Why Hasn’t the Housing Market Recovered?

Weekly Real Estate Kick-Off for August 2, 2010

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August 2, 2010 - This Week’s Topics:

  • Reasons Why The Housing Market Hasn’t Recovered
  • Sidelined Sellers Impacting the Housing Recovery
  • Treasury to Hold Conference on Fannie, Freddie Future
  • Foreclosures Rising in Most Metro Areas
  • Declaring Bankruptcy to Prevent Foreclosure
  • Fannie’s CEO Exclaims Strongest Book of Business Yet
  • Costs Associated with an Attorney

Reasons Why The Housing Market Hasn’t Recovered

It’s been four years since the housing bubble burst, but we’re still not seeing a recovery. Why? Many industry experts predict we’re heading for a “double dip” housing recession, despite seemingly optimistic developments in the market. A 30% drop in housing prices made buying a home affordable again for potential homeowners, and rates for a 30-year fixed mortgage are at a 50-year low. So why the glum outlook? Here’s six reasons:

  1. Unsteady labor market – Unemployment is still hovering around 9.5%, which means a lot of potential homeowners are either out of work or worried about losing their job. A steady labor market is the key to the housing recovery because a steady income is the first step to buying a home. Until the job market stabilizes, the housing market will continue to feel the results.
  2. Fewer new households – As jobs are scarce, those who are unemployed are moving in with friends or family members, making the number of new households created at the lowest level since 1947. From March 2008 to March 2009, only 398,000 new households were formed, compared to the norm of 1.2 million. This is one of the key drivers of real estate demand.
  3. Foreclosures – The housing market is still significantly oversupplied- with an 8.3 month supply of unsold homes, compared to the average 6-month supply of a balanced market. Foreclosures continue to hit the market, with filings reported on nearly 1.7 million homes in the first six months of the year, with more on the way.
  4. Tight credit – Even though mortgage rates are at an all-time low, not everyone can take advantage of that. Lending standards have increased significantly, thanks to huge losses the banks incurred during the housing boom. Today borrowers need high credit scores (above 720), 10% for a down payment and fully documented assets and income.
  5. Falling home prices – While home prices have stabilized, they are expected to continue to fall. As a result, people are scared away from entering into homeownership, fearing their investment could lose value before they even get settled.
  6. Selling the other home – Today approximately one in four homeowners owe more on their house than it’s worth, meaning they will take a loss if they sell their house. These homeowners are not in a position to help the housing market recovery at all.

Sidelined Sellers Impacting the Housing Recovery

Sellers who have been “sidelined” during the housing bust may pose a threat to the overall recovery of the housing market. These are homeowners who have wanted to sell their houses, in some cases for years, but have been holding off on listing them due to falling prices. But as the slightest signs of an upturn appear, they will start testing the waters. Many agree that this group represents another form of “shadow inventory” still to come. Last year, Zillow.com surveyed homeowners and found that 7% would be very likely to put their home on the market if they saw any signs of improvement in the overall housing market. That low percentage translates to 5 million homes! Once people see positive news for a couple of months, they are going to test the waters for themselves, meaning more homes added to the national inventory. It will prevent supply from getting too low. On top of that, the percentage of home sellers with equity in their homes is sitting around 63%, meaning they will continue to cling to unrealistic views of how much their homes are worth.

Treasury to Hold Conference on Fannie, Freddie Future

Could the government finally be reaching a decision on what to do with Freddie Mac and Fannie Mae? In just two weeks, the Treasury will hold a conference to discuss their future. Mortgage industry representatives, including bankers, consumer groups and housing advocates are expected to attend the conference set for August 17. Critics say the administration’s failure to deal with the mortgage crisis in a larger way has contributed to at least hundreds of thousands of additional foreclosures. The recent financial overhaul didn’t include any provisions for the mortgage giants, despite protests. The Obama administration said it wants to wait until next year to make a decision. So far, stabilizing Freddie and Fannie has cost taxpayers $145 billion. Treasury Secretary Timothy Geithner said the administration’s ultimate plan is to bring dramatic change to the mortgage system. “We're not going to preserve Fannie and Freddie in anything like the current form. We're going to have to bring fundamental change to that market." He said the administration will consider "preserving or putting in place a carefully designed guarantee" in which the government would ensure that it's possible for consumers to get mortgages -- even in a severe recession.

