Weekly Talking Points – 11/9/2012

Wednesday evening, my wife and I pondered the fascinating county-by-county maps provided by the Denver Post of what had happened in this election. We were the proverbial Monday morning quarterbacks to the weekend’s slate of important football games…and, as we worked our way through the maps, we realized just how much the task resembled the analysis of a sport.

Indeed, Moneyball—the book and film—came to mind, with its assertion that you can put together the right factors and come out, predictably, with wins. In that respect, Obama’s campaign was a huge success, and Romney’s was somewhat out of synch the times.

What I found staring me in the face, embodied in these maps, was a partial refutation of most of the assumptions I had built up around this election. And, the more I looked, the more I found a great deal of relevance to the real estate industry—the kinds of homes being built, the neighborhoods being developed, the needs of the buyers in particular areas. The kinds of homes and neighborhoods and community services desired and needed by people in certain areas differ in ways we’ve been overlooking at our peril from current assumptions, I increasingly believe.

Okay. Let’s sweep aside my faulty assumptions. I had developed the idea that broad, sweeping views of how the world, our society and our economy work were being distilled into a few important themes. As several commentators suggested, we had, on the one side, people who believe that innovation and economic opportunity are stoked by giving people the broadest array of openings in developing their new business ideas, and we have, on the other side, people who strongly believe that business should be regulated by the government for the protection of our people.

It’s intriguing to me that we feel the one has to be sacrificed for the other. I could go on and on about that, as could anyone in real estate. (One of the thoughts that has been crossing my mind is what a mess we would have in the real estate trade if the activities of real estate professionals were more regulated…simply because real estate remains one of the few “jobs” in which people are willing to work outrageously hard, not just putting in hours, because the potential rewards are so great.)

Anyway, what my wife and I kept noticing as we looked at and compared the blue counties and the red counties. We live in Washington State, and it is split rather neatly up the middle by a mountain range. One side, the east, is red; the other, is blue for the most part (except for the few counties where livings are made primarily in the lumber business).

My wife commented on how, by living in modern cities with uncertain jobs, the people in the blue counties had sets of needs that differed from those in red counties. If you’re living in an agricultural setting, after all, what you need from government differs greatly from the needs expressed by city folk. We think of agricultural populations as feisty, independent, very traditional. These aren’t people who need government officers poking into their business. The city dwellers, on the other hand, need the constant present of police and other services to get safely through the day and night.

Obviously, there isn’t room here to dwell on this adequately. Suffice to say that, without getting to the discussion of personal philosophies, we’ve seen in this election that there are viable generalizations to be made based on where people choose to—or must—live.

And those generalizations spill over into the needs those people have when it comes to their housing. If demographics are changing, as they most definitely are, then the votes move in certain predictable directions—but so do the needs of homebuyers. Their sense of home needs to be answered to, their sense of comfort and safety needs to be served by home and neighborhood designs, and the services offered to city dwellers should be paramount on our minds as we develop new towns and neighborhoods.

We should be studying this election for years, not just for what it tells us about politics but, even more important, for what it tells us about how to design homes and neighborhoods that meet changing needs…and sell like hotcakes.

[P.S.—The markets are taking the election hard, it seems. We’ll get to that next time.]

The Week in Review – 6/29/2012

The economic numbers over the past week were fairly uninspiring. A 1.5% decline in the number of sales of existing homes was disappointing, as were the slightly larger numbers for people seeking new unemployment claims.

It feels like another blah week, with the economic data treading water for the most part, though interest rates declined a bit more (the Freddie Mac weekly average for the 30-year FRM is truly scraping the bottom of the known world). The dollar looked good, unsurprisingly, against most other currencies. It is, after all, the haven of choice for most investors across the planet.

And the fear factor is no longer pushing the price of gold or oil higher. Both are suffering from the possibility that the world economy may slow significantly. Investors, therefore, seek liquidity with their safety, and worry that something like oil will fall into a tailspin as major economies produce less demand for fuel.

