This is another in a series of blog posts in which I intend to excerpt and expand upon portions of a recent book, "Reckless Endangerment".
The authors of this book investigate and take apart the various factors that led to the current recession or depression (you pick the term) in the real estate market.
From 2000 through 2006, the average price of a single family house in Delaware County increased by 61%. (From $160,000 to $257,000 as per MLS, Trend). Since then we have had a market correction that has driven the average resale price down by 27% nationally. In Pennsylvania, the average decline since 2006 has been 13% (Freddie Mac, 05/11).
One of the predictable results of that kind of a decline is a glut of houses on the market. As per MLS Trend, in Delaware county, there are 4,103 single family houses for sale as of June, 2011. Back in the height of the good old (or was it really) seller's market, the inventory of single family houses was around 1,600. Wow, a 256% increase in inventory. No wonder prices are down.
One other indicator of stress in the housing market is the rate at which single family houses are either 90+ days behind in mortgage payments or in foreclosure. According to CalculatedRiskBlog.com, the rate for Fannie Mae purchased loans was under 1% until late 2007. Since then, in 2010, it spiked to a heretofore unheard of 5+%, a five fold increase.
Along with this glut has come the now all too familiar litany of high unemployment, declining incomes and immense pain on the part of a lot of people.
What caused this dramatic shift and all of the corresponding misery? More on that in the next blog post which will be out next week. Suffice it to say, it came about because lenders made way too many easy loans, with standards that were way too lax.
However, was it because of the "Greedy Bankers and Wall Street Sharks" who
"Took Advantage of Government De Regulation to mess up the economy? That is the basic line that has been pushed by most of the major media in this country.
However, as I think you will see, the answer is Not Really. It was caused by deliberate policies of our federal government interfering in and, in effect, over regulating the loan market.
I would welcome your comments and thoughts.
Friday, July 15, 2011
Tuesday, July 5, 2011
WHY ARE WE IN THE DUMPER THAT WE ARE IN, OR, "THANK YOU AGAIN FEDERAL GOVERNMENT"
There have been a number of critiques written about how greedy bankers, deregulated financial markets, capitalism run amok caused the current economic holes in which we find ourselves. A few brave souls have also hinted around the edges that maybe, just maybe the federal government through it's sponsorship of Fannie Mae and the repurchase of mortgage debt from private lenders had a huge part in the debacle. Now there is a new book on the subject called "Reckless Endangerment" that blows the lid off Fannie's real role in causing all of this world wide pain and suffereing.
More about this in a future blog, but here is a quote from a July 1 column by George Will.
The 1977 Community Reinvestment Act pressured banks to relax lending standards to dispense mortgages more broadly across communities. In 1992, the Federal Reserve Bank of Boston purported to identify racial discrimination in the application of traditional lending standards to those, Morgenson and Rosner write, “whose incomes, assets, or abilities to pay fell far below the traditional homeowner spectrum.”
In 1994, Bill Clinton proposed increasing homeownership through a “partnership” between government and the private sector, principally orchestrated by Fannie Mae, a “government-sponsored enterprise” (GSE). It became a perfect specimen of what such “partnerships” (e.g., General Motors) usually involve: Profits are private, losses are socialized.
There was a torrent of compassion-speak: “Special care should be taken to ensure that standards are appropriate to the economic culture of urban, lower-income, and nontraditional consumers.” “Lack of credit history should not be seen as a negative factor.” Government having decided to dictate behavior that markets discouraged, the traditional relationship between borrowers and lenders was revised. Lenders promoted reckless borrowing, knowing they could offload risk to purchasers of bundled loans, and especially to Fannie Mae. In 1994, subprime lending was $40 billion. In 1995, almost one in five mortgages was subprime. Four years later such lending totaled $160 billion.
As housing prices soared, many giddy owners stopped thinking of homes as retirement wealth and started using them as sources of equity loans — up to $800 billion a year. This fueled incontinent consumption.
Fannie Mae became, the authors say, “the largest and most powerful financial institution in the world.” Its power derived from the unstated certainty that the government would be ultimately liable for Fannie’s obligations. This assumption and other perquisites were subsidies to Fannie Mae and Freddie Mac worth an estimated $7 billion a year. They retained about a third of this. (John Herreid comment, translation - they passed about 2/3 of this debt onto bankers, who probably should have known better, but didn't. However, if Fannie and Freddie had not made it possible for the loans to be made, this "Investment Bundle" would not have been made possible)
Morgenson and Rosner report that in 1998, when Fannie Mae’s lending hit $1 trillion, its top officials began manipulating the company’s results to generate bonuses for themselves. ...... Fannie Mae’s political machine dispensed campaign contributions, gave jobs to friends and relatives of legislators, hired armies of lobbyists (even paying lobbyists not to lobby against it), paid academics who wrote papers validating the homeownership mania, and spread “charitable” contributions to housing advocates across the congressional map.
By 2003, the government was involved in financing almost half — $3.4 trillion — of the home-loan market. Not coincidentally, by the summer of 2005, almost 40 percent of new subprime loans were for amounts larger than the value of the properties.
“Reckless Endangerment” is a study of contemporary Washington, where showing “compassion” with other people’s money pays off in the currency of political power, and currency. Although Johnson left Fannie Mae years before his handiwork helped produce the 2008 bonfire of wealth, he may be more responsible for the debacle and its still-mounting devastations — of families, endowments, etc. — than any other individual. If so, he may be more culpable for the peacetime destruction of more wealth than any individual in history.
Morgenson and Rosner report. You decide.
georgewill@washpost.com
Now, here is another tidbit you might find interesting.
If the Fannie/Freddie policies of pressuring lenders to make loans "... appropriate to the economic culture of urban, lower-income, and non traditional consumers" really had an impact, one could logically expect that the impacts of these policies would be greatest in states where there was more opportunity to implement these policies and lesser in states where the opportunity was smaller. Well lo and behold, there is a recent report from our federal government that gives us some insight into just that.
A recent Freddie Mac summary of 5/4/2011 showed Home Price changes by state from June 2006 through March of 2011. According to Freddie, the national average home price decline was -27%.
Taking a swath through the Middle of our country shows the following price changes by state: North Dakota, +11%; South Dakota, -1%; Nebraska, -7%; Kansas, -8%; Oklahoma, -4%; Texas, 0%.
Contrast that with the more densly populated states like: California, -45%; Florida, -49%; Minnesota (right next door to the Dakotas), -31%; Georgia, -31%; Nevada, -59%; Oregon, -32%; Washington, -24%.
HMMMMMM!!!! Like one prominent news network says, We Report, You Decide"
More about this in a future blog, but here is a quote from a July 1 column by George Will.
The 1977 Community Reinvestment Act pressured banks to relax lending standards to dispense mortgages more broadly across communities. In 1992, the Federal Reserve Bank of Boston purported to identify racial discrimination in the application of traditional lending standards to those, Morgenson and Rosner write, “whose incomes, assets, or abilities to pay fell far below the traditional homeowner spectrum.”
In 1994, Bill Clinton proposed increasing homeownership through a “partnership” between government and the private sector, principally orchestrated by Fannie Mae, a “government-sponsored enterprise” (GSE). It became a perfect specimen of what such “partnerships” (e.g., General Motors) usually involve: Profits are private, losses are socialized.
There was a torrent of compassion-speak: “Special care should be taken to ensure that standards are appropriate to the economic culture of urban, lower-income, and nontraditional consumers.” “Lack of credit history should not be seen as a negative factor.” Government having decided to dictate behavior that markets discouraged, the traditional relationship between borrowers and lenders was revised. Lenders promoted reckless borrowing, knowing they could offload risk to purchasers of bundled loans, and especially to Fannie Mae. In 1994, subprime lending was $40 billion. In 1995, almost one in five mortgages was subprime. Four years later such lending totaled $160 billion.
As housing prices soared, many giddy owners stopped thinking of homes as retirement wealth and started using them as sources of equity loans — up to $800 billion a year. This fueled incontinent consumption.
