The Future of Real Estate

One in Four Borrowers Is Underwater

itenenchuk@gmail.com (The Future of Real Estate) — Sat, 28 Nov 2009 18:51:00 +0000

November 24, 2009, WSJ
By RUTH SIMON and JAMES R. HAGERTY

The proportion of U.S. homeowners who owe more on their mortgages than the properties are worth has swelled to about 23%, threatening prospects for a sustained housing recovery.

Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic, a real-estate information company based in Santa Ana, Calif.

These so-called underwater mortgages pose a roadblock to a housing recovery because the properties are more likely to fall into bank foreclosure and get dumped into an already saturated market. Economists from J.P. Morgan Chase & Co. said Monday they didn't expect U.S. home prices to hit bottom until early 2011, citing the prospect of oversupply.

Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home's value, the First American report said. More than 520,000 of these borrowers have received a notice of default, according to First American.

Most U.S. homeowners still have some equity, and nearly 24 million owner-occupied homes don't have any mortgage, according to the Census Bureau.

But negative equity "is an outstanding risk hanging over the mortgage market," said Mark Fleming, chief economist of First American Core Logic. "It lowers homeowners' mobility because they can't sell, even if they want to move to get a new job." Borrowers who owe more than 120% of their home's value, he said, were more likely to default.

Even home buyers who thought they were getting a bargain are now finding themselves underwater. The News Hub panel discusses a mortgage crisis that has left millions owing more than their homes are worth.

Mortgage troubles are not limited to the unemployed. About 588,000 borrowers defaulted on mortgages last year even though they could afford to pay -- more than double the number in 2007, according to a study by Experian and consulting firm Oliver Wyman. "The American consumer has had a long-held taboo against walking away from the home, and this crisis seems to be eroding that," the study said.

Just months after showing signs of leveling off, the housing market has thrown off conflicting signals in recent weeks. Jittery home builders and bad weather led to a 10.6% drop in new home starts in October, and applications for home-purchase mortgages have dropped sharply in recent weeks.

These same falling prices have boosted home sales from the depressed levels of last year. The National Association of Realtors reported Monday that sales of previously occupied homes in October jumped 10.1% from September to a seasonally adjusted annual rate of 6.1 million, the highest since February 2007.

The bump in sales was ahead of forecasts, spurred by falling prices, low mortgage rates and a federal tax credits for buyers. Congress recently expanded and extended the tax credits.

The latest First American data aren't comparable to previous estimates because the company revised its methodology. First American now accounts for payments made by homeowners that reduce principal, and it no longer assumes that home-equity lines of credit have been completely drawn down.

The changes reduced the total number of borrowers under water -- although both old and new methodology show increases from the previous quarter. Using the old methodology, the portion of underwater borrowers would have increased to 33.8% in the third quarter.

Homeowners in Nevada, Arizona, Florida and California are more likely to be deeply under water, according to the analysis. In Nevada, for example, nearly 30% of borrowers owe 50% or more on their mortgage than their home is worth, said First American.

More than 40% of borrowers who took out a mortgage in 2006 -- when home prices peaked -- are under water. Prices have dropped so much in some parts of the U.S. that some borrowers who took out loans more than five years ago owe more than their home's value.

Even recent bargain hunters have been hit: 11% of borrowers who took out mortgages in 2009 already owe more than their home's value.

Andrew Lunsford put 20% down when he bought his home in Las Vegas for $530,000 in 2004. Now, he said, his home was worth less than $300,000.

"I'm to the point where I feel I will never get my head above water," said Mr. Lunsford, a retired state trooper who works for an insurance company. He said his bank won't modify his loan because he can afford his payments, and he's unwilling to walk away, he said: "We're too honest."

Borrowers with negative equity are more likely to default if they live in a state where the bank can't pursue their assets in court, according to a study by the Federal Reserve Bank of Richmond.

But borrowers who are less than 20% under water are likely to maintain their mortgage if their loan is modified and the payments reduced, said Sanjiv Das, head of Citigroup's mortgage unit. "Beyond 120%, the most effective modification is a complete loan restructuring, including a principal reduction."

Mortgage companies have been reluctant to reduce mortgage principal over worries about "moral contagion, with people not paying their mortgage or redefaulting because they believed the bank would reduce their principal," Mr. Das said.

Many borrowers are so deeply under water that they can't take advantage of lower rates and refinance their mortgage. "We're declining hundreds of loans each month," said Steve Walsh, a mortgage broker in Scottsdale, Ariz. "The only way we will make headway is if we allow for a streamlined refinance where the appraisal is irrelevant."

