• The Profile showed increased transaction sides among members to 7 in 2011 from 5 in 2010.
• Members reported increased transaction sales volume of $2,010,500 among members who performed sales activity in 2011.
• The typical dollar value of a sales transaction was $414,300 and the typical square feet was 9,600 for commercial members in 2011.
• For more information on the Commercial Member Profile and to read the press release, click here.

The FHA’s rules restrict the FHA from lending in complexes where:

• More than 50% of the units are not owner occupied
• More than 25% of a complex’s square footage is for commercial use
• 15% of the units are 30 days late or more on their HOA dues

While the rules are intended to protect the agency from risks, they may not be appropriate for the post-bust real estate environment. Job losses, stagnant incomes, and high unemployment have caused delinquencies on HOA dues to rise, limiting some apartment complexes’ eligibility for FHA financing programs. Limitations on the number of rental occupants has reduced the number of potential buyers for units in non-eligible condominium buildings and some argue that this pattern has hampered the recovery of markets like Phoenix and Miami where investors are buying up units to convert into rentals.

As pictured above, the 90+ day delinquency rate for the United States on FHA-financed mortgages for both single family and condominiums climbed steadily from 2007 to date. However, the delinquency rate on condominiums is well below that of single family (SFR) properties as evidenced by the spread. While the spread between the two rates has eased, it remains significant.

Furthermore, this pattern of a significant spread between the delinquency rates on single family and condominium loans backed by the FHA is evident in Chicago, Denver, Los Angeles, New York, San Francisco and Washington, DC. Miami and Phoenix are the two exceptions where the delinquency rate on condominiums has outpaced that of single family properties. The divergent pattern for Phoenix only developed in early 2011, when the foreclosure rate on single family properties fell, while the delinquency rate on condominiums has continued to rise. This decline in the spread since 2010 might be indicative of the restrictions on lending in local markets for condominiums relative to single family homes.

The homeownership rate peaked at 69% in 2004 and has since retreated to 66%. Expectations are for more foreclosures in 2012 and 2013 which could drive that rate even lower. The dislocation of homeowners, weak economy, and damaged credit histories will raise demand for rental units. As a result, first-time and low income buyers will find it increasingly difficult to begin the homeownership process in areas with high shares of rental units. Given this shift and the relatively low delinquency rate on FHA condominiums, it may be time for the FHA to reevaluate its condo lending rules.

• Employment conditions continue to improve in May based on the initial unemployment insurance claims data released today by the Department of Labor.
• 370,000 initial claims for unemployment insurance were filed for the week ending May 19 under the regular state programs; this is lower than the 372,000 claims (revised) filed the previous week and last year’s 424,000 initial claims. The number of initial claims has been trending down since 2009 when initial claims hit a peak of about 600,000.
• The insured unemployed, or those who have continuing insurance claims, is also down to 3.26 million from the previous week’s 3.29 million.
• The decline in insurance claims means that the economy is not shedding as many jobs, which means greater job stability for more people; with income stability, households can look to making longer-term investments such as purchasing a home.
• Partly based on this trend, NAR expects about 2 million net new jobs to be added to the economy in 2012.

• Continuing good news regarding the housing market as new home sales rose in 3.3 percent in April from the prior month and up 9.9 percent from one year ago.  The improvement is roughly in line with yesterday’s figure on existing homes.
• The latest median price of newly sold homes was $235,700, which is an increase of 4.9 percent from one year ago.  New homes nearly always sell at a higher price than existing homes.  But the gap has opened wider in recent years as many existing homes, particularly the foreclosed properties, were selling below the replacement cost.  That could also imply faster price recovery in the future for existing homes.
• There are two key differences between new and existing home sales.  First, new home sales are not closings but are new contract signings.  There is no official figure on closed sales of new homes, but one would expect that all the newly built ones will eventually sell at some point despite short-term contract fallouts.  Second, new homes comprise a very small market share.  Normally, new homes would make up about 15 percent of total home sales.  In recent years, new homes have made up only 5 to 8 percent of all home sales.
• New home sales are likely to rise 25 percent this year and another 20 to 30 percent jump next year.  Inventory levels are very thin.  Housing starts suffered much more than the existing homes market and new home sales are now primed for a stronger recovery.  Unfortunately, the larger builders are likely beneficiaries at the expense of small builders because of very restrictive lending for construction loans to smaller-sized homebuilders, while the big builders can tap Wall Street funds.  Larger banks getting bigger and larger builders getting bigger at the expense of smaller players may be the unintended result of the Dodd-Frank bill.

