Many First-Timers Considering Buying a Home This Spring

In a survey for Century 21 Real Estate fielded earlier this month among prospective first time home buyers who indicated they were likely to purchase a home in the next two years, a majority — 78% — said that now is a good time to buy a home, despite widespread concern about the economy. Of those responding to the online poll, 68% said that now is a better time to buy than six months ago.

Prices emerged in the online survey as the primary driving force for prospective first-time buyers, with 85% saying they consider current homes prices affordable and 73% saying that taking advantage of current pricing would be a major factor in their decision to buy.

However, potential first-time buyers are still split between “being willing to consider an offer now” (42%) and “waiting for prices to go down before they seriously consider making a purchase” (48%).

“Current pricing, rates and incentives — such as the first time home buyer tax credit — provide tremendous opportunities for first-time home buyers to get into the market,” said Tom Kunz, the president and CEO of Century 21.

“Our research shows that while consumers still have concerns about the future of the economy, many are actively considering their options as we move into the spring selling season,” he said.
More than three-quarters of those polled — 77% — said they are more likely to buy a home in the next six months because of the $8,000 first-time buyer credit.

Perceptions about the residential mortgage market remain a key concern for potential first-time home buyers, the survey found.

Seventy-two percent considered current mortgage rates affordable and 62% recognized that rates are lower than they were a year ago. However, 75% said they believe it is difficult to get a home loan right now and 74% think it is harder to get a loan than the same time last year.

“Traditional mortgage investors, Fannie Mae, Freddie Mac, FHA and VA are receiving significant financial backing from the federal government, keeping interest rates low and mortgage funds available for qualified buyers,” said Marshall Gayden, senior vice president of Century 21 Mortgage.

“Home buyers who have a stable job history of at least two years, solid credit (620 and above) and downpayment money that can be documented (3.5% on FHA loans) are well positioned to secure a mortgage in today’s credit environment,” Gayden said.

Prospective first-time buyers also indicated that there is a real need for someone who can provide accurate and reliable information while they look for a home. When asked about the real estate transaction process, more than half — 59% — of potential buyers rated their understanding of the process as only “fair” or “poor.”

“Between home loans and the closing process and understanding the new government stimulus, real estate professionals play a vital role in working with first-time home buyers to help them navigate the current market,” said Kunz.

Among other key findings of the survey:

• Bargains in the marketplace are providing additional options for buyers to consider.
• Fifty-six percent of potential first-time home buyers are considering purchasing a foreclosed or short sale home, and 63% are open to purchasing either a “fixer-upper” or “as-is” home.
• When asked to rate the features that they look for when choosing a home, price is the primary consideration, with 87% saying it is “very important,” followed closely by neighborhood safety (80%) and the condition of the home (71%).
• Having enough money for a downpayment is a top concern, with 46% saying they are “very worried” about the issue.
• Most respondents — 86% — reported being in the market for single-family homes.

Beach to Bay Real Estate Center is a full service real estate brokerage servicing buyers, sellers and renters at the Delaware beach areas. We handle all forms of real estate, including residential, commercial, and lots and land, in addition to bank owned, short sales and auctioned properties and representation; mortgage needs including refinances, new home purchases, second homes, first time homebuyer programs and reverse mortgages; maintain professional relationships with local settlement attorneys, insurance companies, contractors, and inspection companies; and are affiliated with a preservation and restoration company. Beach to Bay services all of Sussex County, and southern Kent County, with a strong focus on the beach resort areas of Rehoboth Beach (19971), Lewes (19958), Bethany Beach (19930), Dewey Beach (19971), Milton (19968), Millsboro (19966) and more.

State of the Housing Market

I’ll start with the subject we all care about the most: housing. First, some good news: Existing Home Sales (for February) came out yesterday and unexpectedly rose by 5.1%. This is the largest monthly rise since July 2003. As you all know, I thought home sales would bottom in November but I was wrong . . . January’s #s were lower than November’s. I expected Obama’s Stimulus package to more aggressively attack the housing problem.

Unfortunately, the housing problem was pretty much left out of Obama’s $800 billion stimulus package ($8,000 tax credit for 1st time homebuyers doesn’t really help much). As I explained previously, the deflationary spiral in housing is very well entrenched and really requires government intervention to stop it from continuing.

Fortunately, the quantitative easing (explained below) the Fed announced last week should hold mortgage rates low for awhile which should help the housing market. If the uptrend in sales continues, January will be the bottom in terms of Home Sales. However, due to the declining stock market and the extreme negativity of the media, consumer sentiment was very low in the first half of March, so, it is possible that March Home Sales will be lower than February’s. On the bright side, if the stock market keeps going up or at least, doesn’t decline much, I think consumer sentiment will improve dramatically in late March/April. This will definitely help home sales. A 500 point gain on the Dow yesterday will certainly help sentiment.

Home Sales can be thought of as the 1st derivative of Home Prices. In other words, Home Sales reflect the slope of the Home Price curve. As Home Sales start increasing, we will see the pace of Price declines start to moderate. Once home sales rise sufficiently and go above a certain threshold, Home Prices will finally bottom out and start to rise. I expect this to happen late this year on a National level, possibly sooner if we get a dramatic stock market rise or additional housing stimulus.

