Housing market already shows signs of new bubble

When housing began to simmer back in 2002, prices were rising around 7 percent a year, then 8 percent in 2004 and a stunning 12 percent in 2005.

At the time, words like "bubble," and "unsustainable," were uttered with every monthly reading. No one had seen home prices soar like that since the mid 1970's.

Historically, prices nationally rise about 3 to 4 percent a year. The market was clearly too hot, and by 2007 it had reversed dramatically, with prices falling nationally for the first time in history.

Fast forward to today and the housing recovery.

Barely a year in, home prices rose over 8 percent annually in December. That is the tenth consecutive month that home prices have risen on a year-over-year basis and it is the biggest gain in more than six years, according to a new report from CoreLogic. While still down double digits from their 2006 peak, prices are suddenly soaring again and raising some serious red flags.

Analysts at Clear Capital, which runs a four-month moving average price index, note that January's numbers show, "momentum stalls." While they blame this on seasonal slowdowns, they point to Florida as a concern.

"Florida metros, namely Miami, Orlando, Tampa, and Jacksonville, were all missing from the top 15 performing market list. Since September 2011, at least one of these markets made the list," cautions Dr. Alex Villacorta, Director of Research and Analytics at Clear Capital. "While this isn't confirmation that the recovery is finished in the sunshine state, it's certainly something to keep an eye on. These markets led the recovery in late 2011, and share some of the hallmarks for recovering markets overall."

Florida's housing market has been driven by distressed homes, and investors buying them at a rapid pace.

Other markets that saw the most distress during the housing crash, like Phoenix, Las Vegas, and much of California, have also seen so much investor demand, that prices are up by double digits from a year ago.

Pheonix leads the pack, with prices up 26 percent from a year ago, according to Clear Capital. The "REO saturation" there, that is the share of sales that are foreclosures (Real Estate Owned) is 17 percent. Mind you, that is down from over 50 percent just a few years ago, when the market was still crashing. The story is the same in Las Vegas, where REO saturation is still 38 percent, prices are up over 15 percent annually. Investors have cleaned out the inventory so much that they are now bidding up prices higher than any expectations, and that is pushing many potential owner-occupant buyers out, especially first-time home buyers.

In Florida, where there is a huge pipeline of distressed loans, foreclosures had been severely delayed due to the so-called "robo-signing" foreclosure processing scandal. After years of negotiations and now final bank settlements, foreclosures are moving again. This increased inventory may be what is slowing the big price gains.

More concerning is that the investor price drives are not playing out in other parts of the country, specifically in the South and Midwest.

In St. Louis, Chicago, Charlotte and Dallas, distressed properties are making up about one third of the market, often higher than markets out West, but home prices are either flat or down annually, a far cry from the jumps out West. That is because investors are not as interested in these markets. As banks now begin to ramp up foreclosures, not just in Florida, but especially in states like New York and New Jersey where judges had been holding up the process as well, more distressed inventory will come on the market with fewer potential buyers. That will push prices there down.

Essentially, the recovery is becoming increasingly bifurcated, with much of the nation still suffering as some markets see bubble price dynamics.

And here's just one more red flag.

Most of the investors in those bubble markets are big money, hedge funds. They have claimed that they are in the market to hold and reap rental rewards, but as prices jump, they may be inclined to take their profits now.

What we had thought were safer, long term buys, may now turn into the flips of the last decade. The question will be if there are enough non-investor buyers out there to support those sales?

True, consumer confidence in housing is returning. Improving employment is making home buying an option again. Price gains have brought many potential buyers out from underwater on their mortgages, allowing them to move again. Of course they would have to list their homes first, adding to inventory.

You can see where the dynamics become so complicated that it is easy to have huge housing optimism among the many warnings. Inventories are very low right now, and that is driving prices. Most predict prices will continue to rise through 2013, but prices always lag sales, and these prices are reflecting the sales of last year, the investor sales. If sales do not continue to be strong, and lately they have not been, then prices could easily turn in the hot markets and worsen in the still struggling markets.

Courtesy of: Diana Olick, CNBC.com

REAL ESTATE: Mortgage debt forgiveness averts ‘fiscal cliff’

 

The settlement by Congress to avert the “fiscal cliff” didn’t only keep some tax hikes at bay for middle-income America.