Realtors reported that home sales in October were up 24% from a year earlier. The number of homes listed for sale nationwide was 3.57 million at the end of October, down 3.7% from a month earlier, the trade group said. But that inventory could rebound next year as banks acquire more homes through foreclosure.

About 7.5 million households were 30 days or more behind on their mortgage payments or in foreclosure at the end of September, according to the Mortgage Bankers Association. Many of those homes will be lost to foreclosure, adding to the supply of homes for sale.

A recovery could pay off for the roughly 30% of underwater borrowers who owe 110% or less of their home's value and are able to endure the slump. "Most people prefer to stay in their home" even if the value of their property has declined, said John Burns, a real-estate consultant based in Irvine, Calif.

Prime Property Prices Begin to Stir

itenenchuk@gmail.com (The Future of Real Estate) — Sat, 28 Nov 2009 18:48:00 +0000

London, Switzerland, Monaco and the South of France are Sparking to Life

November 27, 2009, WSJ
By TARA LOADER WILKINSON

After sharp falls during the credit crisis, prime residential property prices in Europe are beginning to regain their poise, fueled by investor appetite for direct investment opportunities, cheap money and exchange-rate advantages.

London is leading the charge, but residential property in Switzerland, Monaco and the South of France is also sparking to life.

The downturn hit prime property -- those valued at €2 million and above -- hard. Central London prime residential property fell between 20%-30% from peak to trough, say estate agents.

Monaco and South of France property was off 20%. Switzerland, less exposed to a property bubble before the credit crisis, bucked the trend, with top properties selling for 5% more so far in 2009.

But the worst of the crisis for top residential property prices in London and other prime locations outside of Switzerland appears to be over.

Knight Frank, the upmarket London-based estate agent, said that 30% of its deals in the prime central London market were sealed in October and September. Savills, another exclusive London estate agent, reported a similar rise in activity during the same period.

"People are coming to us with saddlebags laden with money," said Trevor Abrahmsohn, who runs estate agency Glentree, which sells houses on one of the capital's most expensive streets, Bishops Avenue.

"They have made up some of their losses in gains in the equity markets and, with such low yields of cash, are being more aggressive with their investment strategies," Mr. Abrahmsohn added.

Forty percent of properties Glentree has sold so far this year have been in the last two months.

Property lawyers are saying activity is being helped by many wealthy investors buying prime residential property in Europe for investment reasons.

"They like the direct investment opportunity of buying residential properties in cities like London," said Henry Stuart, a partner and property specialist at private client lawyers Withers. "Right now, they see property as transparent, tangible and useful -- they do not share the same optimism towards indirect investments."

Mr. Stuart said activity has been particularly strong around the £1 million to £2 million market in central London. Withers also worked on six of the 10 houses sold for £10 million-plus in central London in the second quarter of this year.

Many wealthy buyers are taking advantage of cheap mortgage deals to finance purchases.

"Buyers see prime property as a low risk means of generating cheap capital," said prime London property consultant Charles McDowell. "There used to be an image issue. It was thought that people who borrowed to buy didn't have deep enough pockets. Now clients are very keen to hang onto their money and borrow to buy. They want to stay liquid."

Mr. McDowell said two thirds of the deals he has worked on worth £5 million and more were financed by mortgages. "This is a far higher percentage than would have been purchased with mortgage finance in previous years," he said.

At least 50% of buyers for prime central London property are coming from abroad, say estate agents. Middle East and Asian buyers are active, and continental European buyers, buoyed by the strong euro are also driving demand. Knight Frank said the introduction of the Italian tax amnesty, which came into force in October, was instrumental in fueling purchases from wealthy Italians.

The estate agent said there has been a quadrupling of the number of Italian buyers looking for London property and they now comprise 38% of European buyers in the city.

Weak sterling and the desire to own a "trophy" house in central London might be behind much of the demand for prime property in the U.K. capital, but in Switzerland prime property purchases are being driven by Europe's wealthy looking for refuge from tougher tax regimes. With a number of European countries imposing higher taxes on their wealthy citizens and removing loopholes for nondomiciles, as well as the threat of higher taxes hanging over many other economies, Switzerland's low tax environment looks increasingly appealing.

"We are advising more wealthy Europeans about moving to Switzerland than ever before," said Robert Ferfecki, managing director of Henley & Partners, a residence and citizenship planning consultancy based in Zurich. Mr. Ferfecki added that foreign demand for top properties in Switzerland is as strong as it has been for years.

