Everywhere I turn nowadays, I hear that real estate is on the rise.  Well, OK, not everywhere.  Not on the news. Not in the real estate blogosphere (known as the RE.net). Not from statistical analysis. Not from the National Association of Realtors.

Everywhere else, though.  People on the street.  My barber mentioned that real estate was getting better…wasn’t it?  Potential seller clients (always optimistic) tell me that real estate is getting better…isn’t it?  People at my church tell me real estate is getting better…right?

Sure.  If you say so.

Saying So Doesn’t Make It So

At some level, if you get enough people to talk up a particular topic whether it’s the real estate market, the stock market or the latest mystery thriller on Amazon, that thing will go up.  This is what stock market speculators do.  They buy a stock, send out rumors and whispers on the Internet and through all the other channels that people think have authority and, voila, the stock price goes up, the speculators dump it and everyone else is left with a dud stock.

If enough people start to talk up the real estate market, it might actually go up.  But not for long.  With a  huge amount of inventory (i.e., homes on the market available for sale) there is no way that prices can rise.  it’s simple supply and demand.  There is a ton of supply.  Virtually no demand because of the horrendous mortgage environment.  So, unless your home happens to be in one of the pockets that are doing well because of the geographic location, you probably won’t actually see any movement.

What Needs To Happen

Now that the Government has stopped stimulating the housing market (i.e, the tax credit is gone).  We need to get the banks to loosen up credit for mortgages.  I don’t suggest that they start lending to anyone who can fog a mirror like they did in the old days. I am suggesting that there are quite a few financially qualified buyers that are looking for homes to live in and quite a few financially qualified real estate investors looking for the bargains they can snap up, rehab, and re-sell.  It’s time to provide the capital to allow these “players” to get into the market and reduce the housing inventory.

Once the number of houses available for sale has been reduced significantly, prices will stabilize and even begin to rise, again.  Not at 25% per year like the good old days.  That bus has left the terminal.  Maybe somewhere in the neighborhood of 3% to 5% per year.  Still, that will be enough to turn a home into a retirement nest egg as well as a nice place to live with heat in the winter and cool in the summer.

The “housing recovery” is proceeding in fits and starts.  There was a uptick in the April time frame due, mostly, to the expiration of the home buyer tax credit.  Both new homes and existing homes saw an increase in sales and some stabilization in home prices.  Both good things.

Whether this continues into May and June is another story.

Does Seller Contributions To the Buyer’s Closing Cost Help?

Currently, the FHA allows the Seller to contribute up to 6% of the sales price of the house being purchased.  For a $300,000 house that’s $18,000 — a lot of money — and probably what it takes to assure the buyer gets to the settlement table.  However, the FHA is moving to reduce the amount of Seller contribution from 6% to 3%.  So, using the same $300,000 house, that means the Seller will only be able to contribute $9,000 towards the Buyer’s closing costs.

That still sounds like a lot of money.  Yet, in Maryland (one of the most expensive, if not the most expensive, State for closing costs) for most FHA home buyers, it may not be enough.  Most home buyers in the moderate to low price ranges just haven’t saved up that much actual cash.  They still need to come up with the 3.5% down payment (that’s $10,500 for a $300,000 home) . So, they look to the Seller to assist with the closing costs.  If that happens the Sellers sells, the Buyer buys and everyone’s happy…or, at least, satisfied.

Less Closing Help Could Mean Fewer Buyers

Creating a requirement for the home buyer to come up with even more cash to purchase a house may decrease the number of buyers in the marketplace.

• Fewer buyers mean fewer home sales.
• Fewer buyers equals lower home prices as home sellers try to compete for the fewer buyers in the marketplace.
• Lower prices might equal more short sales or foreclosures due to home sellers losing the equity they need to sell their home and pay off their existing mortgage.

Still, there is the school of thought that home buyers should have the money to make a home purchase. Part of the problem we’re experiencing now was bought on by allowing lots of people with little or no financial resources to buy a home they couldn’t afford.  Forget the down payment and closing costs.  They can’t even afford the monthly payment.  So, the thinking goes, we should force home buyers to come up with as much cash as they possibly can to make the home purchase.

