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S&P – shadow inventory holding back recovery

Although the drop in default rates shows promise, the amount of shadow inventory still creates a dark loom over the future of housing prices, according to latest results from Standard & Poor’s U.S. Residential Performance Index.  The shadow inventory of unresolved distressed properties is currently at an estimated $405 billion, representation four years of housing inventory and one-third of the outstanding U.S. non-agency residential mortgage debt.  The report states that full recovery will only occur once the supply of distressed properties shrinks to less than a quarter of the current volume.  Additionally, the monthly liquidation and cure rates are at about 2.5%. This stems to an overall resolution rate of 5%, where these rates have lingered in the past nine months.  The slowing first default rates allows borrowers to resolve loans and clear out the inventory instead of defaulting and adding more, S&P said in the report.

DSNews.com – 49% of homeowners think they own more than they owe

Less than half of homeowners – 49% – currently believe their home is worth more than the amount they still owe on their mortgage.  July marks the second month in a row but only the third time since late 2008 that the Rasmussen Reports rate has fallen below 50%.  High-income homeowners were more confident in their home values that low-income homeowners, and investors were consistently more confident than owner-occupants.  One-third of homeowners believe they are underwater with their mortgage, and 18% of respondents said they weren’t sure.  The rates are the result of a Rasmussen Reports national telephone survey of 676 homeowners. The survey was conducted July 17 and 18, and results were released Thursday.

Relatively unchanged since last month, 7% of homeowners had missed or been late on at least one mortgage payment in the last six months, while 90% had not.  Eight% said they were likely to miss or be late on a payment in the next six months, and 89% did not foresee difficulty making their payments over the next six months.  Just days before the survey results, on July 19, Rasmussen released the results of another survey, which examined homeowners’ confidence that their home values will increase over the coming year.  At 11% confidence, reached an all-time low, according to the survey.

Debt ceiling impasse

After weeks of rancorous talks, finger-pointing and political point-scoring, both sides appeared still far apart on a deal to reduce the budget deficit, which would clear the way for Congress to raise its $14.3 trillion borrowing limit.  With an Aug. 2 deadline little more than a week away, lawmakers have steadfastly refused to compromise and talks once again collapsed in acrimony at the weekend. Democrats and Republicans split into two camps to work on their own proposals.  Financial markets were uneasy in Asia and Europe on Monday about the prospect of a first-ever U.S. debt default, which Fed Chairman Ben Bernanke has said would be a “calamitous outcome” for the U.S. and the global economy.  Republicans strongly oppose tax increases, while Democrats who lead the Senate dislike proposed cuts to social programs.

Olick – mortgage bankers reverse course

“It was barely a few months ago, albeit a few thousand degrees ago, that I moderated a panel of mortgage types from the major banks, including the Mortgage Bankers Association’s new president David Stevens, formerly FHA commissioner.  Stevens and I have been talking housing for many years now, so I’m well aware that he is not exactly the ambivalent type.  When I suggested to the panel that the risk of a double-dip in housing was great and that winding down Fannie Mae and Freddie Mac now could be detrimental to the housing market, Stevens was adamant that housing was well into recovery, and all those home price and mortgage delinquency reports I was citing were backward looking and not indicative of the current state of the market.  Now Stevens is reversing course.

This morning he put out a statement advocating a continuation of the higher loan limits at the GSE’s (Fannie and Freddie) and the FHA for one more year. ‘The temporary loan limits authorized by Congress have benefited consumers and the housing market during what has been a turbulent period for our nation’s economy,’ Stevens said in the statement. ‘That decline is not over yet.’  The statement was a little dry for me, knowing the source, so I called Stevens for a little elaboration. He stated right from the get-go that he is still bullish about the future of the housing market, which is not exactly saying he feels great about it right now.  ‘It looked very clear at the beginning of the year that we were heading toward a flattening of the market, but we’ve seen clearly an impact to the housing market which is not solely a result of the U.S. economy. It’s brought on by general uncertainties: Oil prices spiked for a while, which hit confidence, there were a lot of impacts both domestically and internationally,’ he continued. ‘I think the view right now that I have is that this is a relatively inexpensive initiative that could support the housing market at a time when pulling back makes no sense.’