Fannie Mae became, the authors say, “the largest and most powerful financial institution in the world.” Its power derived from the unstated certainty that the government would be ultimately liable for Fannie’s obligations. This assumption and other perquisites were subsidies to Fannie Mae and Freddie Mac worth an estimated $7 billion a year. They retained about a third of this. (John Herreid comment, translation - they passed about 2/3 of this debt onto bankers, who probably should have known better, but didn't. However, if Fannie and Freddie had not made it possible for the loans to be made, this "Investment Bundle" would not have been made possible)
Morgenson and Rosner report that in 1998, when Fannie Mae’s lending hit $1 trillion, its top officials began manipulating the company’s results to generate bonuses for themselves. ...... Fannie Mae’s political machine dispensed campaign contributions, gave jobs to friends and relatives of legislators, hired armies of lobbyists (even paying lobbyists not to lobby against it), paid academics who wrote papers validating the homeownership mania, and spread “charitable” contributions to housing advocates across the congressional map.
By 2003, the government was involved in financing almost half — $3.4 trillion — of the home-loan market. Not coincidentally, by the summer of 2005, almost 40 percent of new subprime loans were for amounts larger than the value of the properties.
“Reckless Endangerment” is a study of contemporary Washington, where showing “compassion” with other people’s money pays off in the currency of political power, and currency. Although Johnson left Fannie Mae years before his handiwork helped produce the 2008 bonfire of wealth, he may be more responsible for the debacle and its still-mounting devastations — of families, endowments, etc. — than any other individual. If so, he may be more culpable for the peacetime destruction of more wealth than any individual in history.
Morgenson and Rosner report. You decide.
georgewill@washpost.com
Now, here is another tidbit you might find interesting.
If the Fannie/Freddie policies of pressuring lenders to make loans "... appropriate to the economic culture of urban, lower-income, and non traditional consumers" really had an impact, one could logically expect that the impacts of these policies would be greatest in states where there was more opportunity to implement these policies and lesser in states where the opportunity was smaller. Well lo and behold, there is a recent report from our federal government that gives us some insight into just that.
A recent Freddie Mac summary of 5/4/2011 showed Home Price changes by state from June 2006 through March of 2011. According to Freddie, the national average home price decline was -27%.
Taking a swath through the Middle of our country shows the following price changes by state: North Dakota, +11%; South Dakota, -1%; Nebraska, -7%; Kansas, -8%; Oklahoma, -4%; Texas, 0%.
Contrast that with the more densly populated states like: California, -45%; Florida, -49%; Minnesota (right next door to the Dakotas), -31%; Georgia, -31%; Nevada, -59%; Oregon, -32%; Washington, -24%.
HMMMMMM!!!! Like one prominent news network says, We Report, You Decide"
Tuesday, June 21, 2011
Another Snapshot of Price Changes, How Bad Is It (Or Is Not)?
Behind all the gloom and doom about house prices, there are cold, hard numbers to document what is going on. I took a look at some of those numbers for Delaware county to try and get a more factual handle on house price changes from 2006 through 2010.
This time I did it by school district. I looked at resale prices (not new construction) of a 4 bedroom, 2 full bath, 0-1 half baths, single family house with a basement, garage and central air. Here is what I found out.
Garnet Valley School District:
+ 2006, 70 houses sold, average price of $485,773
+ 2010, 48 houses sold, average price of $458,022
+ Differences, Sales down 31%; average price down 5.8%
Marple Newtown School district:
+ 2006, 42 houses sold, average price of $477,367
+ 2010, 42 houses sold, average price of $412,302
+ Differences, Sales were unchanged; average price down 13.6%
Radnor School District
+ 2006, 47 houses sold, average price of $740,100
+ 2010, 27 houses sold, average price of $568,561
+ Differences, Sales down 43%; average price down 23.2%
Wallingford Swarthmore School district
+ 2006, 32 houses sold, average price of $434,996
+ 2010, 19 houses sold, average price of $405,174
+ Differences, Sales down 41%; average price down 6.9%
Rose Tree Media School District
+ 2006, 48 houses sold, average price of $472,848
+ 2010, 36 houses sold, average price of $440,221
+ Differences, Sales down 25%; average price down 7.0%
So, what does it mean? As usual, like my dad used to say, figures do not lie - but sometimes liars figure. Not trying to lie here, but the trends are more uneven than you might expect.
Some Overall Conclusions:
+ Common belief is that more expensive houses have taken a bigger hit. This is backed up by the price decline in Radnor, -23.2%
+ Sales Volume is down everyplace, again the more expensive Radnor area took the biggest hit at -43%.
+ Although the overall percentage price declines are not in wipe out territory, if your house was worth $500,000 in 2006, even the smallest price decline area was 6-10%. $30,000 to $50,000 feels like a real big hit to your bottom line, especially if you borrowed to the maximum and took out a big home equity line of credit. Unfortunately, that is where a lot of home owners find themselves right now.
Would appreciate your thoughts and comments.
This time I did it by school district. I looked at resale prices (not new construction) of a 4 bedroom, 2 full bath, 0-1 half baths, single family house with a basement, garage and central air. Here is what I found out.
Garnet Valley School District:
+ 2006, 70 houses sold, average price of $485,773
+ 2010, 48 houses sold, average price of $458,022
+ Differences, Sales down 31%; average price down 5.8%
Marple Newtown School district:
+ 2006, 42 houses sold, average price of $477,367
+ 2010, 42 houses sold, average price of $412,302
+ Differences, Sales were unchanged; average price down 13.6%
Radnor School District
+ 2006, 47 houses sold, average price of $740,100
+ 2010, 27 houses sold, average price of $568,561
+ Differences, Sales down 43%; average price down 23.2%
Wallingford Swarthmore School district
+ 2006, 32 houses sold, average price of $434,996
+ 2010, 19 houses sold, average price of $405,174
+ Differences, Sales down 41%; average price down 6.9%
Rose Tree Media School District
+ 2006, 48 houses sold, average price of $472,848
+ 2010, 36 houses sold, average price of $440,221
+ Differences, Sales down 25%; average price down 7.0%
So, what does it mean? As usual, like my dad used to say, figures do not lie - but sometimes liars figure. Not trying to lie here, but the trends are more uneven than you might expect.
Some Overall Conclusions:
+ Common belief is that more expensive houses have taken a bigger hit. This is backed up by the price decline in Radnor, -23.2%
+ Sales Volume is down everyplace, again the more expensive Radnor area took the biggest hit at -43%.
+ Although the overall percentage price declines are not in wipe out territory, if your house was worth $500,000 in 2006, even the smallest price decline area was 6-10%. $30,000 to $50,000 feels like a real big hit to your bottom line, especially if you borrowed to the maximum and took out a big home equity line of credit. Unfortunately, that is where a lot of home owners find themselves right now.
Would appreciate your thoughts and comments.
Thursday, June 9, 2011
What is Really Going on in the Mortgage Market
One of the refrains that I hear from sellers and buyers in this market is this. One of the reasons that house prices are low and going lower is that "NOBODY IS LENDING ANY MONEY - THE BANKS ARE SITTING ON ALL OF THEIR CASH".
As with a lot of urban legends, there is some truth to that, but below is the best explanation that I have seen about what is really happening. And, Buyers and Sellers - Take Heart. If your credit is good and you have a dependable job, you will be able to qualify for a loan - it just may take a little bit longer. (Reprinted with permission of KeepingCurrentMatters.com.
As people go through the mortgage process today, I believe that they wonder if their lender has gone insane. Lenders ask for documentation repeatedly, constantly updating, asking for further clarification and explanation for everything. Income, credit, assets and appraisals are scrutinized at a level unseen in my 25+ years. It almost seems like they are trying to find reasons NOT to lend.
But, I assure you, that is not the case. The only way lenders can stay in business is to lend money. It is what funds the operation and pays for salaries, rent and paper clips. Lending is what creates the value of the company. No closings, no revenue, no company.
So why the perception of over-documentation and over analysis when we know the lenders have to make loans? This is the reality of a post-subprime world. Lenders got too liberal and under-documented files and forgot the primary role of underwriting (judging a borrower’s ABILITY and WILLINGNESS to repay the loan) as they approved files. And now, the pendulum has swung back to a very conservative stance. Common sense seems to have been replaced by a “Cover Your Butt Mentality”.
