The other very interesting trend is the dramatic increase in cash transactions.  In 2007 and years prior, Cash purchases made up approximately 5% of total properties purchased.  In 2009, that number had soared to 17% – a 240% increase in just 2 years!  This substantial shift is largely related to the increase in foreclosure property sales – many of these properties are in such bad shape that they cannot be financed.  In other cases it is an investor buying for solid cash flow as a rental or to rehab the property and resell.

The chart below shows that January historically has a stronger showing activity than November and December and due to the 20% decrease in houses for sale in the last 12 months, there’s less competition in the market now.  Less competition makes it more likely that a buyer will find and select your house.  In fact, in January and February 2009, the houses that sold took 15% fewer appointments to do it.

The other reason you should consider listing now is that the home buyer tax credit is only good for purchase agreements accepted by April 30th, 2010.  That gives you less than 4 months to take advantage of what is effectively a subsidy.  If your buyer is a 1st time buyer or has owned their current home for more than 5 years, they’ll get a tax credit ($8000 and $6500, respectively).  If you have been in your house for more than 5 years and plan to buy again, you can get a tax credit too!

While showings pick up substantially in March, more listings historically come on the market during that time too and that only gives you 60 days to put a sale together to take advantage of the extended credit.

I’m a big proponent of the philosophy of “you make your own luck.”  If you want to take the greatest advantage, get moving now.

This is an intriguing question.  While I had my suspicions, I wasn’t sure what I would find so I put together this little image from Twin Cities MN Pending Sales and the 10 Year Treasury Note.  While the 10yr isn’t a direct mortgage interest rate gauge, it correlates very closely.  This chart is on a 5 year scale.

(Pending home sales data from MAAR, click image to see larger picture)

What we see from this chart is that the housing market is very cyclical but the influence of interest rates on the housing market isn’t all that clear.  While rates definitely play a role in housing demand, to me it doesn’t appear to be the dominant factor in housing sales activity.

There are lots of things that may impact housing in 2010 – anyone else want to share their thoughts?

Make Heights Your Home
Columbia Heights Down Payment Assistance Program

Program Summary
Down payment assistance for homes purchased with a 203K loan or other similar financing. The goal of this program is to help increase home ownership and encourage reinvestment.

The Loan
0% interest loan of 3.5% of the acquisition cost (purchase price plus rehab costs) up to $6,000

1. Terms
   1. Assistance must be used with a FHA 203K purchase/rehab loan or similar financing approved by City staff
   2. That assistance is a 0% interest loan of 3.5% of the acquisition cost (purchase price plus rehab costs) up to $6,000 to be used toward down payment
   3. A minimum of $10,000 in home improvements/repairs is required in order to participate
   4. No income restrictions
   5. No monthly payments
   6. Loan will be forgiven in full if borrower lives in property for 10 years
   7. Loan must be repaid in full if borrower occupies property for 3 years or less
   8. Loan repayment will be required in years 4-10 on an equally prorated amount if not occupied by borrower
   9. A home inspection is required prior to closing, city or private
   10. Construction work must be completed by a licensed contractor, with applicable permits and inspections completed
   11. A loan agreement must be signed by the home buyer who certifies they will be an owner-occupant
   12. Construction must start within 30 days of purchase closing. The homeowner must occupy the home within 60 days of completion of the construction work.

Use of Funds
Make Heights Your Home funds must be used for down payment. The borrower may not receive any portion of these funds as cash

Eligible Properties
1. The property must be a single family detached dwelling
2. The property must be located in Columbia Heights
3. There is no sale price limit

Eligible Buyer is anyone who meets the following:
1. Qualifies for and is receiving an FHA 203K loan from an accredited lender or similar financing approved by staff
2. Borrower must be an individual person or persons, not a business entity
Homeownership Education
Borrower must complete a homeownership education class

For more information you can call the City of Columbia Heights 763.706.3675

If we could do more successful loan modifications and short sales we would dramatically reduce the foreclosure problem in the future… more needs to be done at all levels to make this a reality.

While time will tell if Jim Cramer is right, on a local level I’m not ready to call a housing market bottom.  I do believe however that foreclosures have price-bottomed in our market. Unfortunately I also believe that the typical Traditional Seller has further to fall.