In the meantime, I would suggest that you use the dramatic and unexpected increase in existing home sales in February as an indication of a bottom in housing to generate some urgency with your prospects. Here’s a good article you may want to email to your prospects to create some urgency: www.cnbc.com/id/29553757

Home Prices & Affordability

It’s very frustrating for me when I hear “economists” in the media speaking about how they believe home prices still have to drop a bit to return to historical levels relative to incomes. Granted, I agree that home prices will indeed drop more but I vehemently disagree that home prices are still too high. I’m not sure what data these “Professionals” are looking at but the Nationals Data reported by the Census Bureau indicate that the housing bubble has sufficiently burst and prices are back to normal levels. In fact, if you factor in current mortgage rates, homes have never been more affordable. I’ll provide some graphs below to illustrate this.

One of the most common stats referred to regarding home prices is the ratio of the Median Home Price to the Median Household income. Historically, as you can see below, home prices are usually between 3 and 3.5 times Household Incomes. Right now, using today’s data, we are at 3.16. Going back prior to 1980 isn’t really that relevant since the 30 year fixed mortgage industry as we know it today didn’t really exist until the 1980s. In fact, pre-1940, if you wanted to buy a house, you had to take out a 5 year loan (imagine how high the payments were on a 5 year loan).

However, keep in mind, the graph above doesn’t take into account interest rates. As I’ve explained before, most people buy homes by getting a mortgage so you really can’t evaluate the affordability of home prices without incorporating current mortgage rates. The graph below shows the % of Monthly Household Income (Median) needed to pay the Mortgage Payment on a Median Priced Home.

This graph shows that for as far as the data goes back, homes have never been more affordable than they are now. HOWEVER, AND THIS IS REALLY IMPORTANT: Notice how the “bubble” in prices really doesn’t show up on this graph like it does in the first graph above. I found this extremely interesting. Why don’t we see the price bubble in this graph??? The reason is that while home prices boomed, mortgage rates dropped almost as fast as prices went up. So, one could make the argument that we really didn’t have as much of a price bubble as people thought . . . it was mostly a result of dropping mortgage rates as opposed to the common belief that people were buying homes that they couldn’t afford. Granted, many people did buy homes they couldn’t afford but the graph above shows that although median home prices went way up, mortgage rates came down so fast that there was only a slight increase in the % of Household Income used for the Mortgage Payment. So, the average home buyer between 2003-2005 wasn’t as overextended as is commonly believed. Clearly, in areas like California and Las Vegas, home prices were way too high relative to Incomes and people did overextend themselves, but this is not the case for most of the rest of the country. As you can see, homes have never been more affordable. Right now, it requires only 20% of the Median Household Income for the Mortgage Payments on the Median Prices Home (and this assumes 100% financing . . . just multiply all #s by .8 to assume a 20% down payment).

Mark-to-Market Accounting

One of the big issues discussed in the media regarding the banks’ health is Mark-to-Market (MTM) Accounting. First, let me explain what this means. Basically, prior to 2007 (FAS 157), when banks purchased securities such as Mortgage Backed Securities, banks would value the securities on their books at the purchase price (more or less). So, if ABC Bank paid $100 for Security X, ABC Bank would report the value of Security X as $100 until they sold the security, at which point, they would recognize a profit or loss on the sale. Mark-to-Market, or Fair Value, accounting states that banks must report the value of their assets at current market prices (whether they sell them or not). This means, that if a security similar to Security X was recently sold by another bank for $80, ABC Bank would be forced to “write down” the value of Security X to $80 and report at $20 loss.

Right now, most banks own a large amount of Mortgage Backed Securities (CDOs, CMOs, etc). A Mortgage Backed Security (MBS) is just a pool of mortgages where the owner of the MBS collects the payment made by all the people who took out these mortgages. Prior to late 2007, there was a fairly liquid market from MBS securities, meaning, banks could easily sell their MBS securities if they didn’t want to keep them on their books. Once home prices started to drop substantially and mortgage default rates increased, nobody wanted to buy MBSs anymore. Nobody knew how bad the housing market would get and how many people would default on their mortgages so it became very difficult to value MBS securities. So, basically, almost overnight, there were no buyers for MBSs. MBSs became “toxic assets”. Because a normal market from MBSs evaporated, the only transactions for MBSs that took place after late 2007 were “distressed sales”. This means that a bank or hedge fund who owned MBSs could only sell them at drastically discounted prices . . . usually less than 50% of par value. In the example above, ABC Bank could only sell Security X if it was willing to accept a price of $30 (30 cents on the dollar).

So, these “distressed sales” became the new market prices for MBSs. This creates a huge problem. These distressed MBS sales combined with the new Mark-to-Market accounting required banks to “write down” their MBS holdings by huge amounts. If a bank owned $10 billion of an MBS security and the latest sale of a similar MBS security occurred at 30% of par value, the bank would be forced to report a $7 billion loss and write their MBS holdings down to $3 Billion. The important thing to recognize is that this phenomenon is forcing banks to write down the value of their MBS Securities way more than is justified by the cash flows generated by these securities. In other words, many of these MBS securities are still comprised of mostly current loans and are still generating significant cash flow. So, from a Discounted Cash Flow valuation standpoint, these securities are still worth 80-90% of their purchase price. However, the MTM rule requires banks to treat these “good” MBS securities as if they are only worth about 30% of their purchase price.

