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19 Oct, 2011

REO Sales may not peak till 2013

The Miami Real Estate Club learned that the sale of properties repossessed through foreclosure may not peak until 2013, keeping home prices from a meaningful recovery for some time, analysts estimated Monday.

Nearly half of the more than 552,000 REO properties liquidated in the first half of 2011 were held by private banks. In the years ahead, the government — including the Department of Housing and Urban Development, Fannie Mae and Freddie Mac — will begin taking a majority of the activity.

In 2013, REO sales could reach 1.48 million properties, according to estimates from Bank of America Merrill Lynch analysts, a 10% increase from projected amount in 2012.

"We do not expect to see anywhere near the downward pressure on home prices that we had back in 2008, since the expected percent changes in liquidation volumes are so much smaller," BofAML analysts said. "But home prices are starting from a negative point, so the implication is that home prices will continue to decline as the foreclosures transition through the pipeline."

Most of the projected increase will come as the government begins to unload its backlog. The government-sponsored enterprises and HUD, analysts estimate, will liquidate roughly 595,000 properties in 2013 alone.

Total REO liquidations wouldn't drop below 1 million until 2015, according to BofAML.

The Obama administration began work last month developing new strategies for selling this mass of properties, which may involve renting more of them. The Federal Housing Finance Agency is also working on a way to refinance more underwater borrowers to entice them from walking away.

"I would essentially rent the house back to those who are living in them now," said Susan Woodward, an economist with Sand Hill Econometrics. "I don't think it makes a lot of sense to push 4 million people out of their homes when they're victims of a slower economy they had nothing to do with."

Other analysts were skeptical of anyone who could predict accurately what the GSEs or Washington would do, especially after the elections in 2012.

"Do they really think that the government under any administration would let 500,000 homes hit the market and crash prices all over again, six years after the first crash?" said Scott Sambucci, chief analyst at Altos Research.

He said even if unemployment improved by a full percentage point or two — which he said would be a stretch — the market would still struggle to meet such a supply influx.

"It would crash the market, so no, it'll never happen," Sambucci said.

Daren Blomquist at RealtyTrac, which monitors foreclosure filings across the country, said the sale of REO is on track to reach 825,000 by the end of 2011.

"We do expect the REOs to pick back up in 2012 as lenders push through some of the foreclosures delayed by processing and paperwork issues," Blomquist said, adding the inventory needed to be sold could reach well into the millions.

If half of the 800,000 mortgages currently somewhere in the foreclosure process and another half of the 1.5 million loans in serious delinquency end up REO, it could mean an additional, 1.15 million properties that would need to be liquidated — not including new foreclosures that enter the process, according to RealtyTrac.

"That's very possible given continued high unemployment rates and high underwater rates," Blomquist said. RealtyTrac estimates roughly 27% of all outstanding mortgages are worth more than the underlying property.

Woodward said refinancing borrowers, in negative equity or not, down to current market rates could result in a total savings for U.S. households at $250 billion annually. When asked if private investors would return to fund the future mortgage market after such a radical change, she said they would.

"I think the whole world would see this as a one-time fix. We did similar extreme things during the Great Depression," Woodward said.

Investors themselves, though, showed little confidence they would take on such a risk again. In fact, most are trying to keep the government involved in the housing market for the future, to keep risks as low as possible. Otherwise, foreign investors would flee.

While the estimates on how many REO will be sold in the future are extremely difficult to nail down, the size of the best projections share a common and threatening scale. Analysts said major refinancing schemes or new strategies for liquidating REO on a local level would need to be completed soon to rescue house prices from the still increasing pressure of mounting foreclosures.

"The need for policy support would therefore be considered urgent," the BofAML analysts said.

18 Oct, 2011

Investor's can't find houses here's why

The Miami Real Estate Club has discovered that the housing market, which has struggled with an oversupply of homes for years, is facing a new problem: a lack of attractive inventory.

Housing Inventories Down

The number of homes for sale fell for the fourth straight month in September to the lowest level of the year. Track housing inventories.

  •   There were more than 2.19 million homes listed for sale at the end of September, down 20% from a year earlier, according to a new report from the real-estate website Realtor.com. That is the lowest level since the company began its count in 2007.

