FDIC: Slim Odds on Housing Crash

New research by the Federal Deposit Insurance Corp. reveals that home prices usually stagnate, rather than crash, following housing booms—which are characterized by growth of 30 percent or more over a period of three years.

Although the housing market is not likely to collapse, the FDIC notes that the increased use of home-equity credit lines and subprime and high loan-to-value mortgages, as well as other market changes, will make it more difficult to gauge home prices down the road.

Housing collapses typically do not occur on the national level, according to the study, as they are sparked by local economic declines.
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Loans Linked to Builders May Cost More

An undercover investigation by the National Association of Mortgage Brokers found that new-home buyers often are forced to use their builder's affiliated lender and settlement-service provider in order to close the deal.

Posing as a buyer at five sales offices in Florida, NAMB's Marc Savitt confirmed that all of the builders violated federal real estate settlement and anti-trust rules. According to Savitt, the builders refused to provide incentives or OK the sale if the buyer opted to use an unaffiliated lender.

Savitt added that builders often offer free patios, landscaping, or a similar bonus to buyers who use their preferred lenders; however, they include the cost of the incentives in the home price.

"What they're doing here is discouraging buyers from shopping in the open market," Savitt says.

Ivy Jackson, who heads the U.S. Department of Housing and Urban Development's settlement rules office, says incentives are permitted as long as they translate into actual savings for the buyer.

Experts urge buyers to avoid builders who act illegally by mandating the use of their partner firms and to compare the offerings of affiliated lenders against those not part of the venture to determine whether the advertised savings are real.
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Lease-Purchase Option: Now Worth a Look

Fannie Mae, Freddie Mac, and housing agencies and nonprofits across the country have teamed up to establish lease-purchase programs to help low- to moderate-income households achieve homeownership.

Under a traditional lease-purchase arrangement, the home buyer pays a monthly rent that includes funds to be put toward the down payment. In a matter of one to five years, they are given a mortgage and become the owners of the property.

Under Fannie and Freddie's programs, however, the real estate is purchased by a housing authority or nonprofit that holds title to the property until the buyer secures the mortgage. Traditional lease-purchase agreements are formulated by the landlord and the buyer, and most must be ironed out by the courts because they fail to include necessary details and contingencies.

The government-sponsored enterprises hope to avoid that by explaining all of the terms in detail; and the borrower often receives an education as well as a cleaner credit record. Once the renter becomes the homeowner, the interest they pay each month is tax deductible.
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Sharing the Dream: Latinos See Home Gains

The number of home buyers with Spanish surnames in Southern California surged to 34.3 percent in 2004 from 17.6 percent a decade earlier, DataQuick Information Systems reports.

Latino home buyers are moving beyond the traditional magnets of Anaheim, Santa Ana, Pico Rivera, Compton, and Lynwood to Fontana, Riverside, Ontario, and the northern portions of Los Angeles and San Diego counties. While the statewide median home price came in at $425,000 in February, DataQuick says the median paid by Latino buyers was $383,500.

Despite their distrust of banks and lack of traditional credit histories, Latinos are achieving homeownership due to Spanish-speaking marketing campaigns; mortgages for buyers with non-traditional credit; homeownership courses that help Latinos establish checking accounts; and lenders that allow several families to hold title to one property.

Still, Latinos accounted for less than a quarter of home buyers in the state since 2003, compared to 59 percent of non-Latino whites. American CityVista's Henry Cisneros urges builders who target Latinos to include extra bedrooms, outdoor space, and garage space as well as focus on neighborhoods in close proximity to churches, schools, and public transit.
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Up on Roofs? Gardens Help in Several Ways

Green roofs are gaining popularity among owners of residential and commercial properties. Also known as eco-roofs, garden roofs, living roofs, or vegetated roofs, they use plants to absorb pollutants and storm-water. Other benefits of green roofs include cooler interior temperatures during the summer months and warmer interior temperatures in the winter, which effectively reduces heating and cooling costs.

