take action, most say they will refinance.

Sixty percent of these ARM-borrowers said they know when their loan rate resets, while 27% said they don't know and 13% were not sure, according to the survey.

Woo Ho said she's not surprised a fair portion of homeowners don't know when their loan rate adjusts.

"We find that in our servicing of customers it's becoming more important for us to continue to inform and educate them as to what they actually bought. It's a question more of remembering, not that it wasn't discussed," she said.

Homeowners should take note of any alerts from their lender regarding an impending rate adjustment.

"Our general advice is you should probably start thinking three to six months before your deadline about what options are available so you can decide what you want to do."

Give me energy savings

When offered a list of possible home-improvement options and a hypothetical gift of $50,000 to make those improvements, 24% of the homeowners said they'd make environmentally friendly additions, followed by 12% who said they'd install a state-of-the-art kitchen; 11% pointed to a luxury master bedroom suite or bath, 8% said swimming pool or hot tub, 6% said a dedicated play area for their children, 1% said an in-home wine storage area, 18% said none of the above, and 13% weren't sure.

Why the emphasis on environmentally friendly changes? "There's much more awareness of high energy costs," Woo Ho said. Plus, she said, "probably the environmental movement in this country is having its impact. People are aware they should be more conscious of the environment," she said.
Read more!

Last-ditch ways to sell your home

How to entice buyers when listing languishes on market
By: Ilyce R. Glink: Inman News
At a party over the weekend, I meet a recently divorced homeowner who had received the house in his divorce settlement and was now trying to sell it.

The house has been on the market for seven months - which might as well be an eternity for a home seller. On the plus side, there have been more than 60 showings. Clearly, there's interest in the property - just not at the list price.

He said he was desperate to get rid of the house. What could he do to finally sell it?

When you've tried all the regular selling tricks, like cleaning your house, organizing it, and pricing it right, it's time to employ a few last-ditch efforts to pull in the right buyer:

    • Pay your buyer's closing costs. Houses are so expensive these days, thanks to
      an extraordinary run-up in prices, that a buyer may want to purchase your home
      but not have enough cash to close. Coughing up a few thousands dollars to help
      pay a buyer's closing costs is a good way to get to the closing table.


    • Buy down the buyer's mortgage. If the buyer can't easily manage the monthly
      mortgage payments on your home after purchasing it, you may want to buy down
      the buyer's mortgage. You pay the difference between what the buyer would have
      paid with a market-rate loan in the first few years and an interest rate that
      is lower. For example, in the first year of a buy-down loan, if the going
      interest rate on a 30-year mortgage is 6.5 percent, you might buy down the
      buyer' s loan so it appears to be 5.5 percent. The second year, the loan
      carries an interest rate of 5.75 percent (instead of 6.5 percent). The third
      year, the loan rate rises to 6 percent, and so on until you reach what should
      have been the starting interest rate. You pay the difference between where the
      rate is and where it should be, which might run a several thousand dollars.


    • Offer seller financing. Buyers like seller financing because it's still
      cheaper and more convenient than going to a conventional lender. There are
      plenty of risks (chief amount them is that the homeowner might default on the
      loan), but if you're a desperate seller willing to do the required due
      diligence on a home buyer, it might be a good idea. Be sure to hire a real
      estate attorney to draft the loan documents.


    • Offer to solve a specific problem. Roseanne used to live in a three-unit condo
      building that only had two parking spaces. Every night, someone else had to
      park on the street, and parking was tough to find. The way she finally sold
      her unit was to offer to pay a year's worth of parking for the buyer who
      purchases your home. While it doesn't solve the problem for good, it could be
      just enough to seal the deal. If your homeowner's association is about to levy
      a special assessment, offer to pay part or all of the special assessment.


    • Offer freebies. What could make your property more attractive to a buyer? Try
      a freebie. Home sellers (and developers) are offering everything from gift
      certificates, free trips and free cars to a decorating allowance, meals at
      fancy restaurants, massages, etc. While these things cost money, they might
      draw some extra attention to your property.


