When Builders Slow Down, Sellers Benefit

In August, home builders broke ground on the fewest number of homes since January 1991.

It was the 16th straight month in which Housing Starts declined.

But, although the press labels these statistics indicative of a recession, home sellers nationwide quietly applaud them.

With fewer new homes coming on the market, home sellers are finding that there's less competition for buyers, helping them to command higher prices for their homes.

It's Supply and Demand in its most basic form.

But that's not all that home buyers have to worry about. The most recent Existing Home Sales report showed an increase in sales nationwide, plus a reduction in the number of single-family homes for sale.

Again, Supply and Demand. Good for sellers, bad for buyers.

However, we should keep in mind that real estate is local. What we see in national and regional trends are not as important as what's happening in your town, your neighborhood, and your street. But, if we learn one thing from the chart above, it's this: builders are rational.

If homes won't sell, builders will stop building them. And, sooner or later, the market -- and home prices -- will catch up.

(Image courtesy: The Wall Street Journal)

Investor face New Lending Limits

In its last act as a semi-independent company, Fannie Mae altered mortgage guidelines for real estate investors last Friday. It was Fannie's 22nd update this year.

The first part of the guideline change limits the number of properties owned by any one person. 

Fannie Mae will now decline any mortgage application for a second home or investment property if the mortgage applicant already finances, or will finance, more than 4 properties in total.

The former guidelines allowed for 10.

There is a loophole, however.  Fannie Mae will not count properties against the 4-property limit if they are held in the name of a corporation.  This holds even if the real estate investor is the sole owner of said corporation. 

Investors, therefore, should consider moving their properties into a corporate structure to avoid triggering Fannie Mae's 4-property limit.  Many take this step for liability and taxation reasons, but it's now a good idea for mortgage approval reasons, too.

The second part of the guideline change cannot be so easily avoided.  Fannie Mae is assessing new, loan-to-value based loan fees on all investment property mortgages.

• Loan-to-value less than 75 percent : 1.75% loan fee
  
• Loan-to-value 75.01-80.00 percent : 3.00% loan fee
  
• Loan-to-value 80.01-90.00 percent : 3.75% loan fee

These fees are mandatory and are in addition to any whatever other risk-based loan fees Fannie Mae may assess.  Currently, those fees amount to a half-percent at minimum for real estate investors.

Since its Fannie/Freddie takeover, government officials have not addressed whether mortgage guidelines will be rolled back to "a looser time".   If they are, it would be a big deal for real estate investors because, as many are finding out, low rates don't matter much if you can't qualify for them.

If you're currently in the market for an investment property (or two), consider that it may be cheaper and simpler to purchase over the near-term versus the long-term.  And consider moving your existing properties into a corporate structure first.

Leaky Toilets Cost Fortunes!

Any plumber will tell you -- toilets are among the least efficient appliances in a person's home.  20 percent of them leak up to 200 gallons of water per day -- the equivalent of an 80-minute shower.

At an average cost of $2 per 1,000 gallons, the EPA estimates that homeowners literally flush $146 of water down the drains each year.

But toilets also waste money by overfilling with water; even low-flush varieties waste 32 ounces per flush.  Because of overfills, an average household of 4 people with 2 toilets squanders an additional 6,575 gallons of water in a calendar year, or $13.15.

Enter the $15 HydroClean toilet valve.

Built by a plumber, the HydroClean product prevents toilet overfills, detects leaks, and cleans the toilet tank for you.  It installs in 5 minutes and the Web site says no special skills are needed.

Within the next 5 years, 36 states expect to suffer water shortage.  Using HydroClean, you can help conserve water and conserve dollars.

HydroClean is available at retail stores and online.

Source
Drinking Water Costs and Federal Funding
EPA.gov, June 2004

Conforming mortgage guidelines are the Home Loan Rule Book, delineating between applicants that approved for a mortgage and those that do not.

Effective today, the rule book just got a little bit tougher.

According to Fannie Mae, homeowners converting their primary residence into a second home or investment property will be subject to additional underwriting scrutiny. Fannie Mae is leery of lending to people that may be over-extended.