"Extensive" garden roofs employ drought-tolerant plans and require little or no maintenance; but some homeowners are opting for "intensive" versions that need watering, fertilizing, and mowing. Once built only on flat roofs, green roofs can now be installed on slopes of up to 26.5 degrees. They involve several layers, built on top of the roof deck, rigid foam insulation, a waterproof membrane, a drainage layer, and the necessary soil and compost.

Home and business owners in Oregon, Washington, Illinois, New York, California, and Maryland have access to incentive programs that offset the upfront costs, which range from $10 to $20 per square foot.
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New report examines green policies for affordable housing

At least a dozen states promote more healthy, sustainable homes
Inman News
A report released today by The Enterprise Foundation shows that state housing agencies are encouraging affordable-home builders to implement a wide range of "green building" practices to make homes healthier, more efficient and more sustainable.

The report, "A Greener Plan for Affordable Housing," summarizes elements in state plans for allocating federal Low Income Housing Tax Credits (Housing Credits) in the areas of smart site locations, energy and resource efficiency, and healthy living environments. The Enterprise Foundation provides financing for affordable-housing projects.

"'A Greener Plan for Affordable Housing' shows states are serious about ensuring that the affordable homes they help provide conserve energy and natural resources, promote healthier living, and support state and local strategies to connect affordable homes to transportation and job opportunities," said Bart Harvey, chairman and chief executive officer of The Enterprise Foundation.

The report finds that many states encourage developers to meet some standard of energy and/or water efficiency, utilize sustainable, durable materials, and ensure proximity to services and amenities. A smaller number of states are taking a more holistic approach that emphasizes strong conservation, healthy homes and smart site location approaches.

Among states that the report finds particularly progressive in certain areas are:

- Georgia, Michigan and Oregon: Emphasize walkable communities.
- Illinois and Minnesota: Stress transit access in connection with affordable housing.
- California, Illinois and Massachusetts: Award points in their scoring systems for developments that utilize alternative energy sources such as solar panels or geothermal heating.

- Connecticut: Rewards developments that meet asthma-safe criteria.
- Arizona and New Mexico: Prioritize indoor air quality.
- Virginia: Awards points to developments in which a U.S. Green Building Council- certified professional participates.

The report was based on an analysis of every state's 2005 Housing Credit allocation plan (as of April 2005) and additional relevant policy guidance that affects the Housing Credit program in certain states. The author is James Tassos, a housing industry consultant based in Santa Barbara, Calif., who worked for nine years on the Housing Credit program at the National Council of State Housing Agencies. The report is available at http://www.greencommunitiesonline.org/.

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California housing starts climb in March

Largest gains seen in Southern California
Inman News
Home builders shook off the effects of record rainfall earlier in the year to post sharp month-over-month increases in housing starts in March, the California Building Industry Association reported.

New housing units as measured by permits issued in March totaled 19,157, up a resounding 33.3 percent from a rain-soaked February and down a slight 2.4 percent from March 2004. Of that total, 14,136 were single-family units (up 35.2 percent from February) and 5,021 were multifamily dwellings (up 28.1 percent).

During the first quarter of 2005, 16 of the state's 28 metropolitan areas posted gains in single-family housing starts, while 15 have posted gains in multifamily units. The San Jose-Sunnyvale-Santa Clara Metro Area, which posted the largest decline in starts in 2004, has rebounded nicely, posting the largest increase in the first three months of 2005. One area showing a significant decline so far has been the Sacramento region, which local building officials attributed to both the weather and delays in processing two large master-planned communities.

Despite the fact that California's housing production is rebounding and is expected to exceed 200,000 new homes and apartments for the second year in a row, home builders still aren't keeping up with continued high demand from the state's growing population, said CBIA President Steve Doyle, a San Diego home builder.

"With interest rates still near their historic lows and demand remaining high due to continued population growth, we expect this year's production to come in right around last year's level." Doyle said. "But even the 210,000 new homes and apartments built last year – the most produced since 1989 – is still not enough.

"The State Legislature needs to take action this year to ensure that land is available for new homes and apartments and that home builders aren't handcuffed by unnecessary and redundant regulations that prevent us from keeping up with demand. Because the bottom line is that housing affordability begins with housing availability, and it's the lack of availability that has contributed to sky-high prices and the diminishing opportunity for Californians to realize the dream of home ownership."