It’s a real conundrum.  We really need to shake through the existing inventory of homes sitting on the market.  Yet, we need the people who buy those homes to have the financial ability to make the initial purchase and keep up the mortgage payments for years to come.

Do you have an opinion about this one?

I recently received this tidbit from a lender:

As of June 1, most investors are instituting Fannie Mae’s Loan Quality Initiative, which will require a credit report to be pulled just prior to closing.  This will mean that any new credit or inquiries made since the initial report must be taken into consideration by the underwriter.

I urge you to counsel any of your buyers to refrain from any credit applications during the home buying process or, if necessary, to consult with the loan officer before doing so. (emphasis mine)

In this case, the word investors means the bank or credit union or mortgage company that is providing the money for the mortgage.

Many people go on a little bit of a spending spree before real estate settlements to buy things like furniture or kitchen things or all kinds of stuff for the new house.  The advice from this tip is: DON’T DO IT!

There can be nothing worse than getting ready to attend your real estate settlement, take the keys to your new home and have the movers (or your friends) ready to go and find out that it isn’t going to happen because you may have over extended yourself a bit.

Be careful.  Consult with your loan officer.

It can be argued that the mortgage profession has been broken for a long time.  Ever since the first adjustable rate mortgage or No Money Down mortgages became available the system started to deteriorate.  People no longer had to work and save.  Buying a house went from being a very big deal where people stayed in their homes and neighborhoods for decades to being an “investment” that required a high re-sale potential.

Of course, the financial services industry exists solely to create more wealth for itself so they came up with mortgage schemes that became more and more exotic.  Pretty soon all you needed to do was fog a mirror and be able to sign your name in order to get a loan for many hundreds of thousands of dollars.  The sub-prime housing bubble was the result.  The housing market bought the rest of the economy down with it as the Big Boys on Wall Street defaulted on promises to make good on bad investments.  Think AIG.  Think Lehman Brothers.

Fast Forward to Today

Now, the pendulum has swung so far in the direction of caution and risk avoidance that responsible people with a job, money in the bank and a history of good credit have a hard time getting a mortgage — even if they have a current, up-to-date mortgage now!

I recently encountered two situations that give me pause as to whether or not we will ever get back to any kind of “normal” housing market.  Both are true stories:

But I’m Really A Responsible Person

A couple has owned their home for several years have decided to “move up” to a larger home in a different neighborhood.  They have no debt outside a small balance on their mortgage.  They have a joint, household income that is substantial and a great FICO credit score.

Here’s the challenge: they have dealt with only one financial institution – their Credit Union – and their Credit Union only reports to one credit reporting agency.  You wouldn’t think this was so bad except that mortgage underwriting standards want the “tri-merge” score from three credit reporting agencies.  So even though the rest of their financial life is on order, they will have to jump through some hoops to finalize their mortgage.

Not The Right Kind Of House?

A large co-operative housing community is suddenly thrust into a position of not being able to point potential members/home buyers to lenders.  The reason:  many lenders do not provide financing for co-ops because the borrower doesn’t really “own” the home.  They own a share in the corporation.

Never mind that this particular community has been around for close to 70 years.  Never mind that there are so few foreclosures that it’s negligible. Never mind that down payment requirements and credit score requirements are already extremely high.

Now Fannie Mae and Freddie Mac want to evaluate the co-op community and decide whether or not they will back the mortgages.  If they decide not to do so, there will be a whole lot of people crying the blues and the two financial institutions that will continue to lend will have zero competition for mortgage interest rates or fees.

Just The Tip Of The Iceberg

This is really just the tip of the iceberg. There are tons of stories of responsible people with the cash reserves, good credit and verifiable employment that have a hard time getting a mortgage.  I’ve written about the problems with condos.  Home Owner Associations of townhouses and even single family homes are going to come under the same scrutiny.

With all this talk of financial reform and whatnot, it’s time for someone to take a good hard look at the mortgage industry in this country and make some corrections.  It’s time to use some leverage to get the financial institutions to make loans to responsible people who want to buy homes.

Many times we get an idea that we want something — like our first home or our next home — but we don’t really have any idea how to start.  Even people who have livined in their own home for years may have forgotten how complicated the process can really be.