The 2012 American Taxpayer Relief Act continues to exempt from taxation mortgage debt that is forgiven when homeowners and their mortgage lenders negotiate a short sale or loan modification — including any principal reduction — on primary property.
 

Extension of the tax exemption to Jan. 1, 2014, has many in California breathing more comfortably.

“We’re relieved because it gives homeowners a sense of relief,” Molly Silva Gurrola, of Riverside-based Silva Group, said as she put finishing touches on a mid-century modern home she is listing for an equity-sale. “Now, everyone can make a decision based on their individual needs.”

Don Faught, president of California Association of Realtors and managing broker of Alain Pinel Realtors in the San Francisco area, notified state trade association members of the “good news” through an e-mail blast on Wednesday, Jan. 2.

He advised Realtors to:

Tell their clients to keep their short-sales on the market.

Encourage clients to consult with their own tax advisers about the impact this tax break can have on their situation.

Congress also raised capital gains rates from 15 to 20 percent for high-income earners, he advised, but the capital gains ceiling on the sale of a principal residence remains at the first $250,000 for single taxpayers and at $500,000 for married couples.

“This extension has given us much encouragement,” said Nancy Carmon Petrone, a broker in San Bernardino, where reports suggest that nearly 50 percent of homes with mortgages there are “underwater,” a status given to a property valued at less than the note.

Petrone said there was a lot of stress before the holidays to close a deal on time.

“A lot of homeowners didn’t know what would happen, and held off on doing anything.”

Now that California homeowners have one more year to complete a short sale or loan modification to benefit from the federal tax break that otherwise would have expired Tuesday, analysts say homeowners will be in a better position to think through 2013 strategies with clearer heads.

Faught said he spoke with two agents before New Year’s who expressed concern that a lender was delaying the close of escrow on short sales, in case the extension did not occur.

“The short-sellers were going crazy,” he said. “At one point they considered going into foreclosure, instead.”

Those two deals closed today, Faught said, and one seller called to express thanks for lobbying to keep the exemption intact.

The act has saved individual homeowners thousands of dollars since it took effect in 2007.
“Our surveys tell us that if the principal is reduced by $100,000, it can save a homeowner anywhere from $15,000 to $35,000” on the phantom income under 2012 tax rates, Faught said. “That’s not an insignificant amount.”

Steve Silva, principal of the Silva Group, said he’s already seeing a spurt of short sales coming onto the market. “People’s attitudes are different than a year ago — more positive,” he said. “I think the government made a wise decision to continue this. I see no let-up right now.”

With short-sales fetching higher amounts than a foreclosure, Molly Silva-Gurrola sees yet another emerging trend: Borrowers who are underwater on their loan may begin to come up for air.

She said she planned to meet a client in Corona this week who is at a break-even point on a $475,000 mortgage, but held off on listing her home six months ago because it would have put her underwater on the sale by the time she paid commission and fees. “We’re going to re-analyze that to see if we can now go through a regular sale.”

Faught said these scenarios are a significant reversal from foreclosure activity. Statewide, foreclosure levels fell to 12 percent in 2012, down from 25 percent of all sales.

“Foreclosures are not good for banks or home values,” he said. “We’re not in a housing boom, but we are on a road to recovery.”

Courtesy of: Debra Gruszecki - The Press-Enterprise

FHA to extend rule permitting loans on 'flips' of fixed-up homes

The agency's policy has encouraged investors to buy foreclosed and deteriorating houses from lenders, then repair them and resell within short periods of time.

December 16, 2012|By Kenneth R. Harney

WASHINGTON — Rehabbers and real estate investors rejoice: You'll still be able to sell houses to first-time buyers using low-down-payment FHA-insured mortgages next year, even if you've owned the fixed-up property for less than 90 days.

The Federal Housing Administration has decided to extend its rule permitting loans on quick "flips" of renovated houses beyond the scheduled Dec. 31 expiration deadline. The policy is widely considered one of the key federal government moves that has encouraged private investors in large numbers — often mom-and-pop, small-scale operations — to buy foreclosed and deteriorating houses from lenders, then repair them and resell within short periods of time.

