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Smart Real Estate News & Commentary by Chris McLaughlin February 16, 2011

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Apartment starts up

Housing starts, the number of new homes being built, rose 14.6% to an annual rate of 596,000 in January, up from 520,000 in December, the Commerce Department said.  While that was better than the 540,000 housing starts economists had expected for the month, it was “all due to apartment building,” said David Crowe, chief economist with the National Association of Home Builders.  Construction of buildings with five units or more, which tends to be volatile month-to-month — gave the overall number a big boost when that category alone surged 80% in January.  Meanwhile, construction of single-family homes — which is viewed as a more stable indicator of new homebuilding activity — was flat. Given fierce winter storms across much of the country, it’s an encouraging sign that category did not actually decline, Crowe said.  Meanwhile, the number of permits for future housing construction fell to an annual rate of 562,000 last month, down 10.4% from 627,000 in December, the Commerce Department said.  The reading fell short of forecasts, with economists surveyed by Briefing.com looking for 575,000 permits.

GOP hammers budget

House Republicans hammered President Obama’s 2012 proposed budget on Tuesday, telling Treasury Secretary Tim Geithner that tax increases included in the plan are unacceptable.  “Because they kill jobs, those tax increases are dead on arrival in this House,” Rep. Kevin Brady of Texas told Geithner, who was testifying before the Ways and Means Committee.  Ways and Means Chairman Dave Camp of Michigan and other Republicans said the president’s plan to let tax breaks expire for the upper-income Americans would end up hurting small businesses. They say many small business owners pay their business taxes by filing as individuals, putting them in the nation’s top tax brackets.  “There’s disappointment on our side that the president’s budget brings up some of the same tax hikes on America’s small business that Congress, even when both chambers were controlled by Democrats, already rejected,” Camp said.  Earlier in the day, House Speaker John Boehner also criticized the president’s budget proposal for not cutting enough.  Boehner pledged that Republicans would address reshaping entitlement programs, such as Medicaid and Social Security, when they release their budget blueprint this spring.  “Republicans will not punt,” said Boehner. “Everything’s on the table. We will put forward a budget that deals with the big challenges that face our country…I have no doubts that all of these issues [Social Security and Medicare] will be on the table.”

MBA – mortgage applications decrease

The Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending February 11, 2011 decreased 9.5% on a seasonally adjusted basis from one week earlier.  On an unadjusted basis, the Index decreased 7.9% compared with the previous week.  The Refinance Index decreased 11.4% from the previous week and is the lowest Refinance Index recorded in the survey since the week ending July 3, 2009. The seasonally adjusted Purchase Index decreased 5.9% from one week earlier. The unadjusted Purchase Index decreased 0.9% compared with the previous week and was 18.2% lower than the same week one year ago.  “Mortgage rates remained above 5% last week, up almost a full%age point from their October lows, and refinance volume continued to drop,” said Michael Fratantoni, MBA’s Vice President of Research and Economics. “Applications for home purchases also declined on a seasonally adjusted basis.  Buyers have not returned to the market as rising rates have reduced affordability, to some extent.”  The four week moving average for the seasonally adjusted Market Index is down 4.5%.  The four week moving average is down 1.9% for the seasonally adjusted Purchase Index, while this average is down 6.2% for the Refinance Index.  The refinance share of mortgage activity decreased to 64.0% of total applications from 66.6% the previous week. This is the fourth straight week the share has declined. The adjustable-rate mortgage (ARM) share of activity increased to 6.0% from 5.9% of total applications from the previous week.

Producer prices rising

Core producer prices in January rose to their highest rate in more than two years, hinting at a build up in inflation pressures as the recovery gathers pace, a potentially troubling development for the Federal Reserve.  The core producer price index, excluding food and energy, rose 0.5%, the highest since October 2008, the Labor Department said today.  The rise, which exceeded economists’ expectations for a 0.2% gain, reflected a jump in pharmaceutical preparations, which accounted for 40% of the increase.  The rise in core PPI comes at a time when a surge in commodity prices has caused most advanced economies to raise red flags on inflation.  The Federal Reserve has so far shown little concern about a pick-up in price pressures and officials have repeatedly said core consumer inflation remains too low for comfort.  The government is expected to report on Thursday the core consumer price index, excluding food and energy, rose 0.1% in January from December. Overall CPI is seen up 0.3% after rising 0.5% in December.

Olick – foreclosure sales rise in key states

“Last week a foreclosure report from RealtyTrac showed the process was still completely skewed by the so-called ‘robo-signing’ (faulty paperwork) issues at some of the nation’s largest mortgage servicers that were uncovered last fall. Another report today from ForeclosureRadar.com, which only tracks a few states out West, shows some important micro-moves that will have a big impact on the Spring housing market.  ForeclosureRadar.com shows that foreclosure sales, that is, either bank repossessions or sales to third parties (usually at the courthouse steps and often investors) jumped dramatically in January from the previous month in some crucial states.  In California, bank repossessions jumped 51.5%, in Arizona 56.2%, in Nevada up 36.8%.  ‘We have not seen this level of activity on the courthouse steps for months,’ says Sean O’Toole, CEO and Founder of ForeclosureRadar.com.

‘The increase in foreclosures is just in time to provide a fresh supply of entry level homes for the spring home buying season.’  More inventory is not what this housing market needs, especially not what home builders need, and especially in those hard hit states where there is already do much foreclosure and builder inventory. Home builder sentiment hasn’t budged in four months, according to a new report today from the National Association of Home Builders. One of the main reasons for the chronic low confidence is competition from foreclosures.  Something else important to note is something I’ve mentioned before, but really became clear in January’s numbers. Notices of Default (NOD), the first phase of the foreclosure process, fell off dramatically in January in California especially. 

