New York Times, December 25, 2005
By MARTIN FACKLER
KASHIWA, Japan - Fourteen years ago, Yoshihisa Nakashima looked at this sleepy suburb an hour and 20 minutes from downtown Tokyo and saw all the trappings of middle-class Japanese bliss: cherry-tree-lined roads, a cozy community where neighbors greeted one another in the morning and schools within easy walking distance for his two daughters.
So Mr. Nakashima, a Tokyo city government employee who was then 36, took out a loan for almost the entire $400,000 price of a cramped four-bedroom apartment. With property values rising at double-digit rates, he would easily earn back the loan and then some when he decided to sell.
Or so he thought. Not long after he bought the apartment, Japan's property market collapsed. Today, the apartment is worth half what he paid. He said he would like to move closer to the city but cannot: the sale price would not cover the $300,000 he still owes the bank.
With housing prices in the United States looking wobbly after years of spectacular gains, it may be helpful to look at the last major economy to have a real estate bubble pop: Japan. What Americans see may scare them, but they may also learn ways to ease the pain.
To be sure, there are several major differences between Japan in the 1980's and the United States today. One is the fact that property prices rose much faster and more steeply in Japan, partly because speculators used paper profits from a booming stock market to invest in property, insupportably leveraging the prices of both higher and higher.
Another difference is that the biggest speculators in Japan's frenzy were deep-pocketed corporations, and they pumped up the commercial property market at the same time that home prices were inflating.
Still, for anyone wondering why even the possibility of a housing bubble in the United States preoccupies so many economists, it is worth looking at how the property crash in Japan helped to flatten that economy, which is second only to that of the United States, and to keep it on the canvas for more than a decade.
And as American homeowners contemplate what might happen if their property values fell -particularly if they fell hard - there are lessons in the bitter experiences of their Japanese counterparts like Mr. Nakashima.
JAPAN suffered one of the biggest property market collapses in modern history. At the market's peak in 1991, all the land in Japan, a country the size of California, was worth about $18 trillion, or almost four times the value of all property in the United States at the time.
Then came the crashes in both stocks and property, after the Japanese central bank moved too aggressively to raise interest rates. Both markets spiraled downward as investors sold stocks to cover losses in the land market, and vice versa, plunging prices into a 14-year trough, from which they are only now starting to recover.
Now the land in Japan is worth less than half its 1991 peak, while property in the United States has more than tripled in value, to about $17 trillion.
Homeowners were among the biggest victims of the Japanese real estate bubble. In Japan's six largest cities, residential prices dropped 64 percent from 1991 to last year. By most estimates, millions of homebuyers took substantial losses on the largest purchase of their lives.
Their experiences contain many warnings. One is to shun the sort of temptations that appear in red-hot real estate markets, particularly the use of risky or exotic loans to borrow beyond one's means. Another is to avoid property that may be hard to unload when the market cools.
Economists say Japan also contains lessons for United States policy makers, like Ben S. Bernanke, who is expected to become chairman of the Federal Reserve at the end of January. At the top of the list is to learn from the failure of Japan's central bank to slow the rise of the country's real estate and stock bubbles, and then its failure to soften their collapse. Only recently did Japan finally find ways to revive the real estate market, by using deregulation to spur new development.
Most of all, economists say, Japan's experience teaches the need to be skeptical of that fundamental myth behind all asset bubbles: that prices will keep rising forever. Like their United States counterparts today, too many Japanese homebuyers overextended their debt, buying property that cost more than they could rationally afford because they assumed that values would only rise. When prices dropped, many buyers were financially battered or even wiped out.
"The biggest lesson from Japan is not to fall into the same state of denial that existed here," said Yukio Noguchi, a finance professor at Waseda University in Tokyo who is perhaps the leading authority on the Japanese bubble.
"During a bubble, people don't believe that prices will fall," he said. "This has been proven wrong so many times in the past. But there's something in human nature that makes us unable to learn from history."
In the 1980's, Professor Noguchi said, the frenzy in Japan reached such extremes that companies tried to outbid one another even for land of little or no use. At the peak, an empty three-square-meter parcel (about 32 square feet) in a corner of the Ginza shopping district in Tokyo sold for $600,000, even though it was too small to build on.
Plots only slightly larger gave birth to bizarre structures known as pencil buildings: tall, thin structures that often had just one small room per floor.
As a result, Japan's property market in the 1980's was much more fragile than America's today, Professor Noguchi said. And when the market fell, it fell hard. Because of all the corporate speculation, the collapse wiped out company balance sheets, crippled the nation's banks and gave the overall economy a blow to the chin.
Since 1991, Japan has spent 11 years sliding in and out of recession. It is only now showing meaningful signs of recovering, with the World Bank forecasting that Japan's economy will grow by a solid 2.2 percent this year
Despite the differences, Professor Noguchi said he also saw parallels between Japan then and America now. Last year, as a visiting professor at Stanford, he said he read real estate articles in local newspapers that sounded eerily familiar. Houses were routinely selling for $10 million or more, he said, with buyers saying they felt that they had no choice but to buy now, before prices rose even further.
"It was déjà vu," Professor Noguchi said. "People were in a rush to buy, and at extraordinary prices. I saw this same haste psychology in Japan" in the 1980's. "The classic definition of a bubble," he added, "is people buying on false expectations about future prices, and buying with the hope of selling in the future."
Economists and real estate experts see other parallels as well. In the 1980's, the expectation of rising real estate prices made many Japanese homebuyers feel comfortable about taking on huge debt. And they did so by using exotic loans that required little money upfront and that promised low monthly payments, at least for a short time.
A similar pattern is found today in the United States, where the methods include interest-only mortgages, which allow homebuyers to repay no principal for a few years. Japan had its own versions of these loans, including the so-called three-generation loan, a 90- or even 100-year mortgage that permitted buyers to spread payments out over their lifetimes and those of their children and grandchildren.
But when property prices dropped in Japan, homeowners found themselves saddled with loans far larger than the value of their real estate. Many fell into bankruptcy, especially those who lost their jobs or took pay cuts as declining property prices helped to incite a broader recession. From 1994 to 2003, the number of personal bankruptcies rose sixfold, to a record high of 242,357, according to the Japanese Supreme Court, which tracks such data.
Even many of those who avoided financial collapse found themselves marooned in homes that they never intended as lifelong residences. For many Japanese homebuyers in the 1980's, land prices had risen so high that the only places they could afford were far from central Tokyo. Many went deep into debt to buy tiny or shoddily built homes that were two hours away from their offices.
Now, after years of tumbling land prices have made Tokyo more affordable again, few people are shopping for homes in the distant suburbs. That has led to severe declines in property values in these outlying areas, leaving many people with homes that are worth less than the balance on their mortgages from a decade or more ago.
Mr. Nakashima, who bought the apartment here in Kashiwa, said it would take him at least another decade to whittle down his loan to the point that he could pay it off by selling his home. And this assumes that the apartment does not drop further in value - a real possibility, because lower prices in Tokyo have led to a recent boom in construction of newer apartments in neighborhoods closer to downtown.
"We can't sell and get something better because we'll take such a huge loss," said Mr. Nakashima, a serious man who recounts his story with careful precision, sometimes pausing to check dates. "The collapse of the bubble robbed us of our freedom to choose where we can live."
He rues the idea that homes came to be seen as just another investment. "Homes should be different from stocks," he said. "They shouldn't be the object of speculative investing. If home prices move too much, they can ruin your life."
Mr. Nakashima says he is resigned to spending the rest of his days in Kashiwa. It is peaceful here, after all, he said. There is also a bit of history: he pointed to two tree-covered mounds in a corner of the apartment complex that are said to contain the severed heads of samurai killed in a battle here five centuries ago.
Some economists say that there are probably millions of people like Mr. Nakashima, trying to make the best of life in homes that are distant from work and for which they grossly overpaid. "There is a whole generation of homebuyers stuck out in far suburbs," said Atsushi Nakajima, chief economist at the research arm of the Mizuho Financial Group in Tokyo. "It's sad, but Japan has basically forgotten about them, and is moving on. They are just left out there."
Mr. Nakajima said he had barely missed being stuck out there himself. In 1991, he was looking at a 100-square-meter apartment (1,080 square feet) for about $600,000 about two hours outside Tokyo. He said his wife stopped him. Six years later, he spent the same amount to buy a more spacious house in a downtown neighborhood. "Maybe my wife should be the economist," he said.
Now that Japan's real estate market is finally showing signs of recovering from the 1991 collapse, economists say it offers a lesson for Americans in how to end - and not to end - a long slide in property prices.
For years after the real estate bubble burst, the Japanese government tried to resuscitate the market and other parts of the economy with expensive public works projects, but they were so poorly planned that they succeeded only in inflating the national debt.
NOT until the late 1990's did the government try a new tack: deregulation. To kick-start the economy, Tokyo started loosening restrictions on the financial industry. While most of this effort was aimed at reviving the banking industry, it also allowed investors to create real estate investment trusts, essentially mutual funds that invest in commercial property. A few years later, the government also eased building codes, such as height limits, and cut approval times for building permits.
Economists and real estate executives credit these changes with bringing new money into the market, and with making redevelopment easier. The results are visible in a boom that is dotting the Tokyo skyline with cranes and new high-rises.
They are also visible in statistics. Residential home prices in Tokyo rose 0.5 percent in the 12 months through July, the first gain in 15 years, the government said in September. Nationwide, land prices are still down, but the pace of decline has slowed to a crawl, the government said.
"Deregulation revived the Tokyo land market," said Toshio Nagashima, executive vice president at Mitsubishi Estate, one of Japan's largest real estate companies. He said the changes were one reason that his company committed to spend $4.5 billion by 2007 to build six skyscrapers in the central Marunouchi financial district.
Japanese economists say the United States is not likely to suffer a decline that is as severe or long-lasting as Japan's, because they see a more skilled hand at the tiller of the American economy: the Federal Reserve. Japan's central bank, the Bank of Japan, failed to curb the stock and real estate bubbles until mid-1989, when it was too late and prices were sky-high, they said.
When it did take action, it moved faster and more drastically than Japan's overinflated land and stock markets could handle, raising its benchmark interest rate to 6 percent from 2.5 percent over 15 months. Economists say that this pulled the rug out from under both markets at the same time.
Akio Makabe, a finance professor at Shinshu University in Matsumoto, says the Fed has been more deft in handling the rise in America's property market, which he believes is definitely in a bubble. He praised the Fed for apparently learning from Japan's mistakes, tightening more gradually and taking the economy's pulse as it does so.
"Japan shows the importance of avoiding a hard landing," Professor Makabe said. "Avoid big shocks. That is the biggest lesson of Japan's bubble."
25 December 2005
17 December 2005
'Seller Subsidy' Adds Big Value to the Deal
Washington Times, December 16, 2005
By M. Anthony Carr
You're reading through a real estate Web site, searching for houses that might meet your criteria. As you're reading the fine print -- and I suggest reading the fine print -- you start seeing words such as "will help with closing costs," "$5,000 to buyer for closing," "decorating allowance," "Seller to assist buyer up to 3 percent."
These items are referred to as "seller subsidies." If you're looking for a good deal, seek out seller subsidies before you look for "price reduced." A seller subsidy interprets into real, big dollars in the buyer's pocket upfront. Sometimes a $5,000 subsidy means more to the buyer than a $10,000 price reduction. It can be more beneficial to you as a buyer to go for larger subsidies instead of a price reduction. The ultimate win for a buyer would be to get both.
As you develop your strategy on your offer, remember that the best time to get a seller subsidy is in the fall and winter market. Although it means the buyer could be looking over smaller inventory than in the spring, winter sellers might be softer in their terms and more willing to negotiate when only a few buyers are visiting the house. In addition, the market is slowest in the fall and winter. Sellers with their homes on the market are serious about moving forward. Just a note to sellers: If you're planning to stay in the same area, list in the fall and winter. You'll have more serious buyers, and, yes, you may have to negotiate downward, but then you'll save a lot on the upward purchase.
When you're looking for the "ripe" properties to work on subsidies and price reductions, look to the DOM -- days on market. The higher the number of days, the more chances you'll have to getting subsidies from the seller. Funny thing about days on market: It's the first indicator that a seller has overpriced the house. The challenge for the seller is that if prices are dropping quickly, waiting even a few weeks to get the price in order could cost thousands of dollars. Price it right upfront.
Have your agent go over comparables from the neighborhood to determine your offer (sellers do the same thing). You want to make sure you're taking advantage of the speed of your market before making an offer. If other sellers are giving up $10,000 in the community, then you can easily take your offer elsewhere if the seller balks at handing over money to the buyer. Keep in mind, there are very few rules to how much subsidy is allowed.
Most times the limit is between 3 to 6 percent. This limitation is usually from the lender, who wants to see some money from the buyer put into the house. A buyer who places his or her own money into the house is less likely to default on the loan. While this amount may not sound like a lot, just multiply it out -- 6 percent on a $400,000 property is $24,000. That can do a lot of redecorating. Keep in mind, though, that how you name the cash left at the table determines if it is a seller subsidy. If, for instance, after the home inspection it's determined the house needs a new roof and the seller agrees to fix it, this is generally not called a "subsidy." The seller is just agreeing to bring the house up to par.
However, if the buyer requests $10,000 for a decorating allowance and then spends it on the roof, they have just negotiated a subsidy from the seller. The wording and agreement in exchange of money is important. The timing of the money spent also may determine if it's a seller subsidy or a seller's own expense. If the seller agrees to paint the interior and gets it done before settlement day, then that's not necessarily a seller subsidy. The seller is painting his own house and then handing it over to the buyer for the agreed-upon price. If you find a flexible seller, during the home inspection you should note the fix-ups you want versus the subsidies you want, because it could affect your financing if you wrongly label the cash being spent.
By M. Anthony Carr
You're reading through a real estate Web site, searching for houses that might meet your criteria. As you're reading the fine print -- and I suggest reading the fine print -- you start seeing words such as "will help with closing costs," "$5,000 to buyer for closing," "decorating allowance," "Seller to assist buyer up to 3 percent."
These items are referred to as "seller subsidies." If you're looking for a good deal, seek out seller subsidies before you look for "price reduced." A seller subsidy interprets into real, big dollars in the buyer's pocket upfront. Sometimes a $5,000 subsidy means more to the buyer than a $10,000 price reduction. It can be more beneficial to you as a buyer to go for larger subsidies instead of a price reduction. The ultimate win for a buyer would be to get both.
As you develop your strategy on your offer, remember that the best time to get a seller subsidy is in the fall and winter market. Although it means the buyer could be looking over smaller inventory than in the spring, winter sellers might be softer in their terms and more willing to negotiate when only a few buyers are visiting the house. In addition, the market is slowest in the fall and winter. Sellers with their homes on the market are serious about moving forward. Just a note to sellers: If you're planning to stay in the same area, list in the fall and winter. You'll have more serious buyers, and, yes, you may have to negotiate downward, but then you'll save a lot on the upward purchase.
When you're looking for the "ripe" properties to work on subsidies and price reductions, look to the DOM -- days on market. The higher the number of days, the more chances you'll have to getting subsidies from the seller. Funny thing about days on market: It's the first indicator that a seller has overpriced the house. The challenge for the seller is that if prices are dropping quickly, waiting even a few weeks to get the price in order could cost thousands of dollars. Price it right upfront.
Have your agent go over comparables from the neighborhood to determine your offer (sellers do the same thing). You want to make sure you're taking advantage of the speed of your market before making an offer. If other sellers are giving up $10,000 in the community, then you can easily take your offer elsewhere if the seller balks at handing over money to the buyer. Keep in mind, there are very few rules to how much subsidy is allowed.
Most times the limit is between 3 to 6 percent. This limitation is usually from the lender, who wants to see some money from the buyer put into the house. A buyer who places his or her own money into the house is less likely to default on the loan. While this amount may not sound like a lot, just multiply it out -- 6 percent on a $400,000 property is $24,000. That can do a lot of redecorating. Keep in mind, though, that how you name the cash left at the table determines if it is a seller subsidy. If, for instance, after the home inspection it's determined the house needs a new roof and the seller agrees to fix it, this is generally not called a "subsidy." The seller is just agreeing to bring the house up to par.