Despite prices coming off from their 2007 highs, demand for prime properties in Monaco remains buoyant. A number of apartments in the principality were placed on the market for a staggering €50 million last summer, helping to cement Monaco's reputation as the world's most expensive place for residential property.

"Demand is coming more for studio and one-bedroom properties, between €1 million to €3 million," said Jean-Claude Caputo, head of Riviera Estates, a Nice-based estate agent. "Although we have also seen three sales for more than €10 million this year."

Mr. Caputo acknowledged that the Monaco property market has seen better years, but said properties in the South of France are more in demand. He said: "International money continues to flow to places like Antibes, St. Tropez and other exclusive areas -- and this is where the real demand is in the region."

Fear of Double Dip in Housing

itenenchuk@gmail.com (The Future of Real Estate) — Fri, 20 Nov 2009 16:20:00 +0000

Home Starts Tumble and Mortgage Delinquencies Rise, Casting Cloud Over Recovery

November 19, 2009
By JAMES R. HAGERTY and SARA MURRAY

The U.S. housing market is sputtering again, adding to doubts about the vigor of the economic recovery.

Just a few months after housing showed signs of leveling off, bad weather and uncertainty over the extension of a home-buyer tax credit sent new-home starts in October tumbling 10.6% from the previous month. They fell to the lowest level since April, the Commerce Department said Wednesday. Starts of single-family houses fell 6.8%.

Earlier this month, Congress expanded the tax credit and extended it through April, so building should improve. Still, the latest data portend poorly for the economy overall, and for fourth-quarter growth.

On Wednesday Pulte Homes Inc., the nation's largest home builder, warned investors of a grim outlook. "As we look out to 2010, we are expecting difficult conditions to continue," said chief executive Richard Dugas.

Meanwhile, more Americans who bought homes during the boom are falling into mortgage limbo. About 3.4% of U.S. households -- or about 1.9 million homeowners -- are 120 days or more overdue on their payments, but not yet in foreclosure, according to LPS Applied Analytics, a research firm in Denver. That is up from 1.5% a year earlier.

Many of these people are likely to lose their homes over the next few years. That means more bank-owned homes will hit a market already suffering from oversupply.

The housing-supply picture is tricky to read. The number of homes listed for sale was 3.63 million in September, down 15% from a year earlier, according to the National Association of Realtors. That is enough to last about eight months at the current rate of sales. Anything above about six months is considered a buyer's market, in which prices may come under downward pressure.

But those numbers don't reflect the millions of homes expected to go through foreclosure over the next few years, adding to supply. Amherst Securities Group in September estimated seven million homes are headed for foreclosure in the next few years -- more than a year's home sales at the current rate.

"Housing faces important problems, including continuing high foreclosure rates," Federal Reserve Chairman Ben Bernanke said in a speech Monday. "But residential investment should become a small positive for growth next year rather than a significant drag, as has been the case for the past several years."

For borrowers with strong credit records, 30-year home mortgages are available for fixed rates of just under 5%, near the lowest levels in 50 years. That is helping demand, but many people can't get such loans because they have too much debt or are unemployed.

One measure of the role of housing in the economy earlier this decade: During the boom, residential investment peaked to make up 6.3% of gross domestic product. That number fell to 2.5% in the third quarter, according to Macroeconomic Advisers.

The average U.S. home price nearly doubled between January 2000 and April 2006, according to the First American LoanPerformance index. Since then, the average has dropped about 30%. In most parts of the U.S., prices are still down from year-ago levels, but prices in some markets, including San Diego and Orange County, Calif., have leveled off, at least temporarily.

Wednesday's data prompted some economists to revise their fourth-quarter forecasts down slightly. Macroeconomic Advisers moved its GDP estimate down to 3% from 3.2% and Nomura Securities is predicting 3.4% growth, down from 3.6%. The data adds to the suggestion "that the recovery is a little bit rickety," said Zach Pandl, a Nomura economist.

Eventually, the steep drop in construction of new homes should help reduce the number of unsold vacant homes to the point where builders need to step up production. But the latest data highlight the fragility of the housing market, which has been propped up by the tax credit and the Fed's efforts to push down mortgage rates.

With the tax credit set to expire in April and the Fed scheduled to wind down its purchases of mortgage-backed securities by the end of March, housing faces a test of its ability to sustain a recovery without as much government aid.

Potential homebuyers are frustrated by the complications of a market dominated by distressed sellers. Tim Kolstad, a financial consultant renting in Scottsdale, Ariz., has been trying to buy a home for more than a year. But the homes he likes are all either foreclosed or being offered for less than the loan balance due -- which means any offer from a potential buyer must be cleared by the lender, and lenders often are slow to respond.

