Happy 4th of July… Stay Tuned for News Next Week
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The last 6-8 weeks have been busy and while the real estate market isn’t what it used to be, it is still keeping me plenty busy. In addition, I’m busy working with Jeff Allen to release a 2nd Quarter edition of our Twin Cities foreclosure/short sale report. Lender mediated sales will be with us for a long time to come so the updated information will give agents and the public a more detailed and current understand of our market. While the MLS recently implemented a “in foreclosure/bank owned” field, we’re going to be relying on our current methodology for a while longer as the fields have not been active long enough to be valuable.
Over the 4th of July activity slows a little as buyers and sellers spend time with family, friends, and fireworks. There’s still a lot of activity out there though so the quiet will be short-lived.
Loose Lending Broke Housing, Tight Lending Keeps it Broken
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The several years of “loose lending” by mortgage lenders helped bring a surge of bad loan programs with borrowers that were either overextended from Day One or should have been unqualified to begin with. This surge has now become a tsunami of foreclosures and short sales, which Jeff Allen and I have lumped together as the term: “Lender Mediated Sales.”
Now that lenders, banks, retirement funds, investment bankers, average investors and everyone else have all been bitten by the fallout from this housecological disaster (like my new word?) we find ourselves trying to change our ways, reduce our foreclosure footprint, and move forward to a more sustainable-housing-market future.
The problem is that while there seem to be a large number of borrowers ready to purchase houses in recent months, it is now these same lending institutions hobbling our housing market.
It starts with short sales: lenders were willing to give 100’s of thousands of dollars to anyone with a heartbeat at a moment’s notice but now take MONTHS to tell you if they’re willing to accept a buyer’s offer on a defaulted borrower’s house… which more times than not is a far better return on their investment than letting it go through foreclosure. The buyers willing to sit on the housing market sidelines for MONTHS while they wait for an answer can wind up the owners of an excellent property at a great price, but few buyers (or their agents) have the stomach for it.
On REO, aka lender owned, homes we see banks still take a week or more to respond to many offers, sometimes haggling over unrealistic sales prices, and so many pages of disclosures and addendums that do everything possible to leave the buyer with an “I just got violated” feeling when they receive the counteroffer from the lender. Some of these bank addendums are so ridiculous that you roll your eyes the whole time you read them.
Many of these lenders do not provide listing agents enough incentive (i.e. money) or oversight for them to do a good job marketing the house (i.e. some interior photos, a new picture when January snow becomes July grass, room dimensions, a phone number with a real live human person, timely responses, an MLS description that says something other than “bank owned,” ACCURATE association fees and tax information, etc.). When buyers have 100’s of houses come up in their search, it is easy to ignore the listings that show nothing, tell nothing and mean nothing.
Assuming that the house is not a short sale or a foreclosure, lenders are still finding ways to get in the way of a good borrower buying a good home. This is the area of the market that I’ve become the most frustrated and cynical about recently. Here are some of my favorite lender fouls lately:
- Mortgage Insurance Company Changes Downpayment Ratios and Doesn’t Tell the Mortgage Company
A BIG mortgage insurance company decided to stop insuring loans with down payment ratios over 90%, but it said that the special state-supported first time home buyer programs (many at 3% down payment) were not affected. A day before closing the mortgage company calls the mortgage insurance company to get the mortgage insurance certificate (which seems way too last minute for my taste) and is told: “sorry, get your borrower to come up with another $14,000 by tomorrow.” Apparently they decided not to give special consideration to the first time buyer programs and never told the mortgage company. - Underwriters Didn’t Look at File Until 24 Hours Prior to Closing
A loan officer had everything in a week prior to closing and the underwriter waited till the day before closing to review the file and came back with a ton of conditions that took days to fix. Heaven forbid that we know these things in time to fix them without a delay in closing. - Loan Packages Showing up Almost a Day Late
File gets underwritten in time and for some reason the loan package sits on the processor’s desk for a day instead of being sent out as it should have. - A Continually Moving Target for Loan Programs
It seems that nearly every day the loan programs are tightening up with more requirements, tighter guidelines, and more downpayment needs. Most conventional loans were still 5% down until just recently… now almost everything is 10% down (due to the tightening mortgage insurance issues) and I think it is quite likely we might see that get even worse given the continuing high number of defaults on bad loans from years ago. The only “sure thing” right now is good ‘ol FHA… 3% down now, 3% down tomorrow, 3% down hopefully forever. While you can sneak by with a 0-down FHA loan, I believe FHA will try to quash those options again this year… which would be fine if FHA could come up with a 1.5% down payment option @ a higher mortgage insurance premium.