In the last two weeks we’ve seen interest rates on 30 year fixed mortgages move from 4.5% to 5.5% (or higher) that’s a big OUCH.  This full interest rate point swing has meant that almost overnight, buyers lost well over 10% of their buying power.  Another way to look at it is housing just got 10% more expensive.

While everyone was thrilled to see 4.5% interest rates, myself included, from the very outset I had concern about what this means for housing long term.

The short term benefits are large and obvious:

• Huge surge in refinancing and purchases
• Large demand for housing has helped stabilize housing (to some extent)
• Housing affordability hit new highs
• Buyers and refinancers locked in phenomenal rates (and most did 30yr fixed mortgages)

The long term drawbacks are also large and ominous:

• We may have set an artificial price floor on housing: now that it is suddenly so much more “expensive” from a payment basis, will there be even further pressure on prices?
• Buyers who didn’t lock (I know several personally) got hit over the side of the head by the huge (and quick) run-up in rates
• A lot of buyers will sit on the fence hoping that rates fall down again (which they may or may not)
• Homeowners who locked in a 4.5% rate will never want to move. ever.  I predict that many of these homeowners will be far more hesitant to move in the future, thus lowering housing sales in the years to come.
• Sub-5% now becomes the magic number which buyers think they can get (or should get) since it was available for a few months.  This means historical rates in the 6% & 7% range will look horrible.  They won’t remember that these record low rates were during the worst economic downturn since the Great Depression… they’ll just remember that they were available.

Who knows what tomorrow will bring, but I will be interested to see what happens to our Pending Sales numbers in the weeks & months to come.

Under the guidance, FHA-approved lenders can develop bridge loans that home buyers can use to help cover their closing costs, buy down their interest rate, or put down more than the minimum 3.5 percent.

The loans can’t be used to cover the minimum 3.5 percent, senior HUD officials told reporters on a conference call Friday morning.

Thus, buyers applying for FHA-backed financing with an FHA-approved lender that offers a bridge-loan program can get a bridge loan to bring down the upfront costs of buying a home significantly but would still have to come up with the minimum 3.5 percent downpayment.

There remain many sources of assistance for buyers needing help with the 3.5 percent downpayment, including many state and local government instrumentalities and nonprofit lenders.

In addition, some state housing finance agencies have developed their own tax credit bridge loan programs, so buyers in states whose HFAs offer such programs can monetize the tax credit upfront to cover all or part of their downpayment. These programs are separate from what HUD announced today.

The first-time homebuyer tax credit was enacted last year–and improved upon earlier this year–to help encourage households to enter the housing market while interest rates are low and affordability is high. The credit is worth up to $8,000 and is available to households that haven’t owned a home in at least three years. The credit does not have to be repaid, and is fully reimbursable, so households can get their credit returned to them in the form of a payment.

Learn more about the credit, including how to apply for it this year even if you’ve already filed your taxes, at REALTOR.org.

Source: Robert Freedman, REALTOR Magazine Online

The purpose of a repair is to correct deficiencies which may affect the health of the occupants and the continued marketability of the property.  Knowing the most common issues upfront can prevent costly and stressful delays later.

1. If the home was built prior to 1978, chipping, peeling paint must be scraped and painted.  This includes interior, exterior, garages, sheds, fences, etc.
2. Roofs should have 2-3 years of useful life remaining and no more than 2 layers of shingles.  If the house is over 10 years old, the snow must be removed from a large portion of the roof for inspection by the appraiser.
3. Broken windows should be replaced.
4. The cause of wet basements should be cured (i.e., improve drainage away from house, gutters, etc.)
5. Electric service must be 60 amp or greater.  Electric certification may be required if 60 amp appears to be overloaded (i.e., larger than 1,000 square feet with more than 2 major appliances).
6. Abandon inoperable wells must be capped and sealed by a licensed well sealing contractor with certification.
7. Safety handrails should be installed in open stairwells of three or more stairs, both inside and outside.
8. Infestation of any kind should be exterminated (i.e., insects, mice, bats, etc.).
9. Damaged or inoperable plumbing, electric and heating systems should be repaired.  The appraiser checks these areas.
10. Structural or foundation problems must be repaired.
11. Flammable storage tanks must be removed and filler cap sealed from the inside (i.e., buried oil tank).
12. If there is a crawl space, it will be the home owner’s responsibility to make this area accessible so that it can be thoroughly inspected.
13. Attic space should be made accessible so the appraiser can visually inspect.