The report is the latest sign of how the U.S. housing market can't seem to catch a break. While falling inventories are typically a sign of health, because reduced competition can boost prices, that isn't the case right now.

Instead, real-estate agents say, people are pulling their homes off the market rather than try to sell them at today's discounted prices. At the same time, banks have been more slowly moving to take back properties through foreclosure ever since processing irregularities surfaced last fall, temporarily reducing the supply of foreclosed properties. The shrinking supply isn't driving up prices because demand is soft.

Yet there is still a substantial "shadow" supply of foreclosures and other distressed homes, estimated to be more than one million, that is likely to stream onto the market in the coming years. The pent-up supply is another constraint on any of the price gains that might normally occur when supply falls.

The decline in inventory also suggests that there are fewer opportunities for buyers and sellers to strike deals. That can further chill sales, as buyers become afraid to overpay while sellers are similarly cautious about underpricing their homes.

"The inventory is low, so it's hard for buyers to find their dream home," said Joan Downing, a real-estate agent in Bloomfield Hills, Mich., a suburb of Detroit. "That's been our challenge more than anything: finding the inventory for the clients. Nobody's complaining about the pricing or the interest rates."

In Detroit, the inventory of homes for sale was down by 28% from a year earlier, according to Realtor.com. Listings were down by 49% in Miami, by 48% in Phoenix and by 46% in Orlando, Fla. Housing inventory was down from one year earlier in all 146 markets tracked by Realtor.com except for Denver and El Paso, Texas.

"On paper, all of the conditions are great for buying, but the reality doesn't seem to match that," said Ross Kutash, a 37-year-old attorney who has looked at more than three dozen homes in different suburbs of Los Angeles. "I wouldn't describe it as a buyer's market so much as no market at all."

[HOUSING]

Mr. Kutash and his wife, who recently had a baby, are looking to move out of their one-bedroom apartment in West Hollywood. "For our sanity, we're in a hurry," he said.

The Realtor.com data include only single-family homes, townhouses and condominiums listed for sale on more than 900 multiple-listing services across the country. They don't include unsold homes listed as "for sale by owner" or other properties that don't find their way onto the multiple-listing services.

The National Association of Realtors calculated that there were 3.58 million single-family homes, townhouses and condos for sale at the end of August, down 28% from a year earlier, though still above levels seen in the first quarter of 2011. The calculation differs from Realtor.com's because it estimates the entire universe of single-family homes for sale. The NAR is in the process of recalibrating its methodology. Both sets of data show housing inventory at a historic low.

Mortgage rates have fallen to their lowest levels in decades, but demand remains weak and credit standards tight. Mortgage applications for home purchases were 3% below year-ago levels during the first week of October, according to the Mortgage Bankers Association.

Industry executives say shortages of well-priced and attractive homes are a bigger drag on sales than sluggish demand.

"As weak as demand is, inventory has been weaker," said Glenn Kelman, chief executive of Redfin Corp., a Seattle real-estate brokerage firm that does business in 13 states. "Right now, the absence of inventory is the limiting factor on sales volume."

16 Oct, 2011

10 Tips for High Value Home Appraisals

The appraiser was due in an hour. The beds were unmade, breakfast dishes in the sink and toys scattered about the playroom. Would she care?

I got moving—and cleaning. At 34 weeks pregnant, that’s not so easy.

After all, I know lowball appraisals can kill deals, something I’ve written about for The Wall Street Journal.

They can also kill a refinancing application, which we are in the midst of for our 1920s Georgian-style house in Queens. If it comes in too low, it’s not worth refinancing or you might need to put in a whole lot more equity.

We don’t know how ours turned out yet but after talking to a handful of appraisers, I felt great regret at not doing more to plan and prep. Here are some tips based on those conversations.

Caution: Some of the advice—like home valuations themselves these days—might feel contradictory. But what they all agree on is to keep the look, feel and condition of the property as updated and cared for as possible. Here are the 10 tips from the Miami Real Estate Club.

