The Weekend Guide! December 14 - December 17, 2006

The Weekend Guide for December 14 - December 17, 2006.
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First-Time Home Buyers Look at Houses Again

High prices have helped drive many consumers out of the housing market. Now, with falling prices and lower mortgage rates, there are signs first-timers are beginning to drift back.
The Wall Street Journal Online
High home prices have helped drive many first-time buyers out of the housing market. Now, with prices falling in many areas, there are some signs that buyers are beginning to drift back.

The share of first-time home buyers dropped earlier this year to its lowest level since 1987, according to the National Association of Realtors. First-time home buyers now account for 36% of home purchases, according to a study released last month by the Realtors group, down from 40% in the three previous years.

First-time buyers play a key role in the housing market. They provide a source of new demand for homes, and they also make it possible for owners of entry-level properties to trade up, creating a ripple effect that affects higher-priced sectors of the market. Declining affordability has made it difficult for first-time buyers to buy homes in many parts of the country, an important factor in the recent housing downturn.

But as more sellers begin to cut their asking prices and rates on fixed-rate mortgages have moved lower, some real-estate agents are reporting renewed interest from people shopping for their first home. Sam Schneiderman, broker-owner of the Greater Boston Home Team, says he has seen "a real surge in first-time buyer activity" in the last two to three weeks as lower prices draw buyers who think the market may be close to bottoming out. Kevin Freadhoff, an agent with Realty Executives of Southern Arizona in Tucson, says in the past 60 days he is seeing first-time buyers "start to warm back up again. They are seeing that houses have become more affordable."

In Madison, Wis., rising interest rates and home prices knocked many first-time buyers out of the market early in the year, says Phil Sveum, broker-owner of Coldwell Banker Sveum Realtors. But in the past month, Mr. Sveum has seen an increase in tenants looking to buy their first home. The recent drop in interest rates "has created some momentum for first-time buyers, not to write an offer today, but to start looking again and be serious about moving in January or February," he says.

First-time buyers are particularly sensitive to rising housing costs, in part because they don't have equity from an existing home they can tap as prices shoot higher. And lower incomes provide less of a cushion when monthly payments climb. In a sign of just how hard it is for first-time buyers to come up with the cash needed to buy a home, 45% of first-time buyers bought their home with no money down, according to the recent National Association of Realtors survey, up from 43% a year earlier.

But recent data have been encouraging for first-time buyers. The National Association of Realtors reported that the median price of an existing home fell 3.5% in October from a year earlier, the largest decline since the group began collecting these data in the late 1960s. The average rate on a 30-year fixed-rate mortgage now stands at 6.16%, the lowest level since October 2005, according to HSH Associates in Pompton Plains, N.J.

A growing number of first-time buyers in Florida's Tampa Bay area are taking advantage of special deals from builders looking to unload newly constructed homes that are bloating their inventories, says Craig Beggins, president of Century 21 Beggins Enterprises.

Jason Colon, a bank analyst, bought a new three-bedroom, 2½-bath townhouse in Apollo Beach, Fla., last month after looking for his first home for roughly a year. Mr. Colon paid $163,000 for the property, which was originally priced at $242,000. The builder also picked up $5,000 of his closing costs. "It was crazy for me not to jump on it because it was brand-new and I'm buying the model unit, which has all the upgrades," says Mr. Colon. Falling interest rates have made the purchase more affordable, he adds.

Yet affordability remains a problem for many would-be buyers. In the second quarter, buyers had to stretch more than ever before in 25 of the top 50 markets, according to Bank of America analyst Daniel Oppenheim. Even with the recent price declines, he estimates that it would take a further 7% fall in home prices, combined with a 4% annual increase in nominal incomes, to bring affordability back in line with average levels over the past decade by 2008 - if interest rates remain stable.

In recent years, many first-time buyers had been able to stretch their dollars by taking out adjustable-rate mortgages and so-called affordability mortgages, which allowed them to lower their monthly payments or buy a home with little, if any, down payment. But as short-term interest rates have climbed higher, the benefits of adjustables have declined.

At the same time, some first-time buyers have become more cautious. Sheila Doyle, an agent with Baird & Warner in Glenview, Ill., says that more of the first-time buyers she works with are getting their parents to help them with a down payment and fewer are financing 90% or 100% of the purchase price. "I don't see them doing the crazy financing that was so frequent last year," she says.

New guidelines for nontraditional mortgages, recently issued by federal banking regulators, could make it tougher for some first-time buyers to use these products. Some lenders are also beginning to tighten their standards as mortgage delinquencies rise.

Many would-be buyers are taking a wait-and-see approach. When home prices were soaring, many first-time buyers jumped to buy houses they could barely afford, believing they would be shut out of the market if they didn't act quickly. Now, with prices falling in many areas, "there's no immediate need to buy, and so they kick the tires more," says Frank Borges LLosa, owner of FranklyRealty.com, a brokerage in Arlington, Va.

Arthur Orkisz, a speechwriter in the Washington, D.C., area, says he expects to hold off until at least next summer before buying his first home, "unless something so dramatic happens that it's absolutely silly to pass it up." Giveaways such as flat-screen TVs are "all nice and dandy, but at the end of the day anyone capable of doing the arithmetic realizes that's a gimmick to get me in the door," he says. "That's not enough of an incentive" to buy.