No one is immune. Appraisers error on the side of lower valuations and heightened criticism of a home’s condition. Underwriters labor over pay stubs, tax returns, bank statements and credit information. Closing agents meticulously examine title and closing documents. Each of them has learned that their mistakes, miscalculations, or errors in judgment (no matter how minor) can result in a loss of their job, a bad loan, and/or monetary damages to their companies.
So, today I just wanted to counsel home buyers. Your lender WANTS to make your loan. However, understand that they have been burned by borrowers, burned by their bad judgment, burned by moronic industry trends of the past. Lenders are going to be a little gun shy. If you can prove that you are willing and able to repay the loan, lenders have lots of money available at incredible (once-in-a-lifetime) rates. When you think your lender is asking for too much, know it’s because they want to say “yes” AND know that their decision is both a good and defendable one.
As with a lot of urban legends, there is some truth to that, but below is the best explanation that I have seen about what is really happening. And, Buyers and Sellers - Take Heart. If your credit is good and you have a dependable job, you will be able to qualify for a loan - it just may take a little bit longer. (Reprinted with permission of KeepingCurrentMatters.com.
As people go through the mortgage process today, I believe that they wonder if their lender has gone insane. Lenders ask for documentation repeatedly, constantly updating, asking for further clarification and explanation for everything. Income, credit, assets and appraisals are scrutinized at a level unseen in my 25+ years. It almost seems like they are trying to find reasons NOT to lend.
But, I assure you, that is not the case. The only way lenders can stay in business is to lend money. It is what funds the operation and pays for salaries, rent and paper clips. Lending is what creates the value of the company. No closings, no revenue, no company.
So why the perception of over-documentation and over analysis when we know the lenders have to make loans? This is the reality of a post-subprime world. Lenders got too liberal and under-documented files and forgot the primary role of underwriting (judging a borrower’s ABILITY and WILLINGNESS to repay the loan) as they approved files. And now, the pendulum has swung back to a very conservative stance. Common sense seems to have been replaced by a “Cover Your Butt Mentality”.
No one is immune. Appraisers error on the side of lower valuations and heightened criticism of a home’s condition. Underwriters labor over pay stubs, tax returns, bank statements and credit information. Closing agents meticulously examine title and closing documents. Each of them has learned that their mistakes, miscalculations, or errors in judgment (no matter how minor) can result in a loss of their job, a bad loan, and/or monetary damages to their companies.
So, today I just wanted to counsel home buyers. Your lender WANTS to make your loan. However, understand that they have been burned by borrowers, burned by their bad judgment, burned by moronic industry trends of the past. Lenders are going to be a little gun shy. If you can prove that you are willing and able to repay the loan, lenders have lots of money available at incredible (once-in-a-lifetime) rates. When you think your lender is asking for too much, know it’s because they want to say “yes” AND know that their decision is both a good and defendable one.
Wednesday, June 1, 2011
Should You Rent or Buy in this Market? Some Recent Thoughts
Reprinted with permission from Keeping Current Matters (www.KCM.com)
Families are trying to determine whether or not now is the time to buy a home. Some are advising these families to sit out the current real estate market and instead rent for the next year or two. We do not agree with this advice. Homeownership means a lot to a family. We also realize that the financial aspects of purchasing a home today can be a concern. The challenge is any advice given by someone in the real estate community is immediately dismissed as self-serving.
For this reason, we want to give you the advice of three entities not involved in real estate sales:
Citigroup
“When we examine the relationships between mortgage payments and income and mortgage payments and rent, we see that these relationships have also reverted back to or below equilibrium points. In some cases, particularly when mortgage payments are compared to the cost of renting, home prices actually appear cheap.”
JP Morgan
“JPMorgan analysts said ‘the continuation of falling rental vacancies and rising rental demand will make home buying increasingly attractive’, especially as rental prices increase.”
Business School professors Eli Beracha and Ken H. Johnson
“Fundamental drivers now appear to be in place that favor homeownership over renting in the near term future…
The second finding might seem unwise to many given the recent crash in the real estate markets around the country. However, rent-to-price ratios now seem to be in place along with other fundamental drivers that favor ownership over renting…
Conditions (historically low mortgage rates and relatively low rent-to-price ratios) now seem in place to favor future purchases.”
Bottom Line
Is it better to rent or buy? According to those quoted above, it seems it may be becoming a no-brainer.
Families are trying to determine whether or not now is the time to buy a home. Some are advising these families to sit out the current real estate market and instead rent for the next year or two. We do not agree with this advice. Homeownership means a lot to a family. We also realize that the financial aspects of purchasing a home today can be a concern. The challenge is any advice given by someone in the real estate community is immediately dismissed as self-serving.
For this reason, we want to give you the advice of three entities not involved in real estate sales:
Citigroup
“When we examine the relationships between mortgage payments and income and mortgage payments and rent, we see that these relationships have also reverted back to or below equilibrium points. In some cases, particularly when mortgage payments are compared to the cost of renting, home prices actually appear cheap.”
JP Morgan
“JPMorgan analysts said ‘the continuation of falling rental vacancies and rising rental demand will make home buying increasingly attractive’, especially as rental prices increase.”
Business School professors Eli Beracha and Ken H. Johnson
“Fundamental drivers now appear to be in place that favor homeownership over renting in the near term future…
The second finding might seem unwise to many given the recent crash in the real estate markets around the country. However, rent-to-price ratios now seem to be in place along with other fundamental drivers that favor ownership over renting…
Conditions (historically low mortgage rates and relatively low rent-to-price ratios) now seem in place to favor future purchases.”
Bottom Line
Is it better to rent or buy? According to those quoted above, it seems it may be becoming a no-brainer.
Thursday, May 19, 2011
HOUSE PRICES IN OUR AREA, WHAT DO THE TEA LEAVES SAY NOW?
As new economic data become available, it is possible to try and read the tea leaves and divine what is going to happen to house prices over the next year or so. This is my shot to do just that. Thanks for reading and I hope that it makes sense.
First a little background. It is generally understood that house prices peaked in our area (and in most of the country) in mid to late 2006. That means we have been in a downturn going on five years now.
According to CNN Money, prices kept declining until April of 2009, at which point they began to recover. A few pundits felt this was the bottom. However, the national number dipped again and hit a new low in February of 2011.
Further, numbers of foreclosures are still accelerating. According to the OCC and OTS Mortgage Metrics Report of 3/20/11, forclosures in process nationwide were 1,290,253 in the fourth quarter of 2010. That is up by 19.6% from the same quarter a year earlier.
According to the same report, new short sales are up by 30.3% from a year earlier, although the pace is down a little from the third quarter of 2010.
One nice thing about history is that at least you know where you have been. With respect to forecasts, the only thing you know for sure is that you will be wrong. You never know if you will be wrong early, wrong late, wrong high or wrong low - just that you will be wrong. However, knowing about general directions in advance can be real helpful in making plans, so here goes.
One of the factors driving real estate price declines across the country has been the number of foreclosures and short sales. California, Nevada and Arizona have been cited as worst examples of the basket cases in real estate. However, the S&P Report of 4/20/11 shows that many areas in those three states are projected to be clearing up their backlogs in from 18 to 36 months. On the other hand, many areas in SE Pennsylvania are projected to need between 72 to as much as 120 months to clear the backlog. If true, that would say that we are in for a long spell of working off excess inventory which will keep prices low.
Reuters News Service in February stated, "...economists now expect home prices will fall 2.3 percent in 2011 and then begin a slight recovery in 2012..."
David Stiff, chief economist of Fsserv said this in February, 2011. "Large supplies of foreclosed properties will continue to be the biggest downside risk for home prices..."
Radar Logic reported in March, 2011, "The supply of homes for sale and potentially for sale is very large relative to demand, and it continues to be fed by high rates of mortgage defaults and foreclosures. At the same time, demand for houses is constrained by tight lending standards. Unfortunately, delcining home prices are likely to exacerbate these challenges to the housing market"
I could quote more of the same, but you get the idea. My bottom line and what I am advising people is this:
+ If you absolutely need to sell, sell now. This is as good a time as you will probably have in the next two years.