The California Building Industry Association is a statewide trade association representing more than 6,200 businesses involved in home construction.
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Freddie Mac: More cash-out refis this year

Home improvement spending grows
Inman News
Cash-out refinancings that resulted in higher mortgages jumped in the first quarter of 2005, mortgage giant Freddie Mac said today.

Freddie Mac said 64 percent of its loans that were refinanced in 2005's first quarter resulted in new mortgages with loan amounts at least 5 percent higher than the original mortgage balances.

In comparison, in the fourth quarter of 2005, 56 percent of refinanced loans had higher new loan amounts. That quarter was the highest since the fourth quarter of 2000.

"The first quarter had record home sales and single-family housing starts and a lot of refinancing activity," Frank Nothaft, Freddie Mac vice president and chief economist, said in a statement.

The share of borrowers who decided to cash out some home equity as part of their refinancing increased as well, Nothaft said. This helped prop up consumer spending on home improvements, even though total consumer expenditures grew more slowly, according to Nothaft.

Freddie Mac expects the U.S. Gross Domestic Product to grow at a slower rate in 2005 than the 3.9 percent growth experienced in 2004. Core inflation (excluding food and energy costs) should continue to be low, but high energy prices are starting to filter into the prices of goods and services and have already depressed consumer spending, the company said.

"The disappointing economic news over the past few weeks is not likely to cause the Fed to deviate from its measured pace of quarter-point increases in the federal funds rate when it meets today, but it could cause the members of the Federal Open Market Committee to change their stance on future rate increases," noted Nothaft.
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Why Won't It Sell? Slow Homes in Fast Market

Even in housing booms, some homes sit unsold. Maybe they're not priced appropriately in comparison to similar homes in the neighborhood or maybe the sellers are restricting the times when buyers can view the property.

Other factors can be to blame. Homes with the right asking price and unlimited viewing times might not be in good condition. Buyers will be turned off by peeling paint, messy lawns, interior clutter, or odors. Buyers commonly associate musty smells with mold, so sellers would be wise to install a dehumidifier. If odors are not easily eliminated, they should opt for a professional cleaning.

Some homes languish on the market due to unattractive features or floor plans. Buyers tend to avoid homes with below-grade kitchens, narrow staircases, lack of natural light, or bedrooms with a walk-through that leads to other rooms.
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Faltering economy not hurting real estate

Fed likely to continue hiking cost of money
By: Lou Barnes: Inman News
All long-term rates fell again late last week. The benchmark 10-year T-note has broken below 4.2 percent, and an "origination fee" will buy a 5.5 percent 30-year fixed-rate mortgage.

Bond traders are placing recession bets. Not (yet) in expectation of a classic recession in which GDP growth would decline, but a "growth recession" in which GDP growth might slip to 1 percent or 2 percent annual, and the unemployment rate begins to increase. The rationale for a recession bet is this win-win equation: either high energy prices and a tightening Fed have already tipped over the economy, or a worsening inflation problem will force a tighter Fed and tip-over at a later date.

Evidence. Last week's breakthrough bond rally started with news of a steep drop in March orders for durable goods, and gained steam on Thursday's news that first-quarter GDP had grown only 3.1 percent. That's fabulous by European or Japanese standards, but not enough to support U.S. job growth. Internal aspects of the report were worse: "final demand" (purchases by business, government, and individuals) rose only 1.9 percent. The excess of 3.1 percent production over 1.9 percent demand is sitting on shelves and floors as unsold inventory, a disincentive to production in this quarter.

Second, the personal consumption expenditure deflator ("PCE"), used to convert nominal GDP to after-inflation, jumped to an annual 2.2 percent gain. The PCE is Federal Reserve Chairman Alan Greenspan's favorite, and the acceptable band for its movement is 1.5 percent-2 percent; if PCE is in a jailbreak, the Fed is coming no matter what collateral damage its inflation-fighting may (will) do to the rest of the economy.