Scott Steiner, managing broker of Help-U-Sell Lakeview Realty in Lake Elsinore, Calif., says he's getting fewer calls and doing fewer showings for the properties he's listing. But fliers describing the properties are being snapped up faster than ever before - a sign, he says, that many first-time buyers are taking their time and waiting for the market to stabilize before making a move.

In much of the country, renting remains a bargain compared with owning, according to an analysis prepared for The Wall Street Journal by Torto Wheaton Research, a unit of CB Richard Ellis Group Inc. In markets such as Las Vegas, San Diego and Washington, the monthly cost of renting the average apartment is roughly half what it would cost to own the median-price home in the third quarter. "Renting is only marginally less of a bargain" even with the latest decreases in home prices, says Torto Wheaton senior economist Gleb Nechayev.
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Easy credit, price cuts will keep homes selling in 2007

Experts continue to predict correction, not collapse
By: Matt Carter: Inman News
Most housing markets experiencing slowdowns aren't facing fundamental economic problems like job losses and out migration and will see prices correct, rather than collapse, in 2007.

That was the outlook of housing experts who participated in a conference call discussion Monday, "Housing Forecast 2007: Inside the Crystal Ball," moderated by Inman News publisher Bradley Inman.

Barring an unforeseen jolt to consumer confidence or a sudden rise in interest rates, panelists predicted that nationwide, the volume of home sales in 2007 will be similar to or slightly below 2006 levels. But in order for that to happen, prices will have to come down in areas that saw rapid appreciation during the boom years.

A "good solid price correction will bring buyers back into the market," David Lereah, chief economist for the National Association of Realtors, said. The economy, although not "robust," continues to grow, he said, and a combination of wage gains and price drops will "make affordability better in many areas of the country."

Although 75 percent of the country will "probably be in expansion mode" in '07, Lereah said, "the real big boom markets will have a prolonged correction ... (and) it's anybody's guess how far prices have to drop to get that correction."

Lereah predicted home sales will hold at 6.4 million in 2007, down slightly from 6.46 million in 2006 and 7.07 million in 2005. A 50-basis-point increase in interest rates in 2006 might have put a deeper dent in sales, he said.

"I'm breathing a sigh of relief," NAR's top economist said of indications that sales may have bottomed out. "We got lucky because mortgage rates went down rather than up."

Delores Conway, Casden Real Estate Economics Forecast
Delores Conway, director of the Casden Real Estate Economics Forecast at the University of Southern California's Lusk Center for Real Estate, doesn't expect mortgage rates to go up or down more than 50 basis points in the year ahead because of "a huge flood of global capital looking for places to invest."

But the panel agreed that credit could tighten next year if there's a dramatic rise in delinquencies and defaults on nontraditional loans that helped fuel the housing boom. The growing U.S. budget deficit and foreign trade imbalance could also put pressure on interest rates, some said.

Richard Powers, general manager of GMAC Residential's Ditech Home Loans, said he expects loan originations will fall between 5 percent and 10 percent in 2007, but that interest rates will remain "very competitive."

Conway agreed with Lereah that "the housing market is correcting, and we are going to see further correction into 2007, but not a collapse."

Real estate cycles "tend to be long, drawn-out affairs," said Michael Sklarz, head of global research for New City Technology. Markets that saw huge increases in home-price appreciation are "just in the early stages" of a correction.

But unlike stocks and commodities, a correction in the real estate market doesn't necessarily translate into a drastic reduction in prices, Sklarz said. Markets that exhibited "bubble-like tendencies" are now entering a "sideways period" where prices could stagnate for five to seven years, he said.

Michael Sklarz, New City Technology
"Sales activity may hold up pretty well, but I think we should prepare for a long extended period" with little price appreciation, Sklarz said.

Boom markets headed for a prolonged correction include regions on both coasts that saw rapid price appreciation, plus Las Vegas and Phoenix, Lereah said.

The panel said Rust Belt states like Ohio and Michigan have deeper, underlying economic problems that will continue to weigh on the housing market. In a recent survey published by the Office of Federal Housing Enterprise Oversight, 18 of the 20 metropolitan statistical areas with the lowest rates of appreciation were in Michigan, Ohio and Indiana.

The region's housing contraction is driven by job losses and out migration, Lereah said, and "there is no magic wand we can use" to fix it.

The rest of the country, by contrast, is experiencing an economic slowdown, but remains healthy, Conway said. "Job growth is steady, we have low unemployment at 4.4 percent nationwide, and stable, long-term interest rates. These are all solid indicators holding up the economy."

Conway noted that parts of the Northwest, including Washington, Oregon, Idaho and Utah, are still experiencing double-digit price appreciation. "The housing market is still very much local," Conway said.

In a market like Las Vegas, where new construction was driven by investors and speculators, prices could come down 10 percent or more, Sklarz predicted, with luxury condos hit harder than other types of housing. Conway said housing starts in the Las Vegas region are already off as builders react to the slowdown.

"Builders responded pretty quickly," Conway said. "Many of those projects are not coming out of the ground."

As is the case in parts of California, constraints on land use limit housing supply and bode well for the long-term health of the Las Vegas housing market, Conway said.

Lereah agreed, noting that Las Vegas' new role as a wholesale distribution center means the economy is not entirely dependent on gambling. Although Lereah expects further price corrections in the next six months, the long-term prognosis for the Las Vegas market over the next two to three years is good, he said.