+ If you can afford to stay in your present house for two years or more, it may be best to do that.
+ However, you really need to consider what you will do if you sell. It could be that the low mortgage rates and prices will help you to make up more in your next purchase than you will lose in selling now.
Where is the bright side you ask? - it is a fantastic time to buy. Prices are soft and going lower; mortgage interest rates are at historic lows. If you have equity in your house and want to move up, now is a great time.
How can a seller make use of these current trends? Well if you need to sell, now is probably the best time that you will have in the next couple of years. If you can wait for more than two years to sell, my advice would be to do it. I certainly hope that prices will be better by then. Of course, if somebody had asked me two years ago if prices would still be going down, I would have said probably not.
Not an easy set of trade offs to manage, but it can be done. If anyone would like some help in that or has another related real estate question, please feel free to email me at delcorealestate@gmail.com or call me at 484-468-1306.
Would appreciate your thoughts and comments.
First a little background. It is generally understood that house prices peaked in our area (and in most of the country) in mid to late 2006. That means we have been in a downturn going on five years now.
According to CNN Money, prices kept declining until April of 2009, at which point they began to recover. A few pundits felt this was the bottom. However, the national number dipped again and hit a new low in February of 2011.
Further, numbers of foreclosures are still accelerating. According to the OCC and OTS Mortgage Metrics Report of 3/20/11, forclosures in process nationwide were 1,290,253 in the fourth quarter of 2010. That is up by 19.6% from the same quarter a year earlier.
According to the same report, new short sales are up by 30.3% from a year earlier, although the pace is down a little from the third quarter of 2010.
One nice thing about history is that at least you know where you have been. With respect to forecasts, the only thing you know for sure is that you will be wrong. You never know if you will be wrong early, wrong late, wrong high or wrong low - just that you will be wrong. However, knowing about general directions in advance can be real helpful in making plans, so here goes.
One of the factors driving real estate price declines across the country has been the number of foreclosures and short sales. California, Nevada and Arizona have been cited as worst examples of the basket cases in real estate. However, the S&P Report of 4/20/11 shows that many areas in those three states are projected to be clearing up their backlogs in from 18 to 36 months. On the other hand, many areas in SE Pennsylvania are projected to need between 72 to as much as 120 months to clear the backlog. If true, that would say that we are in for a long spell of working off excess inventory which will keep prices low.
Reuters News Service in February stated, "...economists now expect home prices will fall 2.3 percent in 2011 and then begin a slight recovery in 2012..."
David Stiff, chief economist of Fsserv said this in February, 2011. "Large supplies of foreclosed properties will continue to be the biggest downside risk for home prices..."
Radar Logic reported in March, 2011, "The supply of homes for sale and potentially for sale is very large relative to demand, and it continues to be fed by high rates of mortgage defaults and foreclosures. At the same time, demand for houses is constrained by tight lending standards. Unfortunately, delcining home prices are likely to exacerbate these challenges to the housing market"
I could quote more of the same, but you get the idea. My bottom line and what I am advising people is this:
+ If you absolutely need to sell, sell now. This is as good a time as you will probably have in the next two years.
+ If you can afford to stay in your present house for two years or more, it may be best to do that.
+ However, you really need to consider what you will do if you sell. It could be that the low mortgage rates and prices will help you to make up more in your next purchase than you will lose in selling now.
Where is the bright side you ask? - it is a fantastic time to buy. Prices are soft and going lower; mortgage interest rates are at historic lows. If you have equity in your house and want to move up, now is a great time.
How can a seller make use of these current trends? Well if you need to sell, now is probably the best time that you will have in the next couple of years. If you can wait for more than two years to sell, my advice would be to do it. I certainly hope that prices will be better by then. Of course, if somebody had asked me two years ago if prices would still be going down, I would have said probably not.
Not an easy set of trade offs to manage, but it can be done. If anyone would like some help in that or has another related real estate question, please feel free to email me at delcorealestate@gmail.com or call me at 484-468-1306.
Would appreciate your thoughts and comments.
Friday, May 6, 2011
HELP, I'M GETTING BEHIND ON MY MORTGAGE AND DO NOT KNOW WHAT TO DO
To begin here is a shocking statistic. 28% of the homeowners in the United States are "Under Water". That means they owe more on their mortgage than their house is worth.
Now, that does not mean that every one of these homeowners is in trouble. Many are still making their payments on time and plan to continue.
The folks who are in real trouble are the ones who are "Under Water and who also lose a job, need to sell right now to move to another part of the country, have a serious illness that interrupts employment, undergo a divorce or other big family upset. If they owe more than the house is worth and also encounter anything that undermines their ability to pay, they can be in a real pickle.
In other words, they find themselves in a place where they need to sell their house but the proceeds are too small to pay off the lender(s). What in the world can they do? Is foreclosure the only option? Most people would probably say yes to this question, but they would be wrong. A homeowner in this position has options other than foreclosure, but they need to get help. An experienced realtor, backed up with the right kind of legal and accounting help can provide this help.
If a homeowner is really "Under Water" and cannot make ongoing mortgage payments, the better avenue is to present the lender, who holds the first mortgage, with all of the facts in the case. If the lender agrees that the homeowner has a legitimate case, they will probably agree to a "Short Sale".
What is a "Short Sale" you say? That is an agreement wherein the lender agrees to accept whatever proceeds come from the sale of the home, even if it is less than what is owed, as full satisfaction of the debt. The lender will insist on the right to approve the deal, but in most cases, they will accept significantly less than the total amount owed.
Stated differently, if the lender(s) agree and the homeowner sells the house, all of the debt/liens that were on the house can be forgiven.
There are lots of advantages to this course of action as opposed to foreclosure. A few of them are:
Person who undergoes foreclosure is ineligible for another Fannie Mae backed mortgage for 5 years. A person who closes a short sale may become eligible after only 2-3 years.
After foreclosure, the former homeowner may find that he or she still owes the bank a lot of money. With a short sale, whatever the bank does not recover from the sale is forgiven and the homeowner owes nothing more.
Foreclosure lowers credit scores from 150 to 300 points, typically for over 3 years. A short sale can lower the credit score by as little as 50 points and the impact can be as short as 12 to 18 months.
Short sales are also better for the banks. On average, a short sale property sells for 89% of the full market value of the house. If the bank has to foreclose, that typically costs the bank another $60,000. For that reason, if the bank becomes convinced that the homeowner really cannot be expected to pay, it is also in their best interest to arrange for a short sale.
For the above and a lot of other reasons, a short sale is a lot better than foreclosure.
If you or anyone you know would like to learn more, in confidence, please email me at DelcoRealEstate@Gmail.com or call me at 484-574-4088.
Now, that does not mean that every one of these homeowners is in trouble. Many are still making their payments on time and plan to continue.
The folks who are in real trouble are the ones who are "Under Water and who also lose a job, need to sell right now to move to another part of the country, have a serious illness that interrupts employment, undergo a divorce or other big family upset. If they owe more than the house is worth and also encounter anything that undermines their ability to pay, they can be in a real pickle.
In other words, they find themselves in a place where they need to sell their house but the proceeds are too small to pay off the lender(s). What in the world can they do? Is foreclosure the only option? Most people would probably say yes to this question, but they would be wrong. A homeowner in this position has options other than foreclosure, but they need to get help. An experienced realtor, backed up with the right kind of legal and accounting help can provide this help.
If a homeowner is really "Under Water" and cannot make ongoing mortgage payments, the better avenue is to present the lender, who holds the first mortgage, with all of the facts in the case. If the lender agrees that the homeowner has a legitimate case, they will probably agree to a "Short Sale".
What is a "Short Sale" you say? That is an agreement wherein the lender agrees to accept whatever proceeds come from the sale of the home, even if it is less than what is owed, as full satisfaction of the debt. The lender will insist on the right to approve the deal, but in most cases, they will accept significantly less than the total amount owed.
Stated differently, if the lender(s) agree and the homeowner sells the house, all of the debt/liens that were on the house can be forgiven.