Since the plan was first put into place by the Obama administration in February 2010, more than 65,000 renovated homes have been financed using more than $11 billion in FHA-backed loans, according to federal officials. Roughly 23,000 of these properties were acquired and resold with FHA loans within the last year alone.

The idea, according to acting FHA Commissioner Carol J. Galante, is to help "stabilize real estate prices as well as neighborhoods and communities where foreclosure activity has been high" by making it easier for investors to buy, fix up and sell run-down homes that add to urban blight and depress values.

The primary purchasers of the renovated properties are first-time, moderate-income families who might otherwise be frozen out of the market because they don't have the down-payment cash required for a conventional loan. FHA down payments can be as low as 3.5%.

The Obama administration's initiative in 2010 represented a reversal of earlier restrictions on flips first imposed in 2003. After scandals in Los Angeles, New York, Baltimore, Washington, D.C., and other large cities over widespread fraudulent flips — in which houses were sometimes resold for double their previous price within days or even hours — the FHA stopped insuring loans on houses whose sellers had owned them for less than 90 days.

Paul Wylie, a Los Angeles-area investor active in renovating distressed properties, welcomed the extension of the FHA policy because "it allows predominantly first-time buyers to compete with cash buyers, investors and others" for houses at affordable prices that have been professionally repaired. In some neighborhoods in and around Los Angeles, many homes that have been rehabilitated for resale within 90 days are what Wylie calls "foreclosure flips, short-sale flips or standard-sale flips." The FHA is pretty much the only financing available for moderate-income, owner-occupant buyers of these renovated properties.

Bruce A. Calabrese, chief executive of Equitable Mortgage Corp. in Columbus, Ohio, says the essential ingredients in the FHA's revised approach are its strict controls on appraisals, inspections and chain of title — all designed to ensure "that there is no funny business going on."

The FHA's policy requires property sellers to comply with a detailed list of standards. Among the most prominent:

• You can't play games on ownership. All transactions must be arm's length with "no identity of interest between the buyer and seller or other parties" involved in the sale. You can't buy a house from your uncle at a bargain price, hire your brother to do a few quick repairs to it, then resell it for a huge profit to an unsophisticated buyer, supported by a hyped-up appraisal signed by a friend or partner.

• The seller of the rehabilitated house must have clear legal title to it. This may sound elementary, but some flippers during the late 1990s never bothered to acquire title and record it. They took over the property one day, slapped a little paint on the outside and sold it for cash the following day.

• If the selling price is 20% higher than what the house cost the seller, a second appraisal, conducted by a member of the FHA's panel of approved appraisers, is mandatory to be certain that the improvements made to the property justify the increased price.

• An independent inspection report, conducted by a professional with no connection to other participants in the transaction, is also mandatory when the price jump is more than 20%. If there are repairs that are still needed that could affect the "health and safety" of the purchasers, they must be completed and a re-inspection conducted before the closing.

Bottom line: Flipping under the FHA's rules should continue to be an important option for buyers of renovated, previously distressed houses and the investors who make it their business to find them and fix them up.

Courtesy of LA Times

LA REAL ESTATE ADVICE: "With Prices Sizzling in the Southland, Housing Market Looking Up"

Reporter: Laurel Erickson
Producer: Karen Foshay
Associate Producer: Alicia Clark
Editor: Michael Bloecher

November 12, 2012

Is Southern California's housing market finally headed for recovery? It's been a rough four or five years with home values collapsing and banks foreclosing. Terms like "underwater" and "upside down" are the new language of real estate. Now there are signs that the "bad old days" may be coming to an end. Prices are climbing again, up to 7 percent compared to a year ago. It's good news if you're looking to sell. And if you hope to buy, there's something you should know -- the pros have already jumped in.

Laurel Erickson: This is Robert. He's a Realtor. He drives back roads, boulevards and side streets scoping for deals. And this is Dan. He's a family guy looking for new digs. And these are the flippers, Phil and Deborah. And they are all competing to find homes in L.A. Flags are waving and signs are hanging all over Southern California.