In areas of south Florida where prices rose rapidly during the boom, there's a large supply of inventory, especially condos, Lereah said. Rising insurance costs in the state's coastal areas are prompting others to put their homes up for sale.

Lereah predicted baby boomers looking to retire to a sunny climate will begin settling in northern Florida, which is viewed as less risky to natural disasters and price swings.

Some are choosing to leave the Sunshine State behind - although it's taking them awhile to unload their homes, and they're not getting what they used to for them.

A Raleigh, N.C., broker told the panel about a "trickle down" effect he's seen among buyers relocating to the area from Florida. The homes they leave behind stay on the market longer, and they show up in North Carolina with less cash, the broker said.

Lereah said he calls such buyers "half backs" - people who moved to Florida from the Northeast and now want to move halfway back, stopping in places like the Smoky Mountains and North Carolina.

Although investors are blamed for inflating prices in some markets to unsustainable levels, they haven't abandoned those markets completely.

Drawn by rising property values in their own countries and a weakening of the dollar, foreign investors from Latin America and Europe continue to buy property in Florida, Lereah said. Some 15 percent of homes sold in Florida are purchased by non-U.S. residents, he said.

Conway said Chinese investors continue to buy high-rise condominiums in Las Vegas, often for use by corporations, and that foreign investors have a "big interest" in California.

Rising rents in California have helped long-term investors profit from rental properties, she said.
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Existing-Home Sales to Trend Upward in 2007

Sales will rise gradually in 2007 from current levels, with annual totals slightly lower than 2006, according to NAR's latest forecast.
REALTOR® Magazine Online
Existing-home sales are expected to rise gradually in 2007 from current levels, with annual totals slightly lower than 2006, while new-home sales will continue to slide, according to the latest forecast by the NATIONAL ASSOCIATION OF REALTORS®.

David Lereah, NAR’s chief economist, says market conditions will vary around the country next year.

“Roughly three-quarters of the country will experience a sluggish expansion in 2007, while other areas should continue to contract for at least part of the year,” he says. “Most of the correction in home prices is behind us, but general gains in value next year will be modest by historical standards.”

For Buyers, a Window of Opportunity

“Buyers, especially first-time buyers, with the combined benefits of seller flexibility and an unexpected drop in mortgage interest rates, have a window of opportunity,” he adds. “These conditions will persist in many areas until early spring when inventory supplies are likely to become more balanced.”

Existing-home sales for 2006, finishing the third-best year on record, are projected at 6.47 million, a decline of 8.6 percent from 2005. For 2007, sales expected to rise steadily to an annual total of 6.40 million, which would be 1 percent lower than this year’s total.

“By the fourth quarter of 2007, existing-home sales will be 4.6 percent higher than the current quarter,” Lereah says.

Builders Slow New-Home Construction

New-home sales in 2006 are expected to fall 17.7 percent to 1.06 million, the fourth highest total on record, before sliding an additional 9.4 percent in 2007 to 957,000.

Much of the contraction in the new housing market results from cuts in builder construction to support pricing for current inventories. In addition, high construction costs in many areas are taking a bite out of potential profits.

Total housing starts for 2006 are likely to drop 12.3 percent to 1.82 million units, with another 15.1 percent decline in 2007 to 1.54 million.

Mortgage Rates Seen Rising to 6.7%

The 30-year fixed-rate mortgage is forecast to gradually increase to 6.7 percent by the fourth quarter of 2007. Last week, Freddie Mac reported the 30-year fixed rate dropped to 6.11 percent.

The national median existing-home price for all of 2006 is projected to rise 1.4 percent to $222,600, with another 1.0 percent gain next year to $224,700. The median new-home price should ease by 0.5 percent to $239,700 this year, and then rise by 0.8 percent in 2007 to $241,700.

“Keep in mind that overall home prices were still appreciating at double digit rates in the first quarter of this year — prices in this buyer’s market are temporarily a little below a year ago when we were in a strong seller’s market,” Lereah says. “This correction is one of the factors drawing buyers into the current market, but most sellers are still seeing very healthy long-term gains.”

Unemployment, Inflation Forecasts

The unemployment rate is expected to be 4.8 percent in 2007, after averaging an estimated 4.6 percent this year.

Inflation, as measured by the Consumer Price Index, is forecast to be 3.4 percent for 2006 and 2.3 percent in 2007, while growth in the U.S. gross domestic product is likely to be 3.3 percent for all of this year and 2.3 percent in 2007. Inflation-adjusted disposable personal income is projected to grow 2.6 percent for 2006 and 3.5 percent next year.
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Home buyer closing costs could drop with fed's help

Consumers benefit when loan providers guarantee fees
By: Jack Guttentag: Inman News
Every consumer taking a home mortgage today pays a tax in unnecessary charges for the various third-party services required to deliver the mortgage. These include services provided by title insurance companies, mortgage insurance companies, appraisers, credit reporting agencies, flood insurance companies, and escrow companies.

The taxes don't go to government, and in most cases the service providers don't keep them. Rather, they are paid to those who are positioned to direct which service provider will receive the business; these referral agents are mainly lenders, Realtors and builders. The payments include referral fees, which are sometimes legal and sometimes illegal. Some of the tax is absorbed by marketing expenses directed to the same referral agents.