Nicci Brown
Mortgage Consultant
Homeservices Lending, LLC dba Edina Realty Mortgage

763.569.5610 Tel
www.niccibrown.com

#1 – Jumbo Mortgages are Illiquid Assets Right Now

The secondary market for jumbo loans has largely dried up, which has reduced availability, tightened debt-to-income (DTI) and loan-to-value (LTV) ratios, and increased the interest rates on these loans.  None of this helps the demand for or sale of housing.  Adding liquidity to this market would spur sales and increased sales of real estate has ancillary benefits for the economy in terms of consumer spending.  Government intervention can fix a broken market until such time as normal activity and liquidity comes back.  At that time the need for government participation in jumbo mortgages could be re-evaluated.

#2 – Jumbo Mortgages are not Just a Niche Product for the Ultra-Rich

Large proportions of the homes in California, Florida and New York are in the jumbo price point because of the much higher cost of living.  The Regional MLS of Minnesota (covering the greater Minneapolis/St. Paul region) reports 2600+ sales over $500,000 in 2008 and 3600+ listings active today.  Homes priced over $500,000 are likely candidates for jumbo mortgages as conventional loans max at $417,000.

#3 – Having Fannie Mae and Freddie Mac Purchase Jumbo Mortgages Would Free up Billions for Mortgage and Business Lending

Since banks can’t find anyone willing to buy jumbo mortgages right now, they have to hold those loans “in-house” for now… which means that they cannot lend that money out to anyone else.  In the past, banks have been able to package these loans and resell them in the market (mortgage-backed securities (MBSs) and Collatoralized Debt Obligations (CDOs) are the common terms for this and while these are also the financial instruments that have caused so much pain in the financial industry, it was in how they were rated and put together, not the practice itself, that caused the problems.

Of the 2600+ sales over $500,000 that occurred in this market last year, the total sales price was just over $2 Billion.  That’s a huge dollar amount.  Now even though many of those sales probably did not need financing or were only partially financed and done using conventional financing, I think it would be very safe to say that half that amount, $1 Billion, was financed using jumbo mortgages that banks cannot resell in the current market… that means there was $1 Billion that banks couldn’t re-loan out to other consumers or businesses.

#4 – Expanding Fannie Mae and Freddie Mac’s Purchasing to Include Jumbo Mortgages Doesn’t Cost the Country Money

Fannie Mae and Freddie Mac right now ARE using government monies to help stay afloat in this time of crisis but when mortgage risk is properly priced and properly managed, as it was for decades, the business of buying and holding mortgages is quite a good business.  While Fannie & Freddie would need the cash right now to purchase the jumbo loans, that money would almost certainly come back to the US Treasury after the housing market and economy have started to grow again, so this would be a LOAN instead of a GIFT.

Adding Fannie Mae and Freddie Mac as buyers of these mortgages would bring down the interest rate of them as it did with conventional mortgages, which dropped almost a full percentage point in interest rates when the government stepped in to help Fannie and Freddie buy more loans.  This is because the rates were artificially high due to slack demand and once that demand came back, the rates adjusted accordingly.  It is very likely we could see the same thing in the jumbo market, which would make higher-priced homes more affordable and bring more buyers forward who have been sitting on the sidelines due to the currently unattractive jumbo mortgage rates.  This would spur even more sales but because it is based off of basic market principles, I don’t see this as an artificial inflation of the housing market.

In just the last few months we’ve seen Linens & Things and Circuit City go completely belly-up and Cost Plus World Market recently closed all their Minnesota stores as well.  When these stores closed, each ran a liquidation sale of their remaining inventory.  In a liquidation sale, prices are regularly reduced until the inventory is all sold… in many cases they sell the product displays, lights, etc right along with the merchandise.

Having been in each of these stores during different phases of their liquidations, I can summarize my experience like this:

10% Off
Buyers don’t see this as much of a sale, so there’s a lot of browsing and thinking, but most of the inventory stays put.  Products that are rarely on sale are likely to go though.

20% Off
This starts to grab buyers’ eyes.  While many products may have small sales, those often don’t get above 20% off so this makes it a threshold when I think buyers start to show interest.  After a couple weeks @ 20% off I felt like many of these stores had cleared out about 25% of their inventory.

30% Off
Ok, now we’re talking.  This is where if you buy 3, get 1 free.  Excitement grows as buyers start scooping up more necessities and also start to grab impulse items because they are “a good deal.”