  1. Spruce the house up. But appraisers caution that you don’t need to deep clean under couches and that a few dirty dishes won’t hurt your value. Rats, cockroaches and that car you’ve been tinkering on might… “Things like overgrown landscaping, soiled carpeting, marks on walls — those do affect value and are part of the property’s overall condition rating,” said Dean Zibas, the president and chief appraiser for Zibas Appraisal in San Clemente, Calif. In other words, think broom clean, not set design for a home-decorating magazine.
  2. Curb appeal also matters so mow the lawn, hack those weeds and trim those hedges. This can also help offset your house from unfair comparisons with foreclosures nearby. “In today’s climate I can’t stress enough condition, condition, condition,” said Doreen Zimmerman, an appraiser in Paradise, Calif. “An hour or two, for the most part, will set your home apart in the actual picture that the lender gets from the appraiser vs. the actual picture that the appraiser will provide of the (foreclosure) down the street.
  3. Keep a list of all the updates you’ve made and be ready to hand it over; a sketch plan of the house indicating square footage also helps. “Have a list of updating done within the past 15 years. Itemize each update with the approximate date and approximate cost. Also highlight the notable features of the property,” says Matthew George, the chief appraiser of Eagle Appraisals Inc. in Denver, Colo. Remember the items that an appraiser might not notice, like a new roof or insulation. Don’t forget the minor items. For example, I mistakenly told the appraiser we hadn’t updated one bathroom but actually we had installed a new sink and had the tub sealed. That counts, according to the experts.
  4. Have comps on hand. Yes, you say this is the appraiser’s job but every little bit helps, “especially if they are aware of a property that sold without the aid of a Realtor (i.e. for-sale-by-owner),” says Mark T. Smith, the owner and president of Smith Appraisal Services in St. Augustine, Fla. That can mean it wasn’t posted on the Multiple Listing Service, and result in other delays by the time it gets posted through other government data sources.
  5. Be mindful of peeling paint. Government-insured loans such as FHA and veterans’ loans will require peeling paint to be removed in houses built before 1978. But don’t worry too much about a child’s scrawling on his bedroom wall, unless it’s going to require a whole new paint job.
  6. Focus. “Don’t spend money that won’t yield a return on the investment. The best expenditures for most markets are paint, carpet, light and plumbing fixtures,” says Denver’s Mr. George. Prioritize what you do; if you’re the type of homeowner who has upgraded and fixed items as they broke, you should be fine.
  7. Location still matters. If there have been changes to the neighborhood, mention them, from a new playground to a new Whole Foods. If the area’s just been declared a historic or landmark district, let the appraiser know.
  8. Keep the $500 rule in mind. Appraisers often value houses in $500 increments so if there’s a repair over $500 that can or should be made, it will count against the property. Fix leaky faucets, cracked windows, missing hand rails and structural damage.
  9. Also remember the concept of “effective age,” the age the appraiser can assign to a home after taking into consideration updating and condition. “Say you have a cracked window, thread-bare carpet, some tiles falling off the shower surround, vinyl torn in the laundry room, and the dog ate the corner of the fireplace hearth, these items could still add up to an overall average condition rating as the home is still habitable, however your effective age will be higher resulting in comparables being utilized which will have the same effective age and resulting lower value,” says Ms. Zimmerman, who wrote the book “Challenge Your Home Appraisal” and runs a web site by the same name.
  10. Lock up Fido and Fifi. Appraisers say they get annoyed enough by homeowners following them around but a snarling, growling dog is even worse. Along the same lines, try to make the appraiser comfortable — if it’s cold out, put the heat on; hot out, the air conditioning. “If it’s 100 degrees out and you never put the air conditioning on, put it on for the appraiser so they don’t question that your unit is broken,” says Ms. Zimmerman.

With those things in mind, let the appraiser do his or her job. “Questions and banter may make the inspection go slow or make the appraise miss something,” said James R. Gerot, a residential appraiser in Ottumwa, Iowa. “My inspections have a rhythm to them so once I get started interruptions are just that. Save questions until after.”

16 Oct, 2011

The case against color

The Miami Real Estate Club's read that pulling the decorating trigger would be much easier if I removed seven of the nine major color options. Left with just black and white, raging indecisiveness would give way to calculated precision. The tough calls could be solved with a coin.