The housing market is sizzling again after taking a few years off during the great recession. It's fueled in part by record-low interest rates and fewer foreclosed properties. Housing prices are up across the Southland, with some counties seeing double-digit increases. Orange County, 5.9 percent. Los Angeles, 9.7 percent. Riverside, 11.3 percent. And San Bernardino, 13.3 percent. 

While housing prices in Southern California are not back to their peak in 2007, they are 27.5 percent higher than the y were at the lowest point in 2009.

Here is the picture: California’s median house price is $287,000 -- that’s up from its bottom price of $221,000 in 2009, at the height of the recession.

Richard Green/USC Lusk Center for Real Estate: Until February, we weren't seeing this. And now we are seeing houses go on the market and they are off the market in a week or two with seven, eight, nine offers, and often above listing price. 

Erickson: Green told us the real estate hot spots are Pasadena, the Inland Empire, and anything along the coast. That's where we met Robert Meadows. 

Meadows: It's booming. People are having seven to 15 multiple offers on every house that is on the market. Where we used to see 70 houses on the market, you are down to 30 houses in the market.

Erickson: He took us on a tour of West L.A., where inventory is low and prices are up.

Meadows: Over my shoulder, we have a house that was listed for $1.1 million. It sold like that. And then we relisted it for 1.4 [million] and it sold instantly, like that. The first day, we had a hundred people come through the house -- a hundred people! I mean I could not keep the people from coming into the house. I had to "Stop! Stop!" That's how big it was.

Erickson: We drove a few miles and saw another hot property.

Meadows: About three months ago this house was on the market for 649 [thousand] and the minute they put the sign on the grass they had 20 offers. I had a client, and we put in a bid. We didn’t even come close to it. Twenty offers overnight. It sold well above the asking price.

Erickson: And just a few blocks over.

Meadows: This house went for 449 [thousand]. We called the agent up, we told her we wanted to put an offer in. She said she had three offers. Twelve hours later, they have 12 offers. We missed out. Gone.

Green: I think the reason this is so surprising is we went through such a long period, where it took a very long time to sell a house. There weren't that many people out there interested.

Erickson: Not anymore. This family, the Garrs, are struggling to find a home in a supply-starved market. For a year, they've been looking to buy. Forty open houses later, they are still looking. 

Dan Garr: We put bids down on three homes and once we initiated the bid, it started to go up and get competitive, and going up something in the neighborhood of $100,000. And it’s going fast, competitive. You are competing with people with all cash down.

Erickson: People like this woman, Deborah Cavallaro.

Deborah Cavallaro: I am public enemy number one for the typical purchaser, the family guy that wants to buy that property and live in it. 

Erickson: That's because Deborah Cavallaro is a "flipper." She buys homes, fixes them up, and quickly puts them back on the market at a higher price. Unlike most family guys, Deborah buys homes with cash.

Cavallaro: So we are a more desirable buyer to the seller, whomever that may be" because we can close faster.

Erickson: She's flipped four homes in the past year, including this one. 

Cavallaro: One of them was on West 48th street, I purchased that property for $115,000 and then we sold it about six months later for $268,000.

Erickson: Like Dan the family guy, Deborah also has enemies in the real estate game.

Cavallaro: I have lots of enemies and they get bigger and bigger and bigger. My enemies are the big corporate buyers. 

Erickson: Buyers like this man, Phil Gilboy of TLC investments. 

Gilboy: She probably has the opportunity to do two or three, whereas we a have a bunch of money behind us.

Erickson: Phil has bought over thirty homes in the past two years. This is his latest flip. It’s a home in Westwood he and his investors picked up for $1.3 million. He'll soon put it back on the market for over $2 million. After investing a few hundred thousand on remodeling, his company is expecting to make a nice return.

Gilboy: This should be $455,000 profit on this property.

Erickson: Home flipping is up in the Southland, accounting for 5.5 percent of all homes sold in September.

Gilboy: It's not just us. We are small fish in this deal. There are guys that purchase 30 houses a month. They are all over Los Angeles.

Green: They are able to come in with cash they raise through, very often, private equity funds and they will go to a seller, particularly a financial institution that has a lot of homes on the books, and they will say, "You know what? We will take 30 of them all at once." But of course, for the family that needs to get a loan, and needs to get underwritten on that home, they are just not able to compete with those kinds of offers.

