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Scraping bottom or turning the corner?
Talk to 10 real estate agents and you’ll likely get 10 different responses on the state of the current market. At the extremes, you’ll find optimists and pessimists with various gradations sandwiched between.
While it is too early to call it a trend, data provided by David Watson of Southern Shores Realty and David Perrot of RE/Max Ocean Realty indicate the local market has hit bottom and may be poised for a mini-rebound.
Watson has been tracking two data sets relating to OBX real estate since 2003. The two groupings compare the number of “active” listings — houses and lots listed for sale on the MLS and being actively marketed — to the number of listings under contract.
Most real estate professionals consider a market to be healthy if listings under contract are at least 25 percent of total listings. Thus, if 1,000 homes or lots are listed for sale at any given time, a healthy market would require at least 250 to be under contract and waiting to close.
In 2005, after about 10 years of “healthy” market activity, Watson’s data began to diverge. Listings soared, and real estate under contract moved in the opposite direction — dramatically. What became apparent, in hindsight, was that the market was populated by short-term investors who wanted to flip properties quickly, having no intention of holding them for rental income and betting instead on rapid price increases. When a large number of houses under construction were completed, the market was flooded with inventory.
At the same time, buyers realized these houses were selling for prices far above what their rental income would support. Buyers wised up, and by 2007, mortgage lenders who also bet on increasing prices began to experience serious defaults. The market for loans on these properties dried up at the same time borrowers recognized the bubble that had fueled investment property price inflation.
In May 2009, four years after the local decline began, Watson’s data indicates there were 2,671 homes actively listed on the northern Outer Banks and in lower Currituck. Of them,155 properties were under contract — 5.8 percent of listings. In June of 2010, 2,602 active listings were arrayed against 197 under contract, or 7.57 percent. While a far cry from the 25 percent considered to be a healthy sales environment, the current numbers are a 31 percent improvement over last year.
Watson also tracks sales prices of lots and homes compared to county assessed tax value. While Realtors and appraisers argue that tax value has no validity relative to market value, tax value does supply a “constant” against which sales prices can be compared. Looking at lots and home prices that closed, one can detect stabilization in pricing since September 2009 in most Outer Banks communities. Depending on the town or area, sales prices range from 60 percent to close to 100 percent of tax value, but since last September those percentages have either stabilized, or declined/improved by very small margins.
Perrot, CEO of Re/Max Ocean Realty, supplied numbers that dovetail with Watson’s figures. Perrot’s information includes all of Dare County as well as the Outer Banks portion and the lower mainland areas of Currituck County. Through May 31, 646 lots, homes and commercial properties had sold versus 446 for the same time period in 2009. Residential housing sales increased from 386 to 553; lot sales jumped from 54 to 87.
While these raw number of sales are nowhere near the peaks seen in the first part of the decade, they lend support for the improvement seen in Watson’s data. Of even more interest, in spite of the perception that foreclosures and “short sales” are fueling the market, Perrot’s numbers indicate foreclosures were 26 percent of sales, and short sales added another 11 percent. Thus, the majority of the increase in sales was accounted for by “normal” transactions between private buyers and sellers rather than bargain pricing from lenders dumping foreclosed or distressed properties.
There are still major hurdles to broach the magic 25 percent under-contract threshold. Few banks are extending lot or construction loans, shutting down that segment of the market. Likewise, within the secondary market, where investors buy mortgage loans originated by mortgage lenders and banks — which replenishes the lender’s cash so more loans can be extended — there is no appetite for loans on investment condominiums at any down payment or price.
In addition, rental homes priced above $417,000, the limit for loans purchased by Fannie Mae and Freddie Mac, also lack investors, even if the buyer is willing to put down 50 percent and has excellent credit scores, income and cash reserves.
Condos and “jumbo” priced investment homes constitute a majority of our rental market sales listings, and until Wall Street and federal bank regulators loosen the spigot for good loans in these categories, sales in all resort markets, including the Outer Banks will doubtless fail to achieve the “healthy market” stamp of approval.
Meet the Cash Buyers: How the Fix-and-Flip Investor ThinksRelease date: 07/21/10
A significant share of cash buyers are investors, people who are buying properties not to live in but to rent out, or to fix up and sell quickly. From January through May, between 14 and 19 percent of all buyers were investors, according to figures kept by the National Association of Realtors.
Investors tend to be less emotionally invested in the homes they are buying than people who are buying homes they are going to live in, according to real estate professionals Inman News contacted. As such, these cash buyers are particularly attractive to some real estate agents.