When I suggested that this was in direct opposition to the MBA’s stand on GSE reform, which includes reducing loan limits in order to bring private capital back to the market, he said there was always a ‘caveat in the white paper for market conditions.’ He also says private capital is still too nervous about the state of housing to come back in force now. As for the FHA, which he has maintained consistently has far too large a market share right now, ‘If FHA is still too big, it is the sign of an unhealthy system, but it doesn’t mean pulling back is the right answer. We must continue providing support.’

Lowering the current loan limits (a maximum of $729,750 in the most expensive markets) would really affect just 5% of the housing market, although that percentage is far higher in certain local markets. Stevens says that’s enough to hurt the overall market right now, and that we still need another year of recovery before we take such a risk. He notes over an over that it really costs the government nothing and doesn’t ‘score’ in the budget.  I’m wondering when the banking industry starts putting its money where its mouth is, now that it’s making money again. There has been all this talk about getting government out of the housing/mortgage market, but no real movement in that direction. There have been some hikes in fees, but nothing really dramatic. The change in the loan limits was supposed to be the first step, something everyone agreed on. Now, not so much. There is certainly risk in lowering the limits, given that we are operating in a housing market that was beaten to a pulp and is still limping. But rehab takes some pain; if we really want a private sector mortgage market, and I’m not advocating one way or the other, but that has been the party line in both parties, then we need to start somewhere.”

Gas up 9 cents in 2 weeks

The average U.S. price of a gallon of gasoline has jumped nearly nine cents in the past two weeks.  That’s according to the Lundberg Survey of fuel prices, released Sunday, which puts the price of a gallon of regular at $3.70.  Midgrade costs an average of $3.84 a gallon, and premium was at $3.95. Diesel was up about four cents, to $3.99 a gallon.  Of the cities surveyed, Tucson, Ariz., had the nation’s lowest average price for gas at $3.28. Chicago had the highest at $4.07.  In California, the lowest average price was $3.69 in Fresno. San Franciscans paid the highest price at $3.83. The average statewide was $3.78, up about a penny.

WSJ – housing squeeze tightening?

At the start of the year, home builders were cautiously optimistic about their prospects for 2011. Home prices were picking up, prompting some builders to buy additional land and start to plan new communities.  What a difference a few months can make. The spring buying season—typically the strongest season for home sales—ended with a thud. Builders are now backtracking on the land deals and some prices have started to fall again.

Industry watchers will be paying close attention to a number of indicators and earnings due out this week. On Tuesday, the Census Bureau is scheduled to release sales of new homes for June. Economists generally expect sales to climb to an annual pace of 328,000. That would be up from May’s extremely weak level of 319,000 sales, but far away from 2005 when sales peaked at 1.3 million.  Also out this week are earnings reports from major home builders including PulteGroup Inc., D.R. Horton Inc. and Meritage Homes Corp.  One analyst said not to expect much. “Builders are going to disappoint investors because they’re going to continue to lose money,” said Alex Barron, a founder and analyst with the Housing Research Center, an independent research firm in El Paso, Texas.