Okay—but there is one set of numbers that intrigue this observer. The number of sales of newly-constructed homes in May shot up by 7.9%. This is dazzling, especially when you consider how abysmal the new homes data has been for years. It’s the most new homes to sell in a month in about two years. And it’s accompanied by very low inventory numbers (the time to sell current inventory is estimated at 4.7 months!).

Why, you may rightly wonder, are things looking up in the new homes department (if indeed this becomes a trend)?

There are a lot of possibilities that some of us have been following for quite a while:

1. The heart of the real estate market today is smaller, newer, more energy-efficient homes. They are particularly desirable to new retirees (Baby Boomers want homes that work more efficiently and that they can lock up whenever they want to go on a trip. They also involve high priorities for first-time buyers, who have generally shown a desire to work with a smaller home and lighter energy requirements. It turns out, in other words, that newer/smaller homes are desirable to the core of today’s buying public.

2. New features, especially energy-efficiency hardware and software, are being built into new homes. It is more expensive to retrofit them into older, existing homes.

3. There aren’t many new homes available today—a problem that brings Will Rogers vaguely to mind. They just haven’t been building many homes for the past seven or eight years. Builders are going to have to catch up. If they play their cards right, they may at last profit greatly from the Great Inventory Repair that may be coming.

Now, these aspects of the new home market have been much in evidence to institutional investors for quite some time. A lot of money has been made in shares of builder stocks, which have done very well for over a year. A lot of money is being made in builder bonds.

And, very likely, more and more money will be made in other areas of the new homes market. There is much to watch closely here—and we’ll be doing so and writing about what we see in the coming weeks and months.

Help for Underwater Homeowners is Here! HARP 2.0

The HARP 2.0 is an underwater refi program for homeowners. This program could help you lower your payments, or reduce your term on the loan, and or pay off debt with the savings! It can also be for your 2nd or Investment properties!

Warren Buffett Speaks on Housing

Warren Buffett speaks on Housing

 

BUFFETT: I would say the single-family homes are cheap now, too.

BECKY: You would?

BUFFETT: Yeah, single-family homes— but if I had a way of buying a couple hundred thousand single-family homes and had a way of managing— the management is enormous— is really the problem because they’re one by one. They’re not like apartment houses. So— but I would load up on them and I would— I would take mortgages out at very, very low rates. But if anybody is thinking about buying a home— five years ago they couldn’t buy them fast enough because they thought they were going to go up, and now they don’t buy them because they think they’re going to go down. And interest are far lower. It’s a way, in effect, to short the dollar because you can— you can take a 30-year mortgage and if it turns out your interest rate’s too high, next week you refinance lower. And if it turns out it’s too low, the other guy’s stuck with it for 30 years. So it’s a very attractive asset class now.

BECKY: If you are a young individual investor at home and you have your choice between buying your first home or investing in stocks, where would you tell someone is the better bet?

BUFFETT: Well, if I thought I was going to live— if I knew where I was going to want to live the next five or 10 years I would— I would buy a home and I’d finance it with a 30-year mortgage, and it’s a terrific deal. And if I— literally, if I was an investor that was a handy type, which I’m not, and I could buy a couple of them at distressed prices and find renters, I think that’s— and again take a 30-year mortgage, it’s a leveraged way of owning a very cheap asset now and I think that’s probably as an attractive an investment as you can make now. But I think equities are very attractive compared to anything else.

BECKY: But, obviously, they’ve come up quite a bit since you first were telling people you were buying them for your personal portfolio…

BUFFETT: Yeah.

BECKY: …with both hands essentially.

BUFFETT: Right. Yeah, well, I wrote that article— I said if you— if you wait till you see the first robin, spring’ll be over. And— well, spring is over, but we’re not in the dead of winter yet either. And stocks— we were— we were here three years ago and stocks have almost doubled exactly since we sat down three years ago. So they’re not as cheap as they were, but measured against the alternatives, would you rather have cash, would you rather have Treasury bonds, would you rather have, you know, you name it? I would rather own great businesses, and we own a lot of them through stocks and we own a lot of them outright, and I’d love to buy another one this afternoon.