In the 1970s, the Fed tried stagflation (accidentally, maybe): keep the economy going at the price of tolerating some inflation. The reward: steadily increasing inflation and deferral of ultimately greater economic sacrifice to remove it. Not this time. Donald Kohn (Fed governor, longtime Fed staffer and key advisor to Greenspan, in the running for the Chairman's job) concluded a speech two weeks ago this way: "We should not hesitate to raise interest rates to contain inflation pressures just because it might set off a retrenchment in housing prices,...nor should we hesitate to raise rates because higher rates mean higher debt-servicing burdens for the current account, the fiscal authority, or households."

Ow. If he won't hesitate for housing, or for the increased cost of our foreign or national debt, or for Mom and Pop, presumably he won't hesitate for the stock market, either.

The bond market's win-win, economic-slowdown equation is correct. However, neither traders nor the Fed know which win will win; i.e., how tough the Fed will have to get. Some think the Fed will signal "tough-enough soon" after its meeting on Tuesday, and stop tightening at 3.5 percent, only three .25 percent moves away. I hope so, but I think there is surprising strength in the economy just under the radar.

The obvious sign of strength: the housing market is as healthy as ever. There are some signs of slowing in price-appreciation in overheated markets, but a truly weakening economy would have showed up in housing stats by now. Recession bets have cancelled any effect of a year of Fed tightening on fixed-rate mortgages; tightening has removed silly prices for ARMs, but the interest-only innovation has more than replaced the ARM loss.

Sneaky strength: tax withholdings from paychecks are running 2.5 percent to 6 percent above official wage growth, and the wage stats are supported by the employment cost index. If wages are growing slowly, if at all, and withholdings are way up, then there are a hell of a lot more people at work than payroll stats show.

Given latent strength, and a mortgage market impervious to Fed hikes in short-term rates, the hunch here is that the Fed will have to go past 3.5 percent but the win-win bet will keep fixed rates under control.

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
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Time to cash out or dive further into real estate?

By: Julie Brosterman: Inman News
The dialog debating the housing boom versus the housing bust continues. Articles in major publications every other week speculate on the meaning of flattening prices and small declines in the percentage of sales. In spite of these stats, sales of homes in the Westside of Los Angeles are rocking. We're back to that multiple-offer, irrational overbidding and all-cash-offer situation that fueled the market last year in March and April.

Is this irrational exuberance or do these buyers know something that I don't know?

Several of my friends who have been trying to buy for a while and haven't found what they're looking for have been outbid on every home that they've looked at in the past three weeks. And if you're looking for a fixer or a flipper, so is everyone else here in L.A.

A listing in need of some major TLC and located around the corner from me came on the market last week. The listing price was $1.3 million. Our friends were interested in seeing if it qualified as a fix and flip so my husband and I went along to give them moral support through the exercise of pricing out the improvements to see if they could get their desired profit after a few months of hard work. It looked like a "go" so they made a solid offer of about $60K over asking price only to be told by the selling agent that there were 27 offers and that they were only going to be responding to the first 12 with bids over $1.5 million.

I'm thinking this must be an L.A. phenomenon. That long, cold winter back East usually works well on kicking up prices this time of year.

So I called our good friend who is an established developer of luxury homes in South Florida to see if the same fever was going on down there. I've been seeing several articles in the past few weeks about how Miami, Ft. Lauderdale and Palm Beach have been experiencing price run-ups similar to those in Southern California.

"Time to get out," I told my friend, the developer. "Take the money and run. Go live on that desert island and drink drinks with pink umbrellas sticking out of them. Done."

"Are you kidding?" my friend asked. "I just bought four more properties that are old hotels that I'm going to be tearing down and turning into million-dollar townhomes. This is no time to be cashing out. You can't believe what's going on down here."

My husband has less emotional thoughts on the subject. "Real estate is the perfect capital market scenario," he said when I posed the "what's going on here" question to him. "Information is readily available via the MLS for not only current listings but past listings and pending sales. Houses are priced accordingly. Houses that are 'tear downs' or in need of major TLC are now being priced with the finished profit in mind – in other words, they incorporate the ability for upside in their pricing – so there's no unknown. The only unknown is whether there will be a terrorist event or an earthquake sometime in the future that will rock the basic foundation of people's faith in the economy as a whole, not real estate in particular."