Pale rooms, sucked free of distracting reds, blues and yellows, are having a moment. A few months ago at a trends seminar at the Decoration & Design Building in New York, super-decorator Miles Redd showed slides of crème colored rooms. Gasp. Even the king of saturated hues was hankering for something more soothing.

PALETTE CLEANSE: A bit of the rough anchors a floaty white bedroom by Anouska Hempel.

"Occasionally I get a client who doesn't want color," Mr. Redd explained to me. "Most recently I worked for a woman with very edited taste, and her directive was to keep it calm. We conjured up rooms in the palest blonde and ice—what became interesting was how shape, texture and paint finish were the strong cards." Becoming more enthusiastic about the subject, Mr. Redd went on to describe, in hilarious detail, his imaginary "total black and white apartment" featuring, "an under-furnished ballroom with chalky plaster walls, an ivory terrazzo floor with a small black star in the center, three pairs of leaded French doors and four Jean-Michel Frank club chairs on a lambskin rug."

  HIGH CONTRAST: From Celerie Kemble's new book 'Black White,' a salt-and-pepper wallpapered room and stairwell and mismatched china that hangs together thanks to an ebony-and-ivory theme.

Call it a trend. Celerie Kemble—the neotraditional decorator to the jet set known for Palm Beach brights—has just come out with a book called "Black & White (and a bit in between)" (Clarkson N. Potter). In it, she catalogues some of the finest no-color work she and her peers have done, listing a million reasons why going color-free is painless, stylish and timeless, even dragging in literary masters to elevate the sell. "Shakespeare constrained himself to a limited meter, and in it, wrote the world's greatest plays," she argues. "By narrowing the mission, you can concentrate your energies, focus your embellishments, and multiply your opportunities."

Ms. Kemble's book is not unlike an ink-blot test, a window into what you are all about. Looking at the range of styles she presents, reduced to black and white, one can zero in on a higher design truth: What style of room you find most appealing. Do you prefer crisp Hollywood high gloss or rough-hewn organic minimalism? You may find your id more easily without all the color noise.

[FREE DECO JUMP] 

Ms. Kemble's book got me daydreaming about the plaster-y white rooms 1970s decorator John Dickinson swore by. Pale slipper chairs against burnished vanilla walls—everything white right down to the silverware. His was a modernized version of the creamy 1920s sleekness of decorator Syrie Maugham (Somerset's wife). Like Syrie, I've had my fill of overly stuffed and colorfully decorated. Her sophisticated cool with a touch of dark complication is right for the times.

Further evidence of a movement toward starkness: Design editrix Linda O'Keeffe singles out the joys of going all white in her newest book, "Brilliant: White in Design" (The Monacelli Press). For whatever reason—lean economic times or overstimulation—Ms. O'Keeffe joins the white party with a gallery of sumptuous rooms and plentiful evidence to solidify the campaign for a non palette. I ran into the author on the street and didn't even recognize her—Ms. O'Keeffe's signature red do had gone completely silver fox.

You can't help but feel good about all this palate-cleansing decorating. To quote Ms. O'Keefe quoting Elsie de Wolfe, "I believe in plenty of optimism and white paint."

14 Oct, 2011

Is it Time to Refinance? Think again

 

The Miami Real Estate Club read that mortgage rates have been hitting historic lows for five weeks in a row. But that doesn't mean you should refinance your mortgage just yet.

The average rate for 30-year-fixed-rate mortgages fell to 3.94% for the week ended Oct. 6, according to mortgage-finance giant Freddie Mac—the lowest on record. Rates on 15-year loans, meanwhile, have fallen to a record low of 3.28%.

While mortgage rates vary by region even among the nation's biggest lenders, they are down throughout the country for borrowers with excellent credit. Citigroup, the third-largest U.S. bank by assets, is pitching a 4.193% rate on 30-year-fixed loans and a 3.806% rate for 15-year-fixed mortgages. EverBank Financial of Jacksonville, Fla., is offering Cincinnati-area residents a 3.89% rate on 30-year fixed-rate loans.