• Obtaining a mortgage continues to be difficult for individuals with lower credit scores or individuals with non-standard credit characteristics, e.g., self-employed.
• Bargain hunters and low-price bids continue.
• The short sale process continues to be slow and frustrating.
• Pricing continues to be a challenge.
• The appraisal process continues to be a problem.

However, fewer respondents noted major problems than had previously been the case. In contrast, a growing number of respondents indicated a growing number of cases of multiple offers, fewer seller concessions, low inventories, and some increase in buyer interest. Many respondents noted that correctly priced properties sell quickly.

The graph for “Total Home Sales” on a twelve month roll (i.e., total sales for the current and previous 11 months reported monthly) shows a market achieving stability from a sales viewpoint, with modest improvement expected based on continued economic and employment expansion. This is consistent with the survey conclusions.

The media has discussed home prices in detail for the last four years. The graph “Prices By Month” indicates that home prices have been headed towards stability. NAR’s forecast is for the attainment of stable prices this year.

The available data indicate continued expansion in residential real estate markets. Like all forecasts, this conclusion is subject to market risks affecting the outlook:

Potentially Negative News

• The Economic Recovery is slow and weaker than normal: Unexpected and unfavorable economic news (i.e., a European bond default, an additional run-up in gas prices) could have a negative impact on the recovery.
• Credit standards imposed by financial institutions in making a mortgage are reported as excessively stringent.
• Job gains are well below normal.
• Consumer Confidence is lower than would otherwise be expected.

Potentially Positive News

• Falling Inventories of homes for sale.
• Stabilization of Distressed Sales in the neighborhood of 30 to 35 percent.
• Home Affordability: Low interest rates and attractive prices continue to facilitate home purchases.
• Demographics: Sales are at a level of approximately 10 years ago, but the population has increased significantly.

The economic recovery is clearly weaker than the historical norm, but appears to be proceeding. Realtor® confidence and price expectations are higher than was the case a few months ago, rising rental rates have favorable implications for home sales, and time on market continues to decrease. Prices and interest rates continue to be lower than has been the case in the past. These are the reasons that we continue to view the outlook as favorable for home purchases.

Given that the typical homeowner will occupy a house for approximately 8 years and that home ownership is basically a lifestyle decision, one can make a very good case that this is a good time to buy a house, remembering that staying within a reasonable budget and acceptable mortgage is important. Additional information on a variety of topics related to current residential market conditions may be found at http://www.realtor.org/reports/realtors-confidence-index.

The national median existing-home price for all housing types jumped 10.1 percent to $177,400 in April from a year ago; the March price showed an upwardly revised 3.1 percent annual improvement.

Current housing affordability conditions:

The proposal by Senators Boxer and Menendez follows several of the recommendations made by President Obama earlier this year and includes:

• Extending streamline refinancing for Fannie and Freddie borrowers
• Elimination of up-front fees on refinances
• Eliminating appraisal costs for all borrowers
• Allowing lenders not currently servicing a loan to refinance the loan with the same representations and warranties and streamline ability as the current servicer, thereby creating competition and lower costs to the consumer
• Requiring second lien holders who unreasonably block a refinance to pay “restitution to taxpayers”
• Requiring mortgage insurers who unreasonably fail to transfer coverage to refinanced loans “to pay restitution to taxpayers”