BECKY: OK.  When you take a look at the housing market, you had told us last year when we sat down here that you thought last year could be the turning point, and you pointed out in your annual report this year that you were dead wrong on that call.

BUFFETT: Exactly.

BECKY: We didn’t see the improvement last year, but you do think that we’ll see it this year?

BUFFETT: Well, I think we’re likely to, but— and I’m somewhat chastened by the fact that I sat a year ago and said it would happen by now. But what I do know is that today there are more households being created than houses. Well, if that continues— and it will continue— eventually it gets in balance. And when it gets in balance— gets in balance in different geographies at different times. But when it gets in balance, we will need more than a million residential housing units annually. And when we’re building a billion units, supply and demand will come into balance. Got way out of balance five years ago and it’s taken us a long time to work it off. But it does get worked off, and households are now being formed. The first year after the recession in 2000— after it hit— in 2009, household formation went like this. I mean, that happens in recessions. But that’s changed. I mean, you know, we have four million people, roughly, hitting each age cohort every year, and we form households and they want to be in houses.

How Purchase Loans are Made – A Step by Step Guide

How Purchase Loans Are Made A Step-By-Step Walkthrough 1. Pre-approval - Get pre-approved for a mortgage and know in advance exactly how much house you can afford. Completing this step will also increase your negotiating power since you’ll be viewed as a “cash buyer”. 2. Loan Search - Put yourself in the hands of an experienced mortgage professional, someone who will help you to determine which financing options best suit your needs today and in the future. 3. Loan Application – It’s crucial to supply the lender with as much information as possible, as accurately as possible. All outstanding debts as well as assets and income should be included. 4. Documentation – Paperwork supporting the application must also be submitted. Information commonly sought includes pay stubs, two years’ tax returns, and account statements verifying the source of the down payment, funds to close and reserves. 5. The Hunt - Begin shopping for a house. Once you find the right one, the terms of the sale will be negotiated, including the price and potentially the terms of the loan being sought. 6. Appraisal - Lenders require an appraisal on all home sales. By knowing the true value of the home, the borrower is protected from overpaying. 7. Title Search - This is the time when any liens against the property are discovered. A lien may have been placed on a property to ensure payment of outstanding debts by the owner. All liens must be cleared before a transaction can be completed. 8. Termite Inspection - While most purchase loans do not require a formal inspection for termite and water damage, some loans (especially government loans) allow for the possibility. If problems are found, repairs may be necessary. 9. Processor’s Review - All pertinent information will be packaged by your mortgage professional and sent to the lending underwriter, including any explanations that may be needed, such as reasons for derogatory credit. 10. Underwriter’s Review - Based on the information put together by the loan professional, the underwriter makes the final decision regarding whether a loan is approved. 11. Mortgage Insurance - Many lenders require private mortgage insurance when borrowers put down less than 20 percent on a loan. 12. Approval, Denial or Counter Offer - In order to approve a loan, the lender may ask the borrowers to put more money down to improve the debt-to-income ratio. The borrower may also need a bigger down payment if the property appraises for less than the purchase price. 13. Insurance - Lenders require fire and hazard insurance on the replacement value of the structure. Flood insurance will also be required if the property is located in a flood zone. In California, some lenders require earthquake insurance on condominiums. 14. Signing - During this step, final loan and escrow documents are signed. 15. Funding - At this point, the lender will send a wire or check for the amount of the loan to the title company. 16. Confirmation of Funding - The lender authorizes the disbursement of loan proceeds. 17. Closing - Documents transferring title will now be officially recorded by the County Recorder. 18. Congratulations, you are now a homeowner! If you’d like to learn more, please give me a call. I’d be happy to speak with you!

Down loan the Handbook Here HomeBuyingHandbook

Liquidity – A True Indicator of a Healthy Housing Market

Today, we are again honored to have Ken H. Johnson, Ph.D. — Florida International University (FIU) and Editor of the Journal of Housing Research as our guest blogger. To view other research from FIU, visit http://realestate.fiu.edu/.