The complete underwriting update is available at the Fannie Mae Web site but some of the more important points are summarized below, divided into Second Home and Investment Property.

Second Home Guideline Changes

• Without 30 percent equity in the second home, mortgage applicants must have 6 months worth of PITI reserves for both properties in their bank accounts.
• With 30 percent equity, the PITI reserve can be reduced to 2 months.

Previously, there was no minimum reserve requirement. Now, a second home buyer needs to know that they can carry that property for a period of time with their current savings.

Investment Property Guideline Changes

• With 30 percent equity in an investment property, 75% of the monthly rental income can be applied toward the applicant's monthly household income.
• Without 30 percent equity, rental income may not be applied to the applicant's monthly household income and 6 months PITI is required for both properties.

Previously, 75% of the rental income was allowable regardless of equity, and minimum reserve requirements were 2 months. Due to the number of "investors" who bought property without equity, and then walked away from the properties when they were unable to rent them, some method of involving the investor in the success and failure of the investment was sought.

Even though just a small percentage of Americans own second homes or investment properties, the conforming mortgage guideline changes impacts homeowners everywhere.

This is because more restrictive guidelines lead to two separate, but concurrent, outcomes:

1. The demand for homes reduces because fewer buyers qualify for mortgages
2. The supply of homes increases because fewer sellers can refinance into more affordable home loan

Less demand and more supply places downward pressure on home prices.

Now, remember that mortgage guidelines continuously evolve and what's accurate as August 1, 2008, may not be accurate six months down the road. In other words, confirm what you're reading about mortgages online with your loan officer before making any real estate-related decisions.

Forbes Says Philadelphia is a Great Place to Buy Real Estate

Philadelphia scores once again as a great place to buy property! In a recent article listing the top 10 cities to buy a home published by Forbes magazine, Philadelphia ranked as the fourth best place to buy a house in the U.S.

In this Forbes article, the ranking was determined by the cost of buying versus renting, tax incentives where present, and whether a buyer would have an opportunity to build equity. Forbes surveyed the 40 largest metropolitan area housing metrics looking for cities where [rices have appreciated over the last two years. It also measured vacancy rates, providing extra points where rents are significantly higher than a buyer's mortgage payment for the same home. Houston and Austin took the top 2 spots, due to their healthy job market and growing tax revenues.

Philadelphia's place was earned due to price stability, increasing rents and affordable housing stock.

Its a story you may have read here before, but its certainly nice to have an outside validation of my ongoing opinion that our marketplace is one of the really good buys around the country.

Sometimes Less is Better

Every homeowner's basic toolkit should include caulk, a sealing agent for sinks, bathtubs, windows and other places where seams exist.

And now, with the mass-market availability of Caulk Singles, that toolkit can be made a bit smaller.

Caulk Singles are a one-time-use caulk package, squeezable from the bottom-up and billed as easier-to-control and clean-up than the familiar caulking gun and tube.

But, at a cost of $2.50 per package, it's also considerably more expensive than "the old packaging". By comparison, a tube of traditional caulk costs about $6.00 per package and holds close to 8 times as much material as its single-use cousin.

Caulk Singles are marketed by GE and available for sales at Lowe's Ace Hardware and True Value. Free samples are available with sign-up at https://www.caulksingles.com.

Consumer Confidence & the Economy

When people lack confidence, prophecies or concerns sometimes become self-fulfilling.

Last week saw the largest Bank failure in our history, when there was a run on IndyMac Bank, causing the third largest bank failure in our history.

According to Marketwatch.com, " Regulators said the "immediate cause" of IndyMac's failure was a deposit run in recent days that began after a June 26 letter to the OTS and the FDIC from New York Senator Charles Schumer was made public. The letter voiced concerns about IndyMac's soundness.

By July 10, depositors had pulled more than $1.3 billion from their accounts, the OTS said in a statement. "

The impact of the IndyMac failure has been softened by the FDIC insurance which provides $100,000 on some covered deposits, and up to $250,000 coverage on IRA deposits, but the cost to the FDIC will be substantial.

