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Home ownership lowest in a decade
According to US Census Bureau data, the homeownership rate dipped in Q409, bringing the rate of homeowners at its lowest point since the second quarter of the year 2000. The Q409 rate of 67.2% is down slightly from Q309’s rate of 67.6%, and is also down from Q408, when the homeownership rate was 67.5%. Seasonally adjusted, the Q409 rate was 67.3%, down from the seasonally adjusted rate of 67.4% in Q309 and 67.6% in Q408. The seasonally adjusted homeownership rate is also at its lowest level since Q200. Regionally, The biggest drop was in the South, where the rate declined to 69.1% from 69.7% in Q309 and 69.8% in Q408. The West declined to 62.3% from 62.7% in both Q309 and Q408. Homeownership in the Midwest decreased to 71.3% from 71.6% in Q309 and 71.4% in Q408. In the Northeast, homeownership declined to 63.9% from 64% in both Q309 and Q408.
Housing prices to drop 5% more?
In normal times, people won’t pay much less to lease a house than to own it. After all, if you’re paying rent instead of a mortgage and taxes, you still get to enjoy the same rec room, chef’s kitchen, and casita for visiting grandparents. So the surest sign of a frenzy appears when owning becomes far more expensive than renting. That’s precisely what happened during the last bubble. And the surest sign that prices have fully adjusted arrives when the ratio of what people pay in rent versus what owners spend on the same property returns to its historic average. “If you look at the trend in rents to see where housing prices are headed, you’re looking at the right measure,” says Yale economist Robert Shiller. In recent reports, Deutsche Bank (DB) demonstrates how steady or even falling rents have pulled down housing prices, to the point where in many markets it costs about the same amount to own as to lease. That’s a golden mean that America hasn’t seen in almost a decade. The DB research also offers convincing evidence that the wrenching adjustment in housing prices is finished for much of the nation, with a bit more pain to come in selected areas.
On average, DB found that families across America were spending about 87% as much to rent as to own in 1999. Hence, they were traditionally willing to pay a premium as homeowners, though not a big one. But by mid-2006, with the craze in full swing, the figure fell below 60%. At that point, Americans were spending an incredible 66% more to own than to rent. It was far worse in the bubble markets: In Las Vegas, Phoenix and Miami, homeowners were paying twice as much as renters, and in San Francisco and Orange Country, owners’ monthly payments were triple those of their neighbors with leases instead of mortgages from 1999 to 2007, apartment rents increased only 32%, but home prices jumped more than three times as fast, around 105%. DB reckoned that housing prices are more or less reasonable when the ratio returns to its 1999 level. Why 1999? Because the ratio was relatively stable throughout the 1990s, and it was the year the steep rise in prices began in earnest.. At the end of the third quarter of 2009, the overall number stood at 83%, meaning renting was just a tad more attractive than owning. Given that analysis, it’s likely that prices will fall another 5% or so nationwide. The drop could even be slightly greater. One reason: Rents, the force that govern housing prices, are still falling. In 2009, apartment rents dropped 2.3%, and the fall continues. And enormous adjustments are needed in still-exorbitant markets such as New York and Baltimore. Thankfully, the improving economy and decline in the rate of job losses means that rents should soon stabilize and could even start increasing by the end of 2010.
Let big banks fail
White House advisor Paul Volcker said yesterday that large financial institutions that engage in speculative activities for profit should be allowed to fail if they get in trouble. “If a big non-bank institution gets in trouble and threatens the whole system, there ought to be some authority that can step in, take over that organization and liquidate it or merge it — not save it,” Volcker said on CNN. “It’s called euthanasia, not a rescue.” As Congress debates financial reform in the wake of the worst financial crisis since the 1930s, Volcker has argued for fencing off investment firms primarily engaged in market speculation from commercial, deposit-taking banks. The former Federal Reserve Chairman, most famous for raising interest rates sharply in the early 1980s to quell double-digit inflation, said the central bank and other regulators were amiss in preventing the crisis. “I don’t think there’s any question the Federal Reserve and other regulators were not on top of the housing picture,” Volcker said.
DSNews.com – Short sales in Las Vegas
Las Vegas has the highest foreclosure rate of any metro in the country, but lenders there have become more willing to accept short sales as an alternative to foreclosure. The Greater Las Vegas Association of Realtors (GLVAR) reports that 21.1 percent of all existing-home sales in the area last month were short sales. The association’s short sale figures represent a 2 percent increase from the previous month. Rick Shelton, GLVAR president, called the increase in short sales “one of the more promising trends” for the month, particularly because it was coupled with a decline in sales involving foreclosed homes. Shelton said bank-owned homes accounted for a decreasing percentage of all local home sales, dropping from 60.1 percent in December to 57.4 percent of all sales in January. Overall, GLVAR’s local housing statistics showed that 2010 started looking very much like the end of 2009, with local home prices staying about the same and home sales increasing from the previous year. During January, GLVAR reported the median price of single-family homes sold in Southern Nevada was $134,925, down 0.8 percent from $136,000 in December. The median price for condos and townhomes increased 5.7 percent, from $65,300 in December to $69,000 in January. According to the GLVAR, the total number of local homes, condominiums, and townhomes sold in January was 3,266, down from 4,196 total sales in December 2009, but up from 2,664 in January 2009. Shelton said this decline in total sales from December to January was expected since it occurs nearly every year in Southern Nevada during these months. The percentage of local homes purchased with cash during January was 45.5 percent, up from 40.4 percent the previous month and the highest such percentage ever tracked by GLVAR.