However, if the buyer requests $10,000 for a decorating allowance and then spends it on the roof, they have just negotiated a subsidy from the seller. The wording and agreement in exchange of money is important. The timing of the money spent also may determine if it's a seller subsidy or a seller's own expense. If the seller agrees to paint the interior and gets it done before settlement day, then that's not necessarily a seller subsidy. The seller is painting his own house and then handing it over to the buyer for the agreed-upon price. If you find a flexible seller, during the home inspection you should note the fix-ups you want versus the subsidies you want, because it could affect your financing if you wrongly label the cash being spent.
14 December 2005
NAR Anticipates Near Record Sales in 2006
Published: December 13, 2005
By Realty Times Staff
WASHINGTON -- The housing market for 2005 is headed for a fifth consecutive annual record, and sales activity in 2006 is expected to be the second best year in history, according to the National Association of Realtors®.
David Lereah, NAR's chief economist, said that market conditions are still favorable for housing. "The slowdown amounts to a tapping of the brakes on a hot market," said Lereah. "Home sales are coming down from the mountain peak, but they will level-out at a high plateau -- a plateau that is higher than previous peaks in the housing cycle. This transition to a more normal and balanced market is a good thing."
The 30-year fixed-rate mortgage should trend up modestly and reach 6.6 percent during the second half of 2006.
Existing-home sales, expected to rise 4.7 percent to 7.10 million this year, are likely to decline 3.7 percent in 2006 to 6.84 million. New-home sales, projected to increase 7.0 percent to 1.29 million this year, are forecast to drop 4.8 percent to 1.23 million in 2006 -- also the second best on record. Total housing starts for 2005 should grow 5.8 percent to 2.06 million units, the highest since 1972, and then decline 4.8 percent to 1.92 million next year.
NAR President Thomas M. Stevens from Vienna, Va., said that housing has always been the soundest investment for most families. "As the old saying goes, homeownership beats the heck out of a drawer full of rent receipts," said Stevens, senior vice president of NRT Inc. According to the Federal Reserve Survey of Consumer Finances, the median net wealth of a homeowner household is 36 times higher than a renter household.
Stevens said that the national median home price has never declined since good record keeping began in 1968. "Although there can always be a temporary decline in a given area if jobs are weak and there is an oversupply of homes on the market, people who stay in their homes for a normal period of homeownership generally see healthy returns over time. There are no guarantees, but there are very good odds."
The national median existing-home price for all housing types, which is experiencing a surge estimated at 12.7 percent to $208,800 for 2005, is expected to rise another 6.1 percent in 2006 to $221,400. The median new-home price is likely to rise 5.5 percent to $233,100 in 2005, and then grow by 7.3 percent next year to $250,100 as higher construction costs impact the market.
The U.S. gross domestic product should grow 3.7 percent for 2005 and 4.1 percent next year. The unemployment rate is expected to decline to 4.9 percent by second quarter of 2006, and then stabilize.
The Consumer Price Index is projected to rise 3.4 percent for 2005, and 2.9 percent next year. Inflation-adjusted disposable personal income is forecast to increase 1.4 percent in 2005 and 4.5 percent in 2006.
By Realty Times Staff
WASHINGTON -- The housing market for 2005 is headed for a fifth consecutive annual record, and sales activity in 2006 is expected to be the second best year in history, according to the National Association of Realtors®.
David Lereah, NAR's chief economist, said that market conditions are still favorable for housing. "The slowdown amounts to a tapping of the brakes on a hot market," said Lereah. "Home sales are coming down from the mountain peak, but they will level-out at a high plateau -- a plateau that is higher than previous peaks in the housing cycle. This transition to a more normal and balanced market is a good thing."
The 30-year fixed-rate mortgage should trend up modestly and reach 6.6 percent during the second half of 2006.
Existing-home sales, expected to rise 4.7 percent to 7.10 million this year, are likely to decline 3.7 percent in 2006 to 6.84 million. New-home sales, projected to increase 7.0 percent to 1.29 million this year, are forecast to drop 4.8 percent to 1.23 million in 2006 -- also the second best on record. Total housing starts for 2005 should grow 5.8 percent to 2.06 million units, the highest since 1972, and then decline 4.8 percent to 1.92 million next year.
NAR President Thomas M. Stevens from Vienna, Va., said that housing has always been the soundest investment for most families. "As the old saying goes, homeownership beats the heck out of a drawer full of rent receipts," said Stevens, senior vice president of NRT Inc. According to the Federal Reserve Survey of Consumer Finances, the median net wealth of a homeowner household is 36 times higher than a renter household.
Stevens said that the national median home price has never declined since good record keeping began in 1968. "Although there can always be a temporary decline in a given area if jobs are weak and there is an oversupply of homes on the market, people who stay in their homes for a normal period of homeownership generally see healthy returns over time. There are no guarantees, but there are very good odds."
The national median existing-home price for all housing types, which is experiencing a surge estimated at 12.7 percent to $208,800 for 2005, is expected to rise another 6.1 percent in 2006 to $221,400. The median new-home price is likely to rise 5.5 percent to $233,100 in 2005, and then grow by 7.3 percent next year to $250,100 as higher construction costs impact the market.
The U.S. gross domestic product should grow 3.7 percent for 2005 and 4.1 percent next year. The unemployment rate is expected to decline to 4.9 percent by second quarter of 2006, and then stabilize.
The Consumer Price Index is projected to rise 3.4 percent for 2005, and 2.9 percent next year. Inflation-adjusted disposable personal income is forecast to increase 1.4 percent in 2005 and 4.5 percent in 2006.
13 December 2005
Fed Boosts Interest Rates: Big Yawn?
Real estate loan rates to remain low, experts predict
Inman News, December 13, 2005
By Janis Mara
Federal Reserve head Alan Greenspan and his colleagues hiked the federal funds rate to 4.25 percent today, the 13th increase since June 2004. With all eyes on the Fed, the burning question arises: So what?
Real estate industry professionals have been wringing their hands ever since the Fed began raising the federal funds rate in 2004. They feared that as the overnight bank rate went up, so would interest rates on 30-year fixed mortgages.
But interest rates on such mortgages still hover around 6.6 percent – not a high rate at all. What gives?
The federal funds rate is the interest rate banks charge each other for overnight loans. Conventional wisdom says that as that rate goes up, so do long-term rates. But obviously, it ain't necessarily so.
In other words: though there has long been a relationship between the bank rate and long-term interest rates, the two are not exactly locked in a passionate embrace. Maybe it's more like a cousin and an uncle.
"The fact that short-term interest rates are rising while long-term interest rates are not rising simply underscores that there is little direct relationship between what the federal funds rate might be and what mortgage rates might be," said Keith Gumbinger, vice president of New Jersey-based financial publisher HSH Associates.
In fact, Gumbinger and other industry experts said long-term interest rates might actually drop.
"It's not unreasonable to think that as the Fed raises short-term interest rates and, by doing so, helps quell any inflationary threat, that long-term interest rates might be stable or perhaps even decline," the vice president said.
"Long-term rates are reflective of the price of money plus an inflation premium. Little inflation means little premium," Gumbinger said.
Even better news: "It's certainly possible that interest rates for fixed-rate mortgages in 2006, while higher than in 2005, may not be much higher than current levels, provided inflation remains tame," according to Gumbinger.
If interest rates remain low, with inventory growing and prices softening in some areas, could another real estate boom be in the making? Alas, that's going a bit too far, according to Gumbinger and others.
"We don't have the conditions necessary to create a new boom," Gumbinger said. "Booms are created as interest rates continually decline over a longish period of time."
But Gumbinger had good news for the mortgage industry.
"There's a very good likelihood that adjustable-rate mortgages that are coming due for their first or continuing adjustments in 2006 will find holders of those products looking at alternatives including refinancing to fixed-rate mortgages," Gumbinger predicted. "Activity levels of refinancings are likely to be pretty solid."
Marcus Ortega, a senior investment executive with the J.P. Turner brokerage, agreed with Gumbinger that mortgage interest rates aren't necessarily on the way up.
"The higher the Fed raises the bank rates, the more the Fed calms foreign investors about inflation," hence keeping rates low, Ortega said.
Many folks currently on the real estate scene have never seen interest rates higher than 8 percent. But, Ortega pointed out, in the early 1980s, interest rates were in double digits.
"In 1981, the U.S. was trapped in an inflation spiral. Paul Volkner, who was the chair of the Federal Reserve, boosted the Federal funds rate to 18 or 19 percent and that broke the inflation spiral," Ortega explained.
"That made the bond market happy, we didn't have to worry about inflation and erosion to our bond principal. Bond prices rallied from 1981 up until now," Ortega said.
The executive sees the 10-year note as "a great barometer for a general sense of where mortgage rates might go." The 10-year bond is now at 4.5 percent interest, Ortega said.
The executive said, "People are worried about mortgage money going back to 7 percent. But that's not a disaster. Back in 1992 and 1993, 7 percent mortgage money was cheap. A 7 percent interest rate for a 30-year fixed mortgage is in the lower 20th percentile historically."
Industry experts surveyed by Inman News have said that only if interest rates reach 8 percent will the market be affected.
"At 6 and 7 percent we still see upward movement or, at worst, sideways-moving price projections," said Michael Sklarz, chief valuation officer for Fidelity National Financial. "But at 8 percent, some markets have prices falling."
As long as the Fed doesn't continue to raise interest rates, Mitchell Grashin, a loan broker with Oakland, Calif.-based Holmgren Associates, is optimistic, he said.
"They really need to slow down those raises," Grashin said. "This is the last hurrah for Greenspan. They are going to let him go out on his terms with his raises and the new guy next year will do a little diminishing of those raises and maybe flatten them out."
Grashin was referring to the fact that Greenspan is retiring, with his successor Ben Bernanke slated to take the reins in 2006. Greenspan's final Fed meeting is on Jan. 31.
A number of economists believe that the Fed's interest hikes are coming to an end, with one final quarter-point increase expected at the Jan. 31 meeting. Even those who expect Greenspan's successor Bernanke to do some rate raising don't foresee the federal funds rate going above 5 percent.
"Most banks are expecting the Fed to slow down their raises next year," Grashin said. "They released the minutes of their September meeting and they were talking about 'maybe we're going overboard with these raises. Maybe next year we'll slow it down a bit.' This is why rates have stayed low."
Inman News, December 13, 2005
By Janis Mara
Federal Reserve head Alan Greenspan and his colleagues hiked the federal funds rate to 4.25 percent today, the 13th increase since June 2004. With all eyes on the Fed, the burning question arises: So what?
Real estate industry professionals have been wringing their hands ever since the Fed began raising the federal funds rate in 2004. They feared that as the overnight bank rate went up, so would interest rates on 30-year fixed mortgages.
But interest rates on such mortgages still hover around 6.6 percent – not a high rate at all. What gives?
The federal funds rate is the interest rate banks charge each other for overnight loans. Conventional wisdom says that as that rate goes up, so do long-term rates. But obviously, it ain't necessarily so.
In other words: though there has long been a relationship between the bank rate and long-term interest rates, the two are not exactly locked in a passionate embrace. Maybe it's more like a cousin and an uncle.
"The fact that short-term interest rates are rising while long-term interest rates are not rising simply underscores that there is little direct relationship between what the federal funds rate might be and what mortgage rates might be," said Keith Gumbinger, vice president of New Jersey-based financial publisher HSH Associates.
In fact, Gumbinger and other industry experts said long-term interest rates might actually drop.
"It's not unreasonable to think that as the Fed raises short-term interest rates and, by doing so, helps quell any inflationary threat, that long-term interest rates might be stable or perhaps even decline," the vice president said.
"Long-term rates are reflective of the price of money plus an inflation premium. Little inflation means little premium," Gumbinger said.
Even better news: "It's certainly possible that interest rates for fixed-rate mortgages in 2006, while higher than in 2005, may not be much higher than current levels, provided inflation remains tame," according to Gumbinger.
If interest rates remain low, with inventory growing and prices softening in some areas, could another real estate boom be in the making? Alas, that's going a bit too far, according to Gumbinger and others.
"We don't have the conditions necessary to create a new boom," Gumbinger said. "Booms are created as interest rates continually decline over a longish period of time."
But Gumbinger had good news for the mortgage industry.
"There's a very good likelihood that adjustable-rate mortgages that are coming due for their first or continuing adjustments in 2006 will find holders of those products looking at alternatives including refinancing to fixed-rate mortgages," Gumbinger predicted. "Activity levels of refinancings are likely to be pretty solid."
Marcus Ortega, a senior investment executive with the J.P. Turner brokerage, agreed with Gumbinger that mortgage interest rates aren't necessarily on the way up.
"The higher the Fed raises the bank rates, the more the Fed calms foreign investors about inflation," hence keeping rates low, Ortega said.
Many folks currently on the real estate scene have never seen interest rates higher than 8 percent. But, Ortega pointed out, in the early 1980s, interest rates were in double digits.
"In 1981, the U.S. was trapped in an inflation spiral. Paul Volkner, who was the chair of the Federal Reserve, boosted the Federal funds rate to 18 or 19 percent and that broke the inflation spiral," Ortega explained.
"That made the bond market happy, we didn't have to worry about inflation and erosion to our bond principal. Bond prices rallied from 1981 up until now," Ortega said.
The executive sees the 10-year note as "a great barometer for a general sense of where mortgage rates might go." The 10-year bond is now at 4.5 percent interest, Ortega said.
The executive said, "People are worried about mortgage money going back to 7 percent. But that's not a disaster. Back in 1992 and 1993, 7 percent mortgage money was cheap. A 7 percent interest rate for a 30-year fixed mortgage is in the lower 20th percentile historically."
Industry experts surveyed by Inman News have said that only if interest rates reach 8 percent will the market be affected.
"At 6 and 7 percent we still see upward movement or, at worst, sideways-moving price projections," said Michael Sklarz, chief valuation officer for Fidelity National Financial. "But at 8 percent, some markets have prices falling."
As long as the Fed doesn't continue to raise interest rates, Mitchell Grashin, a loan broker with Oakland, Calif.-based Holmgren Associates, is optimistic, he said.
"They really need to slow down those raises," Grashin said. "This is the last hurrah for Greenspan. They are going to let him go out on his terms with his raises and the new guy next year will do a little diminishing of those raises and maybe flatten them out."
Grashin was referring to the fact that Greenspan is retiring, with his successor Ben Bernanke slated to take the reins in 2006. Greenspan's final Fed meeting is on Jan. 31.
A number of economists believe that the Fed's interest hikes are coming to an end, with one final quarter-point increase expected at the Jan. 31 meeting. Even those who expect Greenspan's successor Bernanke to do some rate raising don't foresee the federal funds rate going above 5 percent.
"Most banks are expecting the Fed to slow down their raises next year," Grashin said. "They released the minutes of their September meeting and they were talking about 'maybe we're going overboard with these raises. Maybe next year we'll slow it down a bit.' This is why rates have stayed low."
03 December 2005
Facts Left out of Talk about Bursting Bubble
Washington Times, November 25, 2005
By M. Anthony Carr
My ears hurt from all the squealing I hear about the impending bursting of the "real estate bubble." Sometimes I feel like the lone voice of reason crying out in the wilderness. The real estate bubble naysayers whine about the "bubble" as if the whole national real estate market were nothing more than another overinflated stock exchange.
Folks, it is not. Like politics, real estate is local, and I wish those journalists scaring buyers with quotes from their stock market experts would just stop and consider some real facts:
• The top hot U.S. real estate markets are also the top hot job markets.
• Houses are where the jobs go at night.
• Although there are pockets of overinflated real estate, without enough houses in a hot job market, your housing inventory will escalate in price.
• You have to live somewhere, and it's never in a stock portfolio.
Whether renting or buying, there is an automatic necessity for the ownership of real estate, either by a homeowner or an investor. There is no built-in necessity for owning stocks, so there is no real comparison between the two.
In the hot markets across the country -- where the squeals are loudest -- investors must look to the local economy to determine their risks. In the Washington area, the Northern Virginia Association of Realtors (www.nvar.com) looks at those numbers every year at its annual economic summit held at George Mason University.
Unfortunately, most of the press gives it cursory coverage. I think it was especially so this year, because the economists did not dance to the sky-is-falling mantra of bubble theorists. (In the interest of full disclosure, I once worked as NVAR's director of communications). The NVAR's latest monthly Update reported on the summit.
"In a nutshell, you couldn't be in a better market," says Dr. Stephen Fuller, director for the Center for Regional Analysis and School of Public Policy at George Mason University (www.cra-gmu.org). "If you're worried about some bubble, or slowdown, or something that's evil, just put yourself in any other market. They envy us."