    • Offer a Bonus to the Broker Who Brings the Buyer. Real estate commissions are
      usually split equally between the buyer's agent and the seller's agent. So if
      the total commission you pay is 5 percent, each side would get 2.5 percent of
      the sales price (which is then further split between each agent and the firms
      they work for). If you hire a discount broker, a 4 percent total commission
      might be split differently, with 2.5 percent to 3 percent going to the buyer's
      agent and just 1 percent to the listing agent.

But if your house isn't selling, you may want to offer a bonus to the agent who brings the buyer to the closing table. How much should you offer? It could be a bigger commission (4 percent to the buyer's agent instead of 3 percent) or it could be a flat cash bonus of $500 to $2,000, depending on the price of your home.

While no self-respecting agent will force his or her buyer to purchase your property just because of the bonus, most agents will make sure any client they have who might be right for your property gets in to see it.
Read more!

Advice for Wary Sellers: Be Systematic

Sellers have plenty of power in today's buyer's market if they're realistic.
The Kansas City Star: REALTOR® Magazine Online
Danell Watson, a residential consultant with Graham-Welch & Associates in Kansas City, says if she hears “It’s a buyer’s market” one more time, she’s going to scream.

Here’s what she tells her clients who want to sell and who are frightened by predictions that they’ll have a long wait and then accept a low price.

Make a buyer’s profile. Who is going to buy the house? Be realistic.

Study the competition. List all the nearby houses on the market. Learn what the homes are like, why they are being sold, and at what price.

Get comparable sales data. An appraisal is a good tool, but so is looking at what other properties have sold for.

Price competitively. Even if it means taking less than you’d hoped – or less than the loan payoff amount.

Fix it. Clean it. Remove it. Getting rid of any wallpaper leftover from the ‘70s is always a smart move.

Make friends. Tell all your neighbors that you intend to sell and invite them to take a look. They may know somebody who is in the market.

Time limit. Decide how long you’re willing to wait and what happens then if you don’t sell.
Read more!

The Weekend Guide! November 9 - November 12, 2006

The Weekend Guide for November 9 - November 12, 2006.
Full Article:
Read more!

Trends in mortgage fraud schemes exposed

Debt elimination may be emerging strategy for scam artists
Inman News
A new analysis of a decade of suspected mortgage fraud cases shows a rise in identity theft and Internet or telephone-based loan approvals to obtain fraudulent loans, and warns that debt elimination schemes may be the new frontier for scam artists as interest rates rise and growth in housing equity slows.

The study, by the Treasury Department's Financial Crimes Enforcement Network, also found a dramatic increase in the number of suspicious activity reports filed by lenders involving mortgage fraud. But it's not clear whether the numbers reflect an increase in the number of fraudulent loans or an increase in awareness of suspected fraudulent activity.

Lenders filed 7,093 reports of suspected mortgage loan fraud in the first quarter of 2006, a 35 percent increase from the same time last year, according to the latest numbers from FinCEN.

Since investigators began collecting data on mortgage fraud in suspicious activity reports in 1996, the number of reports involving fraudulent home loans has increased by 1,411 percent. But the increase in loan fraud as a percentage of all suspicious activity is not as dramatic. Loan fraud represented 4.9 percent of all suspicious activity reports in 2005, a little more than double the 2.1 percent reported in 1997.

Part of the reason for the dramatic increase in the number of suspected mortgage loan fraud cases is an increase in the number of home loans, FinCEN said in its analysis. The number of residential loans increased by 153 percent between 1997 and 2003.

In 2003, lenders issued 42 million home loans, a 33 percent increase from the year before. Between 2003 and 2004, there was a 92 percent increase in the number of suspicious activity reports documenting suspected mortgage loan fraud.

But the increase in filings "may be attributed to an increase in overall mortgage lending concurrent with the decline in interest rates in the 2002 (to) 2005 time frame and a broader awareness of this fraudulent activity," the report said.

Although the report does not attempt to provide a definitive answer to the question of whether mortgage fraud is in fact on the rise, it does provide insight into the techniques used to obtain fraudulent loans.

The study looked at 82,851 suspicious activity reports describing instances of suspected mortgage loan fraud between April 1, 1996, and March 31, 2006. A random sample of 1,054 narratives was reviewed for additional analysis.