"Cash buyers are usually investors who are more concerned with acquiring the property and not 'falling in love' with the home like primary residence buyers," said Amy Wagner, a broker associate for the Walters Team at Candlewood Realty Group in the Denver metro area.
"Because of this, cash buyers usually do not spend as much time looking; the less houses I have to show to one particular buyer, the better for me. (It) cuts down my work time and expenses and frees me up to work with more clients."
Investors tend to know exactly what kind of house they want to buy, where, and how much they are willing to spend.
"The investors are easy. They know what ZIP codes they want and what price they are willing to pay based on the condition of the home and what it will cost to rehab to flip," said Michele Guss, a Thompson's Realty agent based in the Phoenix metro area.
Transactions involving cash buyers can also be easier and faster because they don't require loan approvals and appraisals.
According to one Northern Colorado multiple listing service, Information and Real Estate Services (IRES), cash buyers made up 15 percent of transactions in the region between Jan. 1 and June 15. At the same time, figures nationwide hovered at about 26 percent, according to the National Association of Realtors.
Ron Strehlow, 54, is a "fix and flip" investor in the Denver area. The owner of a wholesale real estate company called Distinct Home Solutions, Strehlow invested in real estate part time for about eight years, but went in full time in 2008 when he was laid off from his job as a software engineer in the telecommunications industry.
"It so happened to be a great time (to) invest in real estate. The market is at a low point, which makes purchasing property at a discount pretty appealing, but there's still enough buyers that can buy them when they're turned around and fixed up," Strehlow said.
He buys about 10 homes a year, hires contractors to fix the places up, and usually sells sometime within 90 and 120 days of buying. He works with Wagner at Candlewood to both buy and resell the homes. They've worked together for about two years, since Strehlow started investing full time. Since real estate investing is his job, he especially values Wagner's efficiency, he said.
"(Wagner's) just easy to work with and efficient as far as placing offers through and follow-up," Strehlow said. "It's tough finding a (real estate agent) that you work well with. You find one that gets things done the way you want them to and it's pretty valuable."
Wagner also sticks with him through the multiple-bid situations he often encounters in the Denver market, he said.
"I end up losing a lot more offers than I get, so a lot of (real estate agents) get discouraged. You have to put in several bids and they're not getting paid obviously until something's accepted," Strehlow said.
Strehlow found Wagner through a website Candlewood set up specifically for investors to find properties: FixandFlipDenver.com.
The brokerage also targets cash-buyer investors with ads for investment properties on Google, Facebook, LinkedIn, Twitter, WordPress, Craigslist, HotPads and Backpage, said Andrea Altieri, managing broker of the Walters Team at Candlewood. Altieri also sends a weekly newsletter to every lead in the brokerage's lead database via e-mail marketing company Constant Contact.
For real estate agents interested in working with investors, Strehlow recommends agents go where they congregate.
"There are several investor meetings in the Denver area, real estate agents that want to work with investors should attend them, meet the investors, and give them listings that may fit their investing criteria," he said.
That last part is crucial. "I get a lot of e-mail from (real estate agents) that send me pages of listing(s) that never meet my buying critieria. I don't even open their e-mails anymore," he said.
As an experienced investor, Strehlow knows exactly what kind of property he wants. He usually makes up his mind about whether he'll buy a property in the half-hour it takes to tour it.
For a start, he works only with single-family, detached houses, usually with three bedrooms and one bathroom, that he can turn around and sell to first-time homebuyers. And the homes have to be heavily discounted, which means that he buys only "real estate owned" (REO) homes or short sales.
"There needs to be a 30 percent to 40 percent discount from retail price. I get a lot of listings with discounts of 5 percent to 10 percent. That won't even pay the selling commission," he said. "Everyone I work with makes money, and there has to be that delta to keep everyone happy."
To buy the properties, he uses his own savings and funds from private investors.
"I treat multiple-offer properties just like any other offer. I know what I can sell it for, what repairs and expenses are going to cost and the highest price I can offer, and that's what my offer will be," Strehlow said.
Strehlow usually knows whether a bid has been accepted within five days of submitting it, though a short sale can take 90 days or more for final approval from the seller's bank.
Because cash buyers don't have to deal with loan approvals or appraisals, the speedy transactions they can offer banks is especially helpful when buying REOs, Strehlow said.
"A lot of times the banks want to sell the property as soon as possible, like the end of the month, to get it off the books," he said.