To put it bluntly, we're going to have a housing problem in the future, but it's not the bursting kind. Rather, it is the how-can-I-make-$60,000-a-year-and-not-have-to-live-out-of-my-car" kind. In the Washington area and other hot job market areas, housing is climbing in value simply because there is not enough of it.
Mr. Fuller reports that the regions surrounding Washington have drawn 287,000 jobs to the area in the last five years. However, the Washington region is not providing houses for all these people.
This year, there's a deficit in housing in this region of 463,300 units. That means that while people can take jobs here, they won't be able to live near them. They'll have to commute from a couple of hours away.
The numbers don't get any better, Mr. Fuller says. By 2030, he projects a shortfall of housing in the Washington area of 716,100 units. So, squealers, where's the bubble? The term being used by journalists is left over from the stock market's inexplicable rise in value when nothing but hype drove the market. Companies were raising lots of venture capital and creating products they couldn't sell, meaning that they ate through the borrowed funds and finally burst. In hot real estate markets, there's no hype.
There are real jobs being created by real companies, creating real products and selling them to real consumers. Real money is being made, and these real companies need real employees to make it happen. We need real houses to put them in. If you want to quell the fear, build more houses.
Now, would all the squealers please stop? You're giving me a headache.
By M. Anthony Carr
My ears hurt from all the squealing I hear about the impending bursting of the "real estate bubble." Sometimes I feel like the lone voice of reason crying out in the wilderness. The real estate bubble naysayers whine about the "bubble" as if the whole national real estate market were nothing more than another overinflated stock exchange.
Folks, it is not. Like politics, real estate is local, and I wish those journalists scaring buyers with quotes from their stock market experts would just stop and consider some real facts:
• The top hot U.S. real estate markets are also the top hot job markets.
• Houses are where the jobs go at night.
• Although there are pockets of overinflated real estate, without enough houses in a hot job market, your housing inventory will escalate in price.
• You have to live somewhere, and it's never in a stock portfolio.
Whether renting or buying, there is an automatic necessity for the ownership of real estate, either by a homeowner or an investor. There is no built-in necessity for owning stocks, so there is no real comparison between the two.
In the hot markets across the country -- where the squeals are loudest -- investors must look to the local economy to determine their risks. In the Washington area, the Northern Virginia Association of Realtors (www.nvar.com) looks at those numbers every year at its annual economic summit held at George Mason University.
Unfortunately, most of the press gives it cursory coverage. I think it was especially so this year, because the economists did not dance to the sky-is-falling mantra of bubble theorists. (In the interest of full disclosure, I once worked as NVAR's director of communications). The NVAR's latest monthly Update reported on the summit.
"In a nutshell, you couldn't be in a better market," says Dr. Stephen Fuller, director for the Center for Regional Analysis and School of Public Policy at George Mason University (www.cra-gmu.org). "If you're worried about some bubble, or slowdown, or something that's evil, just put yourself in any other market. They envy us."
To put it bluntly, we're going to have a housing problem in the future, but it's not the bursting kind. Rather, it is the how-can-I-make-$60,000-a-year-and-not-have-to-live-out-of-my-car" kind. In the Washington area and other hot job market areas, housing is climbing in value simply because there is not enough of it.
Mr. Fuller reports that the regions surrounding Washington have drawn 287,000 jobs to the area in the last five years. However, the Washington region is not providing houses for all these people.
This year, there's a deficit in housing in this region of 463,300 units. That means that while people can take jobs here, they won't be able to live near them. They'll have to commute from a couple of hours away.
The numbers don't get any better, Mr. Fuller says. By 2030, he projects a shortfall of housing in the Washington area of 716,100 units. So, squealers, where's the bubble? The term being used by journalists is left over from the stock market's inexplicable rise in value when nothing but hype drove the market. Companies were raising lots of venture capital and creating products they couldn't sell, meaning that they ate through the borrowed funds and finally burst. In hot real estate markets, there's no hype.
There are real jobs being created by real companies, creating real products and selling them to real consumers. Real money is being made, and these real companies need real employees to make it happen. We need real houses to put them in. If you want to quell the fear, build more houses.
Now, would all the squealers please stop? You're giving me a headache.
Slowdown is a Return to Balance
Washington Times, December 2, 2005
By Chris Sicks
Making predictions about the Washington-area housing market isn't easy. For several years, market watchers, including me, kept predicting that the market was just about to cool off.
We were wrong about 2003 and 2004; 2005 was the year when the market finally did cool down, with a sudden drop in sales and a sharp rise in supply. So, how will 2006 look? Do I dare to make any predictions? I do, but I also will call in an expert to back me up.
Next year won't be the on-fire seller's market of recent years, but it also won't be the cool, leisurely buyer's market of mid-1990s. What we'll have is something in between.
"It's what I call a 'normal market,' " says David Rathgeber, principal broker of Your Friend in Real Estate in Potomac Falls, Va. "Most of us don't even know what a normal market looks like because we went through it so quickly last time." Mr. Rathgeber is referring to 1998-99, when the market quickly shifted gears from a buyer's market to a seller's market. Sales climbed and inventory fell, and that combination began a rise in home prices that didn't peak until this spring. "Next year's normal market will mean that buyers will be able to take a little time to think about their purchase," Mr. Rathgeber says. "Many will find they don't have to fight off other buyers, and so they will be a lot happier."
"Sellers will find they can't just stick any old price on a home and sell it in two days. They will have to carefully analyze their home's value before listing it. After they've done that, they will be able to sell their property in a reasonable amount of time for a decent price."
Next year's sellers should be as happy as the buyers, although some may grumble. Homes won't sell as quickly in 2006 as they did this year, but they will sell. Profits will be large, too, because of the incredible rise in home values during the past several years.
Real estate agents also will be happy with next year's normal market. In a frantic seller's market, agents have to baby-sit frustrated buyers who make offer after offer, only to be outbid by other buyers.
The opposite is true in a plodding buyer's market such as we had from 1991 to 1997. Back then, sellers were the ones who needed hand-holding as they waited month after month, hoping someone would come along and even make an offer on their home. Next year should be a much healthier market. Home values won't go through the roof, which will disappoint anyone who bought recently.
Remember, however, that we only experienced that kind of appreciation because the market was so imbalanced. Inevitably, balance had to be restored, and that's what I believe we'll see in 2006. A little more balance, a little normalcy. Won't that be refreshing?
The statistics in this story reflect a metro area that includes the Maryland counties of Montgomery, Prince George's, Anne Arundel, Howard, Charles and Frederick; the Virginia counties of Arlington, Fairfax, Loudoun, Prince William, Spotsylvania and Stafford; the city of Alexandria; and the District.
By Chris Sicks
Making predictions about the Washington-area housing market isn't easy. For several years, market watchers, including me, kept predicting that the market was just about to cool off.
We were wrong about 2003 and 2004; 2005 was the year when the market finally did cool down, with a sudden drop in sales and a sharp rise in supply. So, how will 2006 look? Do I dare to make any predictions? I do, but I also will call in an expert to back me up.
Next year won't be the on-fire seller's market of recent years, but it also won't be the cool, leisurely buyer's market of mid-1990s. What we'll have is something in between.
"It's what I call a 'normal market,' " says David Rathgeber, principal broker of Your Friend in Real Estate in Potomac Falls, Va. "Most of us don't even know what a normal market looks like because we went through it so quickly last time." Mr. Rathgeber is referring to 1998-99, when the market quickly shifted gears from a buyer's market to a seller's market. Sales climbed and inventory fell, and that combination began a rise in home prices that didn't peak until this spring. "Next year's normal market will mean that buyers will be able to take a little time to think about their purchase," Mr. Rathgeber says. "Many will find they don't have to fight off other buyers, and so they will be a lot happier."
"Sellers will find they can't just stick any old price on a home and sell it in two days. They will have to carefully analyze their home's value before listing it. After they've done that, they will be able to sell their property in a reasonable amount of time for a decent price."
Next year's sellers should be as happy as the buyers, although some may grumble. Homes won't sell as quickly in 2006 as they did this year, but they will sell. Profits will be large, too, because of the incredible rise in home values during the past several years.
Real estate agents also will be happy with next year's normal market. In a frantic seller's market, agents have to baby-sit frustrated buyers who make offer after offer, only to be outbid by other buyers.
The opposite is true in a plodding buyer's market such as we had from 1991 to 1997. Back then, sellers were the ones who needed hand-holding as they waited month after month, hoping someone would come along and even make an offer on their home. Next year should be a much healthier market. Home values won't go through the roof, which will disappoint anyone who bought recently.
Remember, however, that we only experienced that kind of appreciation because the market was so imbalanced. Inevitably, balance had to be restored, and that's what I believe we'll see in 2006. A little more balance, a little normalcy. Won't that be refreshing?
The statistics in this story reflect a metro area that includes the Maryland counties of Montgomery, Prince George's, Anne Arundel, Howard, Charles and Frederick; the Virginia counties of Arlington, Fairfax, Loudoun, Prince William, Spotsylvania and Stafford; the city of Alexandria; and the District.
21 November 2005
Housing: What's Behind the Boom
The Wall Street Journal, November 21, 2005
By JAMES R. HAGERTY
Conditions have been almost ideal for the housing industry in recent years.
Mortgage interest rates hit their lowest levels in more than fourdecades, making it much easier for Americans to buy houses. Manypeople who were burned in the stock-market bubble of the late 1990s decided that real estate was the best place to stash spare cash. The children of baby boomers began buying their first houses even as theirparents started purchasing second homes or speculating on rentalunits. And American businesses finally began creating jobs again.
Home builders couldn't put up houses fast enough to keep up with all this demand. As a result, home prices are up by an average of 53% from five years ago, according to the closely watched index published by the Office of Federal Housing Enterprise Oversight.
Almost everyone agrees that prices can't keep rising this fast much longer. The debate now is whether the boom will lead to a soft landing, with gentler price increases, or to a long, painful bust, in which prices fall considerably in some places before buyers regain confidence.
However the current boom ends, longer-term forces are reshaping the housing industry. Here is a look at some of them.
1. SHORT ON SPACE
America still has lots of wide-open spaces, but many of them aren't where people want to live. And builders are finding it more difficult to get permits to put up new houses in many of the more economically vibrant metropolitan areas, particularly along the East and West coasts.
"The housing supply has been constrained by government regulation as opposed to fundamental geographic limitations," concludes a paper released in December 2004 by Edward L. Glaeser, an economics professor at Harvard University, and two colleagues.
Homeowners share the blame. Prof. Glaeser's paper says they have grown savvier about organizing themselves to block proposals that would bring new and more densely packed housing to their neighborhoods --something that they fear could reduce the value of existing homes.
In the more crowded markets, home values no longer have much to dowith the cost of building a home. In San Francisco, the paper estimates, the structure itself typically accounts for no more than30% of a home's value; the rest of the value reflects the costs of land and obtaining regulatory approvals to build. That's why somepeople pay as much as $1 million for an old home, immediately tear itdown and build a new one.
2. STRAINED BUDGETS
The housing boom has enriched many Americans by pushing up the values of their homes. But it hasn't been splendid for everyone. Nearly a third of American households spend more than 30% of their income on housing, and more than one in eight households spend more than 50%,according to the Joint Center for Housing Studies at HarvardUniversity. Others move to distant suburbs so they can pay less for housing, but then must pay high costs to commute. A third of all households in the Boston area are at least 30 miles from the central business district, according to a Harvard study, and about a fifth live 40 or more miles out.
For people with modest incomes, housing has soared out of reach insome areas. The California Association of Realtors estimates that only15% of households in that state earn enough to buy a median-priced home, currently costing about $544,000, without spending more than 30% of their income on mortgage payments, real-estate taxes and home insurance.
3. A SHRINKING FORECAST
For years, homes have been getting steadily bigger. The median size of new single-family homes in 2004 was 2,140 square feet, up from 1,535 square feet in 1975, according to the Census Bureau.
But some academics and industry people believe more Americans will embrace smaller, more urban homes, to avoid long commutes. James Z.Pugash, chief executive officer of Hearthstone Inc., San Rafael,Calif., which finances housing developments, predicts that American cities will become more like their European counterparts, with more midrise buildings, higher housing costs and fewer square feet per person.
In a 2004 paper for the Brookings Institution, Arthur C. Nelson, a professor at Virginia Tech, says there are at least tentative signs of growing demand for more "walkable" living environments combining homes, entertainment and offices. He cites as a model Arlington County, Va., near Washington. In 1990, Mr. Nelson writes, the conventional wisdom was that the county was "built out" and lacked space for more residents. Yet the population continues to grow rapidly. Mr. Nelson says the county is encouraging higher-density housing on former industrial sites and near mass-transit stations, while preserving the character of established neighborhoods.
The desire for more urban living -- and speculation that it will grow-- has spawned a boom in condominiums. In the 12 months ended in August, sales of condos and cooperative housing soared 14%, to a seasonally adjusted annual rate of 942,000 units. In the same period, sales of single-family homes rose a more modest 6.9%.
4. TAKING A RISK
As home prices have soared, lenders have promoted loans that help people afford houses that otherwise would be beyond their reach. These"affordability" loans hold down monthly payments in the early years but subject borrowers to the prospect of much higher payments later.
Among the most popular of these loans are interest-only mortgages, which allow borrowers to avoid paying down any of the principal in thefirst few years. Another twist is the payment-option loan, giving borrowers a choice of several payment levels each month, including one that is less than the interest due. If the borrower makes that choice, the loan balance increases, something known as negative amortization.
Lenders also have reduced the amount of documentation that many borrowers have to provide to verify their income and assets.
Bank regulators have started asking questions about all of these practices. The fear is that some borrowers have exaggerated their income or won't be able to meet the higher monthly payments once they come due. Another concern is that affordability loans have artificially pumped up housing prices by allowing people to bid more than they can really afford to pay in the long run.
5. THE HOME AS PIGGY BANK
The traditional goal of homeowners is to pay off the mortgage -- well before retirement, if possible. For now, many Americans seem to have forgotten that notion.
To take advantage of lower interest rates, Americans regularly refinance their loans. In the process of refinancing, they often borrow a bit more -- in effect swapping home equity for cash to spend on other things. Such "cash out" refinances totaled $139 billion in 2004, according to Harvard's Joint Center for Housing Studies. Egged on by lenders, other people take out separate home-equity loans, using their homes as collateral.
"I guess this generation believes that real-estate values will go up forever, so there's no need to pay down principal," said Angelo R.Mozilo, chief executive officer of Countrywide Financial Corp., the nation's largest mortgage lender, during a conference call with investors last year.
This blithe attitude has fueled consumer spending. A recent Federal Reserve study found that borrowing against home values added $600 billion to American consumers' spending power last year, or 7% of personal disposable income, up from 3% in 2000 and 1% in 1994.
6.FOREIGN FRENZY
The proliferation of riskier mortgage loans comes as foreign investors are playing a larger role in financing the U.S. housing market.
Investors in Asia and Europe have long been major buyers of debt issued by Fannie Mae and Freddie Mac, the two government-sponsored providers of mortgage financing. Now they also are buying an increasing amount of mortgage-backed securities, bonds backed by the payments of interest and principal on large pools of mortgages.
There are no reliable figures on the total size of foreign investments in U.S. mortgage securities, because many of the purchases are indirect, made through U.S. entities. But the direction is clear. Inside Mortgage Finance, a newsletter, estimates that foreign holdings of one type of mortgage bond -- those not guaranteed by Fannie orFreddie -- jumped to $40 billion as of June 30 from $30 billion six months earlier.
7. REDUCED-RATE REALTORS
The Internet hasn't slashed transaction costs in residential real estate, as it has in such areas as airline reservations. Commissions paid to agents still average more than 5% and sometimes reach 7% or more, according to industry estimates.
But brokers offering various cost-saving alternatives finally seem to be gaining traction. Many small brokers charge a flat fee, generally around $500, for putting a house into a multiple-listing service and providing a limited menu of other services; the consumer then typically offers to pay an additional 2.5% or 3% of the purchase price to any agent who supplies a buyer. Other brokers offer to rebate part of any commissions to the consumer.
Some traditional brokers are experimenting with their own discount arms, even as they try to preserve the full-commission business by backing state laws that mandate a minimum level of service.