Here’s why this is such a big problem: when a bank writes down the value of their MBS securities by let’s say $10 billion, there is an immediate decrease in the Bank’s retained earnings (and thus Equity) by $10 billion. For every $1 of Equity (Capital) a bank has, a bank typically loans out around $10 (10:1 leverage or a 10% leverage ratio). Banks like to maintain a constant leverage ratio and are required to maintain a minimum leverage ratio by the FDIC. So, when a bank loses $10 billion is Equity, in order to maintain the same Leverage Ratio, the bank would have to decrease the $ amount of their outstanding loans by $100 billion. This is the problem . . . as banks take more and more losses on their MBS portfolio, they need to reduce their lending by 10 times as much as their losses . . . this creates an enormous reduction in new lending and in some cases has caused banks to “call-in” some of their loans just to meet the minimum leverage ratio required by the FDIC. This is the reason banks have stopped lending. Also, another issue making the problem worse is that while the government is publicly telling banks to keep lending, behind the scenes, the bank regulators are scrutinizing everything a bank does and scaring the crap out of banks. Bank regulators (FDIC regulators) are literally threatening to take over or shut down a bank if the bank continues to issue “risky” loans.

Incidentally, you won’t hear this mentioned much by the media (mostly because they don’t know financial history that well) but Mark-to-Market accounting was also required during the Great Depression and is considered one of the reasons for the severity of the Great Depression and also one of the main reasons so many banks failed during the Great Depression. Recognizing the problems caused by Mark-to-Market accounting, FDR repealed the MTM rule in 1938. So, banks lived blissfully without MTM accounting between 1938 and 2007. Also interesting is the fact that Mark-to-Market accounting was required during the 1930s for much the same reason that it was re-instated in 2007: to create more transparency within the financial reporting of banks and other institutions. I can’t help but think of the cliché “Those who don’t know history are destined to repeat it.”

Here’s the real problem with Mark-to-Market accounting: although it seems like a good and reasonable idea, a side effect of MTM is that it greatly amplifies the economic cycle and creates both a positive feedback loop in good times (causing bubbles) and a negative feedback loop in bad times (causing depressions). In good times, banks are able to “write-up” their assets under MTM and thus significantly increase their lending which perpetuates the economic boom. In bad times, banks are forced to “write down” their assets and in order to maintain their capital ratios, they must significantly reduce lending, which perpetuates the economic decline. So, while it is honorable and it makes sense to require banks to use current market prices to value their assets, the negative side effects are devastating. One may even argue that without MTM, the Great Depression would not have occurred because much fewer banks would have failed. As a caveat, there was no FDIC prior to the Great Depression. The FDIC was implemented to prevent the types of “Bank Runs” that destroyed the banks during the Great Depression.

The Toxic Asset Plan

So, there are really two ways the government can help the banks right now: They can either repeal the MTM rule, allowing the banks to value the MBS securities at their purchase price or they can do something to help the banks sell these “toxic assets” and get them off their books. Here are the arguments for and against each method of helping the banks:

Repeal the MTM Rule

Pros: Repealing this rule would literally fix the banks balance sheets overnight and create windfall paper profits for the banks. The assets that these banks wrote down to 30 cents on the $, the banks could “write up” to 100 cents on the dollar, booking a huge profit, and creating a huge increase in equity (capital). Doing so, would allow banks to significantly increase their lending.

Cons: The opponents of repealing the MTM rule claim that all we would be doing is fooling ourselves by allowing the banks to value their MBS securities at values that are clearly not accurate given the state of these mortgages and the housing market. Doing this would simply delay the inevitable loss the banks would have to take when they either sell their MBS securities or let them mature. The argument is that repealing this rule would be financially irresponsible and would just be perpetuating the American way of sacrificing the future prosperity of our children for our own current economic benefit.

Buying the Toxic Assets from the Banks

Pros: this would allow the banks to raise cash and rid themselves of the assets that have been destroying their balance sheets. By selling these assets, the banks would have more cash “reserves” and would thus be able to make more loans. More importantly, once the assets are off the banks books, the uncertainty of how much damage these assets are going to do to the banks will be gone, allowing the banks some breathing room to rebuild and recapitalize.

Cons: The buyer of these toxic assets probably will not be willing to pay a price high enough to induce the banks to sell their toxic assets. Right now, the banks essentially have a “paper loss” on these assets. If the banks sell them for pennies on the dollar, the banks will be locking in a large cash loss on these assets. As I explained above, many of these assets are probably worth a lot more than the current market value assigned to them. So, unless the bank is desperate for cash, it is in the banks best interest to hold the toxic assets and hope that the housing market recovers to the point where these assets start trading at values closer to par.

As you know, the government has chosen the 2nd option above and yesterday announced a public/private toxic asset purchase plan. In my opinion, although this plan is better than nothing and may improve sentiment regarding the safety of the banks, I do not believe many banks will choose to sell their toxic assets under this plan. Banks know that the government will eventually have to fix our housing and economic crisis. Banks don’t want to “Buy High & Sell Low” so most banks will choose to hold these assets on their books until conditions improve and they can sell them at a better price. The Private Hedge Funds involved in the governments plan will only buy these MBS assets at a significantly discounted price (so they can turn a profit). However, I don’t think the banks are going to be willing to sell at this significantly discounted price. We’ll see.

There is some major opposition to repealing the MTM rule so I doubt this will happen either. However, I do think that the government will alter the MTM rule (they already have slightly) in a way that will allow banks to value their MBS assets at a higher value. This will help a lot.