Here are five “must have” items to get started on buying your first home…or your next home:

1. A Realtor

Believe it or not, even with access to all kinds of information on the Internet about what homes are available and all kinds of other stuff, it is still best to get a professional on your side to help you through the process.  In the MD Suburbs of DC, we call these types of Realtors buyer’s agents.  Buyer’s agents have a fiduciary [legal] responsibility to represent your best interests.  Sure.  You could run around to Open Houses and check the Internet for the For Sale By Owner places but remember when you talk to a Realtor in an Open House you are talking to the seller’s representative.  His or her fiduciary duty is to represent the best interests of the home seller.

Besides, a Realtor (buyer’s agent) can get you into homes on your schedule.  It’s kind of like your own private Open House.  The house showing part of the process is really just the tip of the iceberg.  There is the negotiation for terms that you would like to offer, the home inspection, appraisal, and on and on.  The bottom line is that if you really want a “good deal” on a house you like in a neighborhood you’ll enjoy living in then you should hook up with a Realtor.

2. A Mortgage

Unless you have a suitcase full of cash or lots of money invested somewhere you can get at it, you’ll need a mortgage.  Finding a good, experience loan officer from a reputable lending institution will be key.  This is another area your Realtor can help out.  A good buyer’s agent will have had experience with lots of different loan officers and know the good ones who can get your mortgage funded by the time of the settlement date.

It may be surprising to most people that this is not a slam dunk.  Mortgages are extremely difficult to obtain nowadays thanks to the sub-prime loan debacle.  If you don’t have someone experienced at getting things done you may find yourself with a lot of disappointment and you may even be out some cash.

3. Money

Surprising as it may sound, there are still a lot of people in the world who think they can buy a house without any money.  This is a myth.  The VA Loan is about the only mortgage that still has no down payment.  You still have closing costs and it’s not a given that the home seller will pony up all the buyer side closing costs.

FHA requires a minimum of 3.5% of the sales price of the house as a down payment.  On a $300,000 house that’s  $10,500.  And you still may have to pay some closing costs depending on the specific house and situation.

There’s also home owner’s insurance you have to purchase, the cost of the home inspection, the appraisal and so on.  You’ll need a stash of cash.

4. Focus

It really helps a lot if you have some idea of where you want to live and what type of home you want to live in.  “Somewhere near METRO.” is not focus.  “Silver Spring” is not focus.  Think about the neighborhood you like or at least the little part of the town you want to live in.  Do you really, really, really need to be 1o minutes from METRO?  If so, are you (or can you) pay the price?  What type of house would you like to live in?  How many bathroom do you need? Is a fireplace important?

The whole point of focus is that it can really help you and your Realtor find a home you’ll be happy with.  It may take a little while to find just the right one but if you know what you’re looking for, you’ll know it when you see it and be able to make a good decision.

5. Time

This is not time as in “I have all the time in  the world.” or “I don’t really want to move in until sometime next year.”

Time, in this case, means that you are willing and able to set aside a significant chunk of time to:

1. look for the home you want
2. put together the documentation you’ll need for the mortgage
3. attend the home inspection
4. attend settlement

If you have other things going on in your life that are more important, that’s OK.  Just set the house hunting aside until you can devote your time and energy into finding the place you’ll probably be living in for the next 10 years or more.

This is the place where you may be raising a family, getting involved in the neighborhood association and schools and all kinds of stuff.  So you need to set aside some weekend time and maybe even take time off work so you can get out to look at places without running into crowds.

Time devoted to this process will be the best use of your time ever!

Yes, it’s true.

Congress did not extend, expand or do anything with the home buyer tax credit except to let it expire of natural causes.  If you were able to enter into a legally binging contract of sale to purchase a home by April 30th, you’re on the path.  Now you have to make sure you can get to settlement by June 30th.  Here are a few things that can turn your dream of free money into a nightmare:

1. financing issues — if you want to shop around for an eight of point on your interest rate, if you go out and buy something that throws your income-to-debt ration out of whack or if you’ve gone to a lender that lied to you about their ability to get the loan done.
2. inspection issues — this might come from the home inspector or it might come from the appraiser.  Either way, if something needs to get fixed to get to settlement and it doesn’t happen then settlement won’t happen either.
3. title issues — if there are problems with the title to the house which can include tax liens or, maybe, the home seller is very close to the edge for paying off the mortgage from the proceeds of the sale or a host of other problems then it might take some time to clear up the title enough to be able to transfer it to the home buyer.