U.S. antitrust enforcers at the Justice Department and Federal TradeCommission are putting heavy pressure on the industry to give new models a chance. For instance, the Justice Department in September sued the National Association of Realtors, alleging that its policy on sharing of listing information discriminates against brokers that mainly use Web sites to engage with their customers. The association denies that claim.
8. THE BIG GET BIGGER
Home building used to be mostly a local business, and there are still around 80,000 home builders in the country, most of them tiny. But the biggest builders are gobbling up more of the market. This year, the top 10 builders account for about 24% of the market (excluding homes built for customers on land they already own), up from 10% in 1997, says Ara K. Hovnanian, chief executive of Hovnanian Enterprises Inc., a large builder based in Red Bank, N.J. Within a decade, he predicts, that share will be more than 50%.
Big players have the upper hand partly because they have the financial resources to acquire prime parcels of land. Robert I. Toll, chief executive of Toll Brothers Inc., Horsham, Pa., says he often approves land purchases of $100 million or more, something small builders couldn't contemplate.
But Ivy Zelman, chief housing analyst at Credit Suisse First Boston in New York, says the big builders already have grabbed the easiest market-share gains in fast-growing metropolitan areas and now increasingly are butting heads with one another. That may make future market-share gains slower and more expensive.
9. GIMME MORE SHELTER
Americans have made so much money from their homes that they can't resist buying more real estate. Investment properties and vacation homes accounted for 14% of new mortgages last year, up from 7% in2000, the Federal Reserve says.
Much of this buying comes from baby boomers seeking retirement homes or people hoping to strike it rich as landlords. While these purchases have helped to feed the recent strength in housing, they also could make the market more volatile. That's because second homes and rental properties, unlike primary residences, can easily be dumped onto the market if their owners lose confidence or fail to find reliable tenants.
10. WATCHING THE RANKINGS
J.D. Power & Associates, the consulting and research firm best known for its surveys of automobile quality, also quizzes buyers of newhomes. The home surveys, which began in 1997, now cover 30 largemetropolitan areas.
Companies that have done well in the surveys -- such as Pulte Homes Inc. and Centex Corp. -- are trumpeting the results. That's forcing other builders to try harder to score as well.
One problem for the industry is that it relies mainly on a continually changing cast of subcontractors to perform tasks like pouring foundations, installing heating ducts and shooting nails into roofing tiles. That makes it hard to ensure that quality standards are always met. Hovnanian Enterprises is experimenting with using its own employees to do more of the tasks in some markets in an effort to improve consistency.
Among other things, says Bruce Karatz, chief executive of KB Home, the surveys have nudged his company into communicating better with customers, including giving them earlier estimates of when houses will be completed. If KB is more than 30 days late, he says, "many customers will never forgive us."
11 November 2005
Housing Market Cooling, Data Say
In Washington, Sales Are Down, Inventory Is Up
Washington Post, November 11, 2005 - p. A1
By Kirstin Downey and Sandra Fleishman
Lynn Edmonds and his wife, Sebnem, could barely wait to sign on the dotted line back in May when they committed themselves to pay $796,000 for a three-floor townhouse under construction in Alexandria's Cameron Station.
But since May, the sales prices for the development have fallen -- and units like the one the Edmonds bought are now being sold for $699,900. The Edmonds are facing the prospect of a $100,000 loss in value before they even walk through the front door.
"We blithely stepped into the contract, thinking it would hold its value -- but that's not the case," said Edmonds, 46, a program analyst and Air Force veteran. "I feel so stupid putting myself into it. It's real estate -- I knew on a theoretical basis that it might go up and it might go down, but now I know it on a practical level."
New data released yesterday show that in the past year, home sales in the Washington region have declined sharply, the inventory of unsold homes is up significantly, and prices have flattened and, in some cases, fallen.
The trend is most striking in Northern Virginia, where most of the region's growth has occurred, but it is evident almost everywhere. Statistics on home sales released by Metropolitan Regional Information Systems Inc., the regional multiple-listing service, show that:
- In the two counties and three cities that make up the Northern Virginia market, more than twice as many homes were available for sale in October as in the same month one year ago -- 7,122 homes, compared with 3,254 -- and sales are off 28 percent.
- In the District, listings are up 62 percent and sales are down 28 percent.
- In Montgomery County, listings are up 49 percent and sales are down 8 percent.
- In Prince George's County, the listings are up 45 percent. But home sales have remained fairly stable, dropping only 2.6 percent.
The last time the region had this many houses for sale was the late 1990s, the MRIS figures show .
With housing supply higher and demand lower, prices have fallen from their summertime peaks -- though prices fluctuate every month and often decline in the fall because summer is the busiest home-buying season. Nevertheless, some slides are evident almost everywhere: In the District, the median price -- the point at which half the houses cost more and half cost less -- was $425,000 in October, down from a high in August of $435,088. In Fairfax County, the peak was in July, when the median price was $503,000; in October, it was $489,450. The peak in Montgomery County was also in July, when prices hit $460,000; the median price in October was $429,000.
The notable exception in the region was Prince George's County, where October's price was an all-time high of $315,000 -- possibly because demand, spurred by prices that are still less expensive than elsewhere in the region, has remained high.
The MRIS, which is jointly owned by the 25 local associations of Realtors, has been tracking home sales since the late 1990s, compiling its monthly figures from 72 counties in four states and the District. Its data mostly reflect sales of existing homes, since builders usually sell new developments themselves, rather than through real estate agents. But new-home sales are also faltering: Within the past two weeks, two of the biggest developers in the region, Toll Brothers Inc. and NVR Inc., have reported that their sales are slowing.
Many local real estate agents say the market is returning to normal. "We're rebounding in terms of evolving to something close to a balanced inventory," said David Howell, a past president of the Northern Virginia Association of Realtors and executive vice president and managing broker at McEnearney Associates Inc. in McLean. He said the true aberration occurred from 2003 to early 2005, when the number of listings fell to record lows, causing what he called "unbelievable and untenable" increases in appreciation.
Howell and others point out that the Washington area is unlikely to experience a major decline in prices because of its continued job growth and the prevalence of government jobs, which tend to be more stable than private-sector employment. "We're the most insulated of any market in the country" from extreme price volatility, Howell said.
The slower market "is so much healthier, it really is," Susann H. Haskins, president of the Greater Capital Area Association of Realtors and a broker at Long & Foster Real Estate Inc. in Potomac. "It's a better balance between buyers and sellers."
Economist Gregory H. Leisch, chief executive of Delta Associates, an Alexandria-based real estate consulting firm, said consumers would benefit in the long run from the slowdown because house prices had been rising so quickly that the market was destabilized. "The market is fatigued, and it should be taking a breather," Leisch said. "It's healthy that it takes a breather."
Housing experts say the slowdown is occurring for several reasons. In the past few months, a lot of homeowners put their places on the market speculatively, hoping to cash in, creating a surge in housing supply. Many investors, whether speculators or landlords, have done the same, either because they believe the market has peaked or because they cannot make enough money in rent to support the mortgages.
They are finding fewer buyers because the double-digit price appreciation of the past few years has priced many people out of the market. The recent rise in mortgage interest rates, which causes monthly payments to rise, adds to price pressures. And now, with fears that the market has peaked, more people are simply afraid to buy.
Meanwhile, new construction is inflating the housing supply, as condominium developers rush projects to market. According to a recent report by Delta Associates, 47,000 units in dozens of projects are hitting the local market in the next three years, which is about five times as many condo units as were sold last year.
Some real estate speculators are starting to feel burned by investments that have turned sour.
Merzad Ranjbaran, a real estate agent with Weichert Realtors in Bethesda, bought a one-bedroom condominium at 1150 K St. NW in the District a year ago at a pre-construction price, hoping to flip it quickly. But it has not sold. He said he will only break even on the sale, after taxes and other costs.
"The market is changing from a seller's market to a buyer's market," Ranjbaran said.
Real estate investor Andy Cabral has had a townhouse on the market at the Wheaton Metro station for 11 months, and though he has steadily dropped the price, it has not sold.
"It's now below the appraised value," Cabral said. "I'm really not happy."
His sister-in-law, Sandra Cabral, a real estate agent with Re/Max Pros in Kensington, puts it more succinctly: "He needs to get rid of it; it's an alligator eating all the money."
But she sees an upside to the situation, with good opportunities to make purchases cheaply in the future. "Within two or three years, there's going to be a whole lot of foreclosures, because with all of the interest-only loans, a whole lot of people don't realize that in two years their payments are going to go up."
Homeowners who want to sell, meanwhile, are drumming their fingers and waiting for buyers to knock on the door.
Violain Romans-Murray, 33, is sick of the long commutes from her four-bedroom home in Gainesville; it can take her husband three hours to get home from his job as a technical manager for General Dynamics Corp. in Fair Lakes. The couple put the house on the market last month for $589,900, hoping to buy a home closer to their jobs. But three weeks have passed, and only two buyers have even visited. When they sold their previous house in Centreville in 2002, it sold in five hours.
"Honestly, we're thinking we might pull it off the market," said Romans-Murray, a mother of three and special projects coordinator for a trade group based in Herndon. "It's scary."
But many would-be buyers have withdrawn from the real estate market, saying prices are just too high to consider making a purchase. Dan McGrath, an organizer for the Service Employees International Union, and his wife, Teresa, who works at the Environmental Protection Agency, have been married for four months, have a combined income of about $100,000 a year and would ordinarily be good candidates to become first-time homeowners. But the McGraths, who live in the District's Shaw neighborhood, have been shocked and repulsed by the prices for homes in the area, including the $400,000 price on one 800-square-foot studio they visited.
"We can't figure out who -- for the life of us -- would buy a place with two doors for $400,000," said McGrath, 28. "We want to think about a future but homeownership here is just not possible."
Washington Post, November 11, 2005 - p. A1
By Kirstin Downey and Sandra Fleishman
Lynn Edmonds and his wife, Sebnem, could barely wait to sign on the dotted line back in May when they committed themselves to pay $796,000 for a three-floor townhouse under construction in Alexandria's Cameron Station.
But since May, the sales prices for the development have fallen -- and units like the one the Edmonds bought are now being sold for $699,900. The Edmonds are facing the prospect of a $100,000 loss in value before they even walk through the front door.
"We blithely stepped into the contract, thinking it would hold its value -- but that's not the case," said Edmonds, 46, a program analyst and Air Force veteran. "I feel so stupid putting myself into it. It's real estate -- I knew on a theoretical basis that it might go up and it might go down, but now I know it on a practical level."
New data released yesterday show that in the past year, home sales in the Washington region have declined sharply, the inventory of unsold homes is up significantly, and prices have flattened and, in some cases, fallen.
The trend is most striking in Northern Virginia, where most of the region's growth has occurred, but it is evident almost everywhere. Statistics on home sales released by Metropolitan Regional Information Systems Inc., the regional multiple-listing service, show that:
- In the two counties and three cities that make up the Northern Virginia market, more than twice as many homes were available for sale in October as in the same month one year ago -- 7,122 homes, compared with 3,254 -- and sales are off 28 percent.
- In the District, listings are up 62 percent and sales are down 28 percent.
- In Montgomery County, listings are up 49 percent and sales are down 8 percent.
- In Prince George's County, the listings are up 45 percent. But home sales have remained fairly stable, dropping only 2.6 percent.
The last time the region had this many houses for sale was the late 1990s, the MRIS figures show .
With housing supply higher and demand lower, prices have fallen from their summertime peaks -- though prices fluctuate every month and often decline in the fall because summer is the busiest home-buying season. Nevertheless, some slides are evident almost everywhere: In the District, the median price -- the point at which half the houses cost more and half cost less -- was $425,000 in October, down from a high in August of $435,088. In Fairfax County, the peak was in July, when the median price was $503,000; in October, it was $489,450. The peak in Montgomery County was also in July, when prices hit $460,000; the median price in October was $429,000.
The notable exception in the region was Prince George's County, where October's price was an all-time high of $315,000 -- possibly because demand, spurred by prices that are still less expensive than elsewhere in the region, has remained high.
The MRIS, which is jointly owned by the 25 local associations of Realtors, has been tracking home sales since the late 1990s, compiling its monthly figures from 72 counties in four states and the District. Its data mostly reflect sales of existing homes, since builders usually sell new developments themselves, rather than through real estate agents. But new-home sales are also faltering: Within the past two weeks, two of the biggest developers in the region, Toll Brothers Inc. and NVR Inc., have reported that their sales are slowing.
Many local real estate agents say the market is returning to normal. "We're rebounding in terms of evolving to something close to a balanced inventory," said David Howell, a past president of the Northern Virginia Association of Realtors and executive vice president and managing broker at McEnearney Associates Inc. in McLean. He said the true aberration occurred from 2003 to early 2005, when the number of listings fell to record lows, causing what he called "unbelievable and untenable" increases in appreciation.
Howell and others point out that the Washington area is unlikely to experience a major decline in prices because of its continued job growth and the prevalence of government jobs, which tend to be more stable than private-sector employment. "We're the most insulated of any market in the country" from extreme price volatility, Howell said.
The slower market "is so much healthier, it really is," Susann H. Haskins, president of the Greater Capital Area Association of Realtors and a broker at Long & Foster Real Estate Inc. in Potomac. "It's a better balance between buyers and sellers."
Economist Gregory H. Leisch, chief executive of Delta Associates, an Alexandria-based real estate consulting firm, said consumers would benefit in the long run from the slowdown because house prices had been rising so quickly that the market was destabilized. "The market is fatigued, and it should be taking a breather," Leisch said. "It's healthy that it takes a breather."
Housing experts say the slowdown is occurring for several reasons. In the past few months, a lot of homeowners put their places on the market speculatively, hoping to cash in, creating a surge in housing supply. Many investors, whether speculators or landlords, have done the same, either because they believe the market has peaked or because they cannot make enough money in rent to support the mortgages.
They are finding fewer buyers because the double-digit price appreciation of the past few years has priced many people out of the market. The recent rise in mortgage interest rates, which causes monthly payments to rise, adds to price pressures. And now, with fears that the market has peaked, more people are simply afraid to buy.
Meanwhile, new construction is inflating the housing supply, as condominium developers rush projects to market. According to a recent report by Delta Associates, 47,000 units in dozens of projects are hitting the local market in the next three years, which is about five times as many condo units as were sold last year.
Some real estate speculators are starting to feel burned by investments that have turned sour.
Merzad Ranjbaran, a real estate agent with Weichert Realtors in Bethesda, bought a one-bedroom condominium at 1150 K St. NW in the District a year ago at a pre-construction price, hoping to flip it quickly. But it has not sold. He said he will only break even on the sale, after taxes and other costs.
"The market is changing from a seller's market to a buyer's market," Ranjbaran said.
Real estate investor Andy Cabral has had a townhouse on the market at the Wheaton Metro station for 11 months, and though he has steadily dropped the price, it has not sold.
"It's now below the appraised value," Cabral said. "I'm really not happy."
His sister-in-law, Sandra Cabral, a real estate agent with Re/Max Pros in Kensington, puts it more succinctly: "He needs to get rid of it; it's an alligator eating all the money."
But she sees an upside to the situation, with good opportunities to make purchases cheaply in the future. "Within two or three years, there's going to be a whole lot of foreclosures, because with all of the interest-only loans, a whole lot of people don't realize that in two years their payments are going to go up."
Homeowners who want to sell, meanwhile, are drumming their fingers and waiting for buyers to knock on the door.
Violain Romans-Murray, 33, is sick of the long commutes from her four-bedroom home in Gainesville; it can take her husband three hours to get home from his job as a technical manager for General Dynamics Corp. in Fair Lakes. The couple put the house on the market last month for $589,900, hoping to buy a home closer to their jobs. But three weeks have passed, and only two buyers have even visited. When they sold their previous house in Centreville in 2002, it sold in five hours.
"Honestly, we're thinking we might pull it off the market," said Romans-Murray, a mother of three and special projects coordinator for a trade group based in Herndon. "It's scary."
But many would-be buyers have withdrawn from the real estate market, saying prices are just too high to consider making a purchase. Dan McGrath, an organizer for the Service Employees International Union, and his wife, Teresa, who works at the Environmental Protection Agency, have been married for four months, have a combined income of about $100,000 a year and would ordinarily be good candidates to become first-time homeowners. But the McGraths, who live in the District's Shaw neighborhood, have been shocked and repulsed by the prices for homes in the area, including the $400,000 price on one 800-square-foot studio they visited.