“Remember, December was a holiday month, and a holiday moratorium month,’ mortgage consultant Mark Hanson tells me. “There may have been 14 or 15 [work] days in December, therefore, in California with 23.5K NOD, that’s 1680 per day. In January there were 21 days and 25.1K NOD. That’s only 1195 a day.’  So bottom line. Average daily NOD rate for CA fell from 1680 per day to 1195 per day from December to January, or 29%, according to Hanson.  Why are the banks holding off? Likely trying to be ultra-careful to avoid lawsuits, or trying to manage the pipeline as they now pump out the foreclosure sales. One thing we do know, the drop in NOD’s is not because the market/economy suddenly turned around. They’re coming.”

WSJ – banks demand bigger downpayments

The down payments demanded by banks to buy homes have ballooned since the housing bust, forcing many people to rethink what they can afford and potentially shrinking the pool of eligible buyers.  Last week, the Obama administration called for gradually raising down payments to a minimum of 10% on conventional loans, meaning those that can be bought or guaranteed by mortgage giants Fannie Mae and Freddie Mac. And mortgage data show that private lenders are already pushing sharply higher the required down payments, mainly to mitigate their risk as home prices continue to fall.  The median down payment in nine major U.S. cities rose to 22% last year on properties purchased through conventional mortgages, according to an analysis for The Wall Street Journal by real-estate portal Zillow.com.

That percentage doubled in three years and represents the highest median down payment since the data were first tracked in 1997.  The move to force home buyers to lay out more cash is driven mostly by banks, who have found that larger down payments discourage delinquencies by increasing the buyers’ exposure to loss and reducing the impact of declining prices.

Many home buyers placed little, if anything, down during the boom.   A 2009 Federal Reserve Bank of St. Louis study concluded buyers who made smaller down payments were more likely to default during “unfavorable economic circumstances, such as a housing market slowdown or job loss.”  Higher borrowing costs and heftier down payments could send housing prices falling further. Last week, 30-year fixed mortgage rates rose to 5.05%, their highest level since April. “If there is a scenario where the government talks about raising down payments to 20% on conventional loans, you would absolutely crush the housing market,” said Peter Norden, chief executive of Real Estate Mortgage Network Inc., an Edison, N.J., brokerage.  For now, borrowers who can’t afford such amounts are flocking to alternative programs, such as loans for veterans or those backed by the Federal Housing Administration, creating a parallel—and growing—nonconventional mortgage market for riskier borrowers and those who don’t qualify for conventional loans. 

FHA-backed mortgages, which require 3.5% up front, made up about half of loans for home purchases last year, according to housing-research firm Zelman & Associates, but borrowers often pay higher interest rates and must pay private mortgage insurance, often driving their monthly payments higher.  “There’s no question that the tightening of criteria unquestionably prices households out of the market,” said Zillow economist Stan Humphries. “The middle ground buyer is the one having to fight to get a conventional mortgage.”

Now for our real estate education section…

Cultivating Ambition – Generation Y

Generation Y, the young adults poised to enter the real estate market for the first time in coming years and one of the most important cohorts for the much anticipated real estate recovery, is typically associated with being lazy, unmotivated and lacking in basic work ethics but is that the reality? According to recent research conducted by Trulia, Generation Y is the one cohort MOST interested in owning a home. They just want to do it a bit differently than their parents.

In fact, nearly 90% cite home ownership as a major priority but for entirely different reasons than what has traditionally been considered a reason to purchase a property and with first-time home buyers making up nearly50% of residential property purchases, it’s a good idea for investors and realtor to understand the mindset driving this generation.

1. Affordability. Generation Y understands the value of locking in low prices in order to afford a desirable lifestyle over the long term. Low interest rates, bargain prices and uber-cool pads are just a few of the features driving their interest. Make it your priority to help them land mortgage options within their budget to create a win-win situation.

2. Shunning the Suburbs. Yes, you heard it here first. Generation Y has a distinctly different impression on what constitutes desirable housing than their parents. It’s all about urban settings as 88 percent reported the desire to be close to amenities, reduce the commute and enjoy the convenience of living close to work and other attractions.

3. McMansions are Out – Generation Y wants small spaces with minimal maintenance. Big yards are a nuisance – just give them enough to have a fire pit and someplace to get some sun. The ability to walk to stores, work or banking is a preference they are willing to pay for but forget formal living rooms and soaker bath tubs; Generation Y wants to live the simple life without having to depend upon big car payments, big paychecks or Big Brother to get by. Add a media room to go with that please.

4. Pets Matter – Generation Y isn’t nearly as interested in school districts since online learning is a viable option should they decide to have children. Forget golf courses…leave those for the grandparents. On the other hand, pet parks are a big perk for their four legged friends while doubling as a great place to work out and meet with other like-minded individuals.

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 150 high-value, high-profit
      properties
    * Owner of one of Florida’s largest Real Estate firms,
     running 4 different offices, supporting over
     420 agents, uniquely positioning him to help
     thousands of investors make money in the
     biggest market opportunity ever!

   * In 2010, Chris’ 4 Central Florida real estate offices

      closed 2,786 sides for a closed sales volume of

      $392,912,927!  
    * Highly sought-after speaker, consultant, and
      seminar leader for current trends and hot topics
      in Real Estate Investing, Entrepreneurship, and
      Wealth Building
    * Follow me on Twitter: http://twitter.com/mclaughlinchris
    * Join my Facebook Fan Page: http://www.mclaughlinchris.com
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