Now comes more troubling news: NVR Inc., long considered the industry darling because it managed to earn money during the downturn, reported a weak second quarter on Thursday. Profit slid 46% from a year earlier, dragged down as home closings tumbled 34%.  Particularly concerning is what NVR’s results might say about the Washington, D.C., market. That is NVR’s home market, and it had been one of the nation’s strongest performers. Unlike much of the rest of the nation, house prices in Washington and its suburban Virginia and Maryland neighbors were rising and foreclosures in many communities were relatively low.  But NVR, based in Reston, Va., said orders declined in the mid-Atlantic region, which includes Maryland. According to Raymond James Equity Research, the Washington area’s existing-home sales slumped 19% from a year earlier in June, compared with 8.8% nationwide.  Industry watchers are now trying to figure out whether NVR’s performance signals further pain ahead for housing, or if Washington-area buyers are simply nervous over the debt-ceiling debate and scared about the possibility of government layoffs.  Part of the problem is that the same head winds persist: Unemployment remains elevated, builders must compete with deeply discounted foreclosed properties for sales and tight bank lending standards are keeping plenty of would-be buyers out of the market.  “The new home-sales market will continue to be depressed” for at least another year, said Bernard Baumohl, chief global economist with the Economic Outlook Group.

Yes, but are things getting worse? That’s really the question right now. Many industry watchers say the market has already hit bottom and up-and-down monthly and quarterly economic indicators are just the market bouncing along the bottom as recovery remains elusive.  To be sure, some markets are doing better than others. Sales remain weak in boom-to-bust Las Vegas and Phoenix, which are markets likely to be the slowest to recover. Miami, which saw rampant condominium construction during the boom, is slowly healing, helped by foreign buyers. The technology craze—with its cash-rich youngsters—is benefiting parts of California.  Still, confidence indexes report that most builders remain pessimistic. If Tomorrow’s new-home-sales report shows a gain, perhaps that could brighten their day.

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

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You really can make a huge six figure income … even a 7 figure income … with no money out of your pocket in the deepest recession our country has ever faced.  How?  Just register now for our fr’ee webinar unveiling the strategies to use in this economy…all tonight at 9 PM ET: 

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This should come as no surprise to most of our readers: home prices posted an 18% drop for October of last year, the biggest drop ever since the Standard & Poors/Case-Shiller 20 city housing index was created.  The 10-city index fared a bit worse, dropping 19.1%.  And there areas really got wacked: Phoenix dropped 33%, Las Vegas slid 32%, and San Francisco declined 41%. 

The Conference Board announced that its Consumer Confidence Index dropped 38 in December from a revised 44.7 in November.  The low number surprised economists: a survey of 62 number crunches estimated that the reading would come in around 45.   

But in good news for consumers, General Motors announced that it would once again offer zero percent financing for the next several weeks.  This comes on the heels of the announcement that GMAC was approved as a bank, therefore eligible to tap into $5 billion of the $700 billion of TARP funds. 

Now, on to our real estate investing education section…

Discounting Hedonic Pricing Models

Short sale investors interested in obtaining the lowest possible price should learn to turn the tables on rapid rate increases by discounting hedonic pricing models to their benefit. Hedonic pricing essentially works like this; instead of calculating the increase in a price of a home as inflationary, the “upgrades” and other enhanced “quality” measures are calculated independent of the base price of the home. While this is a valid method of taking quality improvements into account especially during periods of economic growth, it does little to account for increased “liabilities” during periods of economic or financial contraction.

Let’s demonstrate by using a basic example; Buyer A and Buyer B both purchased 3 bedroom, 2 bath homes on 1/3 acre lots with city utilities. Each home is 1500 sq. feet living area and is 3 years of age. Home A is a “bare bones” affordable housing model with laminate counter-tops, inexpensive carpet and off the shelf fixtures throughout. Standard bathtub, windows, doors and other items were used. The cost of the home was $100 per square foot or roughly $150,000 plus the price of the lot. Buyer B also purchased a home of the same size but with granite countertops, imported Italian tile, upgraded windows and custom features throughout. Upgraded appliances, a large in-ground pool, whirlpool spa tubs and other upgrades resulted in a cost of $300 per square foot or a selling price of $450,000 plus the price of the lot.