Would IndyMac have failed without the failure of consumer confidence caused by the Schumer later? Maybe yes and Maybe no, but the lack of confidence was in fact a precipitating factor.

As the government moves to shore up the trouble financial industry, the big question is when and how will consumer confidence be restored? The facts of the economy seem to have much less impact then media coverage and its impact on public perception, and action.

Perhaps we would all be better served, like the people in the movie "Its A Wonderful Life" if we just remember not to panic. In our market at least, the price of homes is very affordable, and the risk of loss of equity is minimal according to the risk assessment done of major metropolitan areas, recently concluded. But I'll cave that for another post.

Whose Take on the Economy do You believe?

"Economic uncertainty" is turning into a 2008 buzzword and there's a lot of good reasons why.

On the one hand, there are precursors to inflation in the economy:

• Rising oil costs
  
• Rising food prices
  
• Higher Cost of Living

On the other hand, there are precursors to recession in the economy, too:

• Mounting job losses
  
• Less access to credit and/or loans
  
• Falling consumer confidence data

The pie chart at right illustrates just how uncertain the "experts" are about the state of the U.S. economy. They're evenly split, right down the middle.

This isn't good news or bad news for Americans, per se, but it does legitimize the idea that the economy's future direction is in doubt. This is one of the biggest reasons why there's been no clear direction for mortgage rates or stock markets since the start of the year, and that can impact the housing markets, too.

As the experts remain confused, so are the consumers, so spending becomes as limited as the confidence of the consumer.

Until the picture gets more clear, we can expect the volatility to continue.

(Image courtesy: Wall Street Journal)

Falling Rate of Foreclosures Reported

According to RealtyTrac, the rate of foreclosures across the U.S. is slowing. Versus May, June foreclosures fell at a 3 percent clip.

25 states showed improvement month-over-month, led by many of the same areas that had fueled foreclosure activity in 2007.

A sampling of RealtyTrac's data includes:

• California : Foreclosures down 4.54 percent
• Georgia : Foreclosures down 14.91 percent
• Arizona : Foreclosures down 0.07 percent
• Michigan : Foreclosures down 6.00 percent
• Illinois : Foreclosures down 15.65 percent

However, the improving nature of the data is not what is making news this morning. Instead, the press is reporting that foreclosures are up by half since last year and that bank seizures have tripled.

And while the annual data may be accurate, that doesn't mean that it's necessarily relevant to home buyers and home sellers across the country.

This is because people buying and selling homes don't usually boast an "annual" mentality; when someone's an active participant in the real estate market, the mentality is "right now".

In other words, annual data fits an economist, but month-to-month data fits you.

June's foreclosure data may be the start of a trend, or it may be a blip. It's really too soon to tell. But the RealtyTrac data reinforces what real estate professionals already know -- that markets all over the country are showing signs of life.

Philadelphia Mortgages Made Affordable Through the Herd Effect

A noon-hour, mortgage-bond rally rendered homes more affordable for Americans Tuesday. It was the second straight day on which this happened.

On both days, the action was swift.

The speed at which Monday's and Tuesday's respective rallies tore through mortgage markets illustrates how deep the uncertainty that surrounds the U.S. economy really is.

One reason why the market swings so quickly is that, lately, traders are tending to follow the herd.

As a mortgage rate shopper, it's outstanding when the herd is moving in your favor. However, when the herd moves in the opposite direction, the impact on your monthly housing cost can be huge.

Volatility has been the common theme for mortgage rates in 2008 and it's likely to remain a factor until the nation's economic picture gets a little bit more clear.

Some experts are saying that may happen in 2009. Therefore, you should be prepared for rapid mortgage rate movement and act accordingly when you see a rate-and-payment combination that makes sense for your household budget.

The payment you see in the morning is likely to be gone by the afternoon. So with prices as affordable as they are in the Philadelphia Marketplace, now is an opportunity to act that may disappear.

How Your Payment is Tied to the Fed Rate Announcements

The Federal Open Market Committee adjourned from its 2-day meeting aton June 28th. It' announced that the group will leave the Fed Funds Rate unchanged at 2.000 percent.

