If Demand is Up and Supply is Down - Are We Starting to Recover?

Statistics are what you make of them, but sometimes, they can provide good perspective.

For example, from its peak in 2005 to its trough in late-2007, the number of "used" homes sold nationwide plunged.

• In 2005: Roughly 7 million homes sold annually
• In 2007: Roughly 5 million homes sold annually

Through all of 2008, though, Existing Home Sales volume has been essentially flat. Some months up, some months down, but always hovering near the 5 million unit mark.

The data from September is no different.

For the 13th consecutive month, the number of home resales nationwide straddled the 5 million benchmark, clocking in at 5.18 million units. This tells us that everyday Americans are still buying and selling real estate at a fairly steady clip -- despite what the news keeps telling us.

Versus August, September sales volume grew by 5.5 percent.

Now, couple this two other data points and we can see that the housing market is showing multiple signs of strength:

1. The national home supply is now down to 9.9 months
2. The number of homes under contract is up 7.4 percent

Again, though, statistics are what you make of them. Just as there are positive signals about real estate, there are negative ones, too. The credit markets are one example of that.

But, either way, with a full year of stable sales volume behind us and stories of recovery in beat-up markets like California, we can't ignore the idea that housing may be done trolling its bottom.

It takes willing buyers and willing sellers to turnaround a market. It appears that housing may have both.

(Image courtesy: The Wall Street Journal Online)

Phillies World Series Take Me Out to the Ballgame

Well the Phillies are the World Champions. I never thought I would be blogging about that, but here we are.

Our four major teams haven't won a championship since 1983 and that's somewhere around 100 opportunities we have missed. I was at a couple of them like the 2001 NBA playoffs against the Lakers, and the 2004 Super Bowl against the New England Patriots, and the major difference here was that at the end of the game, our entire city celebrated. Not a bad difference.
Enjoy the music of the string band that was playing at the left field entrance of Citizens Bank Park the evening that the 5th game started.

Monthly Foreclosure Rate Drops

According to foreclosure-tracking service RealtyTrac, the foreclosure rate is falling nationwide. 

Versus August, foreclosures fell by 12 percent in September 2008 as more than half of the states showed month-over-month improvement. 

Most interesting in the data is that several states that led the foreclosure boom in 2007 now appear to be leading the charge out of it.

For example:

• In Arizona, foreclosures are down 9.43 percent
• In California, foreclosures are down 31.64 percent
• In Colorado, foreclosures are down 6.22 percent
• In Illinois, foreclosures are down 5.14 percent
• In Michigan, foreclosures are down 22.43 percent

But despite September's promising data, the press is choosing to report that foreclosures are up 71 percent over the same period last year.  The data is accurate, but not necessarily relevant. 

When home buyers and sellers engage real estate markets, they rarely think in annual terms.  For them, it's about buying or selling this month, or next month, or the month after that.  When someone is "in" the market, their mentality is "right now".

In other words, annual data is more befitting of an economist, while month-to-month data is more befitting of you.  Of course foreclosures are up 71 percent since last year -- a lot has happened since then.  But on a monthly basis, signals point to improvement.

September's foreclosure data may be a signal of market recovery, or it may just be a blip.  Time will tell, really.  Either way, RealtyTrac's foreclosure data reinforces what most real estate professionals already know and that's that markets all over the country are showing signs of life.

How Will the Fed Affect the Market ?

The Federal Open Market Committee adjourns from its scheduled 2-day meeting today at 2:15 P.M. ET and the markets are eagerly awaiting the central bank's press release.

In it, Fed Chairman Ben Bernanke is expected to address the U.S. economy, the future of credit, and the new Fed Funds Rate.

It's this last point to which mortgage rate shoppers should pay attention -- when the Fed Funds Rate falls, mortgage rates tend to rise.

The inverse relationship between mortgage rates and the Fed Funds Rate is based on the idea that cuts to the Fed Funds Rate are designed to add gas to U.S. economic engine.

In theory, over time, Fed Funds Rate cuts work to improve Corporate America's balance sheets, thereby rewarding shareholders. Therefore, when the Fed Funds Rate falls, or is expected to fall, investors often rush to buy stocks before their prices get bid up. Part of that process, of course, includes selling the "safe" parts of their portfolio which are usually loaded with mortgage-backed bonds.

If you were looking for a reason why mortgage rates tanked Tuesday while the Dow Jones added 11%, now you have it.