The problem is not that there isn't competition in these industries, as the competition is actually intense, but it is directed to referral agents rather than to the consumers who pay for the service. Competition directed to referral agents drives prices up rather than down, since most agents are more interested in being paid for the referral than in negotiating lower prices for consumers.

Under the Real Estate Settlement Procedures Act (RESPA), referral fees are illegal, but this rule has been completely ineffective because it has left the power to refer business unchanged. Small referral agents often ignore the rule and large ones develop affiliated business arrangements, which convert illegal referral payments into legal referral payments.

There are several ways to eliminate or neutralize referral power. Much the most effective way is to require lenders to pay for all third-party services that they require, passing the cost on to borrowers in their rates and fees. Competition by third-party providers to sell lenders would then force the prices down, and rate competition by lenders would force them to pass the savings on to borrowers. This would require federal legislation, however, and the prospect of that ever happening is remote.

An approach proposed by HUD several years ago, which did not require new legislation, would have allowed lenders and others to package third-party services with loans, selling the package at an all-inclusive price. I supported this concept, but it was done in by its complexity, which included something to hate by every interest group in the country.

A third approach, which I recently proposed to HUD, aims to induce some referral agents to become agents of borrowers as a competitive strategy. A lender who negotiates lower prices with third-party providers and passes those prices on to its borrowers can gain a competitive advantage. There are, in fact, lenders who would do this now if not for a well-intentioned HUD rule that prevents it.

To use lower third-party fees as a competitive tool, loan providers must guarantee those fees. Otherwise, they have no way of distinguishing the fees they quote to borrowers from those quoted by competitors. Indeed, without an explicit guarantee, the low fees quoted are indistinguishable from those of low-balling competitors who have no intention of delivering.

But guaranteeing third-party fees is hampered by a HUD rule against marking up the prices of third-party services. Consider a loan provider who guarantees an appraisal fee of $400. If the actual cost comes in at $500, he must take the $100 loss, but if the actual comes in at $300, he must charge $300 to comply with the markup rule.

My proposal is for HUD to revise its rule toward markups on third-party charges as follows: Markups would be permitted by any loan provider that guarantees its own and all third-party charges.

The goal is to encourage loan providers to guarantee their own and all third-party fees. (I use the term "loan provider" because it covers both lenders and brokers, since the proposed rule should apply to both). On refinances, this would be all third-party fees. On purchase transactions, the guarantee would cover charges of service providers selected by the loan provider.

As loan providers offering fee guarantees become a force in the marketplace, borrowers will discover that they can shop rate and total guaranteed fees. This would fundamentally change the way the market works, and put downward pressure on all fees.

On purchase transactions, where the title agency is usually selected by the Realtor or builder, a new and in many cases lower-cost option would become available. In states where home sellers are obliged to purchase title policies for buyers, the availability of a lower-cost policy available through the buyer's loan provider could change the way business is done.

HUD could make the necessary rule change on its own, with minimum political flak. But HUD is a very politically sensitive agency, and I have no political clout. My hope is that others who do have clout will chime in to make it happen.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
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A home loan that'll get ugly fast

Popular option mortgages allow payments so low that borrowers go deeper into debt. The risks are high.
By: David Streitfeld: latimes.com
EVERY day, Will Hertzberg owns a little less of his three-bedroom house in Corona.

Like hundreds of thousands of other homeowners around the state, Hertzberg has a mortgage that lets him choose how much he pays each month.

Like many of them, he always chooses to pay as little as possible.

For the moment, this allows the 56-year-old Hertzberg to continue living in his tract home despite being only marginally employed. But his debt is swelling, and his mortgage company controls his fate.

"I am rather screwed," he said.

Alarmed regulators recently have attempted to force lenders to cut back on loans like Hertzberg's. Even some industry executives are beginning to wonder how these borrowers will handle their added debt, especially if housing prices stay flat or fall.

If it turns out that many can't, it would be a major blow to the housing market. In the worst outcome, it could drag down the overall economy.

Hertzberg could sell now, but his lender would charge him an $11,034 prepayment penalty — money he doesn't have. Yet if he stays, the housing market may tank, vaporizing what little equity he has left.

"I made choices, and they happened to be the wrong choices," said Hertzberg, a big guy who lives alone amid the clutter of decades of memorabilia.

The real estate boom of the last few years has made it very easy to become overextended.

Earlier generations bought houses knowing they had no choice but to keep paying at the same rate for three decades. Their reward: the ability to sleep well, knowing their payments wouldn't abruptly adjust upward.

As interest rates rose in the early 1980s, many borrowers couldn't afford these traditional loans. Lenders responded with adjustable mortgages that offered lower introductory rates.

A few years ago, as home prices began escalating sharply, lenders pushed loans that let the homeowner pay only the interest for an initial period.

When even that was too onerous for some borrowers, they offered loans such as Hertzberg's, often called "pay option" loans.

One of his options is to pay $2,513 a month. That would cover the principal and interest as if it were a traditional 30-year loan.

A second possibility is to pay $2,279, which would cover only the interest.

But each month he always takes the cheapest option: paying $1,106 and promising to make up the shortfall later.

Essentially, option loans are bets that good things will happen. Maybe the mortgage holder will get a big raise, or sell a script to Hollywood, or inherit a chunk of change. When the borrower has to start paying off the loan in earnest in five years, the plan is that he or she will somehow be able to handle it.