AIG & Credit Default Swaps

If there is any one company involved in this whole mess who is really the villain and is worthy of the blame that has been placed on them, it is AIG. In order to justify why I believe that, I need to explain what Credit Default Swaps are. In one sentence, the Credit Default Swap market is an unregulated insurance market . . . “unregulated” is the key word. Because this market is unregulated (it never should have been), it is open for major abuse and fraud. Basically, a Credit Default Swap is simply a way to provide insurance against the default of a specific company or institution on its debt. So, for example:

Let’s say I own $100 of debt (bonds) of Company A. If I am worried that Company A might go bankrupt and not
pay me my $100 back, I can buy a Credit Default Swap to insure me against losing my $100 if Company A
defaults. So, let’s say AIG agrees to sell me a Credit Default Swap that pays me $100 if Company A defaults
anytime within the next two years (a 2 year term . . . swaps are sold with varying terms, usually 1 year, 2
years, and 5 years). In order to provide me with this insurance, AIG requires me to pay them $2 per year for
the next two years. After two years, the Swap expires. So, if the company does default sometime over the next
two years, AIG pays me $100. If Company A does not default, I will have paid AIG $4 and AIG will have paid me
nothing. I could also sell my swap sometime before it expires if I want.

Here’s the problem: As I mentioned, the Swap Market is an “over-the-counter” unregulated market. What this means is that there is no Exchange or Regulatory Agency (like SEC or CFTC) regulating the purchase and sale of these swaps. This creates a big problem because it allows anyone to Sell these Swaps, even if they person selling the swaps doesn’t have the money to pay in the event that a default event triggers a payment (in the above example, AIG could sell me the swap even if they didn’t have the $100 to pay me if Company A defaulted). When a derivative is regulated, the buyer and seller of the derivative are required to post “margin” in an account in order to ensure the ability of the buyer and seller to follow through on the terms of the derivative contract. If the price of the underlying market moves and jeopardizes the ability of the posted margin to cover the loss of the buyer or seller, the losing party will be required to post more margin $ (a margin call) in order to maintain their derivative contract. For this reason, in regulated derivative markets (currency future, stock index futures, stock options, etc), there really is no “counter-party risk”. In other words, you don’t really have to worry about the solvency of the person on the other side of a transaction because the rules governing the transaction will guarantee that the counterparty is always able to fulfill their obligation under the derivative contract. (Sorry if this is confusing or boring . . . this is an important part of understanding the problem created by CDSs).

So, because the CDS market is unregulated, anyone can sell CDSs to pocket the annual premium paid by the buyer of the CDS. Here’s the problem: What if the debt that the CDS covers actually defaults?? Then, the Seller of the CDS has to pay a large sum of money to the buyer of the CDS. What if the seller doesn’t have enough money to pay the Buyer? The problem is that unregulated swap markets creates somewhat of a legalized Ponzi scheme for immoral Sellers of CDSs. With these markets unregulated, someone (or some company) with little to no money could sell millions of dollars worth of these swaps in an effort to get rich, knowing full well that they have no ability to fulfill their side of the deal in the event that some of the debt covered by the CDSs they sold defaults. The Seller thinks: if this works out for me and the debt covered by my CDSs doesn’t default, I’ll be rich . . . if not, I’ll just declare bankruptcy because I know I can’t pay anyway.

This is basically what AIG did. AIG sold way more CDSs than they had the cash to support. In other words, AIG basically threw a Hale Marry pass and crossed their fingers. If the economy had continued to stay healthy, AIG would have collected millions, if not billions of dollars worth of “Premiums” from the Buyers of the CDSs, showing huge profits for the company. But, if the economy turned down and some of the debt covered by these CDSs defaulted, AIG would be obligated to payout Billions of dollars that they didn’t have. It was an extremely irresponsible and selfish thing for AIG to do. It’s kind of like watching a football game with your friend and betting your friend $50 on the game even though you know you only have $5 in your wallet. If your team wins, you smile and collect the $50 . . . if your team loses, you say, “Oh, whoops, sorry, I don’t have $50”.

The reason the government chose to bailout AIG is that the government thought that if they didn’t bailout AIG, that many other companies who bought CDSs from AIG (including many banks) might go bankrupt. The government felt it was easier to support AIG than deal with the fallout caused by not supporting AIG. I tend to believe the government made a mistake here and should not have bailed out AIG. Here’s why: something like 95% of the Credit Default Swaps issued were bought by speculators who did not actually own the underlying debt covered by the CDS. For this reason, these speculators were merely betting (hoping) that a certain company would default on its debt and they could collect a large payment from AIG. So, using my example above, these speculators were paying AIG $2 per year in hopes that the debt covered by the CDS would default and AIG would pay them $100. So, in almost all cases, the CDS buyer would not suffer a catastrophic loss if AIG failed to pay them the $100. On the contrary, if AIG did pay, the Buyers of the CDSs would experience a windfall profit ($2 investment for $100 payout). The buyers already paid the premium to AIG so there really is no additional loss of funds associated with the failure of AIG to pay them their $100. For this reason, I believe very few, if any, institutions that had purchased CDSs from AIG would have failed if we had let AIG fail. In reality, by funding AIG, all we are really doing as taxpayers is allowing some of these lucky CDS buyers to experience windfall profits. Of course, about 5% of the buyers of CDSs actually bought the CDSs to hedge the debt they own from Company A (using the example). These people or companies would have suffered a real loss but I would argue that because these people or companies had the cash to purchase the debt in the first place, they would have been able to sufficiently absorb the loss if AIG failed to pay.