The report noted that mortgage fraud schemes often involve the complicity of industry insiders such as mortgage brokers, real estate agents, property appraisers, and attorneys and title examiners involved in settlement. Typical fraudulent activities include appraisal fraud, fraudulent flipping, straw buyers and identity theft.

Purchase loans constituted 83 percent of all instances of suspected mortgage fraud, while just 12 percent were refinance loans. Material misrepresentations and false statements were reported on 66 percent of the narratives studied, including altered bank statements, altered or fraudulent earnings documentation such as W-2s and income tax returns, fraudulent letters of credit, altered credit scores, and invalid Social Security numbers.

Identity fraud was reported 23 percent of the time, and identity theft was involved in 4 percent of the reports. Mortgage brokers - who today are believed to originate two-thirds of mortgage loans - originated the loans in 37 percent of the suspicious activity reports.

Appraisal fraud and fraudulent property flipping turned up in 11 percent of the narrative reports, and 42 percent of filers said they suspected such activity involved the collusion of mortgage brokers, appraisers, borrowers or real estate agents or brokers.

Common types of appraisal fraud included a failure to use comparable properties to establish property values, a failure to factor in the actual condition of the property, the appraiser's participation in a fraud scheme, and the unauthorized use of an appraiser's name and seal.

Nearly 64 percent of the reports involving fraudulent property flipping described collusion by sellers, appraisers and mortgage brokers.

Reports of fraudulent property flipping have remained steady over the past four years. Although a spike in appraisal fraud was seen in 2004, there was a slight decrease in the trend in 2005, FinCEN reported. But that's not necessarily an indication that appraisal fraud and fraudulent property flipping are decreasing, because activities associated with flipping - straw buyers and false statements - are increasing.

Information on identity theft was not collected until July 2003. FinCEN found reports of identify theft increased by nearly 102 percent between 2004 and 2005, when it was a factor in 941 reports. That number is expected to reach 1,140 this year.

The number of suspected mortgage fraud cases involving retired and elderly borrowers is also on the rise, with 236 instances reported in 2005, up from 169 2004. "The growing number of retired and elderly citizens could provide a burgeoning target for mortgage loan fraud," the report said.

Although less than one percent of suspected mortgage fraud cases were originated over the Internet or telephone, 28 phone-originated problem loans were reported in 2005, nearly twice as many as in 2004. The 29 Internet originated loans included in suspicious activity reports in 2005 represented a nearly ten-fold increase from the three reported in 2004.

"The use of the Internet and related technology to receive and process loan applications is increasing," the report said. "The growing faceless nature of these transactions increases the opportunities for fraud (especially identity fraud) and, coupled with 'low-document' or 'no-document' loans, creates a condition vulnerable to fraudulent activity."

With interest rates on their way back up - and because many homeowners aren't building up equity in their homes as quickly as they were when home values were appreciating at double-digit rates - FinCEN warns that debt elimination could be an emerging mortgage fraud scheme.

Lenders are reporting debt elimination schemes in which borrowers attempt to pay off their mortgages with non-negotiable checks, or fake instruments such as bills of exchange or subrogation and security bonds, or claim a mortgage is invalid and the debt never existed.The claims often rely on an interpretation of Section 1-207 of the Uniform Commercial Code that has never been affirmed or supported by any court or governmental authority, FinCEN said.

Other types of debt elimination schemes reported included attempts to fraudulently release mortgage liens from municipal land records. Once the land title appears clear of all mortgage debt, homeowners obtain another mortgage loan based on what appears to be a clear title. A subsequent lender may believe it has a first priority lien on property when in reality there is little or no equity to secure the loan.

Another "emerging" mortgage fraud scheme is asset rental fraud, in which a borrower's assets are exaggerated or inflated by temporarily depositing funds into the loan applicant’s bank account for the time required to qualify for a loan. Lenders report that the funds may come from friends or family, or a mortgage broker attempting to qualify an ineligible borrower. The temporary funds - which are sometimes "rented" for a fee - are withdrawn from the bank account after the loans are approved.
Read more!

Greenspan Says Housing Market Stable

The housing market isn't out of the woods yet, but it won't worsen, says former Federal Reserve Chairman Alan Greenspan.
Dow Jones News Service: REALTOR® Magazine Online
The housing market isn’t out of the woods yet, but it won’t worsen, former Federal Reserve Chairman Alan Greenspan told attendees at the annual Charles Schwab Impact conference in Washington yesterday.
"I think that while we are past most of it, there are a lot of negatives... but it is no longer subtracting from the [gross domestic product] growth," Greenspan says.