However, it's not what the Fed does that has markets so interested. It's what the Fed will say.

One of the Federal Reserve's roles is to promote stability in the U.S. economy by protecting it from two major threats:

1. Inflation
2. Recession

The Federal Reserve's primary weapon against both of these hazards, though, is the same -- the Fed Funds Rate. To combat inflation, the Fed raises the Fed Funds rate. To fight recession, it lowers the Fed Funds Rate.

But in today's economy, there is evidence of both inflation and recession meaning that the Federal Reserve is likely to leave the Fed Funds Rate unchanged for fear of setting the economy too far towards either threat.

Therefore, markets will be left looking for clues in the carefully-worded press release signed by Federal Reserve Chairman Ben Bernanke and the other voting members of the FOMC.

If the Fed admits added vigilance against inflation, it's expected that mortgage rates will fall because inflation causes rates to rise. By contrast, if the Fed harps on the downside risks in the economy, it's expected that mortgage rates will increase.

Either way, today's press release should be a market-mover.

If you're currently floating your mortgage rate or are deciding between different lenders, be aware that mortgage rates will enter a period of extreme volatility this afternoon.

It may be prudent to complete your rate shopping before 2:00 P.M. ET.

They Call Him Flipper...

Flipper mailbox by Sheeshoo

No, its not about our favorite Dolphin friend, its about helping lenders get REO properties off their books.

Investors have long been a staple of the REO market, and professional investorsoften bought, remodeled and sold properties for a profit. The sale price to the consumer from the investor would generally be higher since the repairs or remodeling of the property actually increased the value of the property. The difference between the cost of the repairs and the increase in value was known as an entrepenuerial return.

When the market heated up some buyers bought property to re-sell to other less informed buyers for higher prices, and in some instances created ladder schemes where a group of individuals sold a single property to a sequence of fictitious purchasers, each time for a higher price until the final buyer just walked away from a mortgage that was well in excess of the value of the property. To stop this fraudulent practice, FHA established a 90 day waiting period on resales five years ago. This however had the unintended consequence of limiting the buyers available to lenders who were selling REO properties since they would usually try to resell the property as quickly as possible after the foreclosure.

With the change in the real estate market, the record number of foreclosures in many parts of the country , and the smaller pool of available financing, FHA is reversing their policies to help lenders get REO properties off their books. They recently announced that they were lifting their 90-day waiting period on resales (see Inman News story). This will help investors in their resale efforts, since the properties are usually completely remodeled, and would easily pass such restrictions, but lenders may still face some challenges on these properties.

If a property has minor deterioration, minor repairs might meet the FHA repair standards if the house is safe clean and sound. If the property needs substantial repair the lender will have to choose between selling the property to an investor or buyer with conventional financing and making repairs to the property. Since lenders are interested in making as rapid a sale as possible, and in a cost efficient manner, they may wish to makeminor repairs to meet lender requirements, or completely rehab a property to reach a broader buying audience and achieve a higher sale price.

It will take some time to see which participants in these transactions benefit most from this change - lenders, investors, or the end buyers., but without question this change is a move in the right direction, and is probably only one of many changes we can anticipate as the mortgage and real estate industries work their way through the current market.

It s A GREAT Time to Buy Real Estate in Philadelphia

Consumers that are bombarded by negative media coverage of the real estate nationally may be missing the boat by not moving forward to buy real estate in the Philadelphia market.

Philadelphia's neighborhoods have perhaps the most efficient housing stock in the nation. The Philadelphia Row house. Though older housing stock, the Philadelphia row house has 2 to 4 bedrooms (mostly three) either one or two full baths, and if the house is less then 60 years old, probably a powder room. If the property is less then 65 years old, there is probably a built in garage.

With low interest rates, and a 9 month supply of real estate on the market prices are good, mortgage rates are affordable, and the opportunities are ripe for buyers, because the basic reasons for buying property are unchanged in our marketplace.