40% Off
It’s almost 1/2 off!  That’s a deal you know.  More impulse buying ensues because when you’re at almost 1/2 off you can think of all the reasons why you really need that thing-a-ma-jig-do-dad.  At this point I think you’ve got at least half of the store’s inventory gone.

50% Off and More
From what I was looking at, once the store is at 50% off it is hard to find anything I really want.  Sure, there’s lots of crap I don’t need, but that crap is both what I don’t need AND don’t want.  This is when shopper’s remorse kicks in because I feel like I should have been here a week ago when they still had 5 of that thing-a-ma-jig-do-dad.

What does this have to do with real estate?

What has happened recently with retailers is also happening in the housing market.  Bank foreclosures are just like a bankrupt company’s product inventory-banks are looking to move that inventory quickly and will aggressively reduce their prices until their inventory sells.  We’ve seen strong examples of this throughout the metro in the last 6-9 months… especially in the areas hardest hit by foreclosures.

From the start of Quarter 4 2008 to the start of Quarter 1 2009 we saw 600 fewer lender mediated listings on the market (foreclosures and short sales) as inventory was picked up quicker by buyers than banks listed it.  This was the FIRST TIME that we saw a reduction in both new lender mediated listings come on the market and fewer total lender mediated listings available for sale, even though total sales of lender mediated listings fell about 200 units in the same time frame, likely due to seasonal demand softness.

What we’ve begun to see in earnest in the last 30 days or so is that the buyers are coming out in strong numbers (we’re up 20% in Pending Sales over the same time last year) and a shrinking supply of homes (down 13% from a year ago) and that’s leading to more houses, especially in the foreclosure and short sale category, receive multiple offers and sell quite quickly.  As the prices have moved from the 10%-20% off category closer to the 30% – 40% off category we’re seeing the homes priced at liquidation levels liquidate quickly… which is to be expected and is also a great sign for the market as a whole because it shows there are buyers out there if they perceive the value to be good enough.

With the approval of the $15,000 home buyer tax credit likely (even if I don’t like it) and the awesome mortgage rates around 5% I feel it is likely that we’ll see a further increase in demand for these properties and a reduction in available inventory in the coming months.  While I don’t expect all the inventory to “dry up” since foreclosures (and short sales) are still being listed in high numbers, the fact that they are clearing out quickly means that the best properties will be in short supply and buyers’ choices and negotiating power will be reduced over previous years.

Let’s recap what buyers have for opportunities today:

• Interest rates near ALL TIME LOWS with plenty of mortgage options still available
• Prices on foreclosures and short sales 30% – 50% off of their prices just a couple years ago
• $15,000 in FREE GOVERNMENT CASH (probably) to purchase a home

Add this all up and we get what could be the best situation for buyers to come along in their lifetime but as they say in the commercials: “this is a limited time offer” and the confluence of events that brought us to where we are today is not going to last forever.

America is in serious trouble and it will take many efforts to bring the country back from a recession/depression.  While most of the measures that the U.S. Government is taking are well beyond my understanding, their efforts on housing are something I believe I have a firm understanding and it is with these efforts which I have concerns.

Many have argued that the reason the economy stopped growing was that housing started falling and that the way to grow the economy again is to stop the fall in housing.  My argument is that housing was just one of the things that bubbled out of control (as did personal debt, corporate debt, derivatives markets, etc) and that until these are all back in line with historical levels we can’t put a firm footing to build upon.

While most housing data uses the Median Sales Price of all home sales to determine affordability, I believe that this metric is not a good representation of current housing prices.  If we look at the Twin Cities, the 2008 Median Sales Price was $195,000… a healthy 13.3% decline from 2007’s $225,000.  If we separate the sales data into “lender mediated sales” and “traditional sales” we find that the Traditional Seller Median Sales Price has only fallen 4.1% to $223,000 in 2008 from $232,500 in 2007.

The lender mediated sales we have today, the foreclosures and short sales, are a relative short-term phenomenon on the timeline of home ownership.  Even if these sales persist for a few more years, when these sales are gone the only homes and prices we’ll have are those of the Traditional Sellers.  With interest rates near all-time record lows, the current prices are still affordable but when interest rates climb to 6.5% – 7%, which are still historically good rates, home affordability will sink 20%+ and we’ll again be faced with housing prices above sustainable levels.