"The offers just sit out there forever," Mr. Kolstad said.

Credit standards are "definitely tighter than they were" in previous years, said Bryan Mitchell, an agent Re/Max Associates in Las Vegas. At least two years of job history, low debt and a good credit score are essential to securing a loan. "You have to have all three, you can't be missing one," he said.

But some economists see signs of better demand ahead. "I think that there's been a lot of doubling up in this recession," said Patrick Newport, an IHS Global Insight economist. "People lose their jobs so they move in with relatives. Your kid graduates from college, he can't get a job, so he stays at home. That's going to start going the other way."

Single family home-building is still 10.9% below year-ago levels. New homebuilding fell to a seasonally adjusted annual rate of 529,000 units, the lowest since April. And apartment-complex construction fell as high vacancy rates, declining rents and borrowing difficulties have deterred builders. Building permits, a sign of future construction, also decreased 4%.

The number of people awaiting foreclosure action has ballooned partly because the government has prodded lenders to consider reducing payments for many distressed borrowers in an effort to avert foreclosures. At the same time, loan-servicing companies, the firms that collect mortgage payments and handle foreclosures, are overwhelmed by the millions of distressed borrowers. "There is only so much volume that can be processed by the servicers each month," said Herb Blecher, a vice president at LPS.

Overall, about 12.4% of American households with mortgages in October were 30 days or more overdue or in the foreclosure process, according to LPS. That's up from 12.3% in September and 8.6% in October 2008. In the latest month, about 6.9 million households fell into this category.

America's Newest Land Baron: FDIC

itenenchuk@gmail.com (The Future of Real Estate) — Tue, 17 Nov 2009 16:34:00 +0000

NOVEMBER 17, 2009, WSJ
By MICHAEL M. PHILLIPS

ATLANTA -- In the waning days of the Great Recession, the federal government is still jump starting the economy and propping up financial markets.

It is also trying to sell Dresden Heights, a failed condo development on a noisy freeway ramp next to a Motel 6, a Waffle House and a Do-It-Yourself Pest Control.

For more than a year, the Federal Deposit Insurance Corp. has been seeking a buyer for 36 partially built condos it inherited from a high-flying, short-lived Atlanta bank. The agency has been fending off vandals, haggling with architects and uncovering the developer's blunders, all in a bid to dispose of this condo project, just one of the 2,554 foreclosed assets dumped onto its books. "These are properties with a bad story," says Jim Gallagher, a senior official in the FDIC's Division of Resolutions and Receivership. "What we're trying to sell is something that is rundown or not completed or has some property damage."

The financial crisis started with Americans buying homes they couldn't afford. It is ending with the government struggling to sell buildings it never wanted.

In the past two years, the FDIC has taken over 150 failed banks. In the process, it has seized more than 5,000 houses, subdivisions, buildings, parcels and other foreclosed assets. The current backlog of property stuck on the agency's books, with an appraised value of $1.8 billion, ranges from an $18,700 clapboard home with stained carpets in Birmingham, Ala., to a $1.7 million mountainside lodge with a heated driveway in Steamboat Springs, Colo.

Taxpayers will be grappling with this flotsam for years to come, one example of how the crisis will linger long after the economy begins to revive. At a recent FDIC auction in Atlanta, the agency offered a four-unit condo building it had already sold once before -- after the savings-and-loan crisis two decades ago.

These days, it takes the FDIC on average six to eight months to sell a property. Dresden Heights, tied up with unpaid bills, a lawsuit and complex right-of-way questions, is among its toughest prospects.

The project was the brainchild of Quantum Homes and its chief executive, Ramsey "Jim" Salahat. In March 2006, just as Atlanta's housing market was peaking, Mr. Salahat took out a $3.78 million, 18-month loan from Main Street Bank in Covington, Ga., to purchase and prepare 5.3 acres abutting an interstate entrance ramp.

The developers brought in a crane, knocked down soaring oak trees, installed sewers and laid out two short roads, Heights Way and Quantum Lane. They planned 80 residential units and seven buildings.

At the groundbreaking in May 2007, Mr. Salahat and Quantum President Eyal Livnat posed for photos, wearing white hardhats and digging red Georgia soil with shovels festooned in blue ribbons. They threw a cocktail party, serving wine, roast beef, quiche and cookies.

"Future home buyers are quickly reserving space at Dresden Heights...so interested home buyers should act fast to ensure they have a home at this great community," Mr. Salahat said in a news release afterward.