Once the homes Strehlow buys and fixes up are listed, he usually sells within one month, he said, for anywhere from $130,000 to $250,000. But first, he hires contractors to rehabilitate the property.
"The properties I look at would only be purchased by investors. They're extreme fixer-uppers. Properties that banks generally won't loan on because the kitchen often isn't complete, things like that. Banks, for a homeowner, usually want a fully functional house," Strehlow said.
Rehabs often involve repainting the home inside and out; installing new carpeting and flooring; redoing the bathrooms -- from the tiles to the plumbing fixtures to the toilets and tubs, if needed; updating the electrical system so that it's up to code; and replacing the furnace.
"So it's almost a new house when I sell it. The repairs usually cost between $30,000 and $50,000," Strehlow said.
According to Altieri and Wagner, the market for investment properties in Strehlow's price range is extremely competitive, partly because the vast majority of such buyers after the expiration of the federal homebuyer tax credits are also purchasing in cash.
Working with cash buyers in a multiple-offer environment has made Wagner re-examine how she finds suitable listings.
"What we have started doing is going back through old inventory that has been on the market a while and 'forgotten' and getting our properties that way," Wagner said.
"We have also started taking out contingencies, like inspection, to give us more of an edge over the other cash buyers. The seller likes this because there is less of a chance that the deal will fall through. If all other terms are very similar (price, cash, possession date, etc.), the seller is more likely to pick an offer that looks more solid with less outs."
Gearing Up for the Fight
by Lawrence Yun, NAR Chief Economist
It hasn’t been a pretty sight in the first month without the tax credit. Pending sales for existing homes fell 30 percent in May. New home sales (which measures contracts and not closings) fell by 33 percent to its lowest level in nearly 50 years. Single-family housing starts also took a dip in May, falling 17 percent. The big declines should have been expected because consumers are rational when making purchase decisions and they respond to incentives. Why sign a contract in May when doing so in April will result in an $8,000 check? Going forward, contract signings for June and July could also remain similarly weak.
However, even with these short-term setbacks the overall tax credit stimulus can only be called a success in terms having stabilized home prices. Stable home values lessen foreclosure pressure, improve bank balance sheets, and most importantly, help steadily revive consumer confidence about a home purchase. Currently there are signs of home price stabilization in nearly every market. Prices are, surprisingly, rising at a double-digit pace in San Francisco and San Diego. Be mindful, however, that low sales activity over the short-term will cause housing inventory to rise, and the months’ supply of homes available for sale could reach 10 months or higher. Provided such elevated inventory will only be for the short-term and not prolonged, then home prices will not undergo heavy pressure to fall. Experience shows, unlike sales, prices are far less immune to big month-to-month fluctuations.
The key test of a sustainable long-term recovery, without the stimulus medicine, will only start to show in the next several months. For this to happen, we need job growth. Not the artificial temporary Census jobs, but true private sector jobs. The net private sector jobs, expanded so far this year to June, were at 593,000. This is relatively small potatoes after the 8 million job cuts in the past two years, but it is nonetheless a start of an expansion. And the latest report from the Bureau of Labor Statistics shows that in June the economy lost jobs for the first time this year. Those temporary Census job additions are over, and state and local governments also cut payrolls. Businesses did add 83,000 payrolls, and – surprisingly -- the unemployment rate declined. Expect one million job additions for the balance of the year and another 1.5 to 2.2 million in 2011.
Mortgage rates also need to remain favorable. Because of the uncertainty regarding the strength of overall economic expansion and of uncertainty regarding the future of the Euro, many investors have put money into the safe U.S. Treasury bond market. That has pushed down the 10-year Treasury yield to 3 percent as of this writing. The 30-year fixed rate mortgage then can be at around 4.8 percent. That is super favorable for consumers.
While jobs expand and rates remain low (fingers crossed), we need to assure that any unnecessary barrier to market recovery be taken down. One of these barriers was the lack of flood insurance. Because the private market has difficulty in providing national flood insurance, the federal government has been involved in the program. This is not a new or stimulative federal program, but simply an old program that has been in existence for many decades. Nearly seven percent of all owner-occupied homes require flood insurance in the country. The figures are as high as one-third of all homes in Louisiana and Florida (which as we know are also now being negatively impacted from the oil spills). Without flood insurance, a homebuyer cannot obtain a mortgage. Fortunately, lawmakers listened and understood the damaging impact and a bill to reauthorize flood insurance passed with a strong majority.