There are lots of other things that can happen to slow down the process.  Luckily, there is some time.  The important thing now is to keep your eye on the prize and keep doing the things that need to be done in order to get to settlement by June 30th….and not a day later!

Recently, I’ve been working with more than a few low priced condos and co-operative homes. Both home seller and home buyers. I’m sure there are people out there looking for single family homes in the mid-tier price ranges.  I just haven’t been working with any lately.

One of the biggest challenges facing both home sellers and home buyers of low priced condos and co-ops is that price, itself, is not the full story. There is the condo/co-op fee on top of the mortgage and property taxes. Property taxes are normally rolled into the mortgage payment so, to most people, they are almost invisible. However, when it comes time to either purchase of sell a home, the property taxes rear their ugly head.  That’s because the price of the home determines the principle and interest only.  Mortgage companies also need to factor in the cost of the property taxes and home owners insurance.

The typical condo and co-op owner doesn’t really need to worry about home owner’s insurance, as such.  That’s usually rolled into the condo or co-op fee.  They do have to worry about “contents” or “condo” insurance to cover loss to the stuff inside the condo or co-op — things like clothes, appliances, TVs, computers, etc.  That type of insurance is usually pretty cheap.

Price + Condo or Co-op Fee + Insurance = Big Payment

From the home seller’s point of view, price is almost the entire story. The price is what is going to pay off their existing mortgage and provide them with some proceeds to buy their next home or retire to an apartment or whatever they’re doing. The price will pay the Realtor selling the home as well as State and County costs and more.

The home buyer, on the other hand, needs to take the price into consideration and the condo or co-op fee plus the cost of insurance. These four factors — Principle, Interest, Taxes and Insurance (PITI) — make up the monthly mortgage payment for the new condo or co-op owner.  The mortgage company will certainly take into consideration the condo or co-op fee plus the amount of the property taxes when determining the ability of the potential home buyer to repay the mortgage. Thus, even if the price of the condo or co-op is low, if the condo or co-op fee is high (which it almost always is) and the taxes are high (which they almost always are), the home buyer will need to qualify for a mortgage payment that is only remotely tied to the price of the real estate.

As a result, the price of the condo or co-op needs to be attractive enough to take the condo or co-op fee plus the property taxes into account.  A low price from the home seller does not translate into a low cost to the home buyer.  Sad but true.

Let’s take a ride in the WABAC machine into the year 2000. Everyone was freaked out about the Y2K bug.  Remember?  It was supposed to bring the world, as we knew it, to an end.  It didn’t crash every computer in the world but I think it rewired people’s brains because right about that time was the beginning of the infamous and notorious housing bubble.  No one knew it then but house prices were about to start climbing straight up like the proverbial “hockey stick” graph.

It started slowly but as new mortgage products became available and people started seeing their friends, family and co-workers get rich, rich, rich from owning real estate (and then selling it pretty quickly) everyone wanted to own a house.  It didn’t matter what it cost or what condition it was in. People wanted it and the financial services industry saw to it that anyone who wanted a house could have a house even if they was no godly way they could repay the mortgage.

The Crash

Then house prices began to fall.  Slowly at first and then like the proverbial “upside down hockey stick” they fell off a cliff with cement shoes.  People started freaking out.  They couldn’t pay the mortgage anymore because the interest rate adjusted from 3% to 6%.  They couldn’t sell their house for what it was now worth.  People that had bought homes at $500,000 were now living in $300,000 houses…but still had a $500,000 mortgage (stated income, 100% financing, interest only).

Short sales, foreclosures, abandoned properties everywhere.  Responsible home owners are trying to hold on and continue to pay their mortgage. However, a lot of people are a paycheck of job downsizing away from quitting their payments.