You take all of these obstacles in the way of today’s home buyer and it is a wonder that our housing market has been doing as well as it has as of late. These home buyers start out excited and optimistic about their upcoming home purchase and end up exhausted and jilted about the process when it is all over. This week I had two buyers almost ready to give up entirely and walk away from great houses at awesome prices because of all the problems with their financing. These were great human beings and qualified buyers that were being beaten up over things that were not of their doing. I think we’ve come back from the edge of the cliff at this point but it is tough to watch your buyer suffer while you stand powerless to effect any real change on the situation.
Don’t get me wrong, there are still a lot of homes selling right now and many transactions never see these problems, but in my conversations with agents all around town, it seems that almost every transaction takes 2x-3x more work and pays far less than it did 3 years ago. Some may call this paying our penance for the “good times” of prior years or a needed cleansing of a bloated industry. Either way, this current housing market’s impact is becoming more pronounced every day.
Until we can get lenders to get their act together and be timely and consistent for a change, I see the current troubles only prolonging a difficult housing market.
Got a story? Feel free to add it via the comment feature below.
Minneapolis Area Association of REALTORS Monthly Video Update
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Take a look at some great commentary by MAAR. The numbers are clearly showing a peak of inventory and a bottom for buyer demand, so we see “strength” in numbers that are no longer continuing to soften. This market has a long way to go before we’re back to “normal” but it all has to start with supply, demand, and affordability… all of which are looking better today than they did even a few months ago.
The Dangers of Unmoderated User-Contributed Content
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So the reason I moderate blog comments prior to posting is because some people are not very polite and write things that are inappropriate. I’m not talking about dissension, I’m talking about things that just shouldn’t be said on a public forum. I have no problem with people who want to sound like idiots or provide criticism… it all adds spice to the forum.
While I appreciate that the Star Tribune is trying to get more interactive with their stories, I believe they need better oversight of their “Featured Comment” tool. Kinda makes them look stupid in my opinion. Click the screen capture below to get the full-size view.
May 2008 Twin Cities Market Stats
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MAAR has released their new market stats for the month of May and I’m trying a new idea: I’ve added commentary to the report expressing what I believe are the important “take aways” from the data. I would love to get feedback both on the concept and your thoughts of my opinion.
Minneapolis/St. Paul Real Estate Market Stats for May 2008 with commentary.
Minneapolis/St. Paul MLS Addresses Foreclosures & Short Sales… Kinda
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The RMLS of Minnesota, which is the governing body of the MLS in the Twin Cities and is owned by the 4 local REALTOR associations, has made some policy changes in regards to the reporting of foreclosures on the MLS, effective on Thursday:
The “In Foreclosure/Lender Owned?” field:
- Initially will be an agent-only field (not available on Customer reports or on public Web sites through Broker Reciprocity).
- Options are: Yes, No and Not Disclosed
- For NorthstarMLS, “Foreclosure” is defined as the homeowner being served official notice of foreclosure by a governing entity (does not include notice of default from the lender when payments are late).
- If you select “Yes,” you certify that you have permission from the seller to disclose that the property is in foreclosure.
- This field is being added in response to the large increase in foreclosure status properties and agents’ desire to more easily search them when the seller has agreed to disclose it. Our goal is to initially keep this information on the MLS simple and rely on agents to communicate with each other regarding the details.
- If you edit an existing listing after the implementation, you will be required to complete these fields before saving the listing.
While I applaud RMLS’s efforts on this issue, it seems to me that they’re missing much of the issue. This new policy ignores the following:
Houses Listed as Short Sales on the MLS
These houses are listed at a price where they have negative equity at the closing table and the seller has no financial ability to pay the difference so the seller is asking their lender(s) to take less than they are owed (a “short pay” or “short sale”) as payment in full. In many circumstances a house is listed on the MLS as a short sale far before official foreclosure proceedings have begun, so these situations are not covered by the new policy. Since offers on houses in a short sale situation can take months to get a response back from the lender(s), it seems critical to me and my buyers that this information is clearly disclosed upfront… often my buyers have no time or no interest to wait around for 60-75 days for a 50/50 chance of a “yes.” Since banks do not give a seller direction ahead of time on what price they’re willing to accept, the list price chosen by the seller and any offers submitted
Houses that are Lender Owned
Since the new RMLS policy takes into account only those houses that are in the foreclosure process, once the house is lender owned (also known as bank owned or REO), there would be no disclosure of it in this new field. While responses from sellers of REOs are quicker, they can still take a week and come with 10-15 pages of “AS-IS” addendums, basically eliminating most disclosures and protections for the buyer and overriding most of the contract language that is used on the standard purchase agreement forms in Minnesota. As such, some buyers have no interest in these properties and many others specifically want these properties since they can typically be purchased for substantial discounts to market value.