There are lots of advantages to this course of action as opposed to foreclosure. A few of them are:
Person who undergoes foreclosure is ineligible for another Fannie Mae backed mortgage for 5 years. A person who closes a short sale may become eligible after only 2-3 years.
After foreclosure, the former homeowner may find that he or she still owes the bank a lot of money. With a short sale, whatever the bank does not recover from the sale is forgiven and the homeowner owes nothing more.
Foreclosure lowers credit scores from 150 to 300 points, typically for over 3 years. A short sale can lower the credit score by as little as 50 points and the impact can be as short as 12 to 18 months.
Short sales are also better for the banks. On average, a short sale property sells for 89% of the full market value of the house. If the bank has to foreclose, that typically costs the bank another $60,000. For that reason, if the bank becomes convinced that the homeowner really cannot be expected to pay, it is also in their best interest to arrange for a short sale.
For the above and a lot of other reasons, a short sale is a lot better than foreclosure.
If you or anyone you know would like to learn more, in confidence, please email me at DelcoRealEstate@Gmail.com or call me at 484-574-4088.
Thursday, April 28, 2011
House Prices in Nether Providence Real Estate, What is Really Happening
This is another in my ongoing series of articles on what is happening to house prices in Delaware county.
National and regional trends tell only part of the story. While our area is certainly affected by those larger trends, just like politics, all real estate is local. This article focuses on single family house sales in Nether Providence Township (NP).
NP has actually been one of the areas that has shown more price retention than a lot of Delaware county, as measured by the average resale price of a single family house. Like most of the rest of our area, resale prices peaked in 2006 at $380,0452. That was an increase of 13% from 2005 and was the third year out of the most recent four in which prices showed double digit increases.
Here is a "Gee Whiz" number for you. From 2002, when the average resale price was "only" $244,342, the average resale price increased to the above mentioned $380,452 in 2006. That is an annual average increase of 13.5% (ah for the good old days, if you are an investor or a seller). Since the average increase in home prices is 3%, that was obviousle not sustainable, but I digress.
After prices peaked in 2006, NP actually was quite resistant to the overall regional price decrease in 2007. Average resale price declined only by about 1% in that year, before taking a negative hit of -11% in 2008.
Resale prices actually recovered slightly in the last two years, coming up to an average of $350,653 in 2010. (Ain't that a surpris though?)
Taking the longer view, prices have "only declined" by about 8% since the peak in 2006. Small consolation if you could have gotten $400,000 for your house back then and can expect $32,000 less now; but that is a lot heathier than some other parts of our area.
However, average resale price is only part of the picture, especially if you are a seller. Another measure of market health is the number of houses that are selling and how long does it take to sell.
All statistics are imperfect, but taken together they will give the best picture we can find. In NP, every year from 2001 through 2007, there were between 140 and 154 resales reported by our local Multiple Listing Service. Starting in 2008, those numbers were 104, 109 and 93. That is about a 30% reduction in annual sales, a big number by anyone's definition.
Another indicator of market health is the average Days on Market. That is the average number of days that a property was listed for sale before an agreement was finalized. In 2010 that was 112 days. In 2006, the last of the "Good Old Years", that number was 49. In other words, we have seen over a 100% increase in the amount of time it takes to sell a house.
However, for every cloud there is a silver lining. As much as this has been bad news for sellers and investors, it has been good news for buyers. The combination of soft and declining prices plus record low interest rates has resulted in an amazing window of opportunity for buyers. For those who are waiting for the market to bottom out to buy, my advice is to buy now. If you wait for evidence that we are at the bottom, you will have missed it.
If anyone would like more specific information, please give me a shout at DelcoRealEstate@Gmail.com. You can also try the old fashioned way by phone at 484-574-4088.
National and regional trends tell only part of the story. While our area is certainly affected by those larger trends, just like politics, all real estate is local. This article focuses on single family house sales in Nether Providence Township (NP).
NP has actually been one of the areas that has shown more price retention than a lot of Delaware county, as measured by the average resale price of a single family house. Like most of the rest of our area, resale prices peaked in 2006 at $380,0452. That was an increase of 13% from 2005 and was the third year out of the most recent four in which prices showed double digit increases.
Here is a "Gee Whiz" number for you. From 2002, when the average resale price was "only" $244,342, the average resale price increased to the above mentioned $380,452 in 2006. That is an annual average increase of 13.5% (ah for the good old days, if you are an investor or a seller). Since the average increase in home prices is 3%, that was obviousle not sustainable, but I digress.
After prices peaked in 2006, NP actually was quite resistant to the overall regional price decrease in 2007. Average resale price declined only by about 1% in that year, before taking a negative hit of -11% in 2008.
Resale prices actually recovered slightly in the last two years, coming up to an average of $350,653 in 2010. (Ain't that a surpris though?)
Taking the longer view, prices have "only declined" by about 8% since the peak in 2006. Small consolation if you could have gotten $400,000 for your house back then and can expect $32,000 less now; but that is a lot heathier than some other parts of our area.
However, average resale price is only part of the picture, especially if you are a seller. Another measure of market health is the number of houses that are selling and how long does it take to sell.
All statistics are imperfect, but taken together they will give the best picture we can find. In NP, every year from 2001 through 2007, there were between 140 and 154 resales reported by our local Multiple Listing Service. Starting in 2008, those numbers were 104, 109 and 93. That is about a 30% reduction in annual sales, a big number by anyone's definition.
Another indicator of market health is the average Days on Market. That is the average number of days that a property was listed for sale before an agreement was finalized. In 2010 that was 112 days. In 2006, the last of the "Good Old Years", that number was 49. In other words, we have seen over a 100% increase in the amount of time it takes to sell a house.
However, for every cloud there is a silver lining. As much as this has been bad news for sellers and investors, it has been good news for buyers. The combination of soft and declining prices plus record low interest rates has resulted in an amazing window of opportunity for buyers. For those who are waiting for the market to bottom out to buy, my advice is to buy now. If you wait for evidence that we are at the bottom, you will have missed it.
If anyone would like more specific information, please give me a shout at DelcoRealEstate@Gmail.com. You can also try the old fashioned way by phone at 484-574-4088.
Monday, April 18, 2011
BEHIND ON THE MORTGAGE? HELP IS AVAILABLE FOR YOU
As the economic slowdown seems to go on and on forever, more and more homeowners are feeling the pinch of trying to keep up with their monthly payment. As of today, there are 3,838 houses listed for sale in Delaware County. 257 of these are "Short Sales" (about 7%) which means that the sellers have too little equity in the property to pay off the mortgage when they sell.
The bad news is that this trend seems to be increasing. The good news is that help is available and that lenders are willing to work with homeowners and their agents to work out a settlement. More good news (for buyers at least, is that Short Sales can be a chance to buy a house at a significant discount to the market.
Many homeowners feel that there is no choice between keeping up their payments and declaring bankruptcy. Actually, they do have significant leverage with their lenders, for these reasons.
If a homeowner decides to just leave and "Give the house back to the bank", his or her credit rating takes an enormous hit that sticks with them for years. Banks do not like it either, because the foreclosure process is long (14-18 months in PA),it costs them a lot of money and the average foreclosure sells for only 59% of the normal value.
If however, the homeowner approaches the bank and lays out the case for a short sale, the average sale price for that situation is 81% of the normal value. That is 22 percentage points. On a house that is worth $300,000 in today's market, that is a difference of about $66,000 in more money to the bank. Other positives for the lender are that the whole short sale process costs a lot less and it can be done a lot faster. While neither a Short Sale nor a Foreclosure is a good thing for the lender, the Short Sale is a lot less damaging.
Not all situations are candidates for a Short Sale, but a lot of them are. If you think that you might qualify or if you know someone who might, you or they will be relieved to know that help is available that can get you out from under a real bad situation. However, this is not something that you should try on your own. You need the help of a trained and able Realtor to help you through the process.
If you would like to learn more about Short Sales, please send me a confidential email at DelcoRealEstate@Gmail.com or make an equally confidential phone call to me at 484-574-4088.
The bad news is that this trend seems to be increasing. The good news is that help is available and that lenders are willing to work with homeowners and their agents to work out a settlement. More good news (for buyers at least, is that Short Sales can be a chance to buy a house at a significant discount to the market.