The release quoted Deanna Helie, a "prospective home buyer" who attended the event, as saying: "When this area begins to grow, I want to be in on that growth at an early point."

Ms. Helie, who lives adjacent to the Dresden Heights property, said she was talking about the neighborhood only, and stopped by out of curiosity, not to shop. She wondered about the wisdom of building homes next to a pest-control outlet. "I was thinking, 'This isn't going to fly,'" said Ms. Helie, a computer programmer.

A few days after the groundbreaking, Mr. Livnat signed a two-year, $6.75 million loan from Alpha Bank & Trust, a start-up bank in nearby Alpharetta, Ga., to finance construction of the first three buildings. Two dozen customers, most of them first-time home buyers, put down $500 to $1,000 deposits on the condos, which started at $194,900. The developers told the early buyers they would likely be able to move in within a year, according to Kristy Jeffries, who at the time was Quantum's saleswoman.

In early 2008, work on the project slowed, Ms. Jeffries recalls. People started asking for their money back, "and the builders weren't giving it to them," she says. In her office, located in the basement of a model home, she started receiving calls from disgruntled subcontractors complaining they hadn't been paid. She says one unhappy supplier repossessed Quantum's construction trailer, which still contained file cabinets with records of potential buyers.

That spring, Mr. Salahat closed Quantum's headquarters in a lavish Atlanta office complex. He moved the company into a cramped, low-budget space behind a chiropractor's office outside of town, where Ms. Jeffries says she went for her paychecks.

The last time Ms. Jeffries saw Mr. Salahat was over a Tex-Mex meal in May 2008, when the developer told her the company was going bankrupt. Former associates say he has moved to Jordan. Neither they nor the FDIC could provide contact information. Mr. Salahat's listed phone numbers in the Atlanta area have been disconnected.

During a brief interview on his stoop, Mr. Livnat, Quantum's former president, declined to discuss details of the Dresden Heights project. "It was an unfortunate time to start a company," Mr. Livnat said. "Things were at a peak, and it went down quick." Mr. Livnat was skittish about answering the door, and he said he is worried the FDIC or creditors might come after him.

Alpha Bank foreclosed on the three partly finished buildings a year after Messrs. Salahat and Livnat broke ground. On May 6, 2008, a bank representative stood outside the Dekalb County courthouse and offered the property for sale. No one was willing to beat the bank's $4.692 million minimum. Alpha Bank now owned Dresden Heights.

The buildings sat exposed to rain, sun and wind through the summer of 2008, prompting bank officials to sign an agreement with McGuire Properties Inc., of Kennesaw, Ga., to finish construction. The company is run by George F. Nemchik, Jr., who was also an Alpha Bank shareholder, according to his attorney and Ms. Jeffries. Mr. Nemchik didn't return calls seeking comment.

Quantum Homes and its owners defaulted on some $10 million in bank loans when the Dresden Heights condo development in Atlanta failed. In 2008, Alpha Bank & Trust foreclosed on the collateral -- three partially built buildings and the land directly beneath them -- and soon failed itself. The Federal Deposit Insurance Corp. took over both the bank and its assets, only to discover that at Dresden Heights its property was completely surrounded by land owned by BB&T Corp., which had foreclosed on another loan to the developers. The uncertain right-of-way made it difficult for FDIC to sell the property; buyers couldn't be certain that they'd be able to reach the buildings without trespassing. Above, a blueprint. The three buildings are outlined.

Alpha Bank retained Ms. Jeffries to sell units. When she went to pick up her paycheck one day in October, a bank executive told her the lender was on the brink of collapse. He suggested the FDIC might want to keep her on as a sales agent for Dresden Heights. She demurred. "I think that property is cursed," she says now.

The American government came to own Dresden Heights on Friday, Oct. 24, 2008, about six weeks after the collapse of Lehman Bros. Georgia regulators closed Alpha Bank and turned it over to the FDIC. That weekend, Stearns Bank of St. Cloud, Minn., took over Alpha's branches. It acquired just $39 million of the $354 million in assets. The FDIC took possession of the rest, including Dresden Heights.

The FDIC inspector general's post-mortem blamed Alpha Bank's failure on "management's aggressive pursuit of asset growth concentrated in high risk" residential real-estate development and construction loans. Former Alpha Bank chief executive Joe Briner, now a consultant with a corporate-turnaround firm in Atlanta, didn't return calls seeking comment.