Buyers who purchase a home for their family, will satisfy a need, pay less then it would cost to rent the same property, and will build equity and security, both emotional and financial over the long term (5 to 7 years). This is a hearkening back to the "old" real estate market (pre-2001) where generation after generation of Philadelphians bought a row home, which they later traded for a Semi-detached home, and perhaps, eventually for a single home in the suburbs. We're not even talking about appreciation here, and we don't need to for an individual or a family to receive the benefits of home ownership.

For investors, the row House offers a positive cash flow with as little as 10% down. And even if the property were only to break even each month, over a period of years, your tenant will pay down your loan, and leave you with an asset that can be used to pay for a child's college education, or to help with a wedding, or retirement. In any case, real estate as a long term investment still beats the pants off of everything else , and that with a minimum of risk.

Check out the details for yourself. Everyone has different needs, but there's a lot of opportunity out there, and the time to take advantage of it is now!

Philadelphia Real Estate Rocks!

Normally the press is not friendly to the real estate industry, but in the sense of true contrariness, Philadelphia Magazine recently was surprisingly positive about our local real estate market in their annual real estate issue, publishing an article entitled "Everything You Know About Philadelphia Real Estate Is Wrong" . The article was surprisingly accurate (sorry guys, but Philadelphia Magazine sometimes seems to forget that there is more to the city then Center City, the Main Line, and the Jersey Shore) and to the point - the real estate market here is not suffering!

I wrote a longer piece on this for Agent Genius (where I contribute some thoughts), and rather then re-write the entire piece here, I thought you could just click here to read my post called Perception Vs Realty

Hope you enjoy the longer post - I look forward to your thoughts about the local market.

I Blog Philadelphia Real Estate

I have not posted anything here for a while, but if the truth be known, this was a test blogging platform. Sort of blogging with training wheels. I wasn't sure what the voice of a blog should be. Was I an expert in Philadelphia Real Estate? An Expert New Jersey Real Estate Broker? A CEO of the only Century 21 Company with offices in both Pennsylvania and new Jersey?

Should I talk about value? Or the Real Estate Bubble? Or Mortgage Fraud? Or How to Invest? Or Foreclosures and Short Sales? What was the point here?

Well its been a little while and I have found out one thing - I need to do this on a regular basis, and before I migrate this to a more sophisticated platform, that will be my first change -

Stay tuned to see what I actually do end up writing about! :-)

What's the Job?

The job of the real estate salesperson is one of the most misunderstood jobs in America. Most sellers think that the job of the real estate agent is performed by placing a sign on a property and waiting for someone to come in to their office to buy the property.
In reality, the real estate agent and their firm perform a variety of jobs for the seller. These jobs are all aimed at helping to facilitate and coordinate the activities of the real estate marketplace.
This is more than just showing the property. It means the marketing efforts which are used to promote the property to other agents and their firms as well as the end user. Much of the agent's work involves these indirect marketing efforts. For example a salesperson will usually have to fill out the forms to submit the property to one or more Multiple Listing services. The agent will also usually have to design and complete a highlight sheet to be used by salespeople who are showing the property. They may design a flyer to be sent to other offices to promote the listing. The agent should schedule the property to be previewed by the agents of their firm. They will either place a sale sign, or arrange for one to be erected if the seller permits. The agent will arrange for property descriptions to be distributed to the agents in their firm, detailing the special instructions for appointments. If the property is to be marketed at an open house a more complex marketing tool is usually designed to be distributed to buyers, and additional signs and advertising is scheduled for the event.
When other agents wish to see the property, the agent will schedule the appointments at the seller's convenience, and then follow up the appointment to discern what if anything can be done to make the sale to that buyer, or to increase the marketability of the property for other prospective buyers.
If the property is not being shown, or offers are not forthcoming, the agent should recommend some adjustment in the marketing situation. Either a price adjustment or some cosmetic changes or some change in the advertising program.
When offers on the property do come to the seller, the agent will review the terms and conditions, and should advise the seller of any potential problems, or guide them through the counter offer process.Finally the agent will assist the seller during the period between acceptance of an offer and the time of final settlement, explaining all of the documentation, obtaining inspectors or contractors, and representing the seller at the settlement table.