So far so good. Unfortunately, as the economy begins to stagnate items originally deemed highly desirable quickly become undesirable as the cost of maintenance and repairs outpaces the ability of homeowners to sustain these items. This is where short sale investors are likely to reap major benefits. Deep discounts of common upgrades or former enhancements are possible by keeping these rules of thumb in mind:

1.     If it requires high maintenance it is a liability and should be deeply discounted. In-ground pools are a prime example. Not only do they increase electric bills when heating but cleaning supplies and maintenance contracts can easily cost $100-$250 per month. Items that require regular out of pocket costs should be deeply discounted as potential liabilities for a property. Aggressive pricing estimates would deduct the cost of repairs, maintenance and even potential removal of the item.

2.     If it requires minimal maintenance but adds no additional value it should be discounted by comparing a standard pricing model. For instance, those beautiful granite countertops don’t save money or increase functionality to the home therefore they are of no more “real” value when selling than laminate or less expensive alternatives. Make a point of going through the home and putting together a comprehensive replacement price list based upon standard “off the shelf” alternatives for all items that do not activity save money or represent major buying incentives in the new economy.

We had so many positive comments about our top 5 positive things about the market … so we’re going to post it again for you:

As 2008 draws to a close and short sale investors look to 2009 the question on everyone’s mind is whether or not the economy will continue its downward spiral or experience a recovery. Despite the considerable abundance of doom and gloom reporting in the media, there are a few bright spots that aren’t receiving the full attention deserved. Short sale investors searching for a silver lining in an otherwise cloudy economic environment would do well to focus on these current trends:

1. $40 per gallon oil and $1.65 per average gasoline. How low will it go and how long it will last is subject to debate but one thing is certain; those who rely upon gasoline and oil are experiencing a bit of much needed relief in the form of lower prices.

2. Low Mortgage Rates & Dropping LIBOR Rates. The cost of money is cheap – not just inexpensive but downright cheap. Make no mistake about it, real interest rates are the lowest in decades and make it less expensive than ever to borrow money to build a short sale empire. It is possible to buy more house for less money while simultaneously spending less on taxes and insurance. It’s a win-win-win situation for those with the courage to buy when others are selling.

3. Huge Fiscal Stimulus. Coming soon to a federal budget near you is a huge fiscal stimulus package destined to become one of the largest in history. Bridges, roads, hospitals, schools, utilities and other mega-projects are slated to spur the economic growth needed to jump-start the economy. Whether you believe the stimulus package will work or worsen the long term economy, one thing is certain; those workers will need affordable and convenient housing for long term projects. Short sale investors would do well to make a mental note of future road plans, schools and other large building projects in the target areas of interest. Whether you buy low and sell high or wait for the path of progress to reach you, it is a position of strength rather than weakness.

4. Long Term Lag-Times. The global decline in commodities and other tangible assets will eventually lead to long term shortages with tremendous upside profit potential for short sale investors. Remember, there is a lag time between the supply and demand which will result in high demand and low supply once the economy stabilizes. Everything from basic building materials to mineral rights, timber and even natural gas holdings will be impacted. Savvy short sale buyers would do well to realize the long term potential inherent in their holdings.

5. More Renters. Foreclosures aren’t over…in fact, due to legislative restrictions on the number of “bad loans” and tangible assets a bank may have on the books at any given point in time, the current bail-out simply provided the liquidity required for banks to prepare for the 2^nd stage of the growing mortgage meltdown. Most experts agree that what began as a sub-prime mess is expanding into ARM’s, low/no Doc loans and even prime mortgages in response to rising unemployment, falling stocks and bonds plus a plethora of other economic problems hit the average homeowner.

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See you at the top!

Chris McLaughlin
http://www.shortsalesriches.com/blog

P.S.:

Are you ready to get 2009 rolling?  Then it is time to come to our LIVE “Recession Proof Real Estate Investing” webinar tonight – at 9 PM ET:

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P.S.S.:

Have you seen the hilarious “Short Sale Kid Gets a Holiday Haircut.”  Don’t miss this challenge issued by Nathan Jurewicz:
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