March 15, 2010 – This Week’s Topics:
• Freddie and Fannie Bounce Mortgages Back to Banks
• Unfinished Construction Offers Investors Another Opportunity to Profit
• Builders Look to Prosper from Hidden Transfer Fees
• Pittsburgh, Louisville Top List of Best Housing Markets
• The American Culture of Homeownership
• 30-Year Fixed Mortgage Rates Fall to 4.76%
• Breathe Life into Your Real Estate Investment Portfolio with Probates
Freddie and Fannie Bounce Mortgages Back to Banks
Freddie Mac and Fannie Mae may force lenders to buy back $21 billion in home loans as part of a crackdown on faulty mortgages. Those banks impacted include Bank of America, JPMorgan Chase & Co., Wells Fargo & Co., and Citigroup Inc. In 2009, Freddie and Fannie stuck those four banks with $5 billion in buybacks. According to a Freddie Mac spokesperson, “We are trying to be good stewards of taxpayer dollars and as part of that, it’s important that those dollars not go to loans that should not have been sold to us in the first place.” These efforts seem counterproductive, as the Treasury and Federal Reserve are trying to help banks heal by recapitalizing them; then along come Freddie and Fannie adding more pressure on the banks through the buybacks. In 2009, BOA recorded a $1.9 billion “warranties expense” for buyback loans; JPMorgan Chase recorded $1.6 billion of costs from repurchases in 2009; Wells Fargo bought back $1.3 billion in loans in 2009; and Citigroup increased its repurchase reserve to $482 million due to a trend by investors for loan-documentation packages to be reviewed. While the 2009 mortgages are proving to be of better quality than previous years, mortgage repurchases are expected to crimp bank earnings through 2011.
Unfinished Construction Offers Investors Another Opportunity to Profit
As a bargain hunter and a real estate investor, what could be better than this: buy a foreclosed, partially finished house at a deep discount, finish it and sell it again or end up with a really nice, brand new home for a song? Sounds ideal, but it’s not always that easy. The vast majority of foreclosed home across the country are existing home, not new home construction. Most existing foreclosure homes are being bought by investors looking for a quick turnaround, perhaps 90 days. There is not as much competition for partially finished homes, which tend to be longer projects. For most buyers, the advantage can come in the financing. Do-it-yourselfers will need to be prepared to pay cash for the cost of the home and the cost to finish it. When the work is done, though, the buyer may be able to get a conventional mortgage. A common pitfall in this type of gamble is underestimating the cost of construction completion. While a shell house may seem more daunting, there is less chance for hidden repairs needed from the house standing vacant or idle for any length of time. The window of opportunity on this type of investment is slowly closing as the inventory of foreclosed partially-completed new construction homes is shrinking. Most builders are not even starting new projects without proof of rock-solid financing from the purchaser.
Builders Look to Prosper from Hidden Transfer Fees
There is a new trend that some developers are embracing, mainly due to the stalled home development market: the hidden transfer fee. This so-called flip tax gets paid to the developer every time the house gets sold. This is a sort of lien attached to a newly built house over a 99 year period! Every time the house is sold in that time, the original developer receives 1% of the price. With the average homebuyer keeping a house for six years, that’s a lot of additional revenue for the builder. Thanks to the controversy this hidden fee has caused, some states are now beginning to either limit or ban the private transfer fee. These states include Kansas, Oregon, Florida and Missouri. Texas and California have imposed restrictions. Since this leaves the majority of states not acting on the fee yet, homeowners need to be aware that it is out there before signing a contract for a new home, because the fees are not subject to negotiation. This may result in homes with transfer fees being more difficult to sell, which is bad news for the current homeowner in an already difficult selling market.
