Real Estate News: June/July 2006
Home prices could start falling
WASHINGTON -- July 26, 2006 -- For the first time in more than a decade, home prices could start to fall around the country in coming months, the National Association of Realtors (NAR) said Tuesday after a report showed that sales of existing homes fell in June and the number of homes for sale soared to their highest point since 1997.
Condo prices are already being hit: They fell 2.1 percent from June last year to a median $226,900 (median means half cost less and half cost more). Prices of single-family homes edged up 1.1 percent in June to $231,500. With a 6.8-month supply of single-family homes on the market and an eight-month supply of condos, sellers are under more pressure to cut prices, and buyers can be choosy.
David Lereah, NAR's chief economist, said he expects "price numbers to start deteriorating," though he still projects home prices will be up 5.3 percent for the year.
The new figures provide deeper evidence that the nation's housing market is undergoing a jarring transition from a seller's to a buyer's market. The five-year boom, which peaked in August, was driven partly by investors, who snapped up 28 percent of homes sold last year. Many of them now want to sell. But rising interest rates and lofty home prices have squeezed out many buyers.
"Prices got too high in some local markets," Lereah said. "So you're seeing two things occur: Investors are leaving quickly, and regular home buyers are staying on the sidelines."
The last time single-family home prices fell was in April 1995, when they slipped 0.1 percent.
The NAR said June existing-home sales slipped 1.3 percent from May, to a seasonally adjusted annual rate of 6.62 million and were down 8.9 percent from June 2005. On Thursday, the Commerce Department will report new home sales for June, and economists such as Phillip Neuhart of Wachovia expect those figures, too, to show continuing weakness.
"The numbers are not fully counting cancellations, which builders are reporting at a very high level," Neuhart notes. Many developers received approval for their projects when demand was sizzling. Now, some have to offer vacations, pools and car leases to entice buyers.
For existing-home sales, the weakest region was the West, where sales plunged 17.1 percent from June 2005. Sales fell 9.8 percent in the Northeast, 6.2 percent in the Midwest and 5.5 percent in the South.
"Markets which have been the hottest are quite likely to see home price declines," says John Ryding, an economist at Bear Stearns. "In those markets, you could see declines for the year."
The California Association of Realtors said Tuesday that home sales skidded 26 percent from June last year and are off 20 percent for the year. Though the median-priced home statewide hit a record $575,800, prices fell in five areas, including Santa Cruz, Palm Springs and Santa Barbara.
"Affordability has probably hit a record low," says Robert Kleinhenz, deputy chief economist for CAR. Ron Peltier, CEO of HomeServices of America, adds, "There is a delayed reaction on the part of sellers to accept the new reality."
Florida’s existing home median price rises, sales ease in May
ORLANDO, Fla. -- June 27, 2006 -- With mortgage rates still ticking upwards, Florida's housing sector in May continued to adjust to changing market conditions, including a greater inventory of homes available for sale in many areas. Statewide, the existing-home median price rose 11 percent to $256,400 last month; a year ago, it was $232,000, according to the Florida Association of Realtors® (FAR). A total of 18,680 existing single-family homes sold statewide last month, a decrease of 24 percent from the 24,523 homes sold during the previous May, according to FAR.
In 2001, the statewide median sales price was $125,200, which is an increase of about 104.7 percent over the five-year-period, according to FAR records. The median is a typical market price where half the homes sold for more, half sold for less.
Nationally, the median sales price for existing single-family homes was $222,700 in April, up 4.3 percent from a year earlier, according to the National Association of Realtors® (NAR). In California, the statewide median resales price was $562,380 in March; in Massachusetts, it was $354,000; in Maryland, it was $305,720; and in New York, it was $263,000.
Home sales across the nation are settling into a slower pace, which is good for the long-term health of the sector, according to NAR housing industry analysts. Still, NAR expects 2006 to be the third strongest sales year on record. Analysts note that the adjusting housing market will continue to provide a strong underlying base to the economy, while slower appreciation will help to preserve long-term affordability.
Looking to Florida's existing condominium market, sales of existing condos also decreased in May, with a total of 5,725 condos sold statewide compared to 8,337 in May 2005 for a 31 percent decline, according to FAR. The statewide median sales price for condos remained relatively flat last month at $222,000; a year ago, it was $222,100. The national median existing condo price in April 2006 also was $222,000.
According to Freddie Mac, the average rate for a 30-year fixed-rate mortgage was 6.60 percent last month, up from 5.72 percent in May 2005. FAR’s sales figures reflect closings, which typically occur 30 to 90 days after sales contracts are written.
Among the state’s larger markets, the Jacksonville metropolitan statistical area (MSA) reported 1,732 existing homes changed hands last month compared to 1,671 homes sold in May 2005 for a 4 percent gain. The market’s median existing home price rose 15 percent to $208,700; a year ago, it was $181,700. A total of 230 existing condos sold in Jacksonville in May for a 35 percent increase over the 170 condos sold the previous year. The market's median existing condo price rose 3 percent to $170,900; a year ago, it was $166,700.