Many homeowners feel that there is no choice between keeping up their payments and declaring bankruptcy. Actually, they do have significant leverage with their lenders, for these reasons.
If a homeowner decides to just leave and "Give the house back to the bank", his or her credit rating takes an enormous hit that sticks with them for years. Banks do not like it either, because the foreclosure process is long (14-18 months in PA),it costs them a lot of money and the average foreclosure sells for only 59% of the normal value.
If however, the homeowner approaches the bank and lays out the case for a short sale, the average sale price for that situation is 81% of the normal value. That is 22 percentage points. On a house that is worth $300,000 in today's market, that is a difference of about $66,000 in more money to the bank. Other positives for the lender are that the whole short sale process costs a lot less and it can be done a lot faster. While neither a Short Sale nor a Foreclosure is a good thing for the lender, the Short Sale is a lot less damaging.
Not all situations are candidates for a Short Sale, but a lot of them are. If you think that you might qualify or if you know someone who might, you or they will be relieved to know that help is available that can get you out from under a real bad situation. However, this is not something that you should try on your own. You need the help of a trained and able Realtor to help you through the process.
If you would like to learn more about Short Sales, please send me a confidential email at DelcoRealEstate@Gmail.com or make an equally confidential phone call to me at 484-574-4088.
Monday, April 11, 2011
MOVE UP NOW OR WAIT FOR RECOVERY? IT IS PROBABLY A DIFFERENT ANSWER FROM WHAT YOU MIGHT THINK
A common dilemma today is the homeowner wondering if it makes sense to sell in todays market and make that move up to a better house or wait until the market recovers.
Logical question, and the initial gut reaction is, "Man the value of my house is way down. I have to wait." However, when you look at the cash flows of making the move now and the estimated cash flows of waiting five years, the answer is a little bit surprising. Bottom line is that if you have enough equity in your house to cover the cost of moving up, you are smart to make that move right now. Of course if you are upside down and owe more than your house is worth, that is another story (and the subject for another blog which will be coming up shortly).
How in the world can that be you ask? Most of the answer lies in the extremely attractive interest rates for home mortgages, which are at historic lows right now. (4.5%, no points vs historical rates of 6.5% or more)
To explain further, please see below. Here are the planning assumptions that are behind the numbers.
Planning Assumptions
+ House prices decline for one more year, recover starting in 2012 and increase thereafter at the long term historical rate of 3% a year.
+ Home mortgage rates are at 4.5% in 2011.
+ Home mortgage rates increase to 6.5% by 2016.
+ Down payment of 20%
Under those conditions, if a house can be sold for $270,000 today and the sellers move up to a house that costs $450,000, their new Principal and Interest payment would be $1,824 a month.
If they wait until 2016, it is true that the selling price of their house will have increased up to $295,036. However, the price of the house to which they move up will also have increased, up to $491,727.
Their monthly payment after the 20% down payment will have increased to $2,486 a month. That is an increase of $662 a month or $7,948 a year.
Why is that so? Well, the increased mortgage amount accounts for about 25% of the increase, but the change in interest rates accounts for 75%.
What is the lesson? If you have enough equity in your present house to finance the move up, there will never be a better time to do it than today.
Another cash flow drawback of waiting for five years is that the amount of the 20% down payment will also have increased by, in this example, $8,345.
If you would like to explore these possiblities for your own situation, just give me a shout at 484-574-4088 or email to DelcoRealEstate@Gmail.com
Thanks for listening.
Logical question, and the initial gut reaction is, "Man the value of my house is way down. I have to wait." However, when you look at the cash flows of making the move now and the estimated cash flows of waiting five years, the answer is a little bit surprising. Bottom line is that if you have enough equity in your house to cover the cost of moving up, you are smart to make that move right now. Of course if you are upside down and owe more than your house is worth, that is another story (and the subject for another blog which will be coming up shortly).
How in the world can that be you ask? Most of the answer lies in the extremely attractive interest rates for home mortgages, which are at historic lows right now. (4.5%, no points vs historical rates of 6.5% or more)
To explain further, please see below. Here are the planning assumptions that are behind the numbers.
Planning Assumptions
+ House prices decline for one more year, recover starting in 2012 and increase thereafter at the long term historical rate of 3% a year.
+ Home mortgage rates are at 4.5% in 2011.
+ Home mortgage rates increase to 6.5% by 2016.
+ Down payment of 20%
Under those conditions, if a house can be sold for $270,000 today and the sellers move up to a house that costs $450,000, their new Principal and Interest payment would be $1,824 a month.
If they wait until 2016, it is true that the selling price of their house will have increased up to $295,036. However, the price of the house to which they move up will also have increased, up to $491,727.
Their monthly payment after the 20% down payment will have increased to $2,486 a month. That is an increase of $662 a month or $7,948 a year.
Why is that so? Well, the increased mortgage amount accounts for about 25% of the increase, but the change in interest rates accounts for 75%.
What is the lesson? If you have enough equity in your present house to finance the move up, there will never be a better time to do it than today.
Another cash flow drawback of waiting for five years is that the amount of the 20% down payment will also have increased by, in this example, $8,345.
If you would like to explore these possiblities for your own situation, just give me a shout at 484-574-4088 or email to DelcoRealEstate@Gmail.com
Thanks for listening.
Tuesday, April 5, 2011
Sales Still Struggling in Our Area
Market Report: Residential Home Sales Fall 3% in February, in our Area
Statistics are courtesy of MLS Trend and KCM.com
Residential sales activity for southeastern PA, southern New Jersey and Delaware dropped 3.8% in February 2011 compared to a year ago, according to statistics generated by MLS Blue. There were 2,785 sales reported in February 2011, compared to 2,896 in February 2010.
Two counties saw increases in sales activity, with the highest percentages in Chester County, PA (24.4%) and Mercer County, NJ (20.3%).
Of the remaining counties, the highest percentage decreases in sales were Salem County, NJ (25.0%), Montgomery County, PA (11.6%), Delaware County, PA (11.4) and Gloucester County, NJ (10.1%).
Sale Prices Decrease Slightly
Average sale prices decreased 2.3% when comparing numbers from February 2011 to February 2010. Overall, average sold prices increased in 5 counties.
The highest increases were:
• Delaware County, PA – 9.0%
• Philadelphia County, PA - 4.1%
• Montgomery County, PA – 3.5%
The highest decreases were:
• New Castle County, DE – 16.7%
• Kent County, DE – 16.4%
• Chester County, PA – 10.1%
Two counties saw higher median prices. Camden County, NJ led the way at 15.6%, while Salem County, NJ had the largest decrease at 21.8%. Bucks County, PA was unchanged.
Pending Sales Drop by 11%
Pending sales in February 2011 decreased in 10 counties compared to February 2010. Sales were 3,959 in February 2011 and 4,462 in February 2010.
The highest increases were:
• Kent County, DE – 25.3%
• New Castle County, DE – 20.3%
• Salem County, NJ – 11.1%
Individually, the highest decreases were:
• Camden County, NJ – 21.4%
• Bucks County, PA – 20.8%
• Philadelphia County, PA – 19.6%
Inventory at the end of February 2011 stood at 48,025 an increase of 2.8% from 46,671 in February 2010.
Comment from John Herreid: The inventory increase is another data point that shows we still have a lot of work to do to get out from under the inventory bulge that is the basic driver of soft and decreasing prices in our area.
Another large part of the inventory overhang problem, as per KCM.com, is that we have about an estimated 10 months of inventory across PA that is distressed , meaning it is heading for either a Short sale or Foreclosures. Short sales typically sell for about 81% of the full value of the property; foreclosures sell for about 59%. If you are interested in seeing what short sales and foreclosures are available in your area, please contact me at delcorealestate@gmail.com.
Statistics are courtesy of MLS Trend and KCM.com
Residential sales activity for southeastern PA, southern New Jersey and Delaware dropped 3.8% in February 2011 compared to a year ago, according to statistics generated by MLS Blue. There were 2,785 sales reported in February 2011, compared to 2,896 in February 2010.