Unlike many other programs the government has funded that have been termed “bailouts”, we are unlikely to get our taxpayer money back from AIG. We have given AIG $180 billion of taxpayer money . . . very little of which I expect to get back. To give some perspective, this # is equivalent to almost $1,600 per American Household. For all intensive purposes, it’s as if each household has written a check to AIG for $1,600. It really is incredible.

Government Intervention in Free Markets

There has been a ton of discussion over the last few months about the government’s role in business and “free markets”. Some argue that markets work the best with little or no government involvement or regulation and others argue that we need a lot more government regulation over our markets and economy. I used to be in the Free Market camp where I believed the government should stay out of the way and let the markets run themselves. I now realize that I was wrong. I believe now that it is the government’s responsibility to create and enforce rules in each market to ensure the fair, moral, and sound operations of markets. However, I also believe that the government should not get directly involved in the markets and also should not do anything that creates an unfair advantage for certain players in the market. Let me provide an analogy that may shed some light on this:

Let’s take the game of soccer. Free Market proponents would say, “Just give them the ball and tell them that the team that gets the ball in the other teams goal the most wins.” The Free Marketeers would not want a referee to supervise the game and would hope that the players general sense of fairness and morality would compel them to follow the basic rules of the game. What do you think would happen? The game would eventually turn into rugby and be dominated by the team with the biggest players who were willing to punch and push the ball into the goal using their hands and any other method they could think of to win the game. The teams that were trying to play fair and stick to the rules of the game, would always lose. Now, the flipside is the Pro Gov’t Regulation crowd. This crowd would not only want many rules and a referee to supervise the game, this crowd might take it too far and create gov’t owned teams that were allowed to play using slightly different rules. The Pro Regulation crowd may even alter the rules for certain teams in an attempt to keep the good teams from winning too much or force the good teams to give some of their players to the losing teams.

Hopefully the analogy makes sense and illustrates that we certainly need rules governing our markets and that the government or some entity needs to enforce those rules. What we don’t want is the government becoming an active participant in the markets or imposing rules that provide an unfair advantage to certain market participants. The Mortgage Industry is a perfect example of an industry that did not have enough regulation. As you know (especially if you watched “House of Cards” on CNBC), the mortgage brokerage business became a very immoral business between 2003 and 2007. Basically, the most successful mortgage brokers were the people who pushed loans upon people who shouldn’t have them and told these people to lie on their loan apps. They did this because there really was no legal or negative financial consequence to the brokers for doing this. Since the mortgage brokers sold off the loans to banks and investment banks who packaged them into CMOs, the mortgage broker didn’t care of the loans defaulted. Also, since there really isn’t any legal enforcement agency for mortgages (like the SEC for Stocks), there wasn’t really any legal risk involved with issuing loans to unqualified borrowers or encouraging borrowers to lie on their loan apps. Basically, the “good” mortgage brokers who tried to follow the rules and do what was right (morally) for the borrowers and the lenders were forced out of business by the brokers who were willing to bend the rules and game the system. One consequence of lax regulation is that in tends to encourage immoral behavior and put the “good” guys and girls out of business.

An example of the government taking regulation too far (in my opinion) is the compensation restrictions on companies that took the TARP money. By doing this, the government is inadvertently altering the game in a way that is not beneficial for the long term health of the economy. Regulating income has a couple negative effects: 1. It discourages people from working too hard since there is a cap on their income . . . in other words, if there is no benefit to being the best and working the hardest, why do it? 2. It creates an unfair advantage for the banks that didn’t take TARP money. If a bank didn’t take TARP money and can still pay whatever they want, they can “poach” all the best employees from the banks who did take TARP money, making the TARP banks even weaker and the other banks stronger. Government control over compensation in a free market economy is a very bad idea.

Ending on a high note, the light at the end of the tunnel is getting much stronger. 2 months of increasing retails sales, consumer confidence increasing, the stock market going up, existing home sales rising, mortgage rates dropping . . . there’s a lot of good stuff happening.

Home Starts Regain Some Ground in February

U.S. housing starts in February turned upward for the first time in eight months, posting a 22.2% gain that was primarily due to a big jump in often-volatile multifamily construction, according to numbers released by the U.S. Commerce Department on March 17.

"While welcome news, this gain only reflects a modest rebound from January, which was the worst month in history for new-home production," said NAHB Chief Economist David Crowe. "The majority of the gain was due to characteristic volatility on the multifamily side, while single-family housing starts were up just over 1% for the month."

"Builders did pull a larger volume of single-family permits in February, suggesting a glimmer of hope for the prime home buying season, which is near at hand," said NAHB Chairman Joe Robson. "That said, we realize there's a need to be extremely cautious in terms of new building activity going forward, because there's still quite a lot of inventory out there that needs to be absorbed as foreclosures continue to flood the market in many areas."

Total U.S. housing starts rose to a seasonally adjusted annual rate of 583,000 units in February — reflecting an 82.3% surge in new multifamily production to a yearly pace of 226,000 units and a 1.1% rise to an annual rate of 357,000 single-family starts.

Regionally, the only area of the country losing ground in February was the West, whose total housing starts skidded 24.6%.

The Northeast was up 88.6%, the largest regional gain, with a rebound that was just about equal to its decline the previous month. The Midwest posted a 58.5% gain following a deep plunge in January, and the South climbed 30.2%. January-February averages were well below the monthly averages for the final quarter of 2008 in all regions of the country.