What is the definition of a healthy housing market?  Is it a housing market in which home prices are decreasing?  Few would agree with this.  Is it a market in which home prices are increasing?  At first glance, many would agree with this definition.  However, increasing prices cannot be used to diagnose a healthy housing market.  If increasing prices indicate market health, then in 2005 housing markets were “very” healthy, and we know that this is not true.

If pricing does not indicate market health, then what does?  The answer is simple: it is market liquidity and not pricing that indicates the health of a housing market.  Liquidity has been defined in many ways but it basically boils down to: can an individual seller, at a time of their choosing, successfully market their property at or near market value?  We often hear of rates (turn-over and absorption) that are related to this concept.  Unfortunately, these measures are difficult to estimate and they all have something to do with outstanding inventory.  What really matters, regardless of outstanding inventory, is the likelihood that a property will close.  This is the most basic meaning of market liquidity and it can easily be proxied.

All of the data necessary to proxy a particular market’s liquidity (and thereby its health) is available on the daily “hot sheets” of almost every MLS in country.  Since liquidity is really just a batting average all that needs to be done is total the successful transactions (closed properties) and divide these by the failed listing transactions (Expireds + Withdrawns + Cease Efforts + Cancelled)[1][2].  The resulting number is a very close approximate to the probability that any given property listed in that market will close and an increasing trend in this number indicates improving market health.

Implications

Pricing trends do not indicate the health of a housing market.  Keep in mind.  For almost every sell in an increasing market, there is a repurchase at a higher price.  For almost every sell in a decreasing market, there is a repurchase at a lower price.  Thus, pricing is a “double edged sword”.  Gains/Losses on a sell are almost always accompanied by higher/lower repurchases.  Thus, pricing trends can never indicate the health of a particular real estate market.  Instead, it is market liquidly, which can be easily proxied, that actually indicates market health.  After all, the real goal is for a seller of property to be able to transact at or near market value with a high degree of certainty.  Fortunately, most MLS’s around the country have the information at their fingertips to estimate the health of their particular market.

It is liquidity (not price) that matters.

Endnotes – thank you to the KCM CREW and Blog

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[1] Different MLS’s have similar but not exact designations for these various categories.  The goal is simply to divide successes by failures.

[2] The timing of the calculation will depend on the number of outcomes each day on a particular market’s MLS hot sheet.  The goal is to avoid a mathematically undefined estimate.  Thus, larger markets might do this average daily, while smaller markets might only calculate this average on a monthly basis.

Common Sense Isn’t Common Practice

It used to be that there was logic applied in the world of mortgage lending. An appraiser determined the value of a home by the axiom, “what a reasonable buyer would pay a reasonable seller”. An underwriter weighed the plusses and minuses of a file (after analyzing the income, the assets, the credit profile and the appraisal) and made a judgment call based on their experience.

Loans with sizable down payments used to be more flexible with how income was documented or what quality of credit was required. Even the decision of what made up “good credit” has been reduced to a FICO score. Determining the risk of a loan affected its approval or denial. Further, loans deemed riskier were given less favorable terms (higher rates and/or costs or larger down payments).

But today, everyone has tried to quantify everything and put everything into a matrix. Credit scores are numerical, and the number determines eligibility and cost. Gone is the concept of explaining why you have defects in your credit. We don’t care why, we just look at your score. Appraisers now are being scored and their data being scrutinized to a level most would find mind-boggling. Amenities that make a home worth more for a particular buyer (like a pool or upgraded basement) are virtually ignored. Underwriters have primarily become fact-checkers and quality control as a computer software program underwrites the vast majority of mortgages today.

Gone is common sense. It has been replaced by numerical formulas and a cover-my-behind, justify-everything-with-data mentality. Basically, the pendulum has swung too far. It used to be that lending was too easy (see the subprime debacle), but now we have eliminated too much of the human element. We need common sense back.

People who have saved 30% for a down payment know what they can afford monthly. Don’t they?

People who had a medical challenge two years ago that is not likely to reappear should not have a twenty year credit history destroyed. Should they?

People aren’t likely to overpay for a home with so much inventory and all the media exposure about falling prices. Are they?

Bring back some common sense when we need it most!

-courtesy of the KCM Crew