"This is the time for pioneers," he continued. "To branch out into areas that are rapidly becoming re-gentrified before everyone else wakes up and drives the prices up there too. There are still a few bargains out there but they are few and far between…and your neighbors might still have bars on their windows."

While concluding this story, I did my own personal test of whether to go further in or pull out of the market. I took a look at my stock portfolio's valuation as another rocky week ended. It certainly has looked better. Maybe it just needs a new coat of paint? Somehow, the idea of investing in real estate seems a whole lot saner.

Julie Brosterman is a consultant to the real estate technology, mortgage and servicing industries. She lives in Los Angeles and can be contacted at juliebrosterman@hotmail.com.
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Residential real estate construction spending grows 12%

Annual spending rate remains above $1 trillion
Inman News
Construction spending during March 2005 was estimated at a seasonally adjusted annual rate of $1.05 trillion, or about 0.5 percent above the revised February estimate, the U.S. Census Bureau of the Department of Commerce announced today.
The March figure is about 8 percent above the March 2004 estimate of $973.9 billion. The seasonally adjusted annual rate projects a monthly total over a 12-month period.

During the first 3 months of this year, total construction spending amounted to $222.4 billion, or about 9.3 percent above the $203.5 billion for the same period in 2004.

Spending on private construction was at a seasonally adjusted annual rate of $815.5 billion, about 0.5 percent above the revised February estimate of $811.3 billion. Residential construction was at a seasonally adjusted annual rate of $585.3 billion in March, about 0.3 percent above the revised February estimate of $583.6 billion and up about 12.1 percent from March 2004. Nonresidential construction was at a seasonally adjusted annual rate of $230.3 billion in March, about 1.1 percent above the revised February estimate of $227.7 billion and up about 6.3 percent from March 2004.

Month-to-month changes in seasonally adjusted statistics often show movement that may be irregular, the Census Bureau reported. It may take two months to establish an underlying trend for total construction and as long as eight months for specific categories of construction. The statistics are estimated from several sources and surveys and are subject to sampling variability as well as non-sampling error including bias and variance from response, non-reporting, and under-coverage.

Statistics for the current month are preliminary estimates subject to revision in following months as additional data become available. The average absolute percent changes from preliminary estimate to first revision for the major seasonally adjusted components are as follows: total construction, 0.8 percent; private construction, 0.7 percent; and public construction, 1.4 percent.
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California: Number of Latino Homeowners Increases

Latinos accounted for 31 percent of Southern California households in 2003, according to research by the Richard S. Ziman Center for Real Estate at the University of California at Los Angeles. They also made up one-quarter of the region's homeowners.

Additionally, 50 percent of Latino homeowners bought their residences during the past five years. The survey reveals that first-time Latino buyers selected neighborhoods that had the most affordable dwellings, while repeat buyers chose better neighborhoods with larger homes.

More than 60 percent of Latino renters voiced their support for mixed-use housing within a two-block radius of their current residences, compared to only 47 percent of Latino homeowners. Nearby retail centers, meanwhile, are favored by 80 percent of renters but fewer than 40 percent of homeowners.
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Fed Sees Inflation as Bigger Threat Than a Slowdown

The Federal Reserve appears to be more concerned about the first quarter's jump in inflation to 2.2 percent than about the U.S. Commerce Department's recent report that the economy expanded at a rate of only 3.1 percent—its lowest level since 2003—during the same period.

The central bank is poised to hike the federal-funds rate next week for the eighth time since last year, boosting it to 3 percent from 2.75 percent, with the biggest debate centering on the post-meeting statements it issues.

There are concerns that continuing to state that the Federal Reserve will drive up the short-term rate at a "measured" pace indicates that it is abiding by an already-established policy, prompting investors to sink their money into riskier investments.

Meanwhile, there are worries that removing the language would lead investors to act on the belief that the central bank is shifting its policy to half-percentage-point hikes from quarter-point increases.
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