The Fed Funds Rate stands at 1.500% and markets are split about how far the FOMC will cut it this afternoon:

• A "pause" is expected by 2 percent of traders
• A 0.250% rate cut is expected by 5 percent of traders
• A 0.500% rate cut is expected by 45 percent of traders
• A 0.750% rate cut is expected by 40 percent of traders
• A 1.000% rate cut is expected by 8 percent of traders

Without a consensus opinion among traders, no matter what the Fed does today, a lot of investors will be forced to rebalance their portfolios to account for their "bad bets". This will add to market volatility for sure.

Mortgage rates are calm this morning. The calm likely won't last. If you are floating your mortgage rate and want to avoid additional risk, consider locking your rate prior to the FOMC press release.

Santiago Calatrava, Architect

Architects design the world we live in and there is often so little we see of their work as the art form it truly is. Framed by Pink Floyd's music, I thought I would share with you some exceptional architecture. I hope you enjoy it as much as I do.

Who Knows What the Future Holds?

As the stock market dips then jumps then dips again, it's important to remember that markets are unpredictable and nobody knows what will happen tomorrow.

Unfortunately, that doesn't stop the analysts from trying.

An obvious example comes from May of this year. As the price of oil crossed $120 per barrel on its way to an all-time high of $147, a Goldman Sachs analyst was quoted as saying that $200 oil was "likely".

It seemed like a logical conclusion at the time.

Today, though, just five months after the prediction, the analyst's "likely" scenario looks downright laughable. Oil is off by more than 40 percent since that day. And there's hundreds of examples just like this, all around us.

Every day, economic experts and analysts are on television, telling us what's going to happen in the future:

• They tell us when housing prices will reach a bottom
• They tell us when stock markets will rebound for good
• They tell us what the economy will do over the next 12 months

But none of them operate with the proverbial crystal ball -- it's all on "gut".

Another example is from today's CNNMoney.com. In the wake of the government's banking response, a mortgage analyst predicts 7 percent interest rates over the next six months This would represent a 1.5 percent from the recent lows.

The rate prediction may be accurate, or it may not. We won't know for another six months. But what we know today, though, is that mortgage rates are all over the place -- just like the stock market. One day up, another day down. And nobody knows what they'll do tomorrow.

Predicting the future has always been an inexact science but that won't stop the experts from trying. And the experts are wrong as often as anybody else.

Real Estate Definitions: Amortization

In the widest definition possible, amortization (pronounced: am-ohr-tih-ZAY-shun) is the scheduled process by which a loan's principal balance pays down to $0.

The opposite of an amortizing loan is an interest only loan for which there is no scheduled principal repayment schedule.

With respect to mortgages, amortization is what determines how much of a monthly payment goes to principal, and how much goes to interest. Amortization schedules are the same for all fixed rate, non-interest only home loans including 15- and 30-year fixed rate mortgages, as well as all non-interest only ARMs.

Monthly principal and interest payments on a mortgage are based on the mathematical formula above, where:

• P = principal
• A = payment
• r = monthly interest rate
• n = number of payments

Now, if you've ever paid on an amortizing home loan, you don't need to use the formula to know that mortgage amortization schedules are dramatically front-loaded with interest.

In other words, in the early years of loan, the interest due on a mortgage is relatively high versus the principal due. And, if you've ever heard someone say, "You don't pay down much of a loan in the first few years," now you know -- mathematically -- why that is.

This interest-heavy mortgage repayment schedule helps banks to collect as much loan interest as possible up-front, offsetting potential loan losses.

But, just because the bank sets an amortization schedule doesn't mean that a homeowner can't change it. In any given month, a borrower can prepay extra principal to the lender, thereby changing the formula and accelerated the loan payoff date.

There are calculators online that do the prepayment math for you, but before making extra payments, talk with your loan officer or financial advisor first. Prepaying your mortgage could trigger a stiff penalty from your lender, or put your liquid assets at risk. Prepayment is not a bad plan, but it may be a bad plan for some.

(Image courtesy: Mortgage News Daily)

Mortgage Insurance Makes Small Down Payments Cost More

Private Mortgage Insurance (PMI) is a mortgage lender's insurance policy against highly-leveraged homeowners. It's typically required when homeowner equity is less than 20 percent at the time of closing.

With PMI defaults up 40 percent over last year, though, private mortgage insurers are taking big losses.

They're also taking outsized steps to prevent additional claims going forward and that is bad news for low-equity homeowners and home buyers.

The first PMI change new, higher insurance rates.

Like home insurers that adjust premiums after a worse-than-expected storm season, PMI insurers are raising mortgage insurance rates for all homeowners, regardless of credit history. The higher premiums are meant to offset the higher losses.