Steve Walsh, who heads mortgage lender Scout Mortgage in Scottsdale, Ariz., says he has seen a surge in interest among borrowers looking to take advantage of low rates. "There's a feeling that rates are basically at the lowest they can get," he says.

But are they?

No one can predict the future, of course, but policy makers seem intent on pushing rates down even further.

The Federal Reserve, for example, is trying to move rates lower by buying more mortgage-backed securities. And Obama administration officials are talking to lenders about ways to reinvigorate the Home Affordable Refinance Program, a government initiative to help borrowers refinance even if they have little or no equity left in their homes.

The goal for both: to get rates low enough so that more people will find it beneficial to refinance. If people start doing it en masse, it could help the economy.

"In the short term, rates could fall," says Brad Hunter, chief economist for Houston-based Metrostudy, a housing-market research firm. "In the longer term, rates will rise as the economy starts to strengthen."

If that were to play out, then refinancing now, with rates still around 4%, could be a mistake. That's because the chances are good that if you own a home, and have significant equity in that home and good credit, you already have refinanced in the past few years. Because refinancing involves costs—typically 2% of the mortgage value—it often doesn't pay to refinance every time rates tick down, tempting though it is.

"Don't become a refinance junkie," says Greg McBride, a senior financial analyst at Bankrate.com, a consumer-information site. "You pay for it later in the form of closing costs."

So how far do rates need to fall before it makes sense for you to refinance? Economists at the University of Chicago have tried to answer the question.

The ideal refinance rate must factor in closing costs, marginal tax rates, the number of years left on the mortgage and other factors, the economists say. Homeowners often make decisions based on faulty assumptions about rates, says David Laibson, an economics professor at Harvard University and one of the Chicago study's authors.

"Mortgage rates follow what we call a random walk, and don't bounce back from lows like most people assume," he says.

In other words, what goes down could keep going down—even if it goes up for a little while first. If you catch the first big dip, you can miss later ones that offer even better opportunities.

The economists produced an online calculator, at zwicke.nber.org/refinance/, that distills their theory into a tool that calculates how far interest rates need to fall for homeowners to derive value from refinancing—the "optimal" refinance rate.

For example, their formula suggests that a homeowner with a $400,000 mortgage with 25 years left on a 30-year-fixed rate mortgage at 4.75% shouldn't refinance until rates fall to below 3.51%, assuming 2% closing costs.

The risk of waiting for a lower rate, of course, is that it will never come. If you are unwilling to take the gamble, your best bet is to negotiate hard on fees.

The conventional wisdom is that it doesn't make sense to refinance unless you can shave at least a point off your interest rate. That's because you don't want your "break-even" point—when your savings exceed your refinancing costs—to be longer than two years or so.

But if you can persuade your lender to waive the fees, or most of them, you might need only a half-point of savings to make a deal worthwhile, says Bankrate.com's Mr. McBride.

Last week, Michael Allison refinanced his $417,000 mortgage on a three-bedroom California Ranch-style house in Santa Barbara, Calif. The 41-year-old fitness-center owner says he will save $200 a month by switching from a 30-year fixed-rate mortgage at 4.87% to one at 4.25%.

"It's an absolutely great deal and didn't cost me anything," Mr. Allison says. His lender, Provident Savings Bank in Pleasanton, Calif., covered the closing costs after his real-estate agent made some calls to the firm.

With a little negotiation, homeowners can persuade lenders to cover their fees. "It's not a free lunch," Mr. McBride says, because borrowers get slightly higher rates in exchange—but it is a good way to minimize your upfront costs.

Another option that's growing in popularity: refinancing a home at a shorter term—say, 20 or 15 years. If you can find a rate that keeps your monthly payment about the same as you were paying on your old 30-year loan, the decision is a no-brainer, says Mr. Walsh of Scout Mortgage.

Lloyd Qualls, a 57-year-old accountant in Mesa, Ariz., decided to do just that. Last month he ditched his 30-year fixed-rate loan at 4.875% for a 15-year fixed-rate loan at 3.375%. While that boosted his payments by $89 a month, it will shorten his payment period by 13 years and save him $104,233 on interest over the life of the loan.

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