Two counties saw increases in sales activity, with the highest percentages in Chester County, PA (24.4%) and Mercer County, NJ (20.3%).
Of the remaining counties, the highest percentage decreases in sales were Salem County, NJ (25.0%), Montgomery County, PA (11.6%), Delaware County, PA (11.4) and Gloucester County, NJ (10.1%).
Sale Prices Decrease Slightly
Average sale prices decreased 2.3% when comparing numbers from February 2011 to February 2010. Overall, average sold prices increased in 5 counties.
The highest increases were:
• Delaware County, PA – 9.0%
• Philadelphia County, PA - 4.1%
• Montgomery County, PA – 3.5%
The highest decreases were:
• New Castle County, DE – 16.7%
• Kent County, DE – 16.4%
• Chester County, PA – 10.1%
Two counties saw higher median prices. Camden County, NJ led the way at 15.6%, while Salem County, NJ had the largest decrease at 21.8%. Bucks County, PA was unchanged.
Pending Sales Drop by 11%
Pending sales in February 2011 decreased in 10 counties compared to February 2010. Sales were 3,959 in February 2011 and 4,462 in February 2010.
The highest increases were:
• Kent County, DE – 25.3%
• New Castle County, DE – 20.3%
• Salem County, NJ – 11.1%
Individually, the highest decreases were:
• Camden County, NJ – 21.4%
• Bucks County, PA – 20.8%
• Philadelphia County, PA – 19.6%
Inventory at the end of February 2011 stood at 48,025 an increase of 2.8% from 46,671 in February 2010.
Comment from John Herreid: The inventory increase is another data point that shows we still have a lot of work to do to get out from under the inventory bulge that is the basic driver of soft and decreasing prices in our area.
Another large part of the inventory overhang problem, as per KCM.com, is that we have about an estimated 10 months of inventory across PA that is distressed , meaning it is heading for either a Short sale or Foreclosures. Short sales typically sell for about 81% of the full value of the property; foreclosures sell for about 59%. If you are interested in seeing what short sales and foreclosures are available in your area, please contact me at delcorealestate@gmail.com.
Tuesday, March 22, 2011
Buying a House Continues to be a Great Deal
Buying a House Continues to be a Great Deal or,
We Think We’re Going to Believe Grandpa
Reprinted with permission from KeepingCurrentMatters.com
There are those currently debating the financial advantages of owning a home. Some are looking at studies and reporting that homeownership has never really been a great investment.
One of these people is Jack C. Francis, a former Federal Reserve economist and professor at Baruch College. He said in a recent CNBC article:
“For generations, parents and grandparents have been telling us that the way to get ahead was to buy a house and keep making payments with a fixed interest rate and after 20 or 30 years it would be way up in value and that was your nest egg in old age. You could either live in it rent free or sell it and use the proceeds to rent an apartment.”
The article goes on to explain the rest of Mr. Francis’ comment:
That was good advice until 2006 when home prices collapsed, he says, and it “may become good advice 10 years from now, but right now it’s not.”
Mr. Francis bases his conclusions on a study he completed which covered the years 1978 through 2008. In his study it showed that home prices increased annually by 5.7% and that the S&P 500 increased by 10.8%. Based on this information, Mr. Francis gives the following advice:
To students who come to him for guidance on whether to buy or rent in the near term, however, Francis has one word of advice: wait. “I keep telling them this is not the time to buy,” he says.
Let’s take a closer look at this conclusion.
1. We have our own study.
Mr. Francis did a study over a thirty year period which did not include the last 3 years. If we look at the same categories since January 2000 (covering one of the worst decades in American real estate history), we find that home values GAINED 42% while the S&P LOST 4.7%. It all depends on which set of data you choose to use.
2. The proper comparison is rent vs. buy.
All of these comparisons claim that putting your money into a different investment vehicle other than real estate might make sense. What they are not taking into consideration is that the investor will still have a housing expense. They will still need money for shelter. They cannot just take their money for shelter and buy other assets with it. A person can’t live in their 401k or their IRA. This leads us to…
3. In most markets today, owning is LESS expensive than renting.
Trulia recently came out with their Rent vs. Buy Index. The report shows:
that it is more affordable to buy than to rent a two-bedroom home in 72 percent of America’s 50 largest cities.
4. Current mortgage opportunities may never be available again
The government has driven mortgage interest rates to all time lows. You can still get a 5% rate and guarantee it for 30 years. Both of these opportunities may soon disappear. Mortgage rates will increase as the economy improves and the Fed no longer feels pressure to keep rates low. The 30 year mortgage may soon be a thing of the past if suggested mortgage reforms come to be. You can lock in your housing expense for 30 years if you purchase. Renting is like having an adjustable rate loan with no cap that readjusts EVERY year. Which way do you think a landlord will readjust it?
5. Most Americans see more to homeownership than financial value.
Last week, Fannie Mae released the National Housing Survey. The survey reported:
• 96% of all homeowners said homeownership has been a positive experience.
• 84% of Americans still believe that owning a home makes more sense than renting. Even 68% of renters believe owning makes more sense.
• 2 in 3 Americans believe that lifestyle benefits of homeownership (65%) are superior to the financial benefits (32%).
Bottom Line
There are more and more studies being done on the value of homeownership. We think we will trust in what our parents and grandparents said. Your mortgage payment is money you put into your savings. Your rent payment goes into the garbage.
We Think We’re Going to Believe Grandpa
Reprinted with permission from KeepingCurrentMatters.com
There are those currently debating the financial advantages of owning a home. Some are looking at studies and reporting that homeownership has never really been a great investment.
One of these people is Jack C. Francis, a former Federal Reserve economist and professor at Baruch College. He said in a recent CNBC article:
“For generations, parents and grandparents have been telling us that the way to get ahead was to buy a house and keep making payments with a fixed interest rate and after 20 or 30 years it would be way up in value and that was your nest egg in old age. You could either live in it rent free or sell it and use the proceeds to rent an apartment.”
The article goes on to explain the rest of Mr. Francis’ comment:
That was good advice until 2006 when home prices collapsed, he says, and it “may become good advice 10 years from now, but right now it’s not.”
Mr. Francis bases his conclusions on a study he completed which covered the years 1978 through 2008. In his study it showed that home prices increased annually by 5.7% and that the S&P 500 increased by 10.8%. Based on this information, Mr. Francis gives the following advice:
To students who come to him for guidance on whether to buy or rent in the near term, however, Francis has one word of advice: wait. “I keep telling them this is not the time to buy,” he says.
Let’s take a closer look at this conclusion.
1. We have our own study.
Mr. Francis did a study over a thirty year period which did not include the last 3 years. If we look at the same categories since January 2000 (covering one of the worst decades in American real estate history), we find that home values GAINED 42% while the S&P LOST 4.7%. It all depends on which set of data you choose to use.
2. The proper comparison is rent vs. buy.
All of these comparisons claim that putting your money into a different investment vehicle other than real estate might make sense. What they are not taking into consideration is that the investor will still have a housing expense. They will still need money for shelter. They cannot just take their money for shelter and buy other assets with it. A person can’t live in their 401k or their IRA. This leads us to…
3. In most markets today, owning is LESS expensive than renting.
Trulia recently came out with their Rent vs. Buy Index. The report shows:
that it is more affordable to buy than to rent a two-bedroom home in 72 percent of America’s 50 largest cities.
4. Current mortgage opportunities may never be available again
The government has driven mortgage interest rates to all time lows. You can still get a 5% rate and guarantee it for 30 years. Both of these opportunities may soon disappear. Mortgage rates will increase as the economy improves and the Fed no longer feels pressure to keep rates low. The 30 year mortgage may soon be a thing of the past if suggested mortgage reforms come to be. You can lock in your housing expense for 30 years if you purchase. Renting is like having an adjustable rate loan with no cap that readjusts EVERY year. Which way do you think a landlord will readjust it?
5. Most Americans see more to homeownership than financial value.
Last week, Fannie Mae released the National Housing Survey. The survey reported:
• 96% of all homeowners said homeownership has been a positive experience.
• 84% of Americans still believe that owning a home makes more sense than renting. Even 68% of renters believe owning makes more sense.