Greenspan also said potential adjustments in loan costs facing many homebuyers probably isn’t a serious concern either. While some individuals will feel the pinch as their payments rise, Greenspan says these changes are "very unlikely to have a macroeconomic effect."
Read more!

NAR Ad Blitz Spawns Media Coverage

"The public reaction we're receiving indicates how much this campaign was needed," says NAR President Thomas M. Stevens. The campaign trumpets today's favorable home buying conditions.
REALTOR® Magazine Online
The NATIONAL ASSOCIATION OF REALTORS®’ first-ever newspaper blitz, in which full-page ads illustrate why now is a smart time to buy, has received widespread media coverage and earned high marks from members across the country.
“The public reaction we’re receiving indicates how much this campaign was needed,” says Thomas M. Stevens, NAR President.

The advertisement (650k PDF) rolled out on Nov. 3 in the Wall Street Journal and USA Today. Over the following weekend, it also ran in The New York Times, Washington Post, Los Angeles Times, and Chicago Tribune.

The ambitious campaign aims to urge hesitant buyers to take action now, while interest rates are near record lows, inventory is supple, and prices have leveled off. Similar full-page ads will run in the same newspapers again on the weekend of Nov. 10-12.

In the days after the ad campaign launched on Friday, news articles about NAR's “Buy Now” message appeared in dozens of well-respected newspapers, from the The New York Times to the The Sacramento Bee. Here's what some of them had to say:

    • “It may go down as the ‘Got milk?’ moment for the housing sector.” — The New
      York Times, Nov. 3.

    • “Local REALTORS® at a media event yesterday said it's a lot better to be
      selling in today's ‘normal’ environment than in the five-year real estate boom
      when prices climbed 20 percent a year and multiple bids over listing price
      were offered on the first day.” — The Baltimore Sun, Nov. 4

    • “The NAR ads say there are strong arguments for prospective buyers to jump
      into the market, with interest rates remaining relatively low and inventories
      of unsold homes still high.” — Reuters News, Nov. 6.

Over the weekend, local and national radio shows also featured stories centering on the campaign's message. Meanwhile, REALTOR® associations on the state and local level report an outpouring of positive comments from members who’ve been trying to motivate buyers who are waiting on the sidelines.

“Real estate professionals around the country know that a lot of the negative publicity about the real estate market just wasn’t true,” Stevens says. “They’re really glad we’re setting the record straight.”
Read more!

Generation X May Boost Sagging Real-Estate Market

The boom may be over, but the long-term outlook for the industry is promising as younger consumers start to buy homes and trade up. But these buyers may press developers to consider new designs and different amenties than what homeowners have favored in the past.
By: Kristen Gerencher: The Wall Street Journal Online
The housing market may be in a slump, but the industry's long-term trends look promising as younger generations begin to buy and trade up. That was the consensus among a group of consultants, analysts and developers speaking at the recent annual meeting of the Urban Land Institute in Denver.

Rising affordability concerns in some home and rental markets remain a challenge, but the generations coming up behind the baby boomers are giving home builders a run for their money, experts said. With more immigration and people living alone, demographic shifts are pressing developers to reconsider what's worked in the past.

Generation X, typically defined as those born between 1965 and 1979, comprise a little more than half of the market for newly constructed homes, said James Chung, president of Reach Advisors, a Boston-based marketing strategy and research firm.

But that doesn't mean the homes that lured baby boomers, born between 1946 and 1964, are meeting the needs of the 30-somethings shopping now.

"Generation X is in the heart of their entry-level home-buying years and are just now entering their peak trade-up years," Chung said. "They haven't yet stolen the thunder of the boomers when it comes to trade-up homes. It's a big shift coming up for home builders and developers."

Partly because many Gen-Xers are buying into the market after the run-up in housing prices began about a decade ago, they tend not to be as moved by deluxe kitchens, huge square footage and "prestige addresses" as their older counterparts are, he said.