Another barrier to recovery could have been the psychologically demoralizing impact of not getting the tax credit among those homebuyers who signed their contracts in April and earlier. They responded to government stimulus, yet they were unable to receive the benefit - through no fault of their own. Many homes require a ‘short sale’ approval from a bank. However, this process is far from being short; it often takes several months and is can be very messy. As a result many home purchases were not able to close by the June 30th deadline. Fortunately, Congress passed legislation on the very last day - June 30th- to extend the closing deadline to September 30th. It is estimated that up to 180,000 homes that were under contract could have fallen out had the extension not occurred.
The flood insurance and tax credit deadlines were short-term barriers and they were removed. But another much higher barrier to recovery which could arise is the elimination or a reduction in the mortgage interest deduction (MID). There has been increased chatter among opinion makers about the need to eliminate or trim this deduction, particularly in light of a very high U.S. budget deficit. In addition, after witnessing an unprecedented rise in foreclosures, some commentators are attacking the essence and societal value of homeownership, implying that housing should not get favored tax treatment.
As we have painfully learned from the recent housing market debacle, people who are not yet financially qualified should not become home owners, period. However, to blame the housing market collapse in any way or in any part on the mortgage interest deduction is equivalent to suggesting we need to completely scrap the free market system because of the banking crisis. Remember, mortgage interest deductions have been in place for many decades without bringing volatile swings to the housing market. Perhaps we should turn our attention to what was new in the recent unprecedented housing cycle; namely, the very lax mortgage underwriting standards and faulty work of credit rating agencies.
If we were to rewrite the tax code beginning with a blank slate, perhaps, a full discussion on the benefits and costs of having MID should take place. But the country is not starting from scratch and we have to contend with history. The mortgage interest deduction has been part of the U.S. tax code since the inception of the income tax nearly a century ago, when the U.S. income tax code came into existence. Under 17 U.S. Presidents and their administrations, hundreds of millions Americans have purchased their homes with the understanding of this important tax break. As a result, many hard-working, tax-paying citizens have been able to realize one of the sacred tenets of the American Dream – of owning a piece of America. Homeowners, aside from paying about 80 to 90 percent of all federal income tax, have been an important stabilizing force in the country as they are rooted in the community and the country. Homeowners are already taking on a massive burden of taxation, and to say they need to be taxed more is simply unjustified.
In my view, to eliminate or change the mortgage interest deduction – a long-running, settled portion of the U.S. tax code – would be to change the rules in the middle of a game. It would result in a massive, unexpected redistribution of wealth in the country. While in any particular year only about one-third of taxpayers itemize, most homeowners have resorted to claiming the mortgage interest deduction at some point in their homeownership life. In the most recently available data from IRS tax returns, 63 percent of the families who claim the mortgage interest deduction earn between $50,000 and $200,000 per year. That is only small part of the story, however. Because of the capitalization impact of the expected stream of future mortgage interest deductions, a removal of the mortgage interest deduction will lead to home values falling by 15 percent, equating to a destruction of housing wealth equivalent to $2.5 trillion. That wealth destruction will be felt by all homeowners, including those who purchased homes with cash and those who have fully paid off their mortgages. Even in today’s economy – that is a lot of dough. Because the mortgage interest deduction has been around for generations and generations, any changes may lead people to doubt about what is settled and what is not? Does a change mean future capricious changes to other ‘well understood’ contracts? For example, will future opinion makers start mentioning the need to tax ROTH IRA earnings in retirement for those who are able to pay (i.e., the rich) to help reduce future budget deficits? Even though the ROTH IRA was created with expressed purpose of providing tax-free earnings (since this retirement contribution is made with after-tax dollars)?
A final and very important aspect to consider in the debate about the mortgage interest deduction is positive Gearing up for the fight (continued)societal externalities. Academic studies have demonstrated the positive social benefits of ownership, including lower juvenile delinquency rates, lower teen pregnancy rates, and higher student achievement levels among children of homeowners versus those of non-owners who were of similar socioeconomic background. Yes, homeownership is not for everyone. However, for those who are financially qualified, have demonstrated financial responsibility, and are willing to purchase a home that is well within their budget, tilting the field in favor of ownership through the mortgage interest deduction—as America has done for the past century—can induce immeasurable societal benefits beyond the counting of the dollars. The fight over this well-established tax benefit is coming. Be ready.
Dennis Davis has a nearly perfect credit score, equity in his home, considerable savings and a solid pension plan. But Mr. Davis recently found that his lender didn't want to refinance his mortgage.
