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New home sector to remain weak
Fitch Ratings analysts say public builders will need to maintain tight controls over costs and expenses in 2010. On the positive side are an ever-increasing pent-up demand for new homes coupled with affordability at record highs. New home data showed spring 2009 sales were stronger than the previous winter months, and remain stable. Cancellation rates improved and are near normal levels and current builder inventory continues to decrease. Inventories of new homes are now 59% below the 2006 peak. And, depending on the market, some mortgage insurers and lenders are relaxing down payment requirements, allow loan-to-values (LTV) of up to 95%. But uncertainties and dangers still remain for the sector. Mortgage delinquencies are still increasing, and with foreclosure moratoria drawing to a close, foreclosures continue to persist near record levels, fueled by the sluggish economy, job losses, and Alt-A and option adjustable-rate mortgage (ARM) delinquencies. Further complicating things for homebuilders is the impact of existing homes inventories, which remain high, particularly with a glut of vacant homes for sale. Obtaining credit is difficult for both builders and potential homeowners. Credit qualification standards for home purchases remain tight, the analysts said, and builders face difficulty obtaining acquisition, development, and construction (AD&C) loans.
DSNews.com – Long-Term Rates at 6% by Year-End
According to the latest Housing & Mortgage Market Review published by the PMI Group, Inc., mortgage interest rates for 30-year fixed loans are projected to hit 6.00% by the end of 2010. Long-term interest rates have generally headed higher since the end of November, probably in response to signs of economic recovery, PMI noted. The California-based company expects this trend to continue, with a notable increase coming in Q2, influenced largely by the Federal Reserve’s withdrawal from the secondary mortgage market. Another government housing stimulus program – the federal homebuyer tax credit – is also expected to leave a significant mark on housing conditions.
The first-time homebuyer tax credit pulled sales forward into the months before it expired in November, PMI explained. Even with the extension and expansion of the credit, the company’s report says it’s likely that there will be a payback period from the original tax credit. Looking ahead, PMI says sales should climb more strongly in 2010, once the payback period from 2009’s tax credit comes full circle. As the job market finally starts to improve and credit markets function better, existing sales should climb by 7.7% and new home sales by 35.5%, PMI said in its report. The continued oversupply of homes on the market still weighs on house prices, although the pickup in sales has tempered this, the company said. Following a projected decline in existing home prices of 12.7% for 2009, PMI says prices should fall by another 5.0% this spring. However, stronger sales and reduced inventory should allow prices to remain relatively flat over the course of 2010, the company concluded.
Debt ceiling fight
The country’s legal debt limit will need to be raised again — and soon. The Senate will debate just how high tomorrow. The increase is likely to be more than $1 trillion and could be as high as $1.8 trillion. The Democratic goal is to boost the limit enough so that the issue doesn’t need to be revisited before the November mid-term elections this year. The debate follows on the heels of an 11th hour short-term increase passed by the Senate on Christmas Eve. That vote raised the ceiling by $290 billion to $12.394 trillion — enough to cover Treasury’s borrowing needs through mid-February.
Democratic leaders could only get support for a short-term boost because a bipartisan group of Senate fiscal hawks have said they would not vote through a long-term increase until lawmakers adopt a “credible process” to curb the growth in U.S. debt. Amendments are expected to be introduced that attempt to force Congress to be more fiscally responsible. Key among them is a proposal to create a bipartisan fiscal commission from Senate Budget Chairman Kent Conrad, D-N.D., and the budget committee’s top ranking Republican, Sen. Judd Gregg, R-N.H. The commission would make recommendations to Congress for how to rein in runaway spending growth, which threatens to overwhelm the federal budget. Two main causes are growing unfunded entitlement obligations and interest that will be owed on the nation’s debt.
Citigroup reports loss
Citigroup posted a fourth-quarter loss of $7.6 billion after repaying government funds. The third-largest U.S. bank said the loss amounted to 33 cents a share, compared with a loss of $17.3 billion, or $3.40 a share, in the same quarter a year earlier. The loss matched analysts’ average estimate, according to Thomson Reuters. The bank set aside $8.2 billion in the quarter to cover bad loans and other losses, down 36% from a year earlier. Citigroup has been struggling to return to profitability in its main lending businesses after posting more than $100 billion of credit losses and writedowns. Although the bank posted a profit for 2009, $6.7 billion came from selling a controlling stake in its Smith Barney business. Citigroup shares fell more than 50% in 2009, while the KBW Bank index, a broader measure of banks, fell 3.6%.