"It's the trade-off generation. It's no longer sort of the live-large mindset," Chung said. "They're living under different economic realities than their predecessors. They carry 70% more debt than the baby boomers did at that point in their lives because of the cost of housing.... Almost all of that is housing debt."

Many are forgoing master suites and separate wings for kids and adults and instead seeking smaller footprints with space designed for family usage rather than individual usage, Chung said.

The market has yet to catch up with their particular demands, he said. "What we're seeing is a fundamental mismatch between what these buyers are wanting and what the market is offering. They're settling for what's available vs. finding what they really want."

As for Generation Y, also know as the echo boomers who were born after 1980, it's premature to draw conclusions, Gadi Kaufmann, chief executive of Robert Charles Lesser and Co., a real estate advisory firm, said during a ULI panel discussion on what young consumers want.

"Gen Y is going to be in student housing and rentals for the next six years," he said. See how student housing has changed today.

More solo dwellers

Also affecting home builders and developers is the rise of nontraditional households, Kaufmann said.

The portion of people living without a spouse or roommate ballooned 23% since 1980, he said. Only 22% of households were made up of a single person living alone 26 years ago compared with 27% in 2005.

A 57% rise in single-parent households and a 26% decline in the percentage of married couples with kids - 23% last year compared with 31% in 1980 - has further changed the housing landscape, Kaufmann said.

There's also more migration from expensive cities to less costly areas, as well as people moving away from their hometowns, he said.

Southern states and those bordering pricey ones, such as Arizona and Nevada, are the beneficiaries of home buyers who can't afford or become disenchanted with higher-priced areas such as California and the Northeast, he said.

So-called second- and third-tier cities with populations of 300,000 to 1 million are attractive to the youth market and poised for growth, Kaufmann told the audience. "Some of the most exciting towns in America are those second-tier cities."

Young people also tend not to mind close living, he said. As more people live alone and wait longer to marry and start families, many in their 20s and 30s are drawn to compact apartment and condo units in urban areas where they can interact with their neighbors.

The growth of the Hispanic population also portends shifts, though what kind remains unclear, Chung said. Latinos currently have a homeownership rate in the high 40% range compared with about 72% for whites. "If they move up in homeownership at a faster rate, that's going to be very positive for the home market."

Love affair continues

Whether the housing market has hit a bottom or not remains controversial.

Last week, the U.S. Commerce Department reported that the nation's economy grew at a preliminary annual rate of 1.6% from July through September, its slowest pace since early 2003 due to cooling in the housing market.

In a survey done in October by Reach Advisors, 41% of 500 consumers looking to buy a house in the last 12 months or planning to look in the next year said their plans to move were affected by market conditions, compared with 27% of consumers who said so in July 2005, Chung told ULI attendees at a panel discussion on the risks and benefits of homeownership.

The portion anticipating a drop in home prices was 32% last month compared with 13% in July of last year, meaning that two-thirds still don't expect price drops, he said. What's more, 93% said owning a home remains a strong or acceptable long-term investment.

Though the housing market may be in the doldrums, Chung said he's confident Americans' love affair with homeownership will endure even after this recent extreme swing in demand. "From 2003 to 2005 it wasn't just a love affair with your primary home. It was a torrid affair with real estate. It was your home plus your home on the side."

Still, a balance of owners and renters is desirable because homeownership isn't for everyone, Ron Terwilliger, chief executive of Trammell Crow Residential, a builder and manager of multifamily housing based in Atlanta, said during the same ULI panel discussion.

"You're better off renting unless you're going to be in a home for at least five years because of the costs of getting in and out," he told attendees.

"The reason this cycle went up so high and flattened so quickly is more speculative buying than I've seen in my 35 years in the business," Terwilliger said. "It's unfortunate so many people bought intending to flip."

It will take time to regain equilibrium, he said. "There's a lot of pain going on in the investment community."
Read more!

Home seekers' big dilemma: buy now or wait?

Risk of price declines keeps many from dream homes
By: Dian Hymer: Inman News
During the last couple of years, new listings sold in a matter of weeks in many areas. Home prices escalated at a record pace. Financing a home purchase was rarely a problem - money was easy and interest rates were low. Few buyers wanted to miss the opportunity to make fast money in a market that seemed to defy gravity.