Erickson: And that's exactly what happened to this home.

Meadows: This went on the market for 649 [thousand]. It had multiple offers. A corporation came in with an all-cash offer, 14-day close, and they put it back in the market and sold it for 899 [thousand].

Erickson: Are these tales of bidding frenzies the prologue of another housing bust? Green says "no" thanks to low mortgage-to-income ratios and stricter lending practices. Financial institutions don't want folks buying homes they can't afford. That was a big contributor to the housing meltdown. While this is a healthier housing bubble than in previous years, Green says we shouldn't ignore California’s patterns of booms and busts. 

Green: What I worry about is, again, you don't want to be too enthusiastic -- you hope that people have learned their lesson, that we don't get the kind of frothiness we had before because 20 percent increases in housing prices are not good for anybody.

Erickson: Back in West L.A., there's a lot of foot traffic at this home. Today is the first open house. And who else is there? Robert and Dan.

It's nice, but not quite the right fit. Robert has some advice for Dan and others looking to get in this "hot right now" market. 

Meadow: If he sees something that he likes, make an offer. Pull the trigger. Otherwise he will miss out on an opportunity and he might go on to next year.

Erickson: Perhaps good advice, but then again, when did a realtor ever tell you not to buy? And who knows if next year brings a fizzle to the sizzle. In the meantime, the flippers, the big investors, and the family guys, are all crowding the open houses, trying to get a piece of what is, for right now, a seller's market.

Hurricane Sandy disrupts real estate market

The U.S. real estate recovery that’s gained strength this year faces a setback from flooding and property damage inflicted by Hurricane Sandy, the biggest tropical gale to hit the Atlantic seaboard.
The storm battered homes in Eastern coastal states that account for about one out of every five U.S. real estate sales and threatened inland areas with flooding and blackouts. Lenders put transactions on hold and companies like Coastline Realty in Cape May, New Jersey, pulled in their for-sale signs to prevent the wind from turning them into projectiles.

“We’ll definitely see lower numbers in new sales and new applications,” said David Stevens, president of the Mortgage Bankers Association. “We do expect to see lenders put a freeze on properties across the northeast on the shoreline until they can be inspected and assessed for damages.”

Sandy, about 1,000 miles wide, prompted warnings of life- threatening storm surges from Virginia to Massachusetts, emptied the streets of the nation’s largest cities, paralyzed mass- transit systems and lashed the area with gales, rain and even snow. U.S. airlines grounded 9,500 flights, U.S. stock trading is closed through today in the first back-to-back shutdowns for weather since 1888. Losses may total as much as $20 billion, with $5 billion to $10 billion of that insured, according to Eqecat Inc., an Oakland, California-based provider of catastrophic risk models.

Property Damage

Almost $88 billion of homes in seven states are at risk of damage, according to a report by CoreLogic Inc., a mortgage software and data firm in Irvine, California. New York has $35.1 billion of property in harm’s way, New Jersey has $22.6 billion, Virginia has $11.3 billion, and Massachusetts has $7.8 billion. Maryland, Delaware and Pennsylvania have a combined $11 billion of property at risk, CoreLogic said.

A fire tore through more than 50 homes today in a Queens beach community that suffered heavy flooding, the New York Times reported. On 57th Street in Manhattan, a crane on a 90-story residential building under construction partially collapsed and was dangling over the street. The storm has accounted for 16 deaths, according to the Associated Press.

The storm may also adversely affect commercial properties and securities linked to their debt. New York accounts for 13.2 percent of property loans contained in commercial-mortgage bonds, according to Standard & Poor’s. Loans in Virginia make up 4 percent of deals, while mortgages in Pennsylvania account for 3.4 percent, S&P said yesterday in a note to clients. Debt on New Jersey properties accounts for 3.1 percent of outstanding bonds.

Adequate Insurance’

“Given the magnitude of the storm there will be some impact on performance but more so on smaller properties, to the extent there is structural damage to the property and they require significant capital expenditures,” said Deutsche Bank AG debt analyst Harris Trifon. It won’t lead to any significant increase in delinquencies, he said, because most properties should have adequate insurance.
Still, the storm, which forced cancellations of U.S. stock trading and fixed-income markets, means Wall Street also had to put on hold about $3 billion of commercial mortgage bond sales that included loans to shopping malls, hotels and office buildings.