"The range of housing options and prices available in the Jacksonville area is one of the attractions here," says Kay Seitzinger, president of the Northeast Florida Association of Realtors and assistant manager with the South Beach office of Watson Realty Corp. in Jacksonville Beach. "The economy continues to be very strong, there are new businesses coming to the area and our jobs outlook is solid now and for the future. The market is adjusting and rising inventory levels offer buyers more opportunities."
Of the state’s smaller markets, the Pensacola MSA reported a 1 percent increase in existing home sales in May, with 589 homes sold compared to 582 homes sold a year earlier. The area’s median existing home sales price rose 8 percent to $170,600; a year ago, it was $158,600. Sixty-seven existing condos sold in Pensacolalast month compared to 70 condos sold in May 2005 for a drop of 4 percent. The market's median existing condo price rose 31 percent to $196,700; a year ago, it was $150,000.
"The forecast for the Panhandle remains good for housing sales," says Auby Smith, president of the Pensacola Association of Realtors and broker for Real Estate Counselors in Pensacola. "We're expecting an increase in military expenditures, which is good for the area's economy. Buyers have a variety of housing choices at reasonable prices, especially when you consider some of the costs of waterfront property in other areas." © 2006 FLORIDA ASSOCIATION OF REALTORS
Report: Affordability problems on the rise even as housing market cools
CAMBRIDGE, Mass. -- June 13, 2006 -- With interest rates rising and speculative demand cooling, the housing boom is coming under pressure, according to the "2006 State of the Nation’s Housing" report from Harvard University's Joint Center for Housing Studies. However, researchers found that as long as the economy continues to create jobs and builders trim production to match slowing demand, house prices will keep climbing and the housing sector will likely achieve a soft landing.
Although house price growth will likely moderate in many areas, sharp drops in house prices are unlikely anytime soon. Major house price declines seldom occur in the absence of severe overbuilding, major job loss, or a combination of heavy overbuilding and modest job loss. Fortunately, these preconditions are nowhere in evidence across the nation’s metropolitan areas, the report notes.
Even with higher interest rates and home prices crimping affordability, the lure of house price appreciation continues to draw homebuyers to the market. While the national homeownership rate edged down a tenth of a percent in 2005, it increased in the West and Northeast where house price growth was the strongest. In fact, about 1 million homeowners were added nationally last year. Mortgage innovations such as low-downpayment, hybrid-adjustable, and interest-only loans helped blunt the impact of higher home prices and interest rates.
“While homeowners with annually adjusting mortgage rates are facing interest increases this year, including those with expiring teaser discounts, only about one in 10 homeowners face higher mortgage payments this year,” says Nicolas P. Retsinas, director of Harvard’s Joint Center for Housing Studies. Fully eight in 10 owners has no mortgage or a fixed-rate mortgage, and most owners with adjustable loans have an initial fixed-rate period of three or more years. Similarly, most interest-only loans extend for at least five years, leaving ample time to move, refinance, or incomes to grow before principal payments start coming due.
But, the report cautions, five years of unprecedented house price appreciation and decades of land use restrictions that make building affordable housing difficult are adding to widespread housing affordability problems. From 2001 to 2004 alone, the number of households spending more than half their incomes on housing increased by 14 percent to 15.8 million. The paradox of today’s housing market is that while more people are building home equity than ever before, slow growth in wages for households in the bottom three-quarters of the income distribution is not keeping pace with escalating housing costs. Amidst a housing boom, it is now impossible to build housing at prices anywhere near what low-income households can afford without subsidies.
Further, the report draws attention to the problems of concentrated poverty. Neighborhood decline is fueling the loss of affordable housing and exposing residents to poor neighborhood conditions. From 1993-2003 the supply of rentals affordable on a $16,000 income fell by 1.2 million, while in 2001 12 percent of such rentals were operated at a loss.
This year’s report also highlights the significant contribution that the foreign-born and minorities will make to overall household growth. New household projections incorporating higher but more realistic immigrant assumptions suggest household growth will accelerate to 14.6 million over the next 10 years from 12.6 million over the last decade.
“Strong household growth, combined with record incomes and wealth, will lift housing investments to new highs next decade,” says Eric Belsky, executive director of Harvard's Joint Center. “Each generation is achieving higher homeownership rates, incomes, and wealth than the one ahead of it, with the leading edge of the echo baby boom now in their 20s and the baby bust now in their 30s starting off on especially high paths.”
Retsinas adds, “Even as the housing industry looks past the current softness to robust growth in the decade ahead, the challenges of providing affordable housing for low-income, and increasingly even middle-income households, are clear. Slow growth in domestic discretionary spending at the federal level and the reluctance of state and local governments to relieve intense barriers to the production of more affordable housing make the road ahead difficult. Unless governments step up to these challenges, spending on housing will increasingly crowd out spending on pensions and savings among those with low and moderate incomes.”
Feds ask: Is that mortgage really right for you?