Building permits, which can be an indicator of future building activity, rose 3% overall to a seasonally adjusted annual rate of 547,000 units in February. Single-family permits rose 11% to 373,000 units, while multifamily declined 10.8% to 174,000 units.

By region, building permits registered a 27.6% gain in the Northeast, no change in the Midwest, a nearly 6% hike in the South and a 13.6% slump in the West in February.

Beach to Bay Real Estate Center is a full service real estate brokerage servicing buyers, sellers and renters at the Delaware beach areas. We handle all forms of real estate, including residential, commercial, and lots and land, in addition to bank owned, short sales and auctioned properties and representation; mortgage needs including refinances, new home purchases, second homes, first time homebuyer programs and reverse mortgages; maintain professional relationships with local settlement attorneys, insurance companies, contractors, and inspection companies; and are affiliated with a preservation and restoration company. Beach to Bay services all of Sussex County, and southern Kent County, with a strong focus on the beach resort areas of Rehoboth Beach (19971), Lewes (19958), Bethany Beach (19930), Dewey Beach (19971), Milton (19968), Millsboro (19966) and more.

New Web Site Provides Home Owner Relief Information

A new Web site for consumers seeking information about the Obama Administration’s Making Home Affordable loan modification and refinancing program — www.MakingHomeAffordable.gov — was launched last week by the Treasury Department and the Department of Housing and Urban Development.

The site includes interactive self-assessment tools that enable borrowers to determine if they are eligible for the program and to calculate the monthly mortgage payment reductions they stand to realize.

First announced by President Obama last month, the program will offer assistance to as many as seven to nine million home owners who have making a good-faith effort to pay their mortgages.

Since releasing the guidelines on March 4 to enable servicers to begin modifications to eligible mortgages under Making Home Affordable, representatives from the Treasury, HUD and other members of a broad interagency task force have conducted detailed briefings and training sessions for mortgage loan servicers and investors, nonprofit housing counselors and borrower advocacy groups.

More than 2,500 participants were briefed on the Administration’s plan in the first two weeks following the release of the program’s specifics.

The Treasury has reported that a wide array of servicers — from large banks to small lenders — have agreed to participate in the program.

Features of the www.MakingHomeAffordable.gov Web site also include:

• Extensive information about the Administration's Making Home Affordable plan
• Resources to find free, HUD-approved counseling services for borrowers who have additional questions
• A handy checklist to ensure that home owners collect all the documents they need before calling their servicers

Beach to Bay Real Estate Center is a full service real estate brokerage servicing buyers, sellers and renters at the Delaware beach areas. We handle all forms of real estate, including residential, commercial, and lots and land, in addition to bank owned, short sales and auctioned properties and representation; mortgage needs including refinances, new home purchases, second homes, first time homebuyer programs and reverse mortgages; maintain professional relationships with local settlement attorneys, insurance companies, contractors, and inspection companies; and are affiliated with a preservation and restoration company. Beach to Bay services all of Sussex County, and southern Kent County, with a strong focus on the beach resort areas of Rehoboth Beach (19971), Lewes (19958), Bethany Beach (19930), Dewey Beach (19971), Milton (19968), Millsboro (19966) and more.

Eye on the Economy: Home Sales Should Stabilize Soon

As we expected, growth of real gross domestic product (GDP) for the final quarter of 2008 has been revised down substantially by the Commerce Department — from an annual rate of -3.8% in the “advance” report to -6.2% in the “preliminary” report. The revised number is the sharpest quarterly contraction since the depths of the 1982 recession.

The downward revision for the fourth quarter reflected weaker numbers for many components of GDP, including consumer spending, business inventory investment, net exports and nonresidential fixed investment — including production of nonresidential structures.

The housing production component of GDP (residential fixed investment) was revised only slightly, showing a 22.2% rate of contraction that knocked 0.78 of a percentage point off the overall GDP growth rate for the fourth quarter.
That’s quite a large drag from a relatively small component of the economy (about 3%) that’s been falling for three full years.

Another Stock Market Debacle Deepens Economic Problems Early This Year
The stock market apparently had hit bottom early last November, and the market managed to stage a modest recovery over the balance of 2008.

But then the equity market took another major leg downward, carving another $2 trillion from household net worth and decimating the attitudes of consumers, businesses and financial market participants alike.

The market has rallied in recent days, on the backs of financial companies of all things, but the market remains deeply in bear territory and the durability of the recent rally is highly in doubt.

Available evidence on economic activity for the early part of 2009 points toward contraction of all major components of real final sales (inflation adjusted) other than spending by the federal government on national defense.

Another major decline in GDP definitely is in the cards for the first quarter — we’re currently estimating -5.5% — even if the stock market continues to improve over the balance of this month.

With respect to housing production, we’re expecting residential fixed investment to contract at an annual rate of about 40% in the first quarter, the largest quarterly contraction of the entire downswing. This is virtually inevitable in the wake of a massive downshift in housing starts late last year and early 2009 that’s taking residential construction put-in-place down sharply at this time.

Labor Market Deterioration Has Picked Up Steam
The current recession began at the end of 2007 when the job market started to lose ground, and the labor market has been deteriorating rapidly through February. According to the latest figures, nonfarm payroll employment has declined by 4.4 million since the recession began, and more than half of that decline, 2.6 million, has occurred during the last four months.

Residential construction (builders and specialty trade contractors) continues to be an important part of the deteriorating employment story, shedding 911,000 jobs since its peak in February 2006 and losing 226,000 during the last four months alone.