Foreclosures Rising in Most Metro Areas

The number of foreclosures continues to rise across the country. In fact, in 154 out of 206 metropolitan areas with at least 200,000 residents showed an increase in foreclosure activity in the first six months of the year, according to RealtyTrac Inc. This figure shows that foreclosures are spreading beyond the top tier of metro areas in California, Florida, Nevada, and Arizona. The combination of a weak job market and a weak housing market is making the threat of foreclosures spread to areas that, in the past, were not affected. Florida alone has nine of the top 20 areas. In all, one in 78 homes received a foreclosure-related warning in the first six months of the year. On a brighter note, nine of the top-10 hardest hit areas saw a lower foreclosure rate than a year ago. However, they still have foreclosure rates that are as much as five times higher than the national average.

Declaring Bankruptcy to Prevent Foreclosure

Filing bankruptcy can bring foreclosure proceedings to a halt, it’s true. It will end the harassment of debt collectors and give homeowners time to make up missed payments and reorganize their finances. In some cases, it can save their homes permanently. Be clear, this is not the solution for every troubled homeowner. If the problem is the homeowners not having enough money, bankruptcy won’t solve that. But, if someone has a steady income but is behind in payments, it might help. Bankruptcy will halt the foreclosure process because lenders can’t even attempt to foreclose until the courts say it’s ok. Which type of bankruptcy – Chapter 7 or 13 – will impact whether someone can keep their home when they emerge from bankruptcy. Chapter 13 is usually more effective in helping people keep their homes if they have kept up on their payments throughout the process. Bankruptcy has its risks. It can take off as much as 240 points from one’s credit score, and can remain on credit reports for as long as 10 years.

Fannie’s CEO Exclaims Strongest Book of Business Yet

Fannie Mae’s CEO, Michael Williams, said that the company is building the “strongest book of business” they’ve seen in the last decade. This is all thanks to tighter underwriting standards and more prudent lending standards. Williams attributes the improving loan quality to their emphasis on safer products, including long-term, low, fixed-rate loans, better borrower documentation and more accurate property appraisals. Credit scores of borrowers are around 760, on average. Over 90% of borrowers have plain old long-term, fixed-rate loans. Loan-to-value ratios are nearly 70%. “Step-by-step, we are putting in place a new foundation for our industry. It’s a foundation based on the right lending standards and on a broad reexamination of what constitutes sensible risk,” said Williams. He added that, “practical and sensible lending, and prudent underwriting practices are the key to a bubble-free and burst-free market.”

Costs Associated with an Attorney

When working with an attorney, it's important to know if the attorney will be working on a flat fee or an hourly rate basis. If on an hourly basis, ask about their hourly rate and at what increments do they bill? Make sure you have a clear understanding of not only what the attorney's fees will be, but how they expect to be paid and when they expect to be paid. In some firms, attorneys charge on hourly rate and their assistants are charged at a lesser or lower hourly rate. Make sure you understand how you will be billed and make sure that you understand how payment is expected. Ask them:

1) Is there an initial retainer charge up front?

2) How much of that retainer is refundable if the work is completed for less than what was anticipated?

3) How frequently will you be billed? Ask about their policy regarding communication with clients.

4) Do they charge for phone calls, postage or photocopying?

5) Ask what's their preferred method of communication - by email, phone or letter?

6) Ask if you can use their conference room to meet with potential clients.

Hope your week is filled with real estate investing success.

Until next time… ~Josh

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