The U.S. housing market has been recovering this year. Median sales prices rose to $188,800, up 11 percent over a year earlier, according to the National Association of Realtors. Home sales reached an annualized pace of 4.75 million in September, up 11 percent from a year ago. Pending home sales edged up in September for the 17th consecutive month on a year-over-year basis.

Martha’s Vineyard

The storm’s central barometric pressure is lower than that of the 1938 hurricane that devastated homes in New York and New England. Flooding has been reported along the coast from Martha’s Vineyard in Massachusetts through New Jersey. The storm submerged Plymouth Rock, the landmark in Massachusetts traditionally represented as the place where Pilgrims first stepped onshore in the New World in 1620.

“I have never seen a storm this large in regards to wind flow,” said Rob Carolan, a meteorologist at Hometown Forecast Services Inc. in Nashua, New Hampshire. “So many bad things had to come together all at once. It is going to make the Perfect Storm’ look small. It’s remarkable what an impact this is going to have.”

Perfect Storm’

The “Perfect Storm” struck the U.S. East Coast in October 1991. It later became the subject of a book by Sebastian Junger and a movie starring George Clooney.

Fannie Mae, Freddie Mac, Bank of America Corp. and Wells Fargo & Co. told property managers to make sure their foreclosed homes were secured, David Benham, co-owner of Benham Real Estate Group, a property management company based in Charlotte, North Carolina, said in a telephone interview.

“They told us to do what we can in terms of the building but keep ourselves safe,” said Benham, whose company manages 2,000 bank-owned homes nationwide. Their assignments start with boarding up windows and doors, he said. They expect to complete field reports, including photos, within five days showing damage from the weather, he said.

Over the long run, the storm could worsen blight on properties in the foreclosure pipeline where owners don’t have the resources — or the intention — to maintain the property and the loan servicers don’t have full legal responsibility for maintaining the property, Chris Whalen, senior managing director at Tangent Capital Partners LLC, said during a telephone interview from New York.

Floating Inventory’

There’s a “floating inventory” of abandoned or delinquent properties not available for sale that has been growing in states like New York and New Jersey, where the foreclosure process takes longest, Whalen said.

About 20,000 New Jersey properties facing foreclosure or already repossessed by banks are in Sandy’s path, in the counties of Burlington, Camden, Gloucester, Salem, Ocean, Atlantic, Cape May, Cumberland, Daren Blomquist, RealtyTrac vice president, said in a telephone interview.

More than 50,000 New York foreclosures are threatened in New York City’s five boroughs and the counties of Ulster, Dutchess, Westchester, Suffolk, Nassau, Rockland, Putnam, Orange, Greene, Columbia, he said.

In Connecticut 3,055 homes in foreclosure will be affected in New London, New Haven, Middlesex and Fairfield counties, Blomquist said.

Closed Courthouses

The storm closed many courthouses where lenders pursue foreclosures, another wrench in a process that takes an average of 1,072 days to complete in New York, the longest process among U.S. states. Foreclosures take an average of 931 days in New Jersey, second-longest, and 661 days in Connecticut, the sixth longest, according to RealtyTrac.

At the current pace of foreclosures, the pipeline of homes with seriously-delinquent mortgages would take 495 months — more than 41 years — to work through in New York and 425 months in New Jersey, the longest of any states, according to Lender Processing Services Inc.

“The magnitude of the damage is not yet known, but none of this can be good for the prospect of getting the foreclosure crisis behind us,” said David Dunn, an attorney with Hogan Lovells in New York.

The Hamptons, on the eastern tip of New York’s Long Island, had lost electricity yesterday afternoon, according to Judi Desiderio, president of Town and Country Real Estate in East Hampton. Owners and buyers who plan to live there during hurricane season should factor in the approximately $50,000 cost of having a generator as part of the price of owning property, she said.

Another necessity, she said, is “a bunch of friends who live nearby so you can have a hurricane party.”

(Courtesy of Bloomberg.com)