"We can't figure out who -- for the life of us -- would buy a place with two doors for $400,000," said McGrath, 28. "We want to think about a future but homeownership here is just not possible."
07 November 2005
News analysis: Expedia founders bet on housing
Inman News, November 07, 2005
By Jessica Swesey
Small-team innovators are constantly entering the real estate market, but there hasn't been a significant industry-changing entrant since the dot-com boom. Until now.
Zillow, a hush-hush online real estate startup founded by former Expedia executives Rich Barton and Lloyd Frink, could represent the first serious challenge to how real estate has been sold for decades. Consider the quality of its founding team, the size of the initial investment and the founders' appetite for new business models.
While Zillow's tight-lipped approach has afforded little indication of what exactly the business will look like, records at the U.S. Patent and Trademark Office lend some clues about what the Seattle company may be planning.
Early patent and trademark recordings filed by the company indicate that it has plans for some kind of online marketplace for real estate listings. Specifically, one record at the Patent Office is for providing an online computer database and online searchable database featuring information and listings for real estate, and to provide real estate research services.
The patent and trademark record also notes the design of computer software, and providing online computer services for real estate, consumer goods and consumer services. Another record drops hints of plans for an Internet auction business for real estate and online services featuring tours of residential and commercial real estate.
It will take more than patents to crack a formidable real estate tradition that stands on a 5-6 percent commission and a broker cooperation business model. But no one underestimates the seriousness and ingenuity of Barton's team, who single-handedly transformed the travel industry with the introduction of Expedia in the late '90s.
The timing seems to be right; there hasn't been a well-capitalized online startup in real estate since HomeGain and HouseValues opened their doors in 1999. These two firms changed how the industry thinks about lead generation and Web marketing.
Now, the next generation of change seems to be upon us with the vast majority of home buyers and sellers starting their real estate searches online and the Justice Department's investigation of the real estate industry clearing the decks for new business models.
The online real estate segment has heated up, with last year's successful IPOs of ZipRealty, an online brokerage model, and HouseValues, which sells online leads, conversion and marketing tools to real estate companies and agents. Media giants including Gannett, Tribune Co. and Knight Ridder stepped up earlier this year with the acquisition of HomeGain.
Google, craigslist and host of other innovative technology companies are paying more attention to real estate, which creates an atmosphere of excitement and spawns new investment.
While Zillow is shrouded in secrets, the expectation is that over the next several months everyone will know who they are and not everyone will like what they're doing. The company has not officially commented on what its business model will be, but has made public the members of its team, a new round of financing and a recent Web site launch.
The company on its newly launched Web site says it is "working hard to develop a new kind of online real estate service." It has been hiring new employees and is looking for more talented people, according to job postings on Zillow.com.
Two top venture capital firms, Benchmark Capital and Technology Crossover Ventures, are betting the team that built Expedia has another success story on its hands. The multibillion-dollar funds, which have long-standing ties to Barton, led the first round of venture financing, though the terms were not disclosed.
Bill Gurley, general partner at Benchmark Capital, and Jay Hoag, founding general partner at TCV, have joined Zillow's board of directors, which also includes Barton; Frink; Greg Maffei, president and CFO of Oracle; Gordon Stephenson, co-founder and managing broker of Real Property Associates; and Erik Blachford, former CEO of Expedia.
Both venture funds have ties to the online real estate industry, with Benchmark as one of ZipRealty's early funders and TCV funding all three rounds of the HomeGain venture.
Zillow's venture funding came just three months after the company raised $6 million in financing from its directors and employees.
By Jessica Swesey
Small-team innovators are constantly entering the real estate market, but there hasn't been a significant industry-changing entrant since the dot-com boom. Until now.
Zillow, a hush-hush online real estate startup founded by former Expedia executives Rich Barton and Lloyd Frink, could represent the first serious challenge to how real estate has been sold for decades. Consider the quality of its founding team, the size of the initial investment and the founders' appetite for new business models.
While Zillow's tight-lipped approach has afforded little indication of what exactly the business will look like, records at the U.S. Patent and Trademark Office lend some clues about what the Seattle company may be planning.
Early patent and trademark recordings filed by the company indicate that it has plans for some kind of online marketplace for real estate listings. Specifically, one record at the Patent Office is for providing an online computer database and online searchable database featuring information and listings for real estate, and to provide real estate research services.
The patent and trademark record also notes the design of computer software, and providing online computer services for real estate, consumer goods and consumer services. Another record drops hints of plans for an Internet auction business for real estate and online services featuring tours of residential and commercial real estate.
It will take more than patents to crack a formidable real estate tradition that stands on a 5-6 percent commission and a broker cooperation business model. But no one underestimates the seriousness and ingenuity of Barton's team, who single-handedly transformed the travel industry with the introduction of Expedia in the late '90s.
The timing seems to be right; there hasn't been a well-capitalized online startup in real estate since HomeGain and HouseValues opened their doors in 1999. These two firms changed how the industry thinks about lead generation and Web marketing.
Now, the next generation of change seems to be upon us with the vast majority of home buyers and sellers starting their real estate searches online and the Justice Department's investigation of the real estate industry clearing the decks for new business models.
The online real estate segment has heated up, with last year's successful IPOs of ZipRealty, an online brokerage model, and HouseValues, which sells online leads, conversion and marketing tools to real estate companies and agents. Media giants including Gannett, Tribune Co. and Knight Ridder stepped up earlier this year with the acquisition of HomeGain.
Google, craigslist and host of other innovative technology companies are paying more attention to real estate, which creates an atmosphere of excitement and spawns new investment.
While Zillow is shrouded in secrets, the expectation is that over the next several months everyone will know who they are and not everyone will like what they're doing. The company has not officially commented on what its business model will be, but has made public the members of its team, a new round of financing and a recent Web site launch.
The company on its newly launched Web site says it is "working hard to develop a new kind of online real estate service." It has been hiring new employees and is looking for more talented people, according to job postings on Zillow.com.
Two top venture capital firms, Benchmark Capital and Technology Crossover Ventures, are betting the team that built Expedia has another success story on its hands. The multibillion-dollar funds, which have long-standing ties to Barton, led the first round of venture financing, though the terms were not disclosed.
Bill Gurley, general partner at Benchmark Capital, and Jay Hoag, founding general partner at TCV, have joined Zillow's board of directors, which also includes Barton; Frink; Greg Maffei, president and CFO of Oracle; Gordon Stephenson, co-founder and managing broker of Real Property Associates; and Erik Blachford, former CEO of Expedia.
Both venture funds have ties to the online real estate industry, with Benchmark as one of ZipRealty's early funders and TCV funding all three rounds of the HomeGain venture.
Zillow's venture funding came just three months after the company raised $6 million in financing from its directors and employees.
Mortgage shopping:
Taking the time to learn the facts
Inman News, November 07, 2005
By Jack Guttentag (This is part 1 of a seven-part series.)
Most consumers, before they start shopping for an automobile, decide on the brand, model and options they want. They realize that they can't shop effectively unless they know exactly what they are shopping for.
When they enter the mortgage market, in contrast, where their financial commitment may be 10 times larger, many consumers don't have a clue as to what they want. They look to the loan provider to guide them through the maze. This dependency is one major reason they often end up with a mortgage that is over-priced and, even worse, does not meet their needs.
This article poses eight questions that prospective borrowers should ask themselves before entering the market.
Subsequent articles provide guidelines on how to answer them.
What type of mortgage should I select?
The major decision is between fixed-rate mortgages (FRMs) and adjustable-rate mortgages (ARMs). ARMs have lower payments in the early years than FRMs but expose borrowers to the risk of higher payments in later years. ARMs with the lowest early-year payments have the greatest risk of future rate and payment increases.
Which mortgage options should I select?
The major options are to waive the obligation to maintain an escrow account for taxes and insurance payments, which will cost you a little; an interest-only payment option, which also costs little; and a prepayment penalty, in exchange for which the lender will usually pay you.
How long of a term should I take?
The term of a mortgage is the period used to calculate the mortgage payment. The longer the term, the lower the mortgage payment but the slower you pay down the balance. Term selection is an issue primarily on FRMs, which are available at terms ranging from 10 years to 40 years. While 15-year and 40-year ARMs exist, most lenders offer only 30-year ARMs.
How many points should I pay?
Points are fees you pay the lender at the time the loan is closed, expressed as a percent of the loan. On a $100,000 loan, two points means a payment of $2,000. The more points you pay, the lower the interest rate. Hence, points should be viewed as an investment on which the return is higher the longer you have the mortgage.
How large a down payment should I make?
The down payment is the difference between the loan amount and the lower of the sale price or appraised value. If you have discretion over how much to put down, the down payment, like points, is best viewed as an investment.
Investment in a larger down payment can yield a high return if it flips the loan into a lower mortgage insurance or interest rate category.
If I put less than 20 percent down, what type of mortgage insurance should I select?
Borrowers who put down less than 20 percent are charged for the risk they impose on lenders. However, borrowers often can choose how to pay. One option is to pay a premium to a private mortgage insurance company (PMI) selected by the lender. A second option is to pay the lender a higher interest rate, which is called lender-provided mortgage insurance (LPMI). In this case, the lender purchases insurance from a PMI, though not always. The third option is a "piggyback" arrangement, where the borrower takes out a first mortgage for 80 percent of property value, and a higher-rate second mortgage for the balance of the funds needed.
How long a lock period do I need and when should I lock?
The lock period is the period during which the lender guarantees the rate and points: the longer the lock period, the higher the price. Borrowers must choose when to lock and for how long.
What documentation requirements should I seek?
A lender's "documentation requirements" stipulate the information about the borrower's finances that must be provided and how this information will be verified, and then used by the lender. Lenders offer choices ranging from "full documentation" to "no-docs." Because the risk to the lender rises as documentation requirements become less stringent, the price of the mortgage rises correspondingly. Borrowers may or may not have any leeway, depending on
what documentation they can provide.
Next week: How should borrowers decide the type of mortgage that best meets their needs?
Inman News, November 07, 2005
By Jack Guttentag (This is part 1 of a seven-part series.)
Most consumers, before they start shopping for an automobile, decide on the brand, model and options they want. They realize that they can't shop effectively unless they know exactly what they are shopping for.
When they enter the mortgage market, in contrast, where their financial commitment may be 10 times larger, many consumers don't have a clue as to what they want. They look to the loan provider to guide them through the maze. This dependency is one major reason they often end up with a mortgage that is over-priced and, even worse, does not meet their needs.
This article poses eight questions that prospective borrowers should ask themselves before entering the market.
Subsequent articles provide guidelines on how to answer them.
What type of mortgage should I select?
The major decision is between fixed-rate mortgages (FRMs) and adjustable-rate mortgages (ARMs). ARMs have lower payments in the early years than FRMs but expose borrowers to the risk of higher payments in later years. ARMs with the lowest early-year payments have the greatest risk of future rate and payment increases.
Which mortgage options should I select?
The major options are to waive the obligation to maintain an escrow account for taxes and insurance payments, which will cost you a little; an interest-only payment option, which also costs little; and a prepayment penalty, in exchange for which the lender will usually pay you.
How long of a term should I take?
The term of a mortgage is the period used to calculate the mortgage payment. The longer the term, the lower the mortgage payment but the slower you pay down the balance. Term selection is an issue primarily on FRMs, which are available at terms ranging from 10 years to 40 years. While 15-year and 40-year ARMs exist, most lenders offer only 30-year ARMs.
How many points should I pay?
Points are fees you pay the lender at the time the loan is closed, expressed as a percent of the loan. On a $100,000 loan, two points means a payment of $2,000. The more points you pay, the lower the interest rate. Hence, points should be viewed as an investment on which the return is higher the longer you have the mortgage.
How large a down payment should I make?
The down payment is the difference between the loan amount and the lower of the sale price or appraised value. If you have discretion over how much to put down, the down payment, like points, is best viewed as an investment.
Investment in a larger down payment can yield a high return if it flips the loan into a lower mortgage insurance or interest rate category.
If I put less than 20 percent down, what type of mortgage insurance should I select?
Borrowers who put down less than 20 percent are charged for the risk they impose on lenders. However, borrowers often can choose how to pay. One option is to pay a premium to a private mortgage insurance company (PMI) selected by the lender. A second option is to pay the lender a higher interest rate, which is called lender-provided mortgage insurance (LPMI). In this case, the lender purchases insurance from a PMI, though not always. The third option is a "piggyback" arrangement, where the borrower takes out a first mortgage for 80 percent of property value, and a higher-rate second mortgage for the balance of the funds needed.
How long a lock period do I need and when should I lock?
The lock period is the period during which the lender guarantees the rate and points: the longer the lock period, the higher the price. Borrowers must choose when to lock and for how long.
What documentation requirements should I seek?
A lender's "documentation requirements" stipulate the information about the borrower's finances that must be provided and how this information will be verified, and then used by the lender. Lenders offer choices ranging from "full documentation" to "no-docs." Because the risk to the lender rises as documentation requirements become less stringent, the price of the mortgage rises correspondingly. Borrowers may or may not have any leeway, depending on
what documentation they can provide.
Next week: How should borrowers decide the type of mortgage that best meets their needs?
Goodbye, My Sweet Deduction[!]
New York Times, November 3, 2005
By EDUARDO PORTER and DAVID LEONHARDT
There are no cows more sacred in the tax code than the deductions for mortgage interest and property taxes.
Together, they add up to at least a $75 billion annual subsidy for housing and homeowners. President Bush, in establishing his advisory panel on tax reform, specifically asked the group to preserve support for home ownership.
So it was quite a shock that the panel, which released its final report on Tuesday, concluded that it had no choice but to significantly trim the home mortgage deduction and eliminate state and local tax deductions if it wanted to find a way to simplify the income tax.
By combining that move with a variety of other measures, the panel was also able to bury the alternative minimum tax, a complex tax originally intended to prevent the wealthy from escaping taxes that is now starting to hit millions of otherwise ordinary upper-middle-class families who have a typical range of itemized deductions and personal exemptions.
The panel had a powerful rationale behind its proposal: many economists say the real estate subsidy is one of the tax code's most unfair features, overwhelmingly benefiting the affluent and pulling investment from the rest of the economy into the housing sector.
But for millions of homeowners, what no doubt matters most about the plan is how it affects their bottom line. And for many of them, especially those living in houses in expensive markets in California and the Northeast, the answer is clear: If it becomes law, the value of their homes will almost certainly fall.
The pain that would be caused by putting an end to deductions for mortgage interest and property taxes explains a lot of the motivation behind the attacks that greeted the panel's proposals.
"I think the short-run prospects of Congress adopting these are very low," said Joel B. Slemrod, the director of the Office of Tax Policy Research at the University of Michigan. "They take away a lot of the deductions and credits that people have gotten used to, and we know that losers cry louder than winners sing."
The plan by the presidential panel would reduce the mortgage deduction on homes in two ways.
First, it would limit the amount of the mortgage eligible to be deducted, cutting it from the current cap of a little more $1 million to as low as $227,000 in cheaper housing markets like Springfield, Ohio, to as high as $412,000 in places like New York and many of its suburbs.
Second, families would receive a credit equal to 15 percent of the interest paid on a mortgage below the cap, rather than a deduction that can be worth as much as 35 percent for taxpayers at the high end of the income scale.
Just about everybody involved in the housing and real estate market has raised objections to this proposal. In a statement released Monday, the National Association of Realtors estimated that home prices across the nation would fall by 15 percent, with "a devastating effect on the nation's housing economy." The Mortgage Bankers Association called the proposals "a tax increase for a lot of working Americans."
Even supporters of the changes acknowledge that house prices would fall. "Almost any economic analysis will conclude that there will be some downward effect on prices, especially at the top of the market," said James Poterba, an economist at the Massachusetts Institute of Technology who is on the president's panel. "The question is how large it will be."
The elimination of the deduction for state and local taxes, including property taxes, also has the potential to bring down house values, especially in high-tax states like New York, California and New Jersey, where homes are selling at record-high prices.
One way to estimate the total impact is to calculate how the change would affect a household's monthly housing payments. If home buyers try to keep their monthly house payment steady, an analysis by Dean Baker, co-director of the Center for Economic Policy Research in Washington, suggests, prices could fall by more than 20 percent in higher-priced markets like New York City. Even in cheaper markets, homes that are priced above the average could
take a substantial hit.
A family living in Lansing, Mich., for example, with $90,000 in taxable income, would have a marginal income tax rate of 25 percent. In Lansing, the average home price is around $250,000.