Pittsburgh, Louisville Top List of Best Housing Markets
Homes are at their most affordable rate in 18 years. According to the Housing Opportunity Index, in the fourth quarter of 2009, housing was 62.4% more affordable than the same time a year ago. To find the country’s best housing markets, the Housing Opportunity Index, a metric created by the National Association of Home Builders and Wells Fargo that determines affordability by measuring median home prices against median incomes, was used. Focusing on the 40 largest housing Metropolitan Statistical Areas that the HOI ranks, Moody’s Economy.com’s one-year forecast for the S&P/Case-Shiller Home Price Index, a measure of sales prices in major markets, was factored in to determine where home prices were expected to rise. Finally the 2009 Foreclosure report from RealtyTrac was included, ranking cities by their percentage of foreclosures. Averaged rankings for all these measures were used to arrive at an overall score.
Pittsburgh tops the list of most affordable housing markets, with appreciating prices that show homeowners are making wise investments; and an affordability rating that gives middle-class families with good credit entry into the market and a relatively low number of foreclosures. In Pittsburgh, 85% of the homes are affordable to those meeting the median family income of $62,500. Only one in every 120 homes is in foreclosure, and home prices are expected to increase 2.67% by the end of the year.
The top ten markets include:
• Pittsburgh, PA
• Louisville, KY
• Houston, TX
• Minneapolis – St. Paul, MN
• Indianapolis, IN
• Columbus, OH
• Memphis, TN
• St. Louis, MO
• Dallas-Fort Worth, TX
• Austin, TX
The American Culture of Homeownership
Federally subsidized housing has a long tradition in our country, beginning in the Great Depression with the creation of the FHA in 1934 and Fannie Mae in 1938. It’s more pronounced during the current financial crisis, with Freddie Mac, Fannie Mae and the FHA propping up the housing market by issuing guarantees for investors on new mortgages. According to some experts, there is a certain wisdom to this approach related to our sense of national identity. Federal subsidies began as a way to reduce unemployment by stimulating housing, as many of the unemployed were associated with the building trades. But what will happen once the economy is operating at full capacity? Economics tells us that when Americans spend more on housing, they spend less elsewhere. Why should housing win out over other types of spending? The answer can be found in American culture: there is a “long-standing feeling that owning homes in healthy communities is connected to individual liberties that embody our national identity. Homeownership is associated with freedom.” If we choose to keep subsidizing individual homeownership, we will also need to build in safeguards so homeowners are less vulnerable financially.
30-Year Fixed Mortgage Rates Fall to 4.76%
Mortgage rates for 30-year fixed mortgages declined this week, with the current rate borrowers were quoted on Zillow Mortgage Marketplace at 4.76%, down from 4.80% at this time last week. The 30-year fixed mortgage rate fluctuated between 4.76 and 4.82 during the past week. Additionally, 15-year fixed borrowers were quoted on average, 4.24% and for 5/1 ARMs, 3.47%.
Breathe Life into Your Real Estate Investment Portfolio with Probates
Probates represent one of the most overlooked areas of real estate investing for finding motivated sellers and big profits. They offer a very consistent source for leads, and there is generally little or no competition. When a house goes into probate, the heirs can be very motivated sellers, willing to sell you the property at a big discount, below market value (often 30-40% below). They may have no choice but to sell the house quickly:
• The heirs don’t have the money to maintain the house payments.
• They have homes of their own already.
• Too many repairs are needed, with not enough money to pay for them.
• The house is heading to foreclosure.
• They need or would rather have the money than the house.
• Too much baggage attached with the house – estate taxes, utilities, insurance, ongoing maintenance.
• They live too far away to maintain the house.
• It holds a negative emotional attachment.
As a knowledgeable real estate investor, you’re taking a burden off their hands and providing a solution to a problem. Finding property probate opportunities is not difficult; it just involves an investment of your time. Start with your local courthouse records. Wills in probate are public record. Use that list to conduct a property or deed search on the decedent to find any real estate they owned. Then it’s a matter of making some phone calls, sending out letters or knocking on doors to contact the estate administrator or executor. Be sure to research probate laws in your state.
Hope your week is filled with real estate investing success.
Until next time… ~Josh
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