At a minimum, the borrower is betting the housing market will be better in a few years than it is today. If the house goes up in value, it will be possible to refinance and the day of reckoning can be put off once again.

In 2003, only about 8 of every 1,000 people buying a home or refinancing a mortgage in California got a pay option loan, according to San Francisco-based data tracking company First American LoanPerformance.

Last year, 1 in 5 loan applicants got one.

In the first eight months of 2006, even as the real estate market began to weaken amid fears of a downturn, the appeal increased again. Nearly 1 in 3 California loan applicants are now choosing them. The state boasts about 580,000 active pay option mortgages, about half the U.S. total.

After four years of escalating prices, they're the only way some first-time buyers can get into the market. But another group flocking to option loans are homeowners who find themselves stretched. For those beset by calamity, these are the loans of last resort.

HERTZBERG bought his house 11 years ago for $129,995, immediately after his second divorce. (He has no children.) Since then, Corona and the Inland Empire have boomed.

Comparable homes in his neighborhood fetch more than $400,000. With fresh paint and a few repairs, Hertzberg could probably sell his place for $275,000 more than he paid.

He would see little of that, however, because he's already seen so much. Over the years he has taken out $190,000 in cash through refinancings.

Hertzberg's home equity paid off his credit cards, financed trips around the world that allowed him to indulge his passion for photography, bought a $32,000 Toyota Avalon and enabled some lousy investments. He bought dot-com stocks and lost money. To recoup those losses, he bought commodities — and lost money faster.

"Free money always has the unfortunate effect of making people go overboard," said Hertzberg, whose living room is strewn with financial publications including American Cash Flow Journal and Donald Trump's "How to Get Rich." "You'd be surprised how fast $190,000 can go."

The money wasn't really free, of course. It just seemed that way, the result of a radical shift during the last decade in how people view their homes.

"Homeownership has become like auto leasing, where the price of the car doesn't matter," said Rick Soukoulis, chief executive of LoanCity, a San Jose lender that funded $7 billion in mortgages in 2005. "All that matters is the size of your monthly payment."

Lenders say these new loans are all about payment choice, but Hertzberg is far from the only borrower who invariably chooses the smallest payment option. Washington Mutual Inc., which has one of the nation's largest portfolios of pay option loans, said 47% of its borrowers in this category last December took the minimum option.

Few people intend to become deeper in debt every month. Hertzberg certainly didn't.

"I assumed my future and my retirement would be taken care of by the company I worked for," he said. "I trusted corporate America."

He used to make a six-figure income selling vacation packages to corporations that would use them as customer incentives and employee bonuses. After the 9/11 terrorist attacks, the business soured.

His current sources of income include selling comic books on EBay and freelance photos to golf and travel publications. "Once you're over 55, what employer wants to hire you?" he asked. "I'm a dinosaur."

Last fall, he went to a mortgage broker and refinanced again to make his payments easier to bear. He thought he would have a five-year window before the principal started coming due.

But the day of reckoning is arriving early. By paying the minimum, Hertzberg has increased the size of his loan in a little over a year from $320,000 to $332,616. His lender, Calabasas-based Countrywide Financial Corp., recently sent him a letter warning that when his loan hits 115% of its original size he'll run out of credit with the company.

That will happen in about two years if he continues to take the smallest payment option. Then his minimum payment will automatically go up 150%, to $2,848 a month.

"If I could afford that," he said, "I wouldn't have needed this loan in the first place."

It's a sorry situation, and Hertzberg is generous in assigning responsibility for it. To start with, he blames his mortgage broker, who didn't advise him how risky these loans were.

Few brokers do, U.S. Comptroller of the Currency John Dugan says.

In an October speech, Dugan said the marketing materials for payment option loans often "emphasized the low initial payments but glossed over the likelihood of much higher payments later." He also said some lenders were not evaluating the borrowers' ability to handle the inevitable higher payments.

Although Dugan and other regulators are taking steps to address both problems, Hertzberg said they never should have allowed these loans to become so prevalent in the first place.

"The government wanted to keep the housing party going," he said.

Yet who didn't want that? Hertzberg admits he was a willing co-conspirator.

"I got spoiled and complacent and was not prepared when the bottom fell out," he said.

COUNTRYWIDE sees little risk of widespread foreclosures, saying its pay option customers have good credit scores, indicating a high degree of financial stability. But at a company investment conference in September, Chairman Angelo R. Mozilo seemed to indicate that these borrowers might be naively optimistic.

"The average age of our borrowers is about 38 years old," Mozilo said. "They have never in their adult lives seen values going down. The concept is alien to them."

Just how many of these homeowners will end up in trouble is the big unknown for the housing market and the economy. Although many economists expect the loans to prompt a certain degree of turmoil, they don't think it would cause a recession.

Hertzberg is much bleaker. He's become a connoisseur of doom, a subscriber to websites and newsletters that predict the economy is headed for both recession and inflation.

The bears' speculation: A rapid increase in foreclosures will flood the market with cheap homes, putting all of real estate into a tailspin. That would push up unemployment among builders, lenders, home improvement warehouses and furniture stores. That, in turn, would stall the economy, which is already slowing.

Although Hertzberg has lost his complacency, he hasn't been compelled to act.

He estimates it would cost about $22,000 to fix up his house for sale, and he'd have to upend his life. The sales agent would take another chunk of money, and he'd have to undercut the crowded market to secure a buyer. Texas and Panama, two places he has thought about moving, aren't so appealing that he wants to be broke there.