• 2 in 3 Americans believe that lifestyle benefits of homeownership (65%) are superior to the financial benefits (32%).
Bottom Line
There are more and more studies being done on the value of homeownership. We think we will trust in what our parents and grandparents said. Your mortgage payment is money you put into your savings. Your rent payment goes into the garbage.
Monday, March 21, 2011
What is Really Happening to Home Prices in Aston Township?
The main purpose of this blog is to analyze and publish local real estate statistics that shed some light on what is really going on in the local real estate market.
Recently I took a look at what has happened and is happening to the price of a single family house in Aston Township, Delaware County. Some of what I found may surprise you.
First of all, it is a common belief that home prices hit a peak in 2006 or 2007 and have declined since then. That is generally true, but the magnitude of the change is kind of surprising.
For example, just ten years ago in 2000, the average price of a single family house in Aston Township was $143,602. By 2007, that climbed to and peaked at $268,635. That is an average annual increase of 9.3%, which is high and unsustainable in the long term. The average longer term annual increase in house prices in the United States is about 3%.
The common belief is that that real estate prices have collapsed since then, but is that really true?
Please check out the below (Courtesy of Trend, MLS).
• The re-sale price of an average single family house in Aston increased every year from 2000 through 2007.
• Total increase was 87% from 2000 through 2007.
• In general, house prices doubled in most of Delaware County from 1996 through 2006.
• Since prices peaked at $268,635 in 2007, they came in at $247,725 in 2008, $240,269 in 2009 and $222,497 in 2010.
• That is a decline of 17.2% since the peak. Not fun for a seller, but a long way from the 50% declines that are real in places like Florida and California.
• By way of comparison, a "normal" real estate price correction is in the area of 10-20%.
• Bottom line, Aston Township has seen pretty much of a normal price correction.
Does this mean that we have gone through the decline and that prices are now ready to rebound? Well, probably not, and for these reasons.
It is well established that prices of any item are driven by supply and demand. The result of supply and demand is how much inventory we have.
The more inventory, the weaker the market and the more downward pressure on prices. (Just think of the after Christmas sales or inventory liquidation sales).
If we have less inventory of anything, demand tends to be up (other things being equal) and there will be upward pressure on prices.
In Real Estate, we have the following definitions:
• Seller Market, 1-4 months of inventory, More buyers than sellers and there is upward pressure on prices.
• Balanced Market, 5-6 months of inventory, about an equal number of buyers and sellers and prices are stable.
• Buyers Market, 7 months or more of inventory, more sellers than buyers and there is downward pressure on prices.
Back in the good old days (if you were a seller) of about 2003 through 2007, there were an estimated 2-5 months of inventory in Aston Township. There was upward pressure on prices and they peaked in 2007.
Starting in 2008, inventory levels increased to about 6.8 months. In 2010, there was an estimated 9.9 months of inventory at the end of the year. That exerts a downward pressure on prices.
Stated differently, there is a unsold inventory that has to be worked off before we can expect to see rising prices again. As per the real estate forecasting service at KeepingCurrentMatters.com, we can probably expect to see about one more year of declining prices, followed by a recovery starting sometime in 2012.
Locally, in places like Aston Township, when inventory levels get back to under 4 months, we should be able to see rising prices once again. Until then, it is a great time to buy.
If you would like more specific information about what has happened to house prices in the immediate area around your house, just let me know and I will be glad to develop it for you.
Recently I took a look at what has happened and is happening to the price of a single family house in Aston Township, Delaware County. Some of what I found may surprise you.
First of all, it is a common belief that home prices hit a peak in 2006 or 2007 and have declined since then. That is generally true, but the magnitude of the change is kind of surprising.
For example, just ten years ago in 2000, the average price of a single family house in Aston Township was $143,602. By 2007, that climbed to and peaked at $268,635. That is an average annual increase of 9.3%, which is high and unsustainable in the long term. The average longer term annual increase in house prices in the United States is about 3%.
The common belief is that that real estate prices have collapsed since then, but is that really true?
Please check out the below (Courtesy of Trend, MLS).
• The re-sale price of an average single family house in Aston increased every year from 2000 through 2007.
• Total increase was 87% from 2000 through 2007.
• In general, house prices doubled in most of Delaware County from 1996 through 2006.
• Since prices peaked at $268,635 in 2007, they came in at $247,725 in 2008, $240,269 in 2009 and $222,497 in 2010.
• That is a decline of 17.2% since the peak. Not fun for a seller, but a long way from the 50% declines that are real in places like Florida and California.
• By way of comparison, a "normal" real estate price correction is in the area of 10-20%.
• Bottom line, Aston Township has seen pretty much of a normal price correction.
Does this mean that we have gone through the decline and that prices are now ready to rebound? Well, probably not, and for these reasons.
It is well established that prices of any item are driven by supply and demand. The result of supply and demand is how much inventory we have.
The more inventory, the weaker the market and the more downward pressure on prices. (Just think of the after Christmas sales or inventory liquidation sales).
If we have less inventory of anything, demand tends to be up (other things being equal) and there will be upward pressure on prices.
In Real Estate, we have the following definitions:
• Seller Market, 1-4 months of inventory, More buyers than sellers and there is upward pressure on prices.
• Balanced Market, 5-6 months of inventory, about an equal number of buyers and sellers and prices are stable.
• Buyers Market, 7 months or more of inventory, more sellers than buyers and there is downward pressure on prices.
Back in the good old days (if you were a seller) of about 2003 through 2007, there were an estimated 2-5 months of inventory in Aston Township. There was upward pressure on prices and they peaked in 2007.
Starting in 2008, inventory levels increased to about 6.8 months. In 2010, there was an estimated 9.9 months of inventory at the end of the year. That exerts a downward pressure on prices.
Stated differently, there is a unsold inventory that has to be worked off before we can expect to see rising prices again. As per the real estate forecasting service at KeepingCurrentMatters.com, we can probably expect to see about one more year of declining prices, followed by a recovery starting sometime in 2012.
Locally, in places like Aston Township, when inventory levels get back to under 4 months, we should be able to see rising prices once again. Until then, it is a great time to buy.
If you would like more specific information about what has happened to house prices in the immediate area around your house, just let me know and I will be glad to develop it for you.
What is Really Happening to Home Prices in Delaware County?
WHAT IS REALLY HAPPENING TO HOUSE PRICES IN DELAWARE COUNTY?
Periodically, I try to publish local real estate statistics that shed some light on what is really going on in the local real estate market.
I recently took a look at what has happened and is happening to the price of a single family house in Delaware County. Some of what I found may surprise you.
First of all, it is a common belief that home prices hit a peak in 2006 or 2007 and have declined since then.
That is generally true, but the magnitude of the change is kind of surprising. For example, just ten years ago in 2000, the average price of a single family house in the country was $160,000. By 2007, that climbed to and peaked at $273,000. That is an average annual increase of right at 8%, which is high and unsustainable in the long term. The average annual increase in house prices in the United States is about 3%.
The common belief is that that real estate prices have collapsed since then, but is that really true?
Please check out the below (Courtesy of Trend, MLS).
- Since prices peaked at $273,000 in 2007, they came in at $267,000 in 2008, $250,000 in 2009 and actually rebounded to $261,000 in 2010.
- That is a cumulative decline of only 4.5% since the peak. Not fun for a seller, but a long way from the 50% declines that are real in places like Florida and California.
- By way of comparison, a "normal" real estate price correction is in the area of 10-20%.
- Inventory of houses for sale in the county was at or below 1,800 units until May of 2005.
- Sales in 2005 were 7,129 houses
- In 2010, the average inventory was 3,542 units or more than double that of May, 2005.
- Sales in 2010 were 4,171 units.
- Stated differently, supply (inventory) is up by more than 100%.
- Demand (sales) is down by 41%.
- Prices are driven by supply and demand. When supply is up and demand is down, prices go down. Overall, that is what we have seen and probably will continue to see for the next year.
If you would like more specific information about what has happened to house prices in the immediate area around your house, just let me know and I will be glad to develop it for you.
Thanks and please let me know if there is anything else that I can do for you.
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