The FDIC wanted the property sold quickly, despite a series of obstacles, including hundreds of thousands of dollars in liens filed against Dresden Heights by building-material suppliers and McGuire Properties, the company that was finishing construction. If enforced by a court, any potential buyer would have to cover those bills before taking possession.

In January, the FDIC's outside property-management firm gave the listing to Atlanta real-estate broker Rob Jordan, a 40-year-old who had spent 10 years as a commercial banker before joining his father in the family firm. These days, Jordan Co. does virtually all of its business selling foreclosed commercial properties.

Mr. Jordan and his colleague, David Walmsley, pulled the county records on Alpha's construction loan, a routine step. They stopped cold at the surveyor's description of the property put up as collateral. "Said tract of land contains 6,776 square feet," the documents said of the first parcel. The other two parcels were similarly small.

Messrs. Jordan and Walmsley realized that Alpha Bank and now the federal government owned the three buildings and the land immediately beneath them -- but not an inch more. "What about the sidewalks? The stairs? The stoops?" asks Mr. Jordan. "They're all on someone else's property." The brokers checked with the county and confirmed that even the two small streets running through the subdivision belonged to someone else.

That someone else was BB&T Corp., a Winston-Salem, N.C., bank. BB&T had bought Main Street Bank, which made the original loan to Quantum that allowed the developer to buy the Dresden Heights land. When Quantum went bust, BB&T foreclosed on that land and put it up for sale for $1 million.

Rifling through court records, Messrs. Jordan and Walmsley discovered that Quantum had signed an easement allowing passage between the two properties. But it wasn't clear if the agreement would be legally binding on future owners.

The murky right-of-way made the sales job far more difficult. The FDIC would have to inform potential buyers there was no guarantee they could gain access to their property without trespassing. The brokers next sought to obtain the building plans, vital documents for anyone hoping to finish the development. In January, Mr. Jordan called Bill vonHedemann of Niles Bolton Associates, the principal architect on the project, to ask for copies. Mr. vonHedemann declined, politely. The developers, he said, owed his firm more than $60,000 in fees.

Anyone who wants the 85 or so computerized drawings will have to pay for them, he told Mr. Jordan. "We don't give the plans away," Mr. vonHedemann said in an interview.

Mr. Jordan didn't worry, initially. Alpha Bank should have had plans on file and regularly sent an agent to the site to check progress. But the brokers found no evidence Alpha had kept such records.

Meantime, the property was beginning to deteriorate. Over the winter, the outside pipes froze. In March, thieves broke into a model unit and stole the refrigerator, the range and the dishwasher. The FDIC boarded up the ground-floor windows on all of the townhouses, changed the locks, stowed the air conditioners in the garages and hired a full-time security service.

Messrs. Jordan and Walmsley fielded nearly a dozen offers, but none was close to the $2.8 million asking price. By May, the brokers worried the FDIC was shooting too high.

The FDIC ordered two new appraisals, a process that took almost five months. The brokers put off would-be bidders by saying the FDIC was undertaking "internal adjustments," an intentionally vague phrase intended to keep shoppers interested without responding to offers.

McGuire Properties, the company that had agreed to finish the Dresden Heights construction on behalf of Alpha Bank, dropped its liens on Aug. 17 in the face of a federal law making the FDIC immune to such claims. Instead, McGuire sued the FDIC in federal district court. McGuire contended that after seizing Alpha, the agency had directed the builder to continue work on the condos, and reneged on a promise to pay. The company demanded $653,014 plus interest.

In court filings, the FDIC denied the main allegations and asked the court to force McGuire to cover the government's legal costs. The two sides are in settlement talks. In September, the agency cut Dresden Heights's asking price 25%, to $2.1 million, and the brokers called the serious prospects.

One repeat bidder was 39-year-old Ho Hyun Chung. Mr. Chung moved from Seoul to the U.S. in 1996 to study business. He stayed to work for the U.S. cell-phone unit of LG Group, a South Korean conglomerate. Frequently up late on conference calls with headquarters, Mr. Chung became hooked on TV infomercials touting DVDs and books that promised riches through foreclosed real-estate. "I bought most of them," he says.

In 2007, as the real-estate market was tanking, Mr. Chung quit LG and started a business with his wife. Their niche: Buying unfinished foreclosed townhouses and completing them. He says he owns 42 units in 11 properties around the Atlanta area, including five townhouses he bought from the FDIC in December. He says he makes money on some, and loses on others.

Mr. Chung spotted Dresden Heights on the FDIC Web site. He liked that it was inside the perimeter beltway and near two universities.