What a difference a year makes. Now, the appreciation rate is running at a snail's pace, and declining in some areas. According to the National Association of Realtors, the median home price nationally declined a little over 1 percent in August from a year ago. This trend is expected to continue through the end of 2006. Consequently, many buyers who were anxious to buy last year are standing on the sidelines, waiting to see what happens next.

Remarkably, there are still areas where the demand for new listings still exceeds the supply. In the desirable Claremont area of Berkeley, Calif., for example, there were recently nine offers on a listing competitively priced at $1.25 million. Another listing in neighboring Rockridge listed for $1.45 million sold with multiple offers for $1.5 million.

Regardless of whether you live in an area where there's plenty for sale or if you are still battling other buyers for too few listings, it's time to return to the basics when considering a home purchase.

HOUSE HUNTING TIP: Until recently, home buyers bought not with an eye to a quick profit but in order to gain control over the place where they lived. As a homeowner, you don't need the landlord's permission to make modifications to the property to suit your needs. You aren't at the mercy of a landlord who might raise the rent or ask you to move. Now there's no guarantee that you'll find a place to rent in a neighborhood where you'd like to put down roots. Also, rents are rising after years of lackluster performance.

Additionally, homeowners tend to take a serious interest in preserving and enhancing the quality of the neighborhoods in which they live. Renters tend to be transient.

The tax benefits of home ownership shouldn't be overlooked. While restrictions do apply, homeowners can claim a deduction for mortgage interest and property taxes from their federal income tax returns. This effectively lowers the cost of home ownership for taxpayers who itemize deductions.

There are several other good reasons why this could be a good time to buy. One is that there is, in general, less competition from other buyers than there was a year ago. It's now possible to negotiate with sellers if the list price seems out of line. Another factor in your favor is that interest rates have recently eased and are still at historically low levels.

Of course, a risk of buying now is that home prices could decline from their current level. David Lereah, NAR's chief economist, recently speculated that we will "probably see prices dip temporarily below year-ago levels as the market works through a build up in housing inventory."

So, why not wait to buy until home prices start climbing again? That's certainly an option, if you can find a suitable rental. However, it's impossible to time the market. We'll know that prices have bottomed out for the cycle only after they have resumed their ascent.

Buying for the short term is risky in the current market. But, this could be a good time to buy for buyers who plan to stay put for the long term, particularly if what they're looking for is not readily available.

THE CLOSING: Some buyers look for years before they find the right place to buy.

Dian Hymer is author of "House Hunting, The Take-Along Workbook for Home Buyers" and "Starting Out, The Complete Home Buyer's Guide," Chronicle Books.
Read more!

Official Says Bad Data Fueled Rate Cuts, Housing Speculation

A Federal Reserve Bank president said that because of faulty inflation data, interest rates were kept low longer than necessary this decade, fueling speculative activity in the real-estate market.
By: Greg Ip: The Wall Street Journal Online
In an apparent and rare in-house critique, the president of the Federal Reserve Bank of Dallas said that because of faulty inflation data, the Fed kept interest rates too low for too long earlier this decade, fueling speculative housing activity.

A number of critics have said the Fed under former chairman Alan Greenspan kept monetary policy too easy from 2003 to 2004. But Richard Fisher's remarks to the New York Association for Business Economics yesterday mark the first time some Fed watchers could recall a sitting Fed policy maker making such comments.

Mr. Fisher said from 2002 to early 2003, inflation, as measured by the price index of personal consumption expenditures (PCE) excluding food and energy, was running below 1%. That suggested that a serious shock to the economy could turn inflation to deflation, or generally falling prices. Deflation makes it much harder for the Fed to boost growth by engineering deeply negative real, that is inflation-adjusted, interest rates.

To reduce the risk of deflation, the Fed lowered its target for the Fed funds rate - charged on overnight loans between banks - to 1% in June 2003 and held it there until mid-2004. It has since raised it to 5.25%.

Mr. Fisher noted that subsequent revisions show PCE inflation was actually a half a percentage point higher than originally estimated. "In retrospect, the real Fed funds rate turned out to be lower than what was deemed appropriate at the time and was held lower longer than it should have been," Mr. Fisher said.