And, the second change is that some PMI firms are discontinuing coverage for "high-risk" transaction types. This includes purchases of non-owner occupied properties, and cash out refinances above 85 percent loan-to-value.

Both changes, however, point to similar conclusion about home loans: Home equity is increasingly important for today's homeowner.

PMI rates are higher than they were six months ago and the rising default rates makes it likely that rates will rise again soon. As PMI rates increase, so does the cost of homeownership for people whose lenders require it.

Go Phillies

Image by wallyg via Flickr

I'm a home town sports fan. I follow the Philadelphia, Eagles and the Sixers regularly. I suffer with them through all of the almost wons and the agonizing seasons because that's what Philadelphia sports fans do. But I have to admit I'm not much of a baseball fan. When I was a kid, I loved the Phillies. My Mom was a huge baseball fan, and she loved Robin Roberts and the Whiz Kids, and I loved my mom so I loved them too. (I'm actually still kind of fond of Robin Roberts - great pitcher AND a neat name). But in 1964, with a 6 1/2 game lead for the championship, the Phillies proceeded to loose 10 straight games, which went down as one of the worst "chokes" in Major League Baseball, and tore my young heart out. So I stopped following baseball for the most part.

This year, the Phillies got me back, but I have to admit that I'm hopping on the bandwagon. I'm not going to pretend to be one of the true faithful that have struggled over the past few years as they almost made it, but I am a happy guy. One of baseball's oldest franchises is fighting it out with one of baseball's newest, and they're earning their name of the "Fightin' Phillies". An underdog going into the 1st game, without home field advantage, the Phillies won the first game in the series last night. I've been a fan in Phillie too long to get too excited, but I'm back for this ride - hope its a good one!

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Simple Ways to Winterize Your Home

With home heating costs expected to increase 20 percent over last year, The Today Show offers 10 tips to reduce home heating costs this winter.

The advice ranges from the well-known to the obscure, but every little bit is meant to put money back in homeowners' pockets:

• Replace your air filter monthly
• Drain a quart of water from your water heater
• Use a thermostat timer for sleeping hours

If you prefer text to video, the 4-minute video is summarized at the NBC Web site.

How Falling Gas Prices Help the Economy

Given the stock market's recent performance, it's not surprising that gasoline's falling prices are garnering very little attention. That doesn't make it any less relevant, however.

Since peaking in July, gas prices are off by 20 percent.

Falling gas prices are an important positive for the U.S. economy because less money spent at the pump means that more money is saved per household for everyday items including food and other staples.

In addition, consumer spending makes up two-thirds of the economy. 

Therefore, falling gas prices may lessen the impact of a forecasted recession.  Because Americans are notoriously poor savers, the extra cash-on-hand is likely to get spent which will, in turn, push the economy forward through the upcoming holiday shopping season.

So, just as inflation can bad for mortgage rates, so can recession.  And while recession won't always cause mortgage rates to rise, right now, it's one of the factors driving rates higher.  Falling gas prices may help keep that scenario at bay.

Pending Home Sales Jump!

Buyers are returning to the housing market.

Each month, The National Association of REALTORS^® tracks homes under contract to sell, but whose closing has not yet happened.  It calls them "pending sales" and publishes a monthly report to quantify them. 

The Pending Home Sales report is important because it's meant to predict future home sales activity.  History shows that 80 percent of homes under contract will "close" within 60 days, and most of the rest will close within 120 days. 

If Pending Home Sales are up, it's believed, actual home sales will be up, too.

In August, Pending Home Sales jumped 7 percent from the month prior, returning to levels not seen in over a year.

The report's strength suggests that buyers are returning to the housing market, continuing the trend that started in March.  This is tremendously good news for sellers because more buyers on the hunt means more demand for homes which, in turn, leads sale prices higher. 

The Pending Homes Sales report is not a perfect predictor, however.  For one, it's not measuring an actual sale -- just the expectation of one.  In addition, it only accounts for "used" homes, ignoring new construction. 

But that aside, the strong uptick in August tells us that home buyers are re-engaging at a quickening pace and finding that "now" is a good time to buy real estate.  When buyer demand rises, the real estate market as a whole isn't usually that far behind.

(Image courtesy: The Wall Street Journal Online)

The Impact of Last Week's Fed Rate Cut

The Federal Reserve made an "emergency rate cut" last week, dropping the Fed Funds Rate by one half-percent to 1.500 percent.

The move is meant to stimulate the U.S. economy.

When the Federal Reserve changes the Fed Funds Rate, it often takes 9 months for the changes to work their way through the economy. 

On a broad scale, therefore, we won't know if the cut truly "worked" until Summer 2009.