If that family were to buy a $500,000 home today with 20 percent down and a 6 percent fixed-rate mortgage - a fairly typical arrangement - the I.R.S. would effectively refund about $7,125 in the first year, according to Mr. Baker's analysis. Adding a 0.9 percent property tax, the total monthly payment, net of federal taxes, would be about $2,160.
Under the new system, however, the family would receive a return of $2,250 from the I.R.S. - 15 percent of the interest at the mortgage limit of $250,000 - effectively pushing their net payment up by $400 each month. If the maximum monthly cost they could afford was $2,160, they would have to settle for a house worth about $70,000 less.
The more expensive the home, the larger the effect. According to a similar analysis by Mr. Baker, a family in the top tax bracket who today could afford a $1 million home in Manhattan would have to trim their budget by more than $200,000 to keep monthly payments the same.
To soften the blow, the panel proposed to phase the change in over five years. But as home buyers across the country were forced to cut back on the value of homes they could afford to buy, they would inevitably drag home prices down.
"If you look at it that way, you have to be prepared for prices to plunge," said Mr. Baker, who has long been expecting housing prices to drop for other reasons.
Mr. Poterba argues that it is unlikely home prices would fall as much as others fear. For one, the changes would also slow investment in housing, reducing the supply of homes along with the demand. Methods of financing homes would also change in response to the tax laws.
Notwithstanding homeowners' pain, reducing the tax code's subsidy to housing is a sound idea, many economists say.
"It's an appropriate change to the tax code," said Mark Zandi, chief economist at Economy.com, a research firm.
"While it may have made sense a quarter of a century ago, now I don't see a compelling advantage to providing these tax advantages to housing."
To begin with, the mortgage deduction diverts capital from other industries by subsidizing investment in housing relative to other economic activities. Moreover, while the tax deductions were conceived to help people who otherwise could not afford to buy a home, the principal effect today is to encourage upper-income taxpayers to buy ever bigger and more expensive houses.
For all the talk of bolstering home ownership, said Edward L. Glaeser, an economics professor at Harvard, the mortgage tax deduction has done very little to help people into homes. He said the subsidy to taxpayers implicit in the deduction had varied widely over the last 40 years, going up and down with the fluctuation of inflation and interest rates.
Yet home ownership over the period has drifted in a band of 63 to 69 percent. And home ownership levels in other affluent countries without such subsidies are generally no lower than in the United States.
Instead, what the subsidy has done is encourage people to build and buy bigger and more expensive houses. "The deduction increases the amount spent on housing," Mr. Glaeser said, "but it has almost no effect on the home ownership rate."
Today, most of the mortgage tax advantages accrue to the rich rather than struggling first-time homeowners. More than 55 percent of the mortgage tax subsidy last year, according to the Congressional Joint Committee on Taxation, accrued to just 12 percent of taxpayers with incomes above $100,000.
Low-income homeowners often do not claim the deduction, opting instead to take the $10,000 standard deduction available to families. Turning the deduction into a tax credit would equalize its value and make it available to more people on the lower end of the market.
"At the high end it reduces demand and will probably push prices down," Mr. Slemrod said. "For low-end housing, it could go the other way around."
By EDUARDO PORTER and DAVID LEONHARDT
There are no cows more sacred in the tax code than the deductions for mortgage interest and property taxes.
Together, they add up to at least a $75 billion annual subsidy for housing and homeowners. President Bush, in establishing his advisory panel on tax reform, specifically asked the group to preserve support for home ownership.
So it was quite a shock that the panel, which released its final report on Tuesday, concluded that it had no choice but to significantly trim the home mortgage deduction and eliminate state and local tax deductions if it wanted to find a way to simplify the income tax.
By combining that move with a variety of other measures, the panel was also able to bury the alternative minimum tax, a complex tax originally intended to prevent the wealthy from escaping taxes that is now starting to hit millions of otherwise ordinary upper-middle-class families who have a typical range of itemized deductions and personal exemptions.
The panel had a powerful rationale behind its proposal: many economists say the real estate subsidy is one of the tax code's most unfair features, overwhelmingly benefiting the affluent and pulling investment from the rest of the economy into the housing sector.
But for millions of homeowners, what no doubt matters most about the plan is how it affects their bottom line. And for many of them, especially those living in houses in expensive markets in California and the Northeast, the answer is clear: If it becomes law, the value of their homes will almost certainly fall.
The pain that would be caused by putting an end to deductions for mortgage interest and property taxes explains a lot of the motivation behind the attacks that greeted the panel's proposals.
"I think the short-run prospects of Congress adopting these are very low," said Joel B. Slemrod, the director of the Office of Tax Policy Research at the University of Michigan. "They take away a lot of the deductions and credits that people have gotten used to, and we know that losers cry louder than winners sing."
The plan by the presidential panel would reduce the mortgage deduction on homes in two ways.
First, it would limit the amount of the mortgage eligible to be deducted, cutting it from the current cap of a little more $1 million to as low as $227,000 in cheaper housing markets like Springfield, Ohio, to as high as $412,000 in places like New York and many of its suburbs.
Second, families would receive a credit equal to 15 percent of the interest paid on a mortgage below the cap, rather than a deduction that can be worth as much as 35 percent for taxpayers at the high end of the income scale.
Just about everybody involved in the housing and real estate market has raised objections to this proposal. In a statement released Monday, the National Association of Realtors estimated that home prices across the nation would fall by 15 percent, with "a devastating effect on the nation's housing economy." The Mortgage Bankers Association called the proposals "a tax increase for a lot of working Americans."
Even supporters of the changes acknowledge that house prices would fall. "Almost any economic analysis will conclude that there will be some downward effect on prices, especially at the top of the market," said James Poterba, an economist at the Massachusetts Institute of Technology who is on the president's panel. "The question is how large it will be."
The elimination of the deduction for state and local taxes, including property taxes, also has the potential to bring down house values, especially in high-tax states like New York, California and New Jersey, where homes are selling at record-high prices.
One way to estimate the total impact is to calculate how the change would affect a household's monthly housing payments. If home buyers try to keep their monthly house payment steady, an analysis by Dean Baker, co-director of the Center for Economic Policy Research in Washington, suggests, prices could fall by more than 20 percent in higher-priced markets like New York City. Even in cheaper markets, homes that are priced above the average could
take a substantial hit.
A family living in Lansing, Mich., for example, with $90,000 in taxable income, would have a marginal income tax rate of 25 percent. In Lansing, the average home price is around $250,000.
If that family were to buy a $500,000 home today with 20 percent down and a 6 percent fixed-rate mortgage - a fairly typical arrangement - the I.R.S. would effectively refund about $7,125 in the first year, according to Mr. Baker's analysis. Adding a 0.9 percent property tax, the total monthly payment, net of federal taxes, would be about $2,160.
Under the new system, however, the family would receive a return of $2,250 from the I.R.S. - 15 percent of the interest at the mortgage limit of $250,000 - effectively pushing their net payment up by $400 each month. If the maximum monthly cost they could afford was $2,160, they would have to settle for a house worth about $70,000 less.
The more expensive the home, the larger the effect. According to a similar analysis by Mr. Baker, a family in the top tax bracket who today could afford a $1 million home in Manhattan would have to trim their budget by more than $200,000 to keep monthly payments the same.
To soften the blow, the panel proposed to phase the change in over five years. But as home buyers across the country were forced to cut back on the value of homes they could afford to buy, they would inevitably drag home prices down.
"If you look at it that way, you have to be prepared for prices to plunge," said Mr. Baker, who has long been expecting housing prices to drop for other reasons.
Mr. Poterba argues that it is unlikely home prices would fall as much as others fear. For one, the changes would also slow investment in housing, reducing the supply of homes along with the demand. Methods of financing homes would also change in response to the tax laws.
Notwithstanding homeowners' pain, reducing the tax code's subsidy to housing is a sound idea, many economists say.
"It's an appropriate change to the tax code," said Mark Zandi, chief economist at Economy.com, a research firm.
"While it may have made sense a quarter of a century ago, now I don't see a compelling advantage to providing these tax advantages to housing."
To begin with, the mortgage deduction diverts capital from other industries by subsidizing investment in housing relative to other economic activities. Moreover, while the tax deductions were conceived to help people who otherwise could not afford to buy a home, the principal effect today is to encourage upper-income taxpayers to buy ever bigger and more expensive houses.
For all the talk of bolstering home ownership, said Edward L. Glaeser, an economics professor at Harvard, the mortgage tax deduction has done very little to help people into homes. He said the subsidy to taxpayers implicit in the deduction had varied widely over the last 40 years, going up and down with the fluctuation of inflation and interest rates.
Yet home ownership over the period has drifted in a band of 63 to 69 percent. And home ownership levels in other affluent countries without such subsidies are generally no lower than in the United States.
Instead, what the subsidy has done is encourage people to build and buy bigger and more expensive houses. "The deduction increases the amount spent on housing," Mr. Glaeser said, "but it has almost no effect on the home ownership rate."
Today, most of the mortgage tax advantages accrue to the rich rather than struggling first-time homeowners. More than 55 percent of the mortgage tax subsidy last year, according to the Congressional Joint Committee on Taxation, accrued to just 12 percent of taxpayers with incomes above $100,000.
Low-income homeowners often do not claim the deduction, opting instead to take the $10,000 standard deduction available to families. Turning the deduction into a tax credit would equalize its value and make it available to more people on the lower end of the market.
"At the high end it reduces demand and will probably push prices down," Mr. Slemrod said. "For low-end housing, it could go the other way around."
31 October 2005
Housing Deductions May Not Be Sacrosanct
Washington Post, October 29, 2005
By Kenneth R. Harney
Is there really any chance that Congress could take away the tax deduction for mortgage interest? How about the deductions for and state and local property and income taxes?
A presidentially appointed bipartisan commission is expected to urge precisely those changes Tuesday when it delivers its final report to the Bush administration. The mortgage interest deduction -- which allows write-offs on first and second loan amounts up to $1.1 million -- would be scrapped and replaced with a 15 percent credit on sharply limited mortgage amounts. Deductions for state and local property and income taxes would be eliminated altogether. The 15 percent credit would be for only mortgages up to a $300,000 to $350,000 ceiling. Interest on home equity loans no longer would be tax-deductible.
In exchange for these losses of tax benefits, the advisory panel would eliminate the alternative minimum tax, add $100,000 to the $500,000 tax-free exclusion on home sale profit, lower capital gains tax rates, cut the number of tax brackets and provide a variety of other simplifications to the federal tax code.
President Bush and the Treasury Department are expected to study the panel's recommendations and then include at least some of them in a budget proposal to Congress early in 2006.
But let's get real here: Nobody seriously believes that the president and Congress would do anything to reduce tax benefits for their largest and most potent constituency, right? Isn't the mortgage interest deduction sacrosanct, politically untouchable, carved in marble on Capitol Hill? Ditto for write-offs of local property taxes and income taxes?
Imagine the screams of pain from homeowners in high-cost, high-tax areas from the East Coast to California. Imagine a Million Realtor March on Washington. Imagine a House and Senate with no incumbents.
That is all certainly the conventional political wisdom and may indeed prove correct. Even the president told the advisory panel in January that he would oppose any tax changes that would hurt homeownership.
Case closed? Dead on arrival? Maybe, but not quite.
Though the final details of the reform panel's recommendations won't be known until Tuesday, its focus on cutting housing benefits casts fresh light on the sheer size, and asymmetrical distribution, of those subsidies. The panel members went after housing because housing tax expenditures present such a big target, especially in an era of double-digit appreciation, McMansions and monster mortgages. Forced to raise revenue to replace the $1.2 trillion 10-year cost of killing the alternative minimum tax, high-cost housing became an obvious place to look.
Consider these numbers if you want to understand where the reformers, Republicans and Democrats alike, are coming from:
- The mortgage interest deduction will cost the Treasury $72.6 billion this year alone, according to congressional estimates;
- The $250,000 and $500,000 tax-free exclusions of home sale profit for single sellers and joint filers will cost $23 billion this year;
- Property tax write-offs cost $20 billion, and tax subsidies for local and state housing bond programs add an additional $1 billion.
Who receives these tax breaks? When a congressional committee examined the distribution of homeowner benefits for 2004, it found that people earning $200,000 and more a year, just one-half of 1 percent of all homeowners filing for deductions, pocketed 22 percent of the total write-offs last year.
Homeowners with incomes between $50,000 and $75,000 -- 26.4 percent of all owners claiming deductions -- received just 16.1 percent of the total. Owners with incomes of $30,000 to $40,000 represented 10 percent of all mortgage deduction recipients but got just 3.1 percent of the total tax-savings pie.
Property tax write-offs showed a similar distribution. High-income households were 3.8 percent of all owners claiming property tax deductions in 2004 but received 15 percent of the total. Homeowners with $30,000 to $40,000 incomes were 9.4 percent of those claiming property tax write-offs but received 3.7 percent of the benefits.
In replacing the mortgage interest deduction with a 15 percent credit, the reformers can argue that far more homeowners, the vast numbers who do not itemize their deductions on federal tax filings, will be able to share the tax subsidy goody bag. By lowering the mortgage ceiling to around $300,000, the subsidies would not so heavily favor wealthy owners in high-cost states.
That, in turn, could be supportive of homeownership nationwide for middle-income citizens who either rent or don't itemize on their taxes. Who knows -- the homeownership rate might even go up.
That's the idea anyway. Can it become law? Not in an election year for sure. Could some of it find its way into law someday, as the country grapples with budget deficits, war expenses and disaster relief reconstruction? That's where the odds start looking slightly better.
By Kenneth R. Harney
Is there really any chance that Congress could take away the tax deduction for mortgage interest? How about the deductions for and state and local property and income taxes?
A presidentially appointed bipartisan commission is expected to urge precisely those changes Tuesday when it delivers its final report to the Bush administration. The mortgage interest deduction -- which allows write-offs on first and second loan amounts up to $1.1 million -- would be scrapped and replaced with a 15 percent credit on sharply limited mortgage amounts. Deductions for state and local property and income taxes would be eliminated altogether. The 15 percent credit would be for only mortgages up to a $300,000 to $350,000 ceiling. Interest on home equity loans no longer would be tax-deductible.
In exchange for these losses of tax benefits, the advisory panel would eliminate the alternative minimum tax, add $100,000 to the $500,000 tax-free exclusion on home sale profit, lower capital gains tax rates, cut the number of tax brackets and provide a variety of other simplifications to the federal tax code.
President Bush and the Treasury Department are expected to study the panel's recommendations and then include at least some of them in a budget proposal to Congress early in 2006.
But let's get real here: Nobody seriously believes that the president and Congress would do anything to reduce tax benefits for their largest and most potent constituency, right? Isn't the mortgage interest deduction sacrosanct, politically untouchable, carved in marble on Capitol Hill? Ditto for write-offs of local property taxes and income taxes?
Imagine the screams of pain from homeowners in high-cost, high-tax areas from the East Coast to California. Imagine a Million Realtor March on Washington. Imagine a House and Senate with no incumbents.
That is all certainly the conventional political wisdom and may indeed prove correct. Even the president told the advisory panel in January that he would oppose any tax changes that would hurt homeownership.
Case closed? Dead on arrival? Maybe, but not quite.
Though the final details of the reform panel's recommendations won't be known until Tuesday, its focus on cutting housing benefits casts fresh light on the sheer size, and asymmetrical distribution, of those subsidies. The panel members went after housing because housing tax expenditures present such a big target, especially in an era of double-digit appreciation, McMansions and monster mortgages. Forced to raise revenue to replace the $1.2 trillion 10-year cost of killing the alternative minimum tax, high-cost housing became an obvious place to look.
Consider these numbers if you want to understand where the reformers, Republicans and Democrats alike, are coming from:
- The mortgage interest deduction will cost the Treasury $72.6 billion this year alone, according to congressional estimates;
- The $250,000 and $500,000 tax-free exclusions of home sale profit for single sellers and joint filers will cost $23 billion this year;
- Property tax write-offs cost $20 billion, and tax subsidies for local and state housing bond programs add an additional $1 billion.
Who receives these tax breaks? When a congressional committee examined the distribution of homeowner benefits for 2004, it found that people earning $200,000 and more a year, just one-half of 1 percent of all homeowners filing for deductions, pocketed 22 percent of the total write-offs last year.