When the year-over-year appreciation numbers in Corona start heading down, he says, he'll do something.

If Hertzberg is living on borrowed time, there's small comfort in the home finance industry's endless inventiveness. It's certainly trying to tempt him. Several times a week, he gets a refinancing offer in the mail.

The latest one suggested a certain unfamiliarity with basic English, proclaiming, "Economic forecast suggests you Interest Rate will increase 1.00% every six months." But its central message was clear: "We can solve your problem in 15 minutes over the phone."

Hertzberg always looks at these fliers, hopeful in spite of himself. "I'm waiting for a 100-year loan," he said. "My heirs can worry about paying it off."
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Good Reasons to List this Holiday Season

The local mall may not be the only place shoppers are looking this season
RISMedia
When clients have decided to sell their home, they are hesitant to place it on the market as the hectic holiday season quickly approaches. Don’t let them be. A common misconception is that listing a home during the winter months is a bad idea. Homes showcased during the holidays provide a warm, inviting listing environment that welcomes sellers and buyers alike.

“Most…markets do not hibernate in the winter,” said Rozanne Kurman, president of the Realtor® Association of NorthWest Chicagoland. “With fewer homes on the market and buyers who are motivated to buy, the holiday months provide an ideal time to list and get ahead of the spring influx.”

People who are shopping for a home during the winter months tend to be more motivated, serious buyers. Generally, these buyers are moving out of necessity so they are more likely to “buy now.” Showings can be much more valuable during the winter because you can cater to the motivated buyer and avoid those only casually looking for homes.

Many of these motivated buyers are employees relocating to a new area because of a job transfer. Since corporations often transfer employees towards the beginning of the calendar year, these buyers use the holidays to house hunt due to time constraints.

With holiday commitments, a limited supply of inventory and the necessity to relocate in the first quarter, many buyers are motivated to move quickly in negotiating their new home purchase. “In order to sell your home in a timely manner, help adjust your listing price to meet the seasonal market. A properly listed home will sell quicker and allow sellers to focus on friends and family,” said Rozanne Kurman.

Homes decorated for the holidays can showcase the inviting atmosphere a buyer needs to close a deal. When looking at listings, home buyers try to imagine their own celebrations in the home. They are also looking for something that is move-in-ready so seasonal decorations should accent the home’s features and not distract potential buyers.
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Home Owners Optimistic About House Values

In a survey, about 55 percent expect their home value to rise slightly, while 26 percent expect those values to increase a great deal.
By: Eduardo Kaplan: REALTOR® Magazine Online
Despite recent slumps in the housing market, most U.S. homeowners are optimistic about the value of their properties, according to a nationwide poll conducted by the Pew Research Center.

About 55 percent expect the value of their homes to rise a little, while 26 percent expect those values to go up a lot.

Seventy-five percent say the recent increase in the value of their home has had little or no effect on their personal finances. About 34 percent of home owners say their homes account for all or most of their personal financial worth, while another 34 percent say it represents half of their worth.

The survey also found 75 percent of all home owners say they are currently paying a mortgage, with 20 percent carrying either a second mortgage or a home equity loan. That percentage rises to 28 percent among younger home owners ages 30 to 49.

The survey found 24 percent of all home owners have a second home or an investment property they own.
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Top of to-do list: Pay property taxes

The region's tax collectors want to remind property owners — before their last dollars are spent on holiday shopping — that it's the season to pay property taxes too.
By: Diane Wedner: latimes.com
That applies to everyone, even those who dispute the amount due or didn't receive their bill, which should have arrived long before now. If yours hasn't, don't delay in requesting one, said Donna Doss, assistant treasurer and tax collector for Los Angeles County.

Statements are available at local assessors' offices or by calling the county's 24-hour help line: (888) 807-2111.

To avoid 10% penalties plus interest, a property owner must have the first installment of the tax bill postmarked no later than Dec. 11. The second installment is due by April 10. If a homeowner feels the amount is wrong or the bill is addressed to the previous owner, pay it anyway and pursue the discrepancies later.

Failure to receive a bill does not excuse nonpayment.

L.A. County property owners may opt to pay their taxes online, by logging on to the website lacountypropertytax.com. Click on the "pay online" link and follow the four steps that are outlined there.

The site also offers instructions for other payment options and provides a link to the assessment appeal board for those who want to dispute their property-tax bills.

For questions about statements that did not arrive, substitute tax bills, property assessment questions and other issues related to property tax, call the treasurer-tax collector's offices at the following numbers:

• Los Angeles County: (888) 807-2111

• Orange County: (714) 834-3411

• Ventura County: (805) 654-3744

• San Bernardino County: (909) 387-8308

• Riverside County: (951) 955-3900
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Freddie Mac Economist Sees Improvement in 2007

The housing correction is about two-thirds finished,
By: Vinnee Tong: REALTOR® Magazine Online
The housing correction is about two-thirds finished, but the market will hit a trough in the first half of 2007, predicts Freddie Mac Chief Economist Frank Nothaft, speaking at the 10th annual Home Building Conference, sponsored by the New York Society of Security Analysts.

"We're most of the way there," he says. "We've still got a bit of decline going forward. I do think by the second half of 2007 we will see home sales and activity picking up, not back to 2004 and 2005 levels, but above the trough."

