Hey everyone, I hope you all had an awesome Memorial Day weekend. It was great to spend some extra time with my family, and also remember those who gave their lives in service for our country. For them, I’m grateful. Now it’s back to the work week ahead, and I wanted to kick it off by sharing some articles I found. Enjoy!
June 1, 2010 - This Week’s Topics:
- Lowest Mortgage Rates of the Year
- 60% of Cities See Home Prices Stabilize
- Commercial Short Sales on the Rise
- $3B Foreclosure Prevention Program Added to Bill
- FHA Backed Loans Top Freddie, Fannie
- The Real Estate Crisis Trickle Effect
- Tips for Managing Real Estate Agents
Lowest Mortgage Rates of the Year
The average 30-year fixed-rate mortgage fell to its lowest point of the year last week – 4.78%, just shy of the 4.71% record set in December 2009. This new low resulted in an increase in applications to refinance to the highest level in seven months. Experts predict that rates will increase again as soon as investors gain more confidence and move away from the less-risky government bonds. When investors move from bonds back to the stock market, mortgage rates will go along, steadily increasing. Homeowners looking to refinance will have to act fast, because waiting for the bottom could mean losing out. However, even with these tempting rates, loans for home buying remain at a 13-year low. Why? Mainly due to the homebuyer tax credit ending in April, and stricter loan requirements which call for solid credit and a larger down payment.
60% of Cities See Home Prices Stabilize
Home prices rose in 91 out of 152 metropolitan areas in the first quarter of this year, according to the National Association of Realtors. Twenty-nine of those showed double-digit increases. Does this mean the housing market is finally starting to stabilize? Many think so, thanks to intervention from the federal government in the form of tax incentives. About 2.2 million homeowners used the first-time tax credit by late March. Of that, one million can be directly credited to the program. Most housing experts expect home prices to remain flat for the next couple of years or show modest increases, assuming unemployment and the economy remain relatively stable. Foreclosures and distressed homes still accounted for 36% of all home sales, so there are great opportunities out there for real estate investors.
Commercial Short Sales on the Rise
Investors are showing a swelling interest in commercial real estate these days, thanks to an increase in the number of short sales available. A congressional panel recently estimated that $1.4 trillion in commercial loans will reset within the next four years, with most of those being underwater. Commercial property owners are facing more vacancies, which means less rent coming in with the loans coming due. There are differences between commercial and residential short sales. The government will not bail out commercial loans the way they did residential. There is also a much more aggressive relationship with commercial loans, and a significant tax liability. A commercial short sale generates taxable income for the seller. For example, if a commercial property owner borrowed $5 million for a property, and sells it via short sale for $3 million, the IRS is going to hold them accountable for the remaining, forgiven $2 million. While a short sale process can be long and complicated, it’s better than simply walking away.
$3B Foreclosure Prevention Program Added to Bill
Last week the Senate passed the Restoring America Financial Stability Act, designed to reduce mortgage payment for unemployed homeowners. The program will lend up to $50,000 to eligible homeowners, who are expected to be able to start making payments again within two years. With national unemployment at 9.9%, this program could offer much-needed relief to many. The program is modeled after Pennsylvania’s Homeowners’ Emergency Mortgage Assistance Program, which has provided $236 million in relief to the unemployed mortgage owners in that state. The bill is expected to go before President Obama before the July 4 recess.
FHA Backed Loans Top Freddie, Fannie
FHA-insured loans are problematic, but are now a bigger part of the market than both Freddie Mac and Fannie Mae combined. During the first quarter of this year, FHA insured loans backed $52.5 billion in home mortgages, compared to Freddie and Fannie’s $46 billion. Together that’s 95% of all loans being run by the government. The FHA backs loans with down payments as low as 3.5%, meaning people will purchase a home with as little money down as possible. So it’s no surprise that default rates are on the increase for FHA-backed loans. These loans are replacing the toxic loans that got us in this housing crisis in the first place. As a country, the savings rate is trending downward. The huge FHA volume is a direct symptom of the larger problem of consumption based on easy debt. These days because of spending habits, people have a harder time stashing away 10% for a down payment on a house. The 3.5% route is much easier and more convenient, but really a short-sighted solution. We already know that no or low down payments are a bad idea. We know that really low interest rates don’t solve problems, and we know that de-centralizing lending was a bad idea. So why isn’t the government imposing tougher standards? To fill the gap left by Alt-As, option ARMS, no-doc, interest only, and other junk loans people moved to the path of least resistance - the FHA.
The Real Estate Crisis Trickle Effect
For a struggling economy trying to find its footing, the real estate continues to act as a weight on progress. Foreclosure and oversupply in both commercial and residential real estate is crimping any forward momentum created by increases in manufacturing and spending. Here are four ways:
- Less construction = fewer jobs – the construction industry lost 2.1 million jobs from March 2007 to April 2010. The remaining jobs constitute a mere 4% of the total workforce. Thanks to a glut of houses and empty commercial space, it’s not likely these jobs will return soon, putting more pressure on unemployment. Construction spending is 13% below last year’s level.
- Home owners are feeling poorer – The ratio of dollars taken out of homes to total personal income fell the last three quarters of 2009. This ratio is a gauge of how much consumers take out in relation to how much they earn. Many consumers are left with a huge amount of debt but little home equity left for investing or spending, which tends to be more sustainable.
- Small businesses are not borrowing as much – Smaller businesses are key to job recovery and growth, and they often use their own property value to secure loans. As those values have fallen, so has their ability to get loans, thereby hampering investment and hiring when we need it most.
- Lower real estate values = lower property taxes – The result is hampered government spending. Much of the money used to pay government employees – including police and safety workers, teachers and others – comes from property taxes. Property taxes rely on property values. Although property taxes have continued to grow, that won’t last as tax assessments catch up (they are a lagging indicator).
Tips for Managing Real Estate Agents
Successful real estate investor must learn to get along with and rely upon knowledgeable and aggressive realtors. They will frequently be a source of deals for properties that you can buy or negotiate short sales when the realtor is unable to list them. When interviewing a prospective real estate agent or realtor for your dream team, you'll need to ask them the following:
- Are you a full time real estate agent?
- In the last twelve months, how many houses have you listed? How many houses have you sold? These questions will tell you if the person is merely a "lister" who does absolutely nothing to market their property or if they are diligent about selling what they have listed and capable of bring in buyers.
- In the last twelve months, what is the gross sales price of all the transactions that you have participated in? (Usually they will embellish the truth and just about double the true number.)
- Find out if the agent has any specialized areas and whether any areas that they are "farming" are consistent with any areas that you as an investor are farming.
- Ask the agent if you are able to develop a good working relationship with them, will they refer to you home sellers that either owe too much on their property, or are behind on their mortgage, and therefore the agent is not able to list their properties with any likelihood of success in selling the property.
Hope your week is filled with real estate investing success.
Until next time… ~Josh
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