Consumer sentiment down
A Reuters/University of Michigan Surveys of Consumers said its preliminary index of consumer sentiment for February was 73.7, down from 74.4 in late January but up from 56.3 a year ago. The reading fell short of analysts’ median expectation of a reading of 75.0, according to a recent Reuters poll. The survey’s gauge of current economic conditions was 84.1 in early February, the highest since March 2008. It was up from 81.1 in late January and above the 81.4 predicted by analysts polled by Reuters. But the survey’s barometer of consumer expectations dipped to 66.9, down from 70.1 in late January and short of the 70.9 forecast by analysts. “Few consumers anticipated any significant declines in the jobless rate any time soon, and the majority expected recurrent economic weaknesses over the next several years,” Richard Curtin, director of the surveys, said in a statement. “The cumulative financial strain during the past few years, coupled with the fact that the majority still expect no gains in their incomes, work hours or home values in the year ahead, has meant that consumers have remained extremely cautious spenders,” Curtin said. The index of consumers’ 12-month economic outlook fell to 79 from 84 in late January. The survey’s 1-year inflation expectation index eased to 2.7 in early February from 2.8 in late January. The five-to-10-year inflation measure eased to 2.8 from 2.9 late last month.
WSJ – US Debt to keep growing no matter what
The crushing weight of US debt threatens to overwhelm everything the federal government does, even in the short-term, best-case financial scenario — a full recovery and a return to pre-recession employment levels. The government already has made so many promises to so many expanding “mandatory” programs. Just keeping these commitments, without major changes in taxing and spending, will lead to deficits that cannot be sustained. Take Social Security, Medicare and other benefits. Add in interest payments on a national debt that now exceeds $12.3 trillion. It all will gobble up 80 percent of all federal revenues by 2020, government economists project.
The US debt crisis also raises the question of how long the world’s leading power can remain its largest borrower. Moody’s Investors Service recently warned that Washington’s credit rating could be in jeopardy if the nation’s finances didn’t improve. Proposed belt-tightening steps by President Barack Obama, including a freeze on some nondefense, nonentitlement spending, would make only a small dent in the mountain of debt. The budget he submitted to Congress this month proposes record spending of $3.8 trillion for 2011. Taxes in next year’s budget will support only $2.5 trillion of that spending, leaving $1.3 trillion to be borrowed. The president’s budget doesn’t take into account future liabilities from the growth of entitlement benefits and is based on projected economic growth that depends on a solid recovery. It assumes Congress will pass all of Obama’s initiatives, including spending cuts and tax increases previously rejected by Congress.
Now on to our real estate investing educational section…
Ready for Round Two?
Despite the optimistic rhetoric spouted by Washington, the actual state of the union is somewhat more subdued; in fact, experts believe we are simply experiencing the eye of the storm as we prepare to “hit the wall”. The newest numbers by RealtyTrac seem to contradict signs of recovery and instead point toward “Round two” of the short sale tsunami.
To recap the major findings of the latest RealtyTrac report:
- The number of U.S. families facing foreclosure surged 15% as compared to one year ago.
- One of every 409 U.S. homes is now facing default.
- More than 87,000 homes were repossessed in January 2010 alone…a 31% increase over January of 2009.
- RealtyTrac estimates the number of pending foreclosures to surge by nearly 40% reaching a record-breaking high of 3.5 million as compared to the (former record) of 2.8 million in 2009.
- Home values plunged by 17% in December 2009.
- Fannie Mae reports delinquency rates among homeowners with conventional mortgages has now more than doubled from 2.1% at the end of 2008 to 5.3% by the close of 2009…no small concern when you remember that Fannie/Freddie are now underwriting up to 95% of mortgages in many areas.
Face it – the worst is on its way. Much like a hurricane that wrecks the greatest destruction on the backside of the storm, those that think they have already seen the worst are likely to be in for a big shock. So…what are you doing to prepare for round two? Running for cover like most investors or revving up the engines to take advantage of once in a lifetime buying opportunities? Toss in rising inflation, escalating energy prices, increased unemployment rates and it doesn’t take a rocket scientist to see there will be more people than ever moving out of over-priced, under-water McMansions in search of affordable housing opportunities.
If this wasn’t dire enough, the days of federal underwriting via Freddie/Fannie are limited; remember, most of their financing comes via the bond market, Ginnie Mae or other related agencies…eventually interest rates will rise and further drive-up the cost of homes. In addition to higher interest rates and larger down payments, credit worthiness will become a critical issue to banks once FHA has exhausted the funding pool used to underwrite current loans. Given that 24% of FHA backed loans written in 2007 are now in default and 20% for those generated in 2008…the day of reckoning may be sooner than anticipated.
See you at the top!
Chris McLaughlin
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Copyright Loss Mitigation Institute LLC 2009.
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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
seminar leader for current trends and hot topics
in Real Estate Investing, Entrepreneurship, and
Wealth Building
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