Considering that a little more than 1 in 4 of the sales occurring in the Twin Cities today is a foreclosure or short sale, it seems crucial to me that we have the best information possible on these properties and that they are easily searchable and reportable. The current policy that the RMLS is implementing is akin to have a way to search for “one story” homes but not “two story” or “split level” homes.
Instead of the current policy, here’s my suggested solution:
Two fields on the RMLS:
Short Sale Subject to Lender Approval (with options of Prior to Sheriff’s Sale and Post Sheriff’s Sale)
These properties require the approval of the purchase agreement by the homeowner (easy to get) AND the lender (not as easy to get).
Lender Owned
These properties are repossessed by the lender via foreclosure or deed-in-lieu of foreclosure and the lender/bank is the only decision maker.
This would address all the properties in some stage of lender mediation and would make disclosures clearer to buyers and market data for all users of the MLS that much more reliable.
I’d love to hear thoughts from the public… please leave comments below.
Great Article on Future ARM Resets for Loans
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Great article talking about how ARM mortgage resets happening right now are not so bad but that there’s still a lot of ARMs out there in future years that might have a problem. I’ve heard quite a bit of this before but this is a pretty good summary of it all.
http://globaleconomicanalysis.blogspot.com/2008/04/closer-look-at-arms-reset-problem.html
Here comes statistics in a video
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Jeff Allen @ the Minneapolis Area Association of REALTORS, my good pal after the months of working on the Lender Mediated Sales Report together, has started what looks to become a once-a-month summary video of the highlights from the MAAR reports. Granted the info discussed is all the positive stuff, but hey, that’s what a good marketing campaign is all about.
May 31st Storms
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I’ve posted some photos to Flickr of the latest hail storm that came through on Saturday, May 31, 2008:
http://www.flickr.com/photos/27215653@N05/sets/72157605363818571/
Q&A - How to Spot a Recovering Housing Market
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I hear buyers, sellers, lenders, real estate agents and the community as a whole rhetorically ask when we’ll see the housing market recover. Unfortunately putting a timeline on a housing recovery is pretty unrealistic as there are simply too many variables to account for. But all is not lost! While I cannot predict when the housing market will recover, I can give you trends to watch for that will signal a turnaround and their current indicators.
Falling Inventory
Supply & Demand 101: if demand has fallen sharply, supply must also fall sharply to keep prices in line. Supply in the Twin Cities is still near record highs, so it must come down significantly. The trend is certainly going the right direction (inventory is falling +/- 200 listings per week vs. last year) but this improvement is still minor and early at this point.
Trend: Positive
Falling New Listings
So far this year we’ve seen 9.5% fewer new listings come on the market versus the same time period last year, which has tempered total active listings this year.
Trend: Positive
Increasing Sales
The supply problem can also be resolved by more buyers coming in to the market. As of May 1, we’re still 12.6% behind last year in the number of Pending Sales year to date, so this indicator still needs improvement.
Trend: Negative
Falling Days on Market
Ultimately we will see the market times of listings fall, but in April it still took on average 154 days to sell a home in the Twin Cities… an increase of 16.7%.
Trend: Negative
Flat Median Sales Price
When we see the sales prices year-over-year flatten, it will show we’ve reached a price stability level and encourage more buyers back into the market. In April our median sales price was down 7.9% from a year ago, so we’re not there yet.
Trend: Negative
Fewer Foreclosure and Short Sale Listings
While it is clear that foreclosures and short sales are different animals from Traditional Sellers, they do have a strong influence on the housing market direction and we need to see them reduce in both number and market share before we can see a strong turnaround. These listings are still coming on strong and while their number and market share hasn’t changed much in recent months, they still account for slightly more than 1 in 4 sales in the Twin Cities.
Trend: Negative
Low Mortgage Rates
Mortgage rates still continue to bounce between approximately 5.75% - 6.25% on a 30yr fixed rate, which is still phenomenally low. As long as these rates stay below 7%, buyers will have strong buying power in this market. If rates climb above 7%, buyers will pull back hard.
Trend: Positive
More Flexible Financing Options
I’m not talking about the return of subprime, I’m only talking about more options for borrowers with little/no down payment. Fannie Mae reversed their position on “declining markets,” FHA is looking at lower down payment requirements, more risk-based pricing options coming back… while it isn’t going to be the world of free money like it was before, financing options seem to be improving.
Trend: Positive
Increased Market Optimism
Markets are often self-fulfilling prophecies… while the general public (and the media) are still down on the real estate market, the market will continue to perform badly. This is something that only time and continued good news can cure.
Trend: Negative
The Return of the Professional Investor
I’m seeing and hearing a lot more about investors lately… more so than I have for at least a year or two. The Professional Investor will go out and cherry-pick the best inventory even if a market bottom hasn’t been called… they know a good deal when they see one.
Trend: Positive
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