The unemployment rate has been moving up substantially from the cyclical low of 4.4% in 2007 and major increases have been recorded in recent months.

Indeed, the civilian unemployment rate jumped from 7.6% in January to 8.1% in February, the highest reading since 1983. The Labor Department’s broadest measure of labor “underutilization,” including discouraged workers and those working only part time for economic reasons, soared to a lofty 14.8% in February — up by more than five percentage points over the past year.

Further deterioration of the labor market is inevitable, for both the housing sector and the overall economy. We expect large payroll job losses to persist through the second quarter and we expect the unemployment rate to peak out above 9% around the end of the year.

Home Sales Should Be Stabilizing Soon
Large cumulative declines in home prices in many areas, combined with attractive interest rates on prime conventional conforming fixed-rate mortgages (salable to Fannie Mae or Freddie Mac) and an FHA/VA loans, have generated substantial improvements in housing affordability measures even as the deepening recession has taken a toll on median household income.

Surveys of consumer sentiment (University of Michigan) showed relatively large proportions of households saying in both January and February that it was a “good time” to buy a house, primarily because of low prices and low interest rates.

Improving sentiment has not yet shown through in official home sales data. Sales of new homes, as reported by the Commerce Department, and “pending” sales of existing homes reported by the National Association of Realtors® (both based on contract signings) declined substantially in January, reaching new cyclical lows.
NAHB’s proprietary survey of large single-family builders, available through February, is providing some tentative encouraging signs.

Seasonally adjusted gross sales (new orders) have been essentially flat since last November, and seasonally adjusted net sales showed a modest recovery over that period as sales cancellations continued to move downward in absolute terms.

NAHB’s broad-based single-family Housing Market Index also was essentially flat during the November-February period, albeit at or near the record low for the series, and preliminary tabulations point toward more of the same in March.

NAHB’s baseline forecast shows a bottoming-out of sales of both new and existing homes in the first quarter of this year, aided and abetted by key provisions of the economic stimulus bill that was signed into law on Feb. 17 — the $8,000 refundable, but not repayable, tax credit for first-time buyers and the boosting of loan limits for both the government-sponsored enterprises (GSEs) and FHA back to 2008 levels.

Everything Now Depends on the Strength of Economic Policy
The economy recently has gone from bad to worse, despite a variety of economic policy supports put in place late last year.

The fate of the economy and the housing sector now depend very heavily on the strength of President Obama’s three-legged policy stool, along with complementary monetary policy support from the Federal Reserve. Policy actions by foreign governments also will be part of the policy puzzle.

There are major question marks about all of this:

• Will the recently enacted fiscal stimulus bill be large enough, with enough short-term stimulus, to fill widening holes in key components of private spending?
• Will Treasury Secretary Tim Geithner’s Financial Stability Plan really stabilize financial markets via recapitalization of the banking system and removal of “toxic” assets from bank balance sheets?
• Will President Obama’s plan to stem mortgage foreclosures be strong enough to make a real difference?
• Finally, will the Federal Reserve be able to revive moribund credit markets via various “balance sheet” policies when the federal funds rate already is at its effective floor?

Regarding the credit markets, the recently launched Term Asset-Backed Securities Loan Facility (TALF), a cooperative venture involving the Fed and Treasury, holds out promise for selected consumer and small-business asset-backed security (ABS) markets — and possibly for commercial as well as private-label mortgage-backed securities markets.

But it’s too early to tell how much difference the much-heralded TALF will make.

The resolve and skill of economic policymakers will determine the length and depth of the current recession and the dimensions of the ensuing recovery and expansion.

It does appear that policymakers have agreed, explicitly and implicitly, to prevent more “systemically important” major financial institutions from going belly-up. (Lehman Brothers was an unmitigated disaster for the markets.)
If that’s the case, and if a decent measure of financial stability is restored in reasonably short order, then the recent judgment by Fed Chairman Ben Bernanke that, “…there is a reasonable prospect that the current recession will end in 2009 and that 2010 will be a year of recovery,” looks like a good bet.

That’s the guts of NAHB’s current baseline forecast, although the range of risk remains unusually wide.

Tax Credit Key to Selling Homes

Home builders may be underestimating the mileage they can derive from the recently enacted $8,000 tax credit for first-time home buyers and should be doing whatever they can to actively promote it with their prospective buyers, according to residential marketing experts participating in an NAHB teleconference on March 16.

“Home builders and their sales and marketing teams can use the credit to clear off excess inventory,” NAHB President and CEO Jerry Howard told the more than 900 association members who called in for the presentation, which included a question and answer session on specifics of the provisions governing the use of the credit.

Suggesting that it is “the best kept secret in the world” in quarters of the housing industry where it can do the most good, Dan Levitan, MIRM, CMP, of

Levitan and Associates in Fort Lauderdale, Fla., noted that “except for large and regional builders, we are not doing what we should to promote this tax credit.”

Big builders have placed major banners heralding the tax credit on their Web sites, Levitan said, and

Lennar and Centex have added flash productions that enable visitors to click through to information explaining the credit and the availability of attractive mortgage interest rates. “This shows us how important this tax credit is to us today in getting the buyer motivated and giving us an excuse to get in contact with that prospect and get them excited,” he said.
While the marketplace has remained slow since the credit became available as part of the massive stimulus package signed into law on Feb. 17, Levitan said that production builders are reporting that they have sold homes based on the availability of the credit in tandem with other programs they have been running to attract reluctant buyers.