But, as it relates to Americans in general, the rate cut spurred two immediate changes.

First, because Prime Rate is directly tied to the Fed Funds Rate, Prime Rate fell by 0.500 percent, too.  That means that interest rates on credit card debt and home equity lines of credit are now lower, reducing monthly interest costs for the majority of American households.

The second change is that mortgage rates were rising at the same time.

The Fed's actions today sparked optimism in some corners of Wall Street and money is now flowing into the stock market at the expense of bonds.   Because mortgage rates move in the opposite direction from bond demand, mortgage rates are higher this morning. 

As always, mortgage markets and mortgage rates remain on edge.  Therefore, rates are subject to change.  And quickly.  If you see a rate and payment you like, be ready to commit to it because it likely won't last long.

(Image courtesy: USA Today)

Pros & Cons of Borrowing Against Your 401(k)

As household budgets get pinched and credit markets tighten, a growing number of Americans are making "hardship withdrawals" from their 401(k) plans. 

One major fund group cites a 15 percent increase in activity from this time last year for various reasons including staving off foreclosure and medical emergency.

However, 401(k) loans should only be made with careful consideration.

On the positive side, 401(k) loans don't require a credit check.  This is helpful feature for people deep in debt, and who may have missed a payment or two to their creditors.  With no credit score requirement, a poor payment history won't disqualify a plan participant.

In addition, most 401(k) loans can be arranged with just a phone call and a small stack of paperwork.  There's no "qualification process" like applying for a credit card or a mortgage.  Money can be available, therefore, in as little as a day.

But there are negatives to 401(k) loans and the biggest one relates to taxation. 

If you take a 401(k) loan and can't repay according to its terms, the IRS taxes the loan as ordinary income and slaps on a 10 percent penalty if you're under 59 1/2.  That can be very costly for a lot of people. 

But, even if you do repay the loan on time, it's still gets expensive.  This is because 401(k) loan repayments are subject to double-taxation. 

The first taxation occurs when the loan is repaid because the payback is made with post-tax paycheck dollars.  A person in the 25% tax bracket, for example, would need a $1,333 paycheck to repay a $1,000 loan -- the missing $333 goes to taxes.

And the second taxation occurs at retirement when the funds are finally withdrawn.  The IRS taxes that money as ordinary income.

Now, this isn't to say that taking a loan against your 401(k) is bad, it just may not be the best possible route for a person in trouble.  Especially because of the costs.  If you're planning to withdraw from your 401(k) for hardship, be sure to talk with a qualified financial professional first. 

If you'd like a referral to a trusted professional, call or email me anytime.

Fannie Mae Lowers Fee, Makes Mortgages More Affordable

In an effort to provide "the most market support possible", Fannie Mae is cutting one of its mandatory loan fees by 0.250 percent, effective immediately.

Fannie Mae introduced the Adverse Market Delivery Charge in December 2007 to offset foreclosure and delinquency losses.  The initial fee was a quarter-percent of the amount borrowed. 

Then, as market conditions worsened, Fannie Mae doubled its across-the-board loan fee to 0.500 percent in August of this year.

As of today, the fee is back to its starting point.

Since the start of the 2008, Fannie Mae has made 21 separate changes to its mortgage guidelines.  Most have been detrimental to borrowers, increasing the difficulty, or the cost, of qualifying for a conforming home loan.

Today's change is among the few that are beneficial.

With mortgage pricing edging higher because of the looming Congressional vote and Wall Street's reaction to the weak jobs report, the good news is that price changes could have been worse. 

Fannie Mae's Adverse Market Delivery Charge flip-flip is keeping rates in check -- perfect timing for home buyers shopping for their new mortgage.

Some Good News From the Falling Stock Market

Monday, the Dow Jones Industrial Average closed below the psychologically-important 10,000 level for the first time since 2004. 

Despite the milestone-marker breach, however, there was a large group of Americans with reason to cheer.  As stocks sold off, mortgage markets rallied to the benefit of home buyers everywhere. 

Conforming mortgages rates improved yesterday.

Most interesting here is that rates improved for the same reason that the stock market fell.  Because of lingering concerns about the worlds' economies, investors lost their collective appetite for risk Monday.  In response, they sold their stock positions and parked the proceeds in the "safe haven" of U.S. government-backed debt. 

The extra demand for safe investments pushed up the prices on mortgage bond which, in turn, pushed down mortgage bond rates.

Now, we can't predict when the market's risk appetite will return, but when it does, expect money to flow into stocks just as quickly as it left. 

All year long, with respect to stock markets, it's been either "everybody in" or "everybody out" and, for now, it's everybody out.  This is why mortgage rates fell Monday. 