He figured he could make a good return if he put no more than $1.5 million into finishing the project and then sold the units for $130,000 to $145,000 each, generating almost $5 million in gross revenue. It's a plan, he says, that depends heavily on the federal government's $8,000 first-time home buyer tax credit. The credit, just extended by Congress, expires at the end of April. "If that goes, I don't know how the market will react," he says.

The FDIC has tried to sell the Dresden Heights condos for more than a year.

In October, almost a year after the FDIC seized Dresden Heights, the FDIC and Mr. Chung signed a sales contract giving him 30 days to conduct due diligence. Neither side would disclose the price.

Only then did Mr. Chung's lawyer notice that the FDIC's buildings were islands surrounded by BB&T's land. Mr. Chung acknowledges the FDIC disclosed the information, but says he "didn't quite understand" the problem until his lawyer raised it.

"I need to clean that up first," he says. He also wanted to make sure the person who buys the BB&T land signs an agreement that allows for the development and sale of the three buildings.

This month, he asked the FDIC for an extension on his 30-day contingency period. The FDIC turned him down, and the agreement expired.

Buying a Home in Time to Get Credit

itenenchuk@gmail.com (The Future of Real Estate) — Tue, 17 Nov 2009 16:27:00 +0000

NOVEMBER 15, 2009, WSJ
By AMY HOAK

House hunting usually slows down this time of year, as people put their searches on hold during the holidays.

This winter could be different, however, thanks to the extension -- and expansion -- of the first-time home-buyer tax credit.

"We're going to see far more interest in the fourth quarter than we generally do because of the tax credit," says Heather Fernandez, vice president of Trulia.com, a real-estate search engine. Traffic surged on the site on Nov. 5, the day Congress approved the credit extension, she says.

The new law extends the tax credit for first-time home buyers and opens it up to some existing homeowners as well: The credit is now up to $8,000 for first-time buyers and up to $6,500 for repeat buyers.

All buyers must have a binding contract on a house in place on or before April 30. The purchase must be for a principal residence and must close on or before June 30.

To be considered a first-time home buyer, an individual must not have owned a home in the past three years. And to be eligible, existing homeowners need to have lived in the same principal residence for five consecutive years during the eight-year period that ends when the new home is purchased.

Income limits have risen as well. According to the Internal Revenue Service's Web site, www.irs.gov, the home-buyer tax credit phases out for individuals with modified adjusted gross incomes between $125,000 and $145,000, and between $225,000 and $245,000 for people filing joint returns.

The inclusion of move-up buyers might inspire homeowners to take action and list their house if they've been putting it off, says Carolyn Warren, a Seattle mortgage broker.

"If people love their home, it's not going to entice them to sell," Ms. Warren says. "If they've had it in the back of their minds and really would like to move up, it might push them into doing it sooner than later."

If you're thinking of purchasing a home, here are five tips:

Don't procrastinate

Start your house search now. Getting an early start will give you a better chance of finding the right house before the credit deadline.

When first-time buyers thought that the credit would expire Nov. 30, people scrambled to find properties in September and October, says Pat Lashinsky, chief executive of ZipRealty, a residential real-estate brokerage firm. In some cases, "there wasn't inventory that fit people's needs," he says. In some markets, including Phoenix, Chicago and parts of California, for example, properties had multiple bidders, Mr. Lashinsky adds.

Before you start house hunting, get preapproved for a mortgage, says Eddie Fadel, a Miami-based mortgage banker. And do a realistic assessment of what you can afford.

Buyers who have to sell an existing home should price it aggressively from the beginning to drum up interest and get a buyer as soon as possible, Ms. Fernandez says.

Don't count on another extension

The credit won't be available forever, Mr. Fadel says.

"This is a medication for the housing crisis," he says, "Once the patient -- which is the housing market -- is cured, there will be no medication needed."

Be mindful of interest rates

Interest rates are low right now, but will likely rise next year, Ms. Warren says. Higher rates will affect your monthly mortgage payments, thus the affordability of the house you are buying.

"It's pretty universally accepted that rates will be higher next year," she says. "What is unknown is how fast and by how much."

Average rates on 30-year fixed-rate mortgages have been hovering around 5%. But when the Federal Reserve stops buying large amounts of mortgage-backed securities next year, interest rates could rise, Ms. Warren points out. The Fed plans to end its purchase program in March.

Communicate with your lender

Make sure you're speaking with your lender regularly to avoid any delays. If the lender asks for any additional documentation, turn it in as soon as possible, says Doug Heddings, a New York-based real-estate agent with Charles Rutenberg Realty.