Nothaft predicts average home prices across the United States will appreciate by 3 percent in 2007.

Lennar Corp. Chief Financial Officer Bruce Gross says the slowdown wasn’t all bad because it offered developers a chance to make operations leaner.

"In good times, we were all busy growing," Gross says. "As things slow down, we can focus on efficiencies."
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The Weekend Guide! December 7 - December 10, 2006

The Weekend Guide for December 7 - December 10, 2006.
Full Article:
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Strong Markets Poised for Continued Growth: Lusk Center Economics Forecast

Healthy growth path in store for 2007
RISMedia
Steady job growth, bustling international ports, an attractive climate and an investor appetite for stable returns will keep the Southern California office and industrial markets on a healthy growth path into next year. This is according to results from the 2006 Casden Office and Industrial Market Forecast released by the University of Southern California Lusk Center for Real Estate.

"The LA office market hasn't looked this good since the late 1980s, Orange County's resilient economy has bolstered demand for office space and the Inland Empire industrial market continues its dominance as a gateway for foreign goods," said Delores Conway, Ph.D., director of the Casden Real Estate Economics Forecast, at a briefing for real estate executives in Los Angeles. "The slowing of residential construction appears to be offset somewhat by expansion in the financial, legal and personal services sectors in addition to increased trade from Asia," she explained.

"Investor appetite for office and industrial space persists across the region, stemming from a constrained supply of product and a large amount of capital chasing a limited number of properties for sale," observed Dr. Conway.

The annual Casden Real Estate Economics Forecast analyzes economic data on rents, vacancies, transactions and employment for office and industrial markets in Los Angeles, Orange, Riverside and San Bernardino counties. The market data was supplied by Grubb & Ellis, which sponsored the forecast along with Old Republic Title Company, Old Republic Exchange Company, Wachovia Bank, Washington Mutual, the California Real Estate Journal and Real Estate Southern California. A multifamily housing forecast will be released on April 4, 2007. The following summarizes key findings in the current Casden Forecast:

Los Angeles County Office:
The office market improved substantially in 2006 with the average vacancy rate dropping below 10% for the first time in over 15 years and average asking rents rising 11%. Rents soared in West Los Angeles - up 15.4% - with new tenants signing longer leases as a hedge against future spikes. Steady demand for affordable office space in the Mid-Wilshire area forced rents up 9% as a low-cost alternative to the expensive Westside. Mid-Wilshire and LA North/San Fernando Valley have the tightest vacancy rates at 6%. Investor interest in the office market should remain steady in the near term due to low interest rates and significant demand. Vacancy rates should decline steadily in 2007 with rents up around 6%.

Downtown has hit historically low vacancy rates of 14.3% and there is talk of building new office space - a proposed Maguire Properties tower would soar 50 stories. Rents should continue to rise through 2007 thanks to a lack of available space and steady job growth. Century City, the submarket with the largest amount of new Class A space available, will continue to be a standout. Vacancy rates declined by 3 percentage points this year as prestigious law firms and the entertainment industry flocked to this valued location.

Industrial:
The Los Angeles County industrial market has the lowest vacancy rate in the country at 1.6%. With a total inventory of nearly a billion square feet, it is also the largest market of its kind in the United States and rents are up nearly 9% from a year ago. With international trade predicted to double over the next 10 years, the sheer volume of goods shipped from China, Japan and Korea has created an explosive demand for warehouse/distribution space. While congested freeways, overburdened rail lines and environmental concerns continue to challenge the greater LA region, the passage of Prop 1B, providing $20 billion in bonds to pay for infrastructure improvements, will bring much-needed improvements. Tight industrial supply will continue to put upward pressure on rents and property values.

Orange County Office:
The OC office market responded favorably to steady economic growth, closing the third quarter of 2006 with lower vacancy and higher lease rates. Average rents are up 12% this year and the vacancy rate is 7%. With an October unemployment rate of 3.6%, far below the national average of 4.4% and a state average at 4.5%, the resilient local economy is adding workers primarily in the business and professional services sectors. The slowdown in the mortgage and financial services industries has had a modest impact on growth so far.

New office buildings should help ease the tight market when delivery of approximately two million square feet of new office space comes online in 2007. Half of the new construction is in the vibrant submarket around the John Wayne Airport with the other half in South Orange County. Class A rents increased by more than 10% in most submarkets this year and rates will continue to rise as space remains tight across the county. The sale of small buildings is the hottest niche in the market thanks to tenants wanting to own v. rent. Investors will continue to pay record prices as the outlook for the local economy remains healthy.

Industrial:
The Orange County industrial market turned in another strong performance in 2006, pursued by investors seeking financial opportunities and tenants seeking space. On the horizon is increased job growth, declining vacancy rates, rising rents and significant demand. With limited new construction, tenants and investors are competing for a select few properties. All submarkets experienced positive net absorption in 2006 and asking rents for all product types increased a staggering 14.5% to $0.87 per square foot this year. This market will see continued strength as developers, short on land, turn to urban infill and redevelopment projects. Developers with land will continue to build what the market has been demanding - smaller buildings under 10,000 square feet. The Airport region, including Irvine and Newport Beach, should continue to be a seller's market with buyers finding quality product in short supply.