But, when the momentum shifts -- and it will shift -- mortgage rate shoppers would do well to be prepared.  Be ready to lock that mortgage rate because as soon as the stock market reverses course, mortgage rates will head higher. 

If stocks recover as quickly as they tanked, expect mortgage rates to spike badly.

(Image courtesy: USA Today)

Fall Lawn Care Tips

In this 4-minute video, turf grass specialist Carmen Magro demonstrates the proper way to prepare your lawn for Spring.

His tips include:

• How to seed "worn down" areas of a lawn
  
• How to control thatch to promote a healthy lawn
  
• How to fertilize a lawn without "overdoing it"

The Fall season is one of the most important times of the year to feed your lawn. With the advice from the video, you'll be sure to do it right.

Solve the Problem of Bulky Plugs

While home electronics advance, the basic extension cord has been slow to catch up.

This has created a size mismatch because today's devices tend to carry large size plugs, but the standard 6-outlet power strip is only meant for "skinny" ones.

Pictured at right: the solution.

Matching form and function, the ezSpace UFO provides 6 outlets in a recessed, circular pattern, eliminating the need for multiple power strips in a home or workplace environment.

In additon, the UFO's On/Off switch is located on its bottom instead of on top. This makes it far less prone to accidental shut-offs than a traditional power strip device.

These features, plus its tiny 6.25" footprint, have generated terrific press for the ezSpace UFO available for sale at Target, among other places.

The device retails for about $30.

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Accept + overcome adversities ;learn-let go- then go on!

Listening to Floyd Wickman in person; still valid after all these yesrs

Small Housing Supply Better for Sellers Than BuyersB

The August Existing Home Sales report was released last Wednesday, showing a decline in the number of homes sold nationwide, and a reduction in the median sales price.

Not surprisingly, the media singled these two statistics out, playing them as a big negative.

They're not.

The decline in sales wasn't good, but it wasn't terrible, either -- sales were actually up in half of the regions around the country.

And, citing "median sales price" is somewhat pointless because median sales price only measures the price point at which half the homes sold for more, and half sold for less.

No, it's the third statistic in the report that deserves as much -- if not more -- attention that the previous two. According to yesterday's press release, the national home supply is decreasing.

This is terrific news for home sellers.

In its report, the National Association of REALTORS said that the nation's existing supply of homes for sale fell by 7 percent in August.

At the current pace of sales, that represents a 10.4-month supply, down from 10.9 months in July. With a reduced supply of homes for sale, all things equal, home prices would increase.

This is Supply and Demand in its most basic form.

Economists and experts have long noted that reducing the housing supply is one of the key elements to a sustainable housing recovery and we've seen several indications that this is happening, including builders not building as much.

Longer-term, this is good news for home sellers because a reduction in housing supply tends to lead to higher prices.

(Images courtesy: The Wall Street Journal Online)

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FHA Becomes More Affordable Tomorrow!

Earlier this year -- and for the first time in its history -- the FHA changed its funding fees and mortgage insurance structure.

Effective October 1, 2008, it's repealing those changes.

Partly to keep FHA home loans affordable, and partly to comply with new laws, the FHA is rolling back its up-front fees and ongoing mortgage insurance requirements and replacing them with new ones.

The new up-front FHA fees are as follows:

• 1.750% : All purchase and "standard" refinances
• 1.500% : All "streamline" refinances
• 3.000% : All FHASecure programs for delinquent mortgagors

These fees are paid as a one-time cost at closing, and are calculated by multiplying the loan size by the fee. A $200,000 FHA purchase, for example, now carries a $3,500 one-time charge.

Ongoing mortgage insurance requirements have changed, too. These changes are based on the loan type and the amount of equity in the home.

• 15-year fixed with 90% borrowed or less: 0.000% annually
• 15-year fixed with more than 90% borrowed: 0.250% annually
• 30-year fixed with 95% borrowed or less: 0.500% annually
• 30-year fixed with more than 95% borrowed: 0.550% annually

Mortgage insurance premiums are calculated by multiplying the initial loan size by the annual premium. The same $200,000 FHA purchase outlined above, using a 95% 30-year fixed mortgage, would require a monthly mortgage payment add-on of $83.33 until the loan is paid in full.

FHA-insured mortgages have grown in popularity this year because, while the guidelines of other mortgage products have tightened, FHA guidelines have remained relatively loose. FHA allows 3.500 percent downpayments on purchases, for example, and allows "cash out" refinances to 95 percent.

Fannie Mae and Freddie Mac do not.