Homeowners with incomes between $50,000 and $75,000 -- 26.4 percent of all owners claiming deductions -- received just 16.1 percent of the total. Owners with incomes of $30,000 to $40,000 represented 10 percent of all mortgage deduction recipients but got just 3.1 percent of the total tax-savings pie.
Property tax write-offs showed a similar distribution. High-income households were 3.8 percent of all owners claiming property tax deductions in 2004 but received 15 percent of the total. Homeowners with $30,000 to $40,000 incomes were 9.4 percent of those claiming property tax write-offs but received 3.7 percent of the benefits.
In replacing the mortgage interest deduction with a 15 percent credit, the reformers can argue that far more homeowners, the vast numbers who do not itemize their deductions on federal tax filings, will be able to share the tax subsidy goody bag. By lowering the mortgage ceiling to around $300,000, the subsidies would not so heavily favor wealthy owners in high-cost states.
That, in turn, could be supportive of homeownership nationwide for middle-income citizens who either rent or don't itemize on their taxes. Who knows -- the homeownership rate might even go up.
That's the idea anyway. Can it become law? Not in an election year for sure. Could some of it find its way into law someday, as the country grapples with budget deficits, war expenses and disaster relief reconstruction? That's where the odds start looking slightly better.
26 October 2005
DOJ/FTC Workshop: Real Estate Competition Called Fierce
Realtor.com, October 26, 2005
With more than 2.5 million real estate licensees and a wide range of brokerage models working in real estate today, competition has never been greater and consumers have never had wider choice in whom to work with in buying and selling homes, industry panelists said at a public workshop hosted by federal trade regulators Tuesday in Washington.
“I’m puzzled by accounts [in the media and among some lawmakers and regulators] that say there’s not a lot of competition in real estate,” Alex Perriello, president and CEO of Cendant Real Estate Franchise Group, told the workshop. “There are no significant barriers to entry or expansion,” and there are “myriad choices for buyers” on models and pricing, he said.
About 200 people from the brokerage community, government, and the media attended the workshop, which was hosted jointly by the U.S. Department of Justice's Antitrust Division and the Federal Trade Commission to look at competition in residential real estate. Some of the panelists focused on laws enacted recently by state legislatures setting minimum service requirements for real estate licensees.
About 10 states have enacted such laws in the last few years, with others considering similar measures. The measures, which the DOJ and the FTC have called anticompetitive in letters to lawmakers, have been supported by state associations of REALTORS®. The laws typically require licensees to present offers, assist their clients with contract negotiations, and be available to answer questions on clients’ behalf, among other things.
Industry critics said the laws make it difficult for some alternative brokerage models, such as limited service brokers—who post listings in the MLS for a flat fee but provide little other service—to compete.
However, no evidence of any anticompetitive effects was presented. Panelists at the workshop also touched on industry efforts to govern how brokers’ MLS data can be displayed on competitors’ Web sites.
That issue is the subject of a lawsuit filed in early September by the DOJ against the NATIONAL ASSOCIATION OF REALTORS®. The complaint says NAR’s Internet listing display rules put Internet-based brokers at a disadvantage to traditional brokers. In fact, the rules allow brokers to exercise a blanket opt-out right that prohibits their listings from appearing on any competitors’ sites, not just sites of Internet-based brokers. In exchange, brokers that opt out can’t post other brokers’ listings on their sites.
Cathy Whatley, NAR’s 2003 president, said brokerages operating all business models have the opportunity to participate in the MLS and have always and will always have access to the property listing information it contains.
“The MLS is a broker-to-broker information exchange” that facilitates cooperation and ultimately helps consumers see more listing data than they otherwise would, she said. For more than four years, she noted, NAR’s Internet data exchange policy has enabled MLS participants to advertise competitors’ listings on the Internet, even though such use by other competitors is subject to the broker’s right to opt out of having his listings advertised by others. That policy, known as IDX, isn’t the subject of the DOJ complaint.
Deborah Platt Majoras, FTC chair, opened the workshop. Other officials making remarks included Thomas Barnett, acting assistant attorney general for antitrust at the DOJ; FTC Commissioner Jon Leibowitz; and Susan Creighton, director of the FTC’s Bureau of Competition.
Lawrence Yun, NAR's senior economist, presented empirical evidence of the magnitude of competition in the real estate brokerage industry. "Consumers are bombarded with choices on television, radio, newspapers, and the Internet,” Yun said. “They are enticed by offers of flat fees, rebates, and other incentives. In fact, discount brokerages and many innovative business models are doing very well in today's real estate marketplace.
Chang-Tai Hsieh, associate professor of economics at the University of California at Berkeley, acknowledged the competitive pressures in real estate today from having such an enlarged field of practitioners vying for business and said commission rates appear to have fallen as a result. But consumers don’t appear to be fully benefiting, he said, in part because increased home prices have caused the total amount paid by consumers to increase.
Industry panelists included Aaron Farmer, owner of Texas Discount Realty in Austin, Texas; Thomas Kunz, president and CEO of Century 21 Real Estate; Colby Sambrotto, COO of ForSaleByOwner.com; Philip Henderson, an attorney with LendingTree LLC; Tom Early of the National Association of Exclusive Buyer Agents; Geoff Lewis, senior vice president and chief legal officer of RE/MAX International Inc.; and Steve DelBianco, executive director of NetChoice Coalition.
The DOJ and FTC are accepting public comments on real estate competition until Nov. 28. To learn how you can voice your opinions about how competitive the industry is and to obtain some prewritten key point to include in your letters, see the Tell Federal Regulators That Real Estate Is Competitive page at REALTOR.org. NAR would like to receive copies of any letters members submit. E-mail a copy to FTCDOJworkshop@realtors.org.To learn more about competitiveness of the real estate industry, go to the About Industry Competitiveness page at REALTOR.org.
With more than 2.5 million real estate licensees and a wide range of brokerage models working in real estate today, competition has never been greater and consumers have never had wider choice in whom to work with in buying and selling homes, industry panelists said at a public workshop hosted by federal trade regulators Tuesday in Washington.
“I’m puzzled by accounts [in the media and among some lawmakers and regulators] that say there’s not a lot of competition in real estate,” Alex Perriello, president and CEO of Cendant Real Estate Franchise Group, told the workshop. “There are no significant barriers to entry or expansion,” and there are “myriad choices for buyers” on models and pricing, he said.
About 200 people from the brokerage community, government, and the media attended the workshop, which was hosted jointly by the U.S. Department of Justice's Antitrust Division and the Federal Trade Commission to look at competition in residential real estate. Some of the panelists focused on laws enacted recently by state legislatures setting minimum service requirements for real estate licensees.
About 10 states have enacted such laws in the last few years, with others considering similar measures. The measures, which the DOJ and the FTC have called anticompetitive in letters to lawmakers, have been supported by state associations of REALTORS®. The laws typically require licensees to present offers, assist their clients with contract negotiations, and be available to answer questions on clients’ behalf, among other things.
Industry critics said the laws make it difficult for some alternative brokerage models, such as limited service brokers—who post listings in the MLS for a flat fee but provide little other service—to compete.
However, no evidence of any anticompetitive effects was presented. Panelists at the workshop also touched on industry efforts to govern how brokers’ MLS data can be displayed on competitors’ Web sites.
That issue is the subject of a lawsuit filed in early September by the DOJ against the NATIONAL ASSOCIATION OF REALTORS®. The complaint says NAR’s Internet listing display rules put Internet-based brokers at a disadvantage to traditional brokers. In fact, the rules allow brokers to exercise a blanket opt-out right that prohibits their listings from appearing on any competitors’ sites, not just sites of Internet-based brokers. In exchange, brokers that opt out can’t post other brokers’ listings on their sites.
Cathy Whatley, NAR’s 2003 president, said brokerages operating all business models have the opportunity to participate in the MLS and have always and will always have access to the property listing information it contains.
“The MLS is a broker-to-broker information exchange” that facilitates cooperation and ultimately helps consumers see more listing data than they otherwise would, she said. For more than four years, she noted, NAR’s Internet data exchange policy has enabled MLS participants to advertise competitors’ listings on the Internet, even though such use by other competitors is subject to the broker’s right to opt out of having his listings advertised by others. That policy, known as IDX, isn’t the subject of the DOJ complaint.
Deborah Platt Majoras, FTC chair, opened the workshop. Other officials making remarks included Thomas Barnett, acting assistant attorney general for antitrust at the DOJ; FTC Commissioner Jon Leibowitz; and Susan Creighton, director of the FTC’s Bureau of Competition.
Lawrence Yun, NAR's senior economist, presented empirical evidence of the magnitude of competition in the real estate brokerage industry. "Consumers are bombarded with choices on television, radio, newspapers, and the Internet,” Yun said. “They are enticed by offers of flat fees, rebates, and other incentives. In fact, discount brokerages and many innovative business models are doing very well in today's real estate marketplace.
Chang-Tai Hsieh, associate professor of economics at the University of California at Berkeley, acknowledged the competitive pressures in real estate today from having such an enlarged field of practitioners vying for business and said commission rates appear to have fallen as a result. But consumers don’t appear to be fully benefiting, he said, in part because increased home prices have caused the total amount paid by consumers to increase.
Industry panelists included Aaron Farmer, owner of Texas Discount Realty in Austin, Texas; Thomas Kunz, president and CEO of Century 21 Real Estate; Colby Sambrotto, COO of ForSaleByOwner.com; Philip Henderson, an attorney with LendingTree LLC; Tom Early of the National Association of Exclusive Buyer Agents; Geoff Lewis, senior vice president and chief legal officer of RE/MAX International Inc.; and Steve DelBianco, executive director of NetChoice Coalition.
The DOJ and FTC are accepting public comments on real estate competition until Nov. 28. To learn how you can voice your opinions about how competitive the industry is and to obtain some prewritten key point to include in your letters, see the Tell Federal Regulators That Real Estate Is Competitive page at REALTOR.org. NAR would like to receive copies of any letters members submit. E-mail a copy to FTCDOJworkshop@realtors.org.To learn more about competitiveness of the real estate industry, go to the About Industry Competitiveness page at REALTOR.org.
21 October 2005
Bursting the Bubble of Negative Predictions
The Washington Times, October 21, 2005
By M. Anthony Carr
Start up a discussion with almost anyone these days and soon it turns to real estate. Very soon after that it turns to the question: When's the bubble going to burst?
The challenge with talking about a bubble so much is that it can become a self-fulfilling prophecy for consumers.
There are plenty of naysayers about the real estate market and its unprecedented growth. Las Vegas-based ReviewJournal.com, for instance, is posting a report by Doug Fabian, president of Fabian Wealth Strategies (www.Fabian.com), and Josh Lewis, first vice president at Santa Ana, Calif.-based Stearns Lending.
The report, "Boom to Bust," lists the following issues about current homeownership as pointing to a possible bubble:
• More than 25 percent of all homes are now bought by people who don't plan to occupy the property.
• Households are allocating a greater percentage of income to housing than ever before.
• More houses are being purchased with no down payment. People are buying primarily because of the expectation of appreciation.
• The majority of today's loans involve some combination of adjustable-rate mortgages, interest-only or negative amortization.
The report says, "This layered risk will result in a major increase in foreclosures, which will bring the total housing market down in value."
Unfortunately, this report brings up nothing new. People have been buying real estate for decades in anticipation of appreciation. Also, during those years, households have been allocating a greater percentage of income to housing. Zero-percent down-payment mortgages have been around for just as long.
All of these factors have been true for the last 20 years.
Compare this list to the second quarter 2005 report issued by the U.S. Department of Housing and Urban Development on U.S. Housing Market Conditions. You'll see a different picture:
• The housing sector continued to be a major contributor to the U.S. economy during the second quarter of 2005.
• New records were set for single-family permits, new home sales, and existing home sales. • Interest rates remained at less than 6 percent, but the challenge to affordability for new home buyers grew.
• Compared to the most recent quarter, the median sales price of an existing home rose by 10.3 percent, and was 13.7 percent higher than a year earlier.
• Compared to the second quarter of 2004, permits for new homes were up 2.1 percent; construction starts were up 4.6 percent; and new housing completions increased by 4.7 percent.
• Sales of existing homes and new single-family units rose, by 4.6 percent and 10.2 percent respectively.
• Permits and new starts for multifamily units slowed after the first quarter of 2005, but remained stronger than in the second quarter of 2004.
So why all this good news on the housing front? Basically, the economy is growing. And that, my friends, is why you have to second guess the concept of a bubble in the real estate market.
We've become accustomed to the "bubble" idea because of 2001 drop in the stock market, following a period of unprecedented growth.
The difference is that the stock bubble was based on the founding of companies on investment in hopes of finding the next Internet-based fortune rather than the actual production of consumer products.
The inflation we are seeing in the housing market is because of economic growth, more jobs, population growth and the local jurisdictions not providing enough housing for this growth.
It's pretty simple. If you grow the economy, you must grow the housing base.
However, in the last five years, metropolitan regions have taken the slow-growth or limited-growth approach to providing housing instead of pushing for more affordable housing in high-density projects.
When the economy slows in any given jurisdiction, you'll see trouble in your real estate market.
For instance, the Washington area, home to the hottest employment growth in the country, is projected to create more than 82,000 jobs in 2005, according to the Center for Regional Analysis at George Mason University (www.cra-gmu.org). However, the center points out that local builders are only allowed to put up about 35,000 houses per year.
If you're bringing more than 50,000 new jobs into an area every year, but only build 30,000 houses, is that a bubble or a true reflection of the supply and demand of housing? You be the judge.
By M. Anthony Carr
Start up a discussion with almost anyone these days and soon it turns to real estate. Very soon after that it turns to the question: When's the bubble going to burst?
The challenge with talking about a bubble so much is that it can become a self-fulfilling prophecy for consumers.
There are plenty of naysayers about the real estate market and its unprecedented growth. Las Vegas-based ReviewJournal.com, for instance, is posting a report by Doug Fabian, president of Fabian Wealth Strategies (www.Fabian.com), and Josh Lewis, first vice president at Santa Ana, Calif.-based Stearns Lending.
The report, "Boom to Bust," lists the following issues about current homeownership as pointing to a possible bubble:
• More than 25 percent of all homes are now bought by people who don't plan to occupy the property.
• Households are allocating a greater percentage of income to housing than ever before.
• More houses are being purchased with no down payment. People are buying primarily because of the expectation of appreciation.
• The majority of today's loans involve some combination of adjustable-rate mortgages, interest-only or negative amortization.
The report says, "This layered risk will result in a major increase in foreclosures, which will bring the total housing market down in value."
Unfortunately, this report brings up nothing new. People have been buying real estate for decades in anticipation of appreciation. Also, during those years, households have been allocating a greater percentage of income to housing. Zero-percent down-payment mortgages have been around for just as long.
All of these factors have been true for the last 20 years.
Compare this list to the second quarter 2005 report issued by the U.S. Department of Housing and Urban Development on U.S. Housing Market Conditions. You'll see a different picture:
• The housing sector continued to be a major contributor to the U.S. economy during the second quarter of 2005.
• New records were set for single-family permits, new home sales, and existing home sales. • Interest rates remained at less than 6 percent, but the challenge to affordability for new home buyers grew.
• Compared to the most recent quarter, the median sales price of an existing home rose by 10.3 percent, and was 13.7 percent higher than a year earlier.
• Compared to the second quarter of 2004, permits for new homes were up 2.1 percent; construction starts were up 4.6 percent; and new housing completions increased by 4.7 percent.
• Sales of existing homes and new single-family units rose, by 4.6 percent and 10.2 percent respectively.
• Permits and new starts for multifamily units slowed after the first quarter of 2005, but remained stronger than in the second quarter of 2004.
So why all this good news on the housing front? Basically, the economy is growing. And that, my friends, is why you have to second guess the concept of a bubble in the real estate market.
We've become accustomed to the "bubble" idea because of 2001 drop in the stock market, following a period of unprecedented growth.
The difference is that the stock bubble was based on the founding of companies on investment in hopes of finding the next Internet-based fortune rather than the actual production of consumer products.
The inflation we are seeing in the housing market is because of economic growth, more jobs, population growth and the local jurisdictions not providing enough housing for this growth.
It's pretty simple. If you grow the economy, you must grow the housing base.
However, in the last five years, metropolitan regions have taken the slow-growth or limited-growth approach to providing housing instead of pushing for more affordable housing in high-density projects.
When the economy slows in any given jurisdiction, you'll see trouble in your real estate market.
