Real Estate Information Archive


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Twist And Shout!

by Don Roth

The Federal Reserve's latest strategy to kick-start the economy has been dubbed “Operation Twist” by pundits, but it's causing many people to shout. When the Fed announced its intentions to purchase $400 billion in long-term bonds on Wednesday, the Dow Jones Industrial Average immediately dropped 250 points. Then on Thursday, the Dow dropped 400 points more. In short, financial markets aren't impressed.

We aren't impressed either. The real issue is general uncertainty in too many sectors of the economy, and, ironically, certainty with interest rates. In fact, we think that the promise of low interest rates extending far into the future will do more harm than good, because now even more people are motivated to move to the sidelines to wait for mortgage rates to fall further still.

We expect to see a pick up in refinance activity, and we look forward to the business, but we would like to see more purchase activity. We remain convinced that the prospect of rising, not falling, rates and more accommodating underwriting standard are what's needed to stimulate purchase activity today.

Information courtesy of Jessica Regan.

Harrisburg PA Mortgage Market Recap - Sept 28

by Don Roth

Homebuilders remain in a state of suspended negative animation, and most of them believe their situation is unlikely to improve any time soon. The homebuilders’ sentiment index posted at 14 for September. It has ranged between 13 and 17 for the past year. Fifty is the split between optimism and pessimism, so there is a long way to go before sentiment changes.

At least the decline in housing starts appears to be moderating. Starts posted at an annual rate of 571,000 units in August, a 5-percent drop from July's numbers. Many media outlets blamed weather – Hurricane Irene in the Northwest and South – for the decline. The good news is that permits for future construction were up 3.2 percent, suggesting a slight improvement for starts in September and possibly beyond.In contrast, existing-home sales showed significant improvement, surging 7.7 percent to an annual rate of 5.03 million units in August. The burst in sales drew supply down by 3 percent to 3.577 million units, dropping supply to 8.5 months from 9.5 months in July.

It appears some additional discounting and bargain hunting among investors was occurring in the existing-home market. The median sales price fell 1.7 percent to $168,300 in August, while the average price slumped 1.6 percent to $216,800. Investors accounted for 22 percent of sales, up from 18 percent in July. This suggests to us that foreclosed properties are being absorbed and taken off the market.Despite the August decline in median and average existing-home prices, we remain convinced the worst is over, though our optimism remains tempered. We are not expecting a surge in home prices any time soon; then again, neither are most housing experts. MacroMarkets surveyed 111 experts and the consensus is for prices to grow at a 1.1-percent annual rate through 2015. It's not a growth rate to get excited over, to be sure; then again, it's not a negative growth rate either.

We are also not expecting a surge in mortgage rates. In fact, rates continue to set new multi-decade lows. As you may have heard, the Federal Reserved announced it will start buying longer-term US Treasury and mortgage-backed securities. The goal is for the Fed to purchase $400 billion worth of securities with maturities between 6 and 30 years by June 2012 in order to further lower long-term borrowing rates.This means low mortgage rates will be with us for a while. The 30-year fixed-rated mortgage is usually priced two to two-and-half percentage points above the yield on the 10-year Treasury note. The yield on that security tumbled to a mere 1.75 percent on Wednesday. Some 30-year mortgage loans are already being quoted below 4 percent.

A Novel Solution, But Can It Work?

by Don Roth

We like it when people think outside the box. Radar Logic, a data and analytic firm, has sent a proposal to Washington on a loan-restructuring plan we find intriguing.

Mortgage News Daily offers an example of Radar logic's plan in practice: A loan with an original balance of $190,000 has been paid down to $186,000, then goes into default. A foreclosure occurs and a subsequent sale of the REO property nets $99,000. The loss suffered by the lender would be $87,000. Under Radar Logic's plan, a restructuring occurs based on borrower information and the appraised value of the home to produce a new loan of $125,000. The restructuring would result in a loss of $61,000 for the lender, but a 26-percent larger recovery.

So what's the incentive for the lender? The restructured loan would also include an equity participation certificate (EPC). While the homeowner would be granted a portion of the appreciation rights, the lender would hold an equity position through the EPC in anticipation of appreciation of the underlying collateral.

There are a couple obvious risks: 1) Radar Logic's contention that its plan will reduce the perception of over-supply and prices rise fails to materialize; and 2) the borrower defaults on the restructured loan. That said, at least Risk Logic is thinking, and we like that.

Information courtesy of Jessica Regan.

Mortgage Market Recap - Sept 23

by Don Roth

The major mortgage servicers are getting their house in order, as foreclosures have accelerated in the past month. RealtyTrac reports that mortgage servicers started foreclosure on more than 78,800 properties in August, a 33-percent increase from July levels.

Most of us were aware that the foreclosure lull was only a temporary reprieve. That said, the growing rate of foreclosures has revived concerns over excessive inventory. The Cato Institute, an economic think thank, estimates an oversupply of three million houses, about a million more than actually demanded.

With so much inventory on the market and more to come, pricing becomes an issue: More supply means lower prices, which, in turn, means more negative equity. Concerning the latter, CoreLogic estimates that nearly 11 million properties, roughly 22.5 percent of all U.S. homes, were worth less than the underlying mortgage in the second quarter of 2011.The prospect of more price depreciation and more negative equity has increased calls for more government action. Problem is, efforts to date have had only marginal benefits or have had negative unintended consequences: Cato reports that government efforts to revive housing have helped the most expensive markets while actually depressing prices in the cheapest markets.

At this point, it might be best to let the market run its course. We’ve noted in past editions that when prices fall, demand increases, then prices increase. We've seen this economic truism at work to encouraging effect in a few hard-hit markets. The Orlando Regional Realtor Association reports that the median price for homes in its area has increased 15.1 percent year-over-year.

We've also often noted that real estate is local. The national numbers on foreclosures and negative equity can be big and scary, but they also carry no relevance to any one particular market.Mortgage rates are another matter; they tend to adhere closely to a national average. Rates at the national level dropped a few basis points this past week on most mortgage products.

There are many reasons for the drop in mortgage rates. One of the more interesting is a rumor that the Federal Reserve is contemplating purchasing longer-term Treasury securities (such as the 10-year note) to drive down long-term interest rates, which would help keep mortgage rates low. Because markets are forward looking, it is possible that the market is getting a jump on the Federal Reserve.

We've been in the minority in questioning the economic benefits of ultra-low mortgage rates. Our rationale is that low rates, and the anticipation of even lower rates, are delaying buying and refinancing decisions today. Our rationale isn't unfounded. Richard Fisher, president of the Federal Reserve Bank of Dallas , believes low rates are limiting economic growth because businesses have an incentive to delay borrowing for expansion. They see no reason to act today if interest rates are expected to stay low tomorrow. We see the same effect in housing.

Information courtesy of Jessica Regan.

Displaying blog entries 1-4 of 4