NORTH PALM BEACH, Fla. -- June 13, 2006 -- Imagine that mortgages were automobiles, and you had the power to witness every sale. Every day, you would watch, dumbfounded, as pizza deliverers passed up Priuses and bought Hummers instead. You would cringe as 16-year-olds screeched off the lot in souped-up cars, destined to die young.
If mortgages were cars, you would see people making these mistakes all the time. Too often, consumers get home loans that are inappropriate or too risky.
Regulators are wrestling with the question of what to do about it. Whose job is it to decide that a particular loan is unsuitable for a specific customer?
"Who am I to tell you that you're eligible for this kind of loan, but you're not suitable for it?" banker Robert Broeksmit asked at a recent Federal Trade Commission workshop. A consumer advocate retorted in an interview: "It can be boiled down to this: Don't offer things that people can't pay and really are rip-offs."
'Nontraditional' mortgages surge
The argument is about what federal regulators call "nontraditional" mortgages -- home loans in which the borrower is required to pay only interest, and not principal, for the first few years. About one-quarter of new mortgages are nontraditional loans, up from a negligible market share just five years ago. That worries regulators, because these loans are considered riskier. Some nontraditional loans, called payment-option adjustable-rate mortgages, don't even require the borrower to pay the interest accrued: The amount owed can increase every month.
Regulators have proposed a "guidance" asking lenders to step cautiously when underwriting nontraditional loans. A guidance is a recommendation -- not as binding as a regulation, but stronger than a mere suggestion. The proposed guidance says lenders should avoid loans "that may result in the borrower having to rely on the sale or refinancing of the property," once the borrower has to start paying principal as well as interest.
In other words, don't give a mortgage to someone who can't afford to pay principal and interest, even if it's an interest-only loan.
Regulatory agencies jointly proposed such guidance in December and asked for written comments. In late May in Washington, D.C., the FTC held the workshop on behalf of itself and other agencies so regulators could ask questions and get answers in a more informal setting.
Added risk for consumers, lenders
Regulators worry about interest-only and payment-option mortgages, because payments can rise abruptly after a few years. In unlikely worst-case scenarios, monthly payments can more than double in one traumatic leap. A lot of borrowers don't make down payments or document their income -- additional risk factors that increase the odds of eventual foreclosure.
Interest-only mortgages have been around for decades, and they were originally marketed to two types of customers: wealthy people who can afford volatile payments, and workers with unpredictable incomes, such as business owners, salespeople on commission and executives whose income mostly comes from annual bonuses. But now a lot of homeowners get these loans because they offer the only way to afford an acceptable house in pricey markets.
Consumer advocates believe that lenders should subject that last group to some sort of suitability test -- "some duty to the borrower to make sure they're not put in a loan that's not appropriate," says Stella Adams, executive director of the North Carolina Fair Housing Center.
Adams imagines a trade group coming up "with a general script that explains the differences between the products and is uniformly applied, so that people can hear an explanation. I tell you, three-page disclosures with 'wherefores' and 'therefores' don't cut it."
Screening out the worst
A suitability standard "would put some obligation on some part of mortgage lenders and mortgage brokers to not squeeze people into loans where they have no reasonable prospect of being able to repay them," says Allen Fishbein, director of housing and credit policy for the Consumer Federation of America.
If that sounds imprecise, that's because it is. A suitability standard would be applied subjectively in a lot of cases. It would screen out egregiously risky loans.
Adams and Fishbein spoke in favor of suitability tests at the FTC workshop. Bankers countered that the lending industry has built-in suitability standards. Riskier borrowers pay higher interest rates and sometimes must buy mortgage insurance. Mortgages are bundled together and sold on the secondary market to investors, who have powerful analytical tools to gauge just how risky a particular pool of loans is.
"If loans are being underwritten that will inevitably fail, there will be no buyers for those loans on the secondary market," says Robert McKew, general counsel for the American Financial Services Association. "The secondary market acts as a regulator in addition to government regulation."
But consumer advocates argue that the secondary market allows the mortgage industry to view foreclosures as just another cost of doing business. One foreclosure in a package of hundreds of loans is a blip on an investor's computer screen, but it's long-lasting trauma to the family that loses a house.
Businesses can insulate themselves from high-risk loans, but the same can't be said for homeowners, Alys Cohen, staff attorney for the National Consumer Law Center, said at the workshop. "Should all the risk be on the borrower?" she asks. "Is that a fair assumption in light of the market today?"
Ultimately, burden falls to consumers
No, it's not a fair assumption, says Peter Macdonald, general counsel for LendingTree Loans. Lenders face reputational and regulatory risk. He says the press and the government jump on lenders' backs if they are poor citizens.
"Ultimately, suitability is about financial literacy," Macdonald says. "That can't be just within the industry. The American public can and will rise to the challenge of learning how these loans work."
Michael Williams, vice president for legislative affairs for The Bond Market Association, agrees that "you have to put the burden on the consumer to be educated." On the other hand, he says, people don't want to be educated. They just want the loan.
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