The problem with the $15,000 tax credit currently being proposed is that it will artificially put a near-term bottom in house prices but leave us with prices still too high when interest rates move up.  Further, while this might provide a large incentive to purchase homes, if buyers are unsure about their job security, will they feel comfortable with taking on more debt than they likely ever have before?  To me, the best way to spend this money is to get the job market growing again and let house prices settle at whatever level the market forces dictate versus at an artificially higher level.  While this may seem more painful in the near term, I believe it will leave us better off in the long run and will help prevent a potential double bottom in real estate prices.

Added 2/9/09 @ 6:30pm-I forgot to note that this credit is proposed to last 12 months so while we all agree we need economic stimulus NOW what we get instead is Congress offering housing stimulus with no urgency to buy now, but rather sometime in the next 12 months.  I hope we’re better off in 12 months than we are today and while I don’t think this is the best course of action to take, I think that if we do use it then we’d be far better off to make it only good till July 4th or September 1st or something much more limited in timeframe.

My Idea:

The U.S. Government should set up another Government Sponsored Enterprise (GSE) charged with providing liquidity and stability to U.S. housing’s jumbo mortgage market.  Jumbo mortgages are necessary on loan amounts above $417,000 to $625,500 depending on the affordability of homes in each market.

If we look back to 2005, jumbo mortgages could be had with 5% down (with a 2nd mortgage for the amount over 80% LTV) and at mortgage rates often only .25% to .75% more than conforming conventional rates.  Flash forward to today and we find that most jumbos require at least 20% down (if not more… 2nd’s are practically non-existant) and rates I’ve seen quoted recently are 2% – 2.5% higher than conventional conforming rates, which lately means 7% or so.  I think everyone will agree that jumbo lending suffered from lax requirements and was too cheap for the inherent risk in the product but I believe the pendulum has swung too far the other direction and that today’s terms and rates are out of line for real risk.

Some people will argue that the government should not “bail out the rich” but this isn’t a question of bailouts, this is a question of liquidity and stability.  Today most banks want nothing to do with any loan that they can’t resell to Fannie Mae, Freddie Mac, or Ginnie Mae because they do not have the asset base needed to hold these loans for their 30 year terms, they often immediately resell them to the GSE’s or another party.  Since jumbo mortgages have no secondary market, most banks have to hold any jumbo mortgage they write.

$100’s of billions have been offered up to financial institutions to improve liquidity in the lending market and yet there has been no improvement in the jumbo mortgage market and in fact it looks like this segment has actually become worse in recent months.

Enter a new GSE: Fattie Mae

Fattie Mae’s sole focus will be restoring liquidity and stability to the jumbo mortgage market.  They shall do so in much the same way that Fannie Mae and Freddie Mac run: Fattie Mae will buy jumbo mortgages from the originating banks and repackage them as mortgage backed securities and resell those in the open market.  Down payment requirements will continue to be higher than in the past… maybe we keep a 20% down payment… but because lenders can resell these loans to Fattie Mae and Fattie Mae can offer better interest rates when they repackage them as mortgage backed securities, the interest rate spread between conforming and jumbo loans should narrow substantially.

The nice part about this is that like much of the rest of the stimulus that the government has employed, it should be long-term revenue neutral if not even a profit making enterprise since the government is not subsidizing anything but rather “market making” for a product that today has no effective secondary market.  In the future the secondary market for jumbo loans will likely improve but even in that situation a GSE like Fattie Mae would still have significant value… just like Fannie Mae and Freddie Mac have for decades.

Others have discussed this general concept, however no one else has come up with a name as cool as Fattie Mae.  I can’t wait to see the letterhead!

This chart is using approximate mortgage costs and an estimated cost per square foot for 2008 so this isn’t “scientific quality” but the trend is very clear and I think it’s close.  What’s stark about this picture is that while most of us would agree that 2005 was the “peak” of the market, median sales price actually rose $1,100 in 2006 over 2005 and mortgage rates ticked up as well.  This lead to 2006 being the peak of homeownership un-affordability.  With the dramatic drop in house prices as well as interest rates in the 2nd half of 2008 we’ve seen financing costs for homes drop accordingly to levels not seen in many years.  This cost excludes taxes, insurance, utilities, maintenance costs and mortgage insurance, if any.

I think this is another good indicator of the improvement in affordability and shows that we’re getting back closer to more normal historic levels of affordability.  What do you think about it?