"In this case, poor data led to a policy action that amplified speculative activity in the housing and other markets. Today...the housing market is undergoing a substantial correction and inflicting real costs to millions of homeowners across the country. It is complicating the [Fed's] task of achieving...sustainable noninflationary growth."

Mr. Fisher, who took office in April last year, said in an interview that his speech wasn't meant to be a criticism of the decisions Mr. Greenspan and the FOMC made then. He said: "I wasn't at the table at the time - it's easy to look at things with 20-20 hindsight. The point is we need to continue to improve our ability to develop and work with better data."

Jan Hatzius, chief U.S. economist at Goldman Sachs, called Mr. Fisher's remarks "pretty striking," while noting it is Mr. Fisher's style to be opinionated. He added that while he agrees the Fed's policy from 2002 to 2004 fueled speculative housing-bubble activity, it was still reasonable "knowing what you knew at the time. You take out some insurance against a really bad, low-probability outcome, and after the fact you regret having paid the insurance premium."

Mr. Fisher said inflation, at about 2.5% now, is still higher than his "comfort zone," but it is possible it "has peaked and is finally heading lower."

Fed governor Susan Bies echoed that sentiment in a speech to Drake University in Des Moines, Iowa, saying, "inflation appears poised to decelerate in coming months... but the risks to that outlook seem tilted toward the upside."
Read more!

How do appraisers calculate home's market value?

Three basic methods involved
By: Robert J. Bruss: Inman News
Although appraisers use three basic "approaches" to arrive at their professional appraisal of a property's market value, not all methods are appropriate for each property. But in some situations, all three approaches are used.

Here is a look at the most common methodology used by appraisers:

1. REPLACEMENT-COST APPROACH. This appraisal method usually involves multiplying the square footage of the structure by the current construction cost for comparable quality to arrive at the estimated replacement cost of a building. When using this method, the key to success is starting with an accurate source of current local construction costs, such as home builders Marshall & Swift, and the Bluebook.

The next step, probably the most difficult for an appraiser, is to estimate applicable depreciation for an older structure to arrive at a reasonable replacement cost-estimate. The land value, based on cost per square foot, is then added to arrive at the property's total market value.

Insurance agents often use the replacement-cost approach to arrive at recommended replacement-cost insurance coverage for houses. Although used as a crosscheck, most appraisers and mortgage lenders don't pay much attention to the replacement-cost approach for all but newer residences.

2. RENTAL-INCOME APPROACH. This appraisal method is most appropriate for rental-income property, such as apartment buildings, shopping centers, office buildings, warehouses and other rental structures. If the property is owner-occupied, such as a warehouse, then rents for equivalent nearby rental property are used with this approach.

The net income, minus a vacancy estimate, is capitalized (based on the local capitalization rates for recent sales of similar income properties) to determine the estimated market value of the subject property. Appraisals of single-family houses and condos do not usually include this method unless the neighborhood is primarily occupied by tenants rather than owner-occupants. Even when a house is used as a rental, this is usually not the best appraisal method because the market value of most residences is determined by recent sales prices of comparable nearby houses, not their rental income.

3. COMPARABLE SALES-PRICE APPROACH. This is the most important appraisal method to determine the market value of a house or condo. To be accurate, the sales prices of comparable nearby residences should be as recent as possible. Sales prices more than six months old are usually not used unless there have not been any more recent home sales in the vicinity. In a rising or falling market, comparable closed home sales within the last three months are preferred.

Because this is the most important appraisal approach for houses and condos, the experience of the appraiser becomes critical to determine what is a truly comparable similar nearby residence. However, adjustments must usually be made to both the "subject property" being appraised when comparing it to the comparable nearby home sales, and to the comparables, to compensate for the pros and cons of each residence.

To illustrate, if the subject home has three bedrooms, but all the recent "comps" have four bedrooms, the appraiser must subtract value for the lack of a fourth bedroom. But if the subject property has a family room and the comps lack family rooms, then the appraiser will add value to the subject property.

The critical part of the appraisal process is the appraiser's addition or subtraction of value, often involving thousands of dollars, based on his or her expert valuation judgments. Square footage of the subject property and the comps also play a big role because the appraiser usually has not seen the interior of the comparable properties.
Read more!