For instance, the Washington area, home to the hottest employment growth in the country, is projected to create more than 82,000 jobs in 2005, according to the Center for Regional Analysis at George Mason University (www.cra-gmu.org). However, the center points out that local builders are only allowed to put up about 35,000 houses per year.
If you're bringing more than 50,000 new jobs into an area every year, but only build 30,000 houses, is that a bubble or a true reflection of the supply and demand of housing? You be the judge.
14 October 2005
The Mortgage Gap [NYT Editorial]
The Mortgage Gap [Editorial]
New York Times, October 11, 2005
We have come a long way since the days when banks wrote off entire minority communities, denying loans and mortgages to creditworthy people because of their race or where they lived. But perhaps not far enough. A recent Federal Reserve study shows that black Americans are three times as likely as whites to be signed up for high-cost "subprime" mortgages that often force borrowers into default.
Lenders typically argue that critics are confusing risk with race and point out that the scores on which they base mortgage rates are computed automatically, based on standardized consumer credit information. It is hard to judge these arguments because so much credit information is kept private. Lenders typically refuse to release data on individual credit scores or disclose their own risk analysis.
But it seems likely at this point that uninformed borrowers are being herded into higher-cost mortgages more frequently than necessary. That is probably due at least in part to the complexity of the current lending system. Mortgages are now sold mainly through mortgage brokers, who are virtually unregulated. This system has spread access to mortgages to communities that were once shut out. But brokers themselves have no legal responsibility to give borrowers the best rate - or even a fair rate, for that matter.
Sellers of mortgages often earn their money by marking up mortgage rates and adding fees and penalties, some of which can be onerous. That poses a particular danger for unsophisticated borrowers. Even well-educated consumers have difficulty finding out how their individual mortgage rates are calculated and what the various fees are.
The disparity between lending costs for black and white homeowners is a serious matter, given the unhappy history of redlining. The federal government should find out once and for all where the racial disparities come from, even if it means forcing the lending lobby to release more kinds of data. Banks and other lenders should voluntarily rein in brokers who direct clients to unjustly expensive loans. Financial institutions should also make the mortgage process more transparent. That would be a bonus not just for minorities, but for everyone.
We have come a long way since the days when banks wrote off entire minority communities, denying loans and mortgages to creditworthy people because of their race or where they lived. But perhaps not far enough. A recent Federal Reserve study shows that black Americans are three times as likely as whites to be signed up for high-cost "subprime" mortgages that often force borrowers into default.
Lenders typically argue that critics are confusing risk with race and point out that the scores on which they base mortgage rates are computed automatically, based on standardized consumer credit information. It is hard to judge these arguments because so much credit information is kept private. Lenders typically refuse to release data on individual credit scores or disclose their own risk analysis.
But it seems likely at this point that uninformed borrowers are being herded into higher-cost mortgages more frequently than necessary. That is probably due at least in part to the complexity of the current lending system. Mortgages are now sold mainly through mortgage brokers, who are virtually unregulated. This system has spread access to mortgages to communities that were once shut out. But brokers themselves have no legal responsibility to give borrowers the best rate - or even a fair rate, for that matter.
Sellers of mortgages often earn their money by marking up mortgage rates and adding fees and penalties, some of which can be onerous. That poses a particular danger for unsophisticated borrowers. Even well-educated consumers have difficulty finding out how their individual mortgage rates are calculated and what the various fees are.
The disparity between lending costs for black and white homeowners is a serious matter, given the unhappy history of redlining. The federal government should find out once and for all where the racial disparities come from, even if it means forcing the lending lobby to release more kinds of data. Banks and other lenders should voluntarily rein in brokers who direct clients to unjustly expensive loans. Financial institutions should also make the mortgage process more transparent. That would be a bonus not just for minorities, but for everyone.
America may be at Peak of 'Materialistic' Cycle
America may be at Peak of 'Materialistic' Cycle - Supersized homes, SUVs afflict a nation
Inman News, Friday, October 14, 2005
By Arrol Gellner
We Americans are a people with profoundly changeable opinions. Our lifestyle ideals, for instance, seesaw from extravagance to asceticism in bursts of 30 years or so. This peculiar national trait affects our architecture as it does everything else, repeatedly taking us from overblown ostentation to reactionary modesty and back again.
The Victorian era, with its seemingly insatiable appetite for visual bombast, gave us an architecture of vast, splendid, yet manifestly impractical, houses. By the dawn of the 20th century, a backlash against these pompous dwellings had ushered in the Arts and Crafts movement, with its renewed appreciation for simplicity and hand craftsmanship.
This chaste aesthetic survived into the economic giddiness of the Roaring Twenties. Then, fueled by a superheated economy, architecture once again entered a period of unsurpassed opulence that abruptly ended with the wake-up call of the Great Depression.
The unmatched prosperity of the post-World War II years once again had Americans indulging in conspicuous consumption. We drove gas-guzzling behemoths with toothy chromium grilles that our British cousins dubbed "The American Dollar Grin." We lived in stretched-out ranch houses with purposely prominent double garages and competed with the Joneses to see whose driveway held the latest tail-finned wonder.
The 1960s brought an escalating Cold War in Europe, as well as an all-too-real war in Vietnam. The decade also gave Americans their first real inkling of the world's impending troubles: mushrooming population, environmental pollution and diminishing resources. It was enough of a reality check to bring us down to earth from the heady materialism of the Eisenhower years.
Needless to say, America is once again at the peak – at least, one hopes it's the peak – of one of these materialistic cycles. As we preside over the dawn of the 21st century, the typical new house has bloated to more than twice the size of an average home of 1950, despite the fact that families have gotten smaller. In the last two decades alone, the average floor area of new homes has increased some 40 percent.
Along the same lines, it's become routine to see featherweight housewives wrestling gigantic 7-foot-high SUVs on half-mile grocery runs. Alas, it doesn't end there, either. Recently, in a shopping mall in a middle-class suburb of Portland, I came across three different boutiques selling clothing, diet supplements and confections – for dogs.
Perhaps there is a point when too much really is too much. We've all seen that bumper sticker beloved by the terminally empty-headed: "He Who Dies With the Most Toys Wins." Yet few intelligent Americans would argue that having a huge house and a couple of Escalades, much less a larder stocked with dog pastries, has actually made their lives any happier. Some might even own up to the contrary. Yet we seem unable to perceive the siren song of materialism for the commercial sham that it is.
Frank Lloyd Wright once observed: "Many wealthy people are little more than janitors of their possessions." Today, it's not just the wealthy who are so afflicted. Rich and poor, old and young, left and right, we Americans seem poised to become a nation of janitors.
Inman News, Friday, October 14, 2005
By Arrol Gellner
We Americans are a people with profoundly changeable opinions. Our lifestyle ideals, for instance, seesaw from extravagance to asceticism in bursts of 30 years or so. This peculiar national trait affects our architecture as it does everything else, repeatedly taking us from overblown ostentation to reactionary modesty and back again.
The Victorian era, with its seemingly insatiable appetite for visual bombast, gave us an architecture of vast, splendid, yet manifestly impractical, houses. By the dawn of the 20th century, a backlash against these pompous dwellings had ushered in the Arts and Crafts movement, with its renewed appreciation for simplicity and hand craftsmanship.
This chaste aesthetic survived into the economic giddiness of the Roaring Twenties. Then, fueled by a superheated economy, architecture once again entered a period of unsurpassed opulence that abruptly ended with the wake-up call of the Great Depression.
The unmatched prosperity of the post-World War II years once again had Americans indulging in conspicuous consumption. We drove gas-guzzling behemoths with toothy chromium grilles that our British cousins dubbed "The American Dollar Grin." We lived in stretched-out ranch houses with purposely prominent double garages and competed with the Joneses to see whose driveway held the latest tail-finned wonder.
The 1960s brought an escalating Cold War in Europe, as well as an all-too-real war in Vietnam. The decade also gave Americans their first real inkling of the world's impending troubles: mushrooming population, environmental pollution and diminishing resources. It was enough of a reality check to bring us down to earth from the heady materialism of the Eisenhower years.
Needless to say, America is once again at the peak – at least, one hopes it's the peak – of one of these materialistic cycles. As we preside over the dawn of the 21st century, the typical new house has bloated to more than twice the size of an average home of 1950, despite the fact that families have gotten smaller. In the last two decades alone, the average floor area of new homes has increased some 40 percent.
Along the same lines, it's become routine to see featherweight housewives wrestling gigantic 7-foot-high SUVs on half-mile grocery runs. Alas, it doesn't end there, either. Recently, in a shopping mall in a middle-class suburb of Portland, I came across three different boutiques selling clothing, diet supplements and confections – for dogs.
Perhaps there is a point when too much really is too much. We've all seen that bumper sticker beloved by the terminally empty-headed: "He Who Dies With the Most Toys Wins." Yet few intelligent Americans would argue that having a huge house and a couple of Escalades, much less a larder stocked with dog pastries, has actually made their lives any happier. Some might even own up to the contrary. Yet we seem unable to perceive the siren song of materialism for the commercial sham that it is.
Frank Lloyd Wright once observed: "Many wealthy people are little more than janitors of their possessions." Today, it's not just the wealthy who are so afflicted. Rich and poor, old and young, left and right, we Americans seem poised to become a nation of janitors.
07 October 2005
A Push Toward Clear Closing Costs
Washington Post, October 8, 2005
By Kenneth R. Harney
It is by far the most common consumer complaint to the federal government involving the home-buying process: uncertainty about the bottom-line costs of obtaining and closing the mortgage.
Unlike with other major purchases, most home buyers cannot be absolutely sure what fees they will be expected to pay at settlement to their lender, title company and other service providers connected with the transaction. Though buyers routinely receive "good-faith estimates" of their expenses, there's a gaping hole in the law that allows those costs to balloon -- sometimes dramatically -- between the time of the estimate and settlement. Federal law does not require any service provider to make good on the estimates.
For example, if an unscrupulous lender tacks on $600 in junk fees at settlement that were never mentioned upfront in the good-faith estimates, that's your financial problem to deal with, not the lender's. If the title charges were understated by half and total $2,400 on the settlement sheet, not the estimated $1,200, that extra cost is on you, not the title company.
But that game of real estate gotcha may be on the way out. Major mortgage lending and brokerage groups themselves are either recommending or actively considering reforms that would "harden" buyers' good-faith estimates into guarantees.
The National Association of Mortgage Brokers, the principal lobby for the country's 60,000-plus loan brokers, now favors mandatory "redisclosure" by lenders and brokers whenever a buyer's closing fees are 10 percent higher than the original good-faith estimate. It also favors giving consumers the right to sue the lender or broker if fees exceed 10 percent of the original estimate and no redisclosure is made before settlement.
The National Association of Independent Mortgage Bankers goes one step further. It supports ironclad, upfront guarantees on all charges that are under the direct control of the lender. These include appraisals, underwriting, application fees, underwriting fees, processing, credit reports, flood zone certifications and tax service fees, among others. The same group also wants similar guarantees on all loan origination charges and points once the mortgage rate is locked. It also demands that title insurance costs -- often the source of the biggest surprises at settlement -- be guaranteed to the home purchaser once the title company confirms a specific charge to the lender or broker.
Still another influential group, the Consumer Mortgage Coalition, which represents some of the largest banks and mortgage companies in the country, supports mandatory guarantees on lender settlement costs. It has drafted a plan that would spell out and guarantee all lender fees, lender title insurance, and taxes and other expenses upfront, at the time of the rate quote. The offer to the consumer would disclose exactly which charges are not guaranteed and beyond the lender's control, such as homeowner's insurance, optional owner's title insurance, flood insurance, daily interest charges and escrows.
All of the recent flurry of proposals has been stimulated by the Department of Housing and Urban Development's ongoing campaign to persuade the key participants in the home purchase and lending process to come up with and support pro-consumer reforms on settlement-cost uncertainties. So far, the mortgage industry's emerging emphasis on guaranteeing -- or at least hardening -- the good-faith estimates appears to be the most promising direction for change.
But heads-up consumers don't have to wait for any of these proposals to become widespread. A small but growing number of lenders already offer fixed-price package deals. These provide you a rate quote along with an absolute guarantee on most, if not all, associated fees. Shop around for such deals because not all lenders advertise them, and some national lenders are trying them out in select locations only.
Besides these, however, you can harden your good-faith estimates on your own and avoid costly eleventh-hour settlement-fee shocks. As you shop for a mortgage, ask whether the broker or lender is willing to guarantee all estimates of its own fees and charges. Ask if the broker or lender will stipulate to that in writing. If the answer is no, you may want to ask yourself: What sort of company is unwilling to guarantee its own charges -- fees that it should know with certainty upfront?
Then ask for guarantees of all title-related charges -- either from the title company you choose on your own or from the lender, if the lender recommends the title company you use. Again, if a company won't stand behind its own estimates, do you really want to do business with it on the biggest purchase of your life?
By Kenneth R. Harney
It is by far the most common consumer complaint to the federal government involving the home-buying process: uncertainty about the bottom-line costs of obtaining and closing the mortgage.
Unlike with other major purchases, most home buyers cannot be absolutely sure what fees they will be expected to pay at settlement to their lender, title company and other service providers connected with the transaction. Though buyers routinely receive "good-faith estimates" of their expenses, there's a gaping hole in the law that allows those costs to balloon -- sometimes dramatically -- between the time of the estimate and settlement. Federal law does not require any service provider to make good on the estimates.
For example, if an unscrupulous lender tacks on $600 in junk fees at settlement that were never mentioned upfront in the good-faith estimates, that's your financial problem to deal with, not the lender's. If the title charges were understated by half and total $2,400 on the settlement sheet, not the estimated $1,200, that extra cost is on you, not the title company.
But that game of real estate gotcha may be on the way out. Major mortgage lending and brokerage groups themselves are either recommending or actively considering reforms that would "harden" buyers' good-faith estimates into guarantees.
The National Association of Mortgage Brokers, the principal lobby for the country's 60,000-plus loan brokers, now favors mandatory "redisclosure" by lenders and brokers whenever a buyer's closing fees are 10 percent higher than the original good-faith estimate. It also favors giving consumers the right to sue the lender or broker if fees exceed 10 percent of the original estimate and no redisclosure is made before settlement.
The National Association of Independent Mortgage Bankers goes one step further. It supports ironclad, upfront guarantees on all charges that are under the direct control of the lender. These include appraisals, underwriting, application fees, underwriting fees, processing, credit reports, flood zone certifications and tax service fees, among others. The same group also wants similar guarantees on all loan origination charges and points once the mortgage rate is locked. It also demands that title insurance costs -- often the source of the biggest surprises at settlement -- be guaranteed to the home purchaser once the title company confirms a specific charge to the lender or broker.
Still another influential group, the Consumer Mortgage Coalition, which represents some of the largest banks and mortgage companies in the country, supports mandatory guarantees on lender settlement costs. It has drafted a plan that would spell out and guarantee all lender fees, lender title insurance, and taxes and other expenses upfront, at the time of the rate quote. The offer to the consumer would disclose exactly which charges are not guaranteed and beyond the lender's control, such as homeowner's insurance, optional owner's title insurance, flood insurance, daily interest charges and escrows.
All of the recent flurry of proposals has been stimulated by the Department of Housing and Urban Development's ongoing campaign to persuade the key participants in the home purchase and lending process to come up with and support pro-consumer reforms on settlement-cost uncertainties. So far, the mortgage industry's emerging emphasis on guaranteeing -- or at least hardening -- the good-faith estimates appears to be the most promising direction for change.
But heads-up consumers don't have to wait for any of these proposals to become widespread. A small but growing number of lenders already offer fixed-price package deals. These provide you a rate quote along with an absolute guarantee on most, if not all, associated fees. Shop around for such deals because not all lenders advertise them, and some national lenders are trying them out in select locations only.
Besides these, however, you can harden your good-faith estimates on your own and avoid costly eleventh-hour settlement-fee shocks. As you shop for a mortgage, ask whether the broker or lender is willing to guarantee all estimates of its own fees and charges. Ask if the broker or lender will stipulate to that in writing. If the answer is no, you may want to ask yourself: What sort of company is unwilling to guarantee its own charges -- fees that it should know with certainty upfront?
Then ask for guarantees of all title-related charges -- either from the title company you choose on your own or from the lender, if the lender recommends the title company you use. Again, if a company won't stand behind its own estimates, do you really want to do business with it on the biggest purchase of your life?
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