The problem? Mr. Davis's income-tax return showed he had taken a loss on an investment he made in a small, family-owned business. That was enough to raise doubts about his otherwise strong financial condition.
Three years after the onset of the mortgage crisis, lenders continue to tighten credit standards. The initial moves were a natural reaction for a business badly burned by rising delinquencies and defaults. But conditions are now so tight that lenders are frustrating borrowers who have enviable financial situations but still can't easily satisfy lenders' rigid checklists.
"The pendulum may have swung too far the other way," Scott Anderson, a senior economist at Wells Fargo Securities, said in a report last month.
Some analysts thought that by this point in the business cycle, lenders would have started to relax credit conditions slightly after clamping down on the risky bubble-era practices. Instead, the screws are still tightening.
That is partly because lenders are taking every precaution to avoid being forced to buy back loans from mortgage investors Fannie Mae and Freddie Mac in the event of default. When a borrower defaults, Fannie and Freddie typically buy the loan out of the mortgage-security pool and pursue a workout or foreclosure. But they can force lenders to repurchase loans when they find flaws in the way they were underwritten. Repurchases were a minor nuisance when defaults were low but have escalated over the past year.
Fannie and Freddie have already tightened their standards: Borrowers with credit scores above 720 accounted for 85% of all loans purchased by Fannie and Freddie last year. But banks are being even more stringent to prevent repurchases and want several years of pay stubs, tax returns and other paperwork from potential borrowers.
During the first quarter of this year, Freddie kicked $1.3 billion in loans back to lenders, up from $800 million during the year-earlier period. At Fannie, repurchase requests jumped to $1.8 billion from $1.1 billion one year earlier.
To be sure, the government has taken steps to keep mortgage spigots open. The Federal Housing Administration allows down payments as low as 3.5%.
Borrowers who have received standard paychecks and have uncomplicated finances generally aren't getting tripped up. But others face hurdles. Self-employed borrowers, for example, document their incomes with tax returns that include business-related write-offs, which might understate their cash flow.
Such caution is helping to hold down lending despite the lowest interest rates in more than five decades. To revive the economy, "we need the banks back in lending," said Anthony Sanders, a finance professor at George Mason University. "We're just kind of stuck in a rut."
Mr. Davis thought he was exactly the kind of customer lenders love. "I've never had a bounced check or a late payment in my life," Mr. Davis said.
He hoped to lower his interest rate to less than 5% from the current 6% through a refinancing. But his mortgage broker, Steve Walsh of Scout Mortgage in Scottsdale, Ariz., said SunTrust Banks Inc. turned down the application, citing the investment-related loss, which Mr. Davis saw as a minor setback rather than a threat to his financial health. SunTrust said it doesn't comment on individual borrowers' situations.
Rather than continuing to shop around for a refinancing, Mr. Davis has decided to cash in some of his investments and pay off the mortgage.
People with complicated financial situations can still find some willing lenders, but "it takes more persistence than most people want to put forth," said Brian Berg, a loan officer at Priority Financial Network, a Calabasas, Calif., mortgage firm.
Recently, Mr. Berg arranged a refinancing for a borrower with a very high credit score and lots of home equity and debt payments totaling just 19% of pretax income. But Mr. Berg said the lender was worried about a credit report showing a $14 missed payment to a credit-card company in 2001. The lender insisted on proof the money had been paid, which Mr. Berg said was impossible to get.
"Who cares?" he said. "It's nine years ago, and it's $14." He appeased the lender by having the borrower write a $14 check, though no one knew where to send it.
Pete Ogilvie, a mortgage broker in Santa Cruz, Calif., hasn't found a bank that will refinance a $250,000 loan on a $1 million property for a borrower with more than $200,000 a year in income and a high credit score. Banks balked because the borrower, a technology executive, was out of work for nearly a year starting in 2008. "We're going to see that for an awful lot of people whose business disappeared unless the banks learn some flexibility," said Mr. Ogilvie.
In June, Fannie put into effect a "loan-quality initiative" that requires more borrower information to ensure that Fannie ends up buying the same loan that it originally agreed to purchase. The effort has led lenders to pull a second credit report before a loan closes, and brokers say consumers should be very careful not to run up credit-card bills before closing on a mortgage.
"If there are inquiries on your report that you're shopping for a car, that's something that has to be answered for," said Dan Green, a Cincinnati broker. "It can delay a closing and, in some cases, it'll kill a closing."
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