The Government stepped in with some relief and some incentives for people who could qualify for a mortgage.  The tax credits, the artificially low interest rates, pressure on the banks to provide loan modifications. Now, though, the party is about to end.

Normal?

The tax credit program ends on April 30th. The Federal Reserve has stopped buying mortgage backed securities so rates are free to move with the normal market forces. Banks are still being slow to provide relief and credit is still extremely tight. So we might be going back to the “good old days” when people actually had to save money to buy a house, have a good job and have good credit.  You know?  Normal.

My guess is that it’ll take a few years for people to settle in and really adjust to home prices that don’t shoot up like a rocket or plummet like a rock. Houses will be something you buy to live in for awhile because you like the house and the neighborhood. Sure.  There will still be real estate investors. These will be the people buying the houses so they can rent them to people who can’t afford a house or otherwise don’t want to buy one.

At least, I think that’s what “normal” will look like for the housing market.  I could be way off.  It’s happened before.

Selling condos is not exactly the same as selling a townhouse of single family home.  For one thing, lenders take the condo fee into consideration when qualifying a potential buyer/borrower for a mortgage. The buyer must not only be able to repay the mortgage amount, they must be able to repay the monthly mortgage payment plus the condo fee.

Another real concern is whether or not the condo development qualifies under Fannie Mae/Freddie Mac guidelines. The most troublesome of these guidelines is the ratio Fannie Mae and Freddie Mac allows for investors-to-owners and the condo fee delinquency rate. You may have heard, there is a lot of short sales and foreclosures going on. This directly affects the condo fee delinquency rate. Condo owners that are in severe mortgage distress usually don’t pay the condo fee.  Even owners that are just feeling a pinch may be delinquent on their condo fee.  This affects the ability for buyers to purchase condos and sellers — even those with plenty of equity — to sell.

If the delinquency rate is too high or the investor-to-owner ratio is too high, the entire condo development may actually be ineligible for Fannie Mae/Freddie Mac backed loans.

An individual condo’s saleability really depends on whether a real estate investor is attempting the purchase or if the potential condo buyer will be using it as his/her principle residence.  Principle residences can be financed through FHA and the guidelines are a lot more flexible.

The bottom line for condo owners and potential condo buyers is that the financial terms agreed upon by the seller and buyer is not the end of the story.  The general financial health of the condo association is also considered.

Realtors and other real estate professionals have known about this for at least a year.  It’s been written about in the real estate blogosphere for months. Now the mainstream press is starting to pick up on it.  Here is the headline in the Washington Post: Foreclosure Wave Threatens Stability of Hosing Market (note: the Washington Post website will archive this article after today and require registration to read it.  Registration is free!).

This story is not buried in the back pages. It is at the top of the newspaper on the front page.  The Washington Post thinks it’s that important.

You should really read the article for yourself but here’s the gist:

• Many, many more home owners are becoming seriously delinquent with their mortgages.
• Banks have been working through the foreclosure process which can take as long as a year.
• Once this “shadow” foreclosure market oozes out into the market these foreclosed homes will further depress home prices
• This foreclosure mess is not short term.  It is expected to take at least three years for the homes to be released to the market and then bought by other home buyers

It’s a mess.  We can wring our hands, worry and fret. However, we cannot change reality and when the mainstream press starts to pick up on this stuff and give it prominent coverage, we would be well advised to sit up and take notice.  The Washington Post is not some rogue blogger sounding alarmist.

Here’s Part of the Solution

If you are a home seller with equity in your home, take note.  If you are a home seller with compelling plans to move — job relocation, retirement, assisted living, etc. — take note.  You cannot and will not be able to price your home at a level where it will not sell. Home sellers with equity in their homes will be “taking a hit” on their equity. This is sad.  It’s not fair.  It is reality.  Pricing a home above market levels is a recipe for a prolonged home sale (months and months and months of sitting on the market without an offer to purchase).

The sad reality of the current economic situation with increased unemployment combined with this coming foreclosure wave combined with extremely strict mortgage guidelines (i.e., a tight credit market) is that home prices will continue to feel substantial downward pressure for a long time to come.  In other words, at this point in time — Spring 2010 — we are probably at the top of a housing market that will continue to falter.