DSNews – Lawyers and Foreclosure Defense
Florida was hit hard by foreclosures in 2009, and a predicted increase in foreclosures in 2010 has prompted many attorneys to add foreclosure defense to their practices, according to Sarasota, Florida-based AmStar Litigation Support, a provider of continuing education and legal process outsourcing (LPO). In 2009, the Sunshine State had the second-highest number of foreclosure filings in the country, according to market researcher RealtyTrac, and it doesn’t appear that this trend will fade in 2010. Analysts believe unemployment and adjustable rate mortgages scheduled to recast this year will push a massive supply of delinquent loans into the foreclosure process. An increasing number of Florida homeowners face the prospect of losing their homes, and as a result, AmStar says the expertise of attorneys skilled in foreclosure defense remains in high demand.
Is reducing mortgage principal a good idea?
Many critics of the Obama administration’s mortgage loan-modification program say it won’t work because it doesn’t do enough to address “negative equity,” the plight of people who owe more on their home loans than the current value of those properties. According to this thesis, without equity in their homes, borrowers have little incentive to keep paying and are apt to walk away as soon as things get tough, if not before. There is even a new word to describe this approach: Lenders need to “re-equify” borrowers by chopping the loan balances to something less than their homes’ values. The trouble is that selectively reducing principal, mortgage paying behavior will be affected. When he was asked about that in a news briefing Friday, Assistant Treasury Secretary Michael Barr didn’t rule out broader use of principal reductions.
But he suggested that there would be a risk that such a program would change a lot of borrowers’ behavior. “Most people, most of the time, make their mortgage payments …even if they’re underwater,” Mr. Barr noted. “You have to be quite careful not to design a program that induces more people to walk away” or one that strikes people as unfair. How would principal reductions induce more people to walk away? Let’s say your neighbor, who hasn’t made any payments on his loan for months, gets a huge reduction in his loan balance. Meanwhile, you’ve been working three jobs and dining on cat food to pay your note each month. Your reward from the bank? Zilch. So maybe you’d decide to stop paying, too, in the hope of the same deal your neighbor got.
Now on to our real estate investing educational section…
Housing Affordability – Good News for Real Estate
Finally there is some good news for real estate. Contrary to what you hear on the popular media, all isn’t as bleak as it initially appears – in fact, there is some downright good news when it comes to housing affordability. Let’s take a few minutes to explore the current status of income, mortgage and interest rates to discover the silver lining brought about by the current recession.
Median Family Income
According to the federal government, median family income actually rose in 2008 to just over $62,000; up from $61,335 during 2007. While not a substantial increase, it goes farther than ever when combined with lower interest rates and reduced sales prices.
Interest Rates
By now everyone has become familiar with the up/down volatility of interest rates. Much to everyone’s surprise, interest rates have managed to remain at or near historic lows despite the massive print/borrow campaign initiated by the federal government. By the end of 2008, interest rates averaged just 6.15…the fourth lowest annual average since 1973.
Low Price
The median price for an existing single family home has continued to decline from $221,000 in 2006 to just under $175,000 at the end of 2009. Combined with low interest rates, the median family income is still able to purchase more home than ever according to the housing affordability index.
Composite Index Ratio
The official composite housing affordability ratio has held at or above historic high’s throughout 2009 ranging from a “low” of 155 to a high of just under 179. Remember, the index score of 100 means the average median household income exactly equals the median cost of the average home mortgage. In comparison, during the early 1980′s the affordability index fell below 70 and remained negative for seven consecutive years.
Bottom line – housing is more affordable than ever! Not only are interest rates near historic lows but the purchasing power of the median household income is stronger than ever. To purchase the average priced home, a family needs to make roughly $45,000 to $50,000…leaving ample discretionary income to cover other expenses or set aside funds for savings and retirement.
See you at the top!
Chris McLaughlin
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About the author:
Chris McLaughlin is widely known as America’s top
Real Estate Attorney and Investment Consultant.
* As the top Florida foreclosure and pre-
foreclosure expert, he oversees more than
100 short sale & REO closings each month
* Long-time authority on real estate investing
and rapid reselling of distressed homes. Owns
portfolio of nearly 100 high-value, high-profit
properties
* Owner of one of Florida’s largest Real Estate firms,
running 4 different offices, supporting over
400 agents, uniquely positioning him to help
thousands of investors make money in the
biggest market opportunity ever!
* Highly sought-after speaker, consultant, and
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