Inland Empire Office:
The office sector in the Inland Empire has been booming, largely due to the population increasing by 100,000 annually and office employment growing at 7%. The growing population is drawing banks, escrow companies and attorneys into the area. The fact that skilled employees are willing to accept lower wages in return for a shorter commute has also drawn firms focusing on medical equipment, computer technology, and electronic and precision instruments. The overall office vacancy rate of 7.3% is among the lowest in the nation. Class A office rents increased nearly 8% in 2006 to $2.11 per square foot, the highest in six years. Almost 3 million square feet of space is under construction, double last year's levels. Widespread development should continue in line with the maturing economy.

Industrial:
The Inland Empire is the top market in the nation for new construction of industrial space, the vast majority for warehouses and distribution centers serving the nearly 40% of all goods from Asia that pass through the ports of Los Angeles and Long Beach. Among all U.S. cities, the market had the highest net absorption in 2006 which encouraged new construction. Currently, 21 million square feet of warehouse/distribution space is under way. Though recent job expansion in the industrial sector is slower than in previous years, the future looks promising. Significant job creation is taking place at the conversion of the former George Air Force Base in Victorville into the Southern California Logistics Airport.

The largest speculative industrial building in the nation - at 1.7 million square feet - is being built in Perris. Robust demand for large industrial space in the Inland Empire is likely to overcome any short-term market adjustments. Even double-digit rent increases past the current $0.40 per square foot still make the area competitive to neighboring Los Angeles and Orange counties. Market-wide vacancy rates should remain under 5% through 2007.

For more information, visit the University of Southern California Lusk Center for Real Estate.
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Rates plummet, home loan apps soar

Borrowers take action as 30-year fixed hits 14-month low
Inman News
Overall mortgage application volume increased 8.1 percent last week on a seasonally adjusted basis from the week before, inspired by a significant drop in interest rates, the Mortgage Bankers Association reported today.

The seasonally adjusted refinance index increased by 13.7 percent to 1,989.7 from 1,749.6 the previous week, and the purchase index increased by 4.9 percent to 426.6 from 406.7 one week earlier.

The refinance share of mortgage activity increased to 50.1 percent of total applications from 46.9 percent the previous week, and is now at its highest level since April 2004. The adjustable-rate mortgage (ARM) share of activity decreased to 23.9 from 24.5 percent of total applications from the previous week, and is at its lowest level since October 2003.

The average contract interest rate for 30-year fixed-rate mortgages decreased to its lowest level since October 2005, falling to 5.98 percent last week from 6.13 percent the week before. Points including the origination fee decreased to 0.91 from 0.97 for 80 percent loan-to-value ratio loans.

Points, which are fees charged by lenders for loan processing, are expressed as a percent of the total loan amount.

The average contract interest rate for 15-year fixed-rate mortgages decreased to its lowest level in 11 months, sinking to 5.66 percent last week from 5.86 percent one week earlier. Points including the origination fee increased to 1.01 from 0.87 for 80 percent loan-to-value ratio loans.

The average contract interest rate for one-year ARMs decreased to 5.79 percent from 5.87, and is now at its lowest level since March 2006. Points including the origination fee decreased to 0.77 from 0.81 for 80 percent loan-to-value ratio loans.

Washington, D.C.-based Mortgage Bankers Association is a national association representing the real estate finance industry. The survey covers approximately 50 percent of all U.S. retail residential mortgage originations, and has been conducted weekly since 1990. Respondents include mortgage bankers, commercial banks and thrifts.
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Second Homes: Strong Forecast for a Small Market

The sheer size of the baby boom generation means sustained growth in the second-home market in the next 10 years.
By: Camilla McLaughlin: REALTOR® Magazine Online
Contributing to the debate over housing as an investment for retirement is recent research by the Research Institute of Housing America of the Mortgage Bankers Association, which reveals that only a small percentage of older Americans own a second home.

Still, the report says, the sheer size of the baby boom generation means sustained growth in the second-home market with the number of homes forecast to grow by 2 million units in the next 10 years.

Of the 43 million American home owners aged 50 and over, only 15 percent also own a second home. Perceptions of a growing market are largely “anecdotal,” according to the study, which shows the rate of second-home ownership among 50- to 60-year olds relatively flat over the 12 years from 1992 to 2004.

Not only is the rate of second-home ownership among older Americans not increasing, but only a small number — 12 percent of second-home owners — plan to eventually sell their main residence and occupy their second home.

Additionally, according to the study, “second homes aren’t a main driver of investment decisions of older households,” with such properties accounting for only 13 percent of a typical second-home owners asset portfolio.

By comparison, the NATIONAL ASSOCIATION OF REALTORS® 2006 Profile of Second Home Owners shows that one-third purchased a second home with an eye toward diversifying investments, and 18 percent intended to use the home as a full-time residence after retirement.

Regional Market, High Turnover

Adding to the perception of growing demand is the regional aspect of this market as well as the rapid turnover of homes. Although nationally the percentage of second homes might be small, in many regional and local markets they account for a much higher percentage of sales. The South Atlantic region leads the country with the most second homes.

The typical second home might be held for 15 years, according to the Mortgage Banker’s study, but turnover is high with 45 percent of older second-home owners disposing of them in a six-year period. Changes in marital status and health drive the decision to sell, according to the study.

Other study conclusions:

    • Younger boomers are no more likely to own a second home than older boomers.
    • A majority of second-home owners either inherited their homes or purchased
      them with cash.
    • Second homes remain a small portion, only 4 percent, of overall mortgage
      originations.

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