“We are using it as a tool to stay in contact with our customers and differentiate ourselves from others who aren’t promoting the credit,” Levitan said.

Educating consumers about the credit is key, and NAHB has created a detailed list of frequently asked questions that association members can deploy to provide information to the home-buying public at

www.federalhousingtaxcredit.com. Members of the association can bolster their businesses with a range of promotional materials posted at www.nahb.org/economicstimulus.

The Real Deal
Levitan said that home builders associations have been leading efforts to promote the credit. Among them, the

Greater Birmingham Association of Home Builders, in partnership with the Birmingham Association of Realtors®, is highlighting the first-time buyer tax advantage in its “The Real Deal” campaign, a five-day event on April 16-20 that will push sales of new and resale homes listed by members of the associations.

The goal of the program, which can be franchised by other HBAs around the country, is geared to getting the local housing market moving again, and it is being publicized through a television, radio and print media blitz and sponsorships through leading area businesses.
“Get something like this going with your local home builders association,” Levitan advised teleconference participants. When “everyone is working together, we ought to be able to sell tens of thousands of houses this year using the tax credit.”

Educating Salespeople
Gaye Orr, MIRM, CMP, of

Coldwell Banker Advantage New Homes in Raleigh, N.C., said that builders need to educate their salespeople on the tax credit if they want their promotions to yield success. “We in the industry should really be up to speed on this. Your salespeople on the front line need to be comfortable with it,” she said. In the meantime, consumers are walking into sales offices “with more questions than they have answers for.”

Although it may take a tax professional to determine for prospective buyers how best to take advantage of the credit, letting people know just a few options — such as how to speed up receipt of the money from the credit — “can get people off the fence,” she said.

The credit also has significant relevance for households in the trade-up market, she said, who have to sell their departure residences first before they can move to a new home, suggesting that not only first-time buyer sales agents need to have expert knowledge on how the credit works.

Combined with the availability of the credit, teaming up with a local financing company to provide financing incentives and convincing the sellers of existing homes to reduce their prices will “help sell departure residences,” Orr said.

She also recommended holding home buyer seminars on the tax credit, an “old school” approach that is “tried and true,” nevertheless. “Mention the word stimulus and people’s eyes start to glaze over,” she said. “Offer past prospects the chance to come in and find out what this means for them.”

Rob Dietz, NAHB’s director of tax issues, said that the credit is “an important benefit,” with 35% to 40% of the home buying market consisting of first-time buyers. He stressed that buyers need to close on their principal residence on or after Jan. 1 of this year and before Dec. 1 to qualify.

To get the proceeds from the credit into the hands of buyers faster, filers can amend their 2008 tax returns to include 2009 home purchases. Although it is no “silver bullet” for monetizing the credit so that it can be used for a downpayment, prospective buyers who know that they will be completing settlement on a home within the eligible time period can adjust their payroll withholdings to save up money for the closing, he said.

State housing finance agencies in Missouri, Delaware and other states are looking at ways to advance the tax credit amount as a short-term loan.

The American Recovery and Reinvestment Act

On February 17, President Barack Obama signed into law a $787 billion economic stimulus plan. That package includes many provisions that may directly benefit you:

Tax Breaks. Individuals earning $75,000 or less will receive a tax credit of $400 on payroll taxes paid in 2009 and 2010. Married couples are eligible for an $800 credit. The tax credit would phase out for single taxpayers with adjusted gross incomes (AIG) of $75,000 to $90,000 and married couples with AGI of $150,000 to $190,000. Retirees who receive Social Security benefits and individuals on disability would receive a one-time tax credit of $250.

Healthcare. The bill provides a subsidy to cover 65% of COBRA premiums for up to nine months. The subsidy is limited to workers who were laid off between September 1, 2008, and December 31, 2009.

Education. Parents of college students will be eligible to claim a tax credit of up to $2,500. Available in 2009 and 2010, the credit covers tuition, fees and course supplies such as textbooks. The credit phases out for individuals with AGI of $80,000 to $90,000 and married couples with AGI of $160,000 to $180,000.

New Housing. First-time homebuyers are eligible for an $8,000 tax credit, which does not have to be repaid unless you sell your home within three years. The credit is available for purchases between January 1, 2009, and before December 1, 2009. The credit phases out for individuals with AGI of $75,000 to $95,000 and married couples with AGI of $150,000 to $170,000.

Green Homes. New tax credits are now available for green home improvements on a principal residence starting January 1, 2009, through December 31, 2010. The credit covers 30% of qualifying upgrade costs, or a maximum amount of $1,500. Qualifying modifications must meet a certain efficiency level to be eligible for the credit. For record keeping, experts advise that you retain all receipts.

New Cars. New car buyers can deduct the sales tax from their AIG on purchases of up to $49,500. The deduction is limited to car and truck purchases made on the date of the enactment of the bill through December 31, 2009. The credit phases out for individuals with AGI above $125,000 and married couples with AGI above $250,000.

Green Cars. From January 1, 2009, to December 31, 2010, there is a tax credit for plug-in hybrid vehicles. This credit — based on the capacity of the battery system — for electric hybrid cars and trucks starts at $2,500 and is capped at $7,500. Previous tax credits for electric vehicles would have been phased out after 250,000 total vehicles. The current stimulus package has increased that number to 200,000 vehicles per manufacturer.

Always consult your tax advisor for tax information and advice.