To analyze the impact of the proposal, data generated by Lender Processing Services (2) was used to estimate the universe of mortgages held by Fannie Mae and Freddie Mac that are both eligible and likely to refinance under such a program. An average 30-year fixed rate mortgage of 4.0% along with a Federal tax rate of 25%, a state tax rate of 5%, and an average loan balance of $150,000 (3) were used to estimate the effect of the refinance program in the first year. It is assumed that borrowers with a current mortgage rate of 5% or higher will refinance (4) and there is no change in mortgage insurance premiums. The proposed changes would result in:

• Just over 3 million refinances
• Reduce the average annual payment by roughly $2,800
• Save borrowers $4.5 billion to $4.8 billion per year (after tax considerations) and more than $45 to $48 billion by 2022
• Some of the reduction in payments might result in increased savings, but much would be spent on goods and services (5). The lower payments would have a multiplier effect resulting in an injection to the economy of possibly the full amount of the money saved by borrowers or perhaps more.

The impact of a refinance program would extend beyond the savings to the consumer. The CBO (6) estimated that a similar program extended to loans securitized by the GSEs and FHA might result in 111,000 fewer defaults. Given the significant proportion of likely GSE refinances, the large number of loans held in portfolio that were not included in the CBO analysis, and lower subsequent CBO forecast for Treasury rates (and thus mortgage rates), it is reasonable to assume that the number of foreclosures averted by the GSE refinance plan would be substantial.

While the number of REO sales, modifications, and short sales have risen in recent quarters, the number of loans in foreclosure or REO remains high, thus underlining the need to staunch the flow of properties into this bucket. REOs are a significant problem for home sellers, the market and local communities:

• NAR estimates a price discount of 20% on REOs relative to non-distressed properties and some groups estimate this to be as high as 30%
• By one estimate, the sales price of a home was lowered by approximately 2.5% for every percentage increase in foreclosures in the same census tract, other factors constant.
• Homes that are vacant for an extended period impose costs on municipal governments ranging between $5,000 and $35,000, depending on length of vacancy, maintenance requirements, and damage to the home.
• Another study found a one percent increase in county foreclosure rate, increased the burglary rate by 10.1 percent. The impact was also significant on larceny and aggregated assault.

Finally, resurgent concerns about European financial conditions as well as the impending fiscal cliff in the Unites States will weigh on the 10-year Treasury and mortgage rates in the near term, allowing more time for consumers to take advantage of a refinance program.

While the estimated $4.5 to $4.8 billion in savings and reduced defaults may seem like small figures, these refinances could have a significant impact in the local areas where the refinances would be concentrated. Furthermore, the relaxation of representations and warrants and loan level pricing adjustments sets an important precedent that could help to ameliorate the tight lending conditions on the originations side of the market.

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1. See Hubbard and Mayer (2008) and Greenwald (2010)
2. Lender Processing Services, Mortgage Monitor; February 2012 Mortgage Performance Observations
3. Based on 4th quarter 2011 10k filing from Fannie Mae and Freddie Mac
4. Relaxing this assumption to a minimum reduction in monthly payment of 5% like the FHA’s streamline program would enable 560,000 additional refinances with a savings of $423 million in monthly payments.
5. Canner, Passmore, and Dynan (2002) assume that 100% of the reduced payment is devoted to personal consumption expenditures and McConnel, Peach and Al-Haschimi (2003) point out that households who refinance tend to have higher propensities to consume due to income constraint.
6. Remy, Luca, and Moore (2011), “An Evaluation of Large-Scale Mortgage Refinancing Programs”.

• The typical member had 10 transaction sides in 2011 – a rise from 8 in 2010. A transaction side can either be on the buyer or seller side of a transaction.
• The typical member had 1 transaction side involving a short sale and 1 transaction side involving a foreclosure.
• The sales volume among members rose from $1.1 million in 2010 to $1.3 million in 2011.
• The number of properties managed among property managers increased to 30 properties in 2011 from 25 properties in 2010.
• The typical appraiser appraised 200 properties in 2011 – the same number as in the prior year.
• For more information on the Member Profile, click here.