And think twice before pursuing a short sale. That's where someone sells a home for less than what he or she owes on a mortgage, with permission of the lender. The process can be lengthy and unpredictable because the homeowner's lender has to approve any deal, Ms. Warren says, and it can get complicated when there is a second mortgage associated with the property.

Don't take shortcuts

Don't forgo any of the steps you would normally take just to make the tax-credit deadline. That means making sure the house is a good fit and is in the right location and getting a home inspection, Mr. Lashinsky says. Skipping steps could cost you in the long run.

"Don't let the tax credit get you to make a decision to buy a house that you wouldn't otherwise want to buy," he says. "Don't shortcut the process to get the tax credit."

Ten Questions on the Volatile Housing Market

itenenchuk@gmail.com (The Future of Real Estate) — Tue, 17 Nov 2009 16:12:00 +0000

Lower Prices Have Spurred Home Sales, but Looming Foreclosures and High Unemployment Are Clouding the Outlook

November 17, 2009, WSJ
By JAMES R. HAGERTY

The U.S. housing market has been in a slump for the past four years. When will it ever end?

In recent years, real estate has proven as jittery and unreliable as any other market. The average U.S. home price nearly doubled between January 2000 and April 2006, according to the First American LoanPerformance index. Since then, the average has fallen about 30%. The drop has been 53% in the Las Vegas metropolitan area and 39% in Miami, where about a quarter of all households with mortgages are behind on their payments or in foreclosure. The value of your home might be determined more by whether the neighbors keep their jobs than whether the house has ample light and closet space.

Here is a guide to navigating a fractured and volatile market:

1. Is the housing market getting better?

It has shown some signs of healing this year, but the much-touted recovery is tentative and fragile.

Home sales have increased from the severely depressed levels of 2008. The inventory of unsold homes listed for sale also is down. Bidding wars are breaking out for foreclosed homes in the sorts of neighborhoods (near jobs and decent schools) that attract both first-time buyers and investors seeking rental properties.

But more than 6.7 million U.S. households with mortgages, or about 13%, are behind on their payments or are in the foreclosure process, according to the Mortgage Bankers Association. Eventually, many of them will lose those homes, sending more supply onto the market. Unemployment has continued to rise, and the housing market is unlikely to show a sustained recovery until job growth resumes.

While the supply of middle-class homes on the market has declined somewhat, it remains ample in most places. And there is a huge glut of high-end houses for sale in many areas. That means prices of high-end homes might still have a long way to fall.

2. When will housing bottom out?

There probably won't be any clear turning point. Monthly indicators, such as home sales and prices, tend to bounce erratically from month to month, making it hard to discern the underlying trend. And the housing bust will end at different times in different places. House prices already might have bottomed out in the coveted Virginia suburbs with short commutes into Washington, D.C., for instance. But it probably will be years before all of the unsold condos find buyers in parts of Florida.

Generalizations about states or metropolitan areas don't say much about what is happening in your neighborhood. In Summit, N.J., known for good schools and an easy, 45-minute train commute to Manhattan, the median home price in September was up 1.2% from a year earlier, according to Otteau Valuation Group, an appraisal company. In Atlantic City, N.J., which suffers from too much speculative building of condominiums and weak demand for vacation homes, the median price is down about 12% from a year ago.

3. What signals should I watch to determine whether my local market is improving?

One way to get a sense of supply is to ask a good local real estate agent for stats on how many homes are listed for sale in your town and how many months it would take at the current sales rate to absorb that supply. Anything over about six months generally is considered high, meaning that sellers might have to cut prices. Another way to get a sense of a neighborhood's health is to count the number of for-sale signs and vacant houses. If there are more than a couple vacant homes in a block, that might be a bad sign, particularly if no one is taking care of them.

The supply of homes listed for sale has fallen very sharply in some areas. But the supply is likely to balloon again in many areas with a renewed surge in foreclosures. Many local newspapers provide information on foreclosure filings.

Demand depends heavily on the job market. The U.S. Bureau of Labor Statistics provides unemployment rates by metropolitan area. In September, they ranged from 2.9% in Bismarck, N.D., to 30% in El Centro, Calif. State and local agencies provide job-market data, too. Celia Chen, a housing economist at Moody's Economy.com, says help-wanted signs can be a useful local indicator; if you start seeing more of them around your neighborhood, that is a sign that business in your area could be starting to recover.

4. How can I figure out the value of my home?

You never know for sure what a home will fetch until you put it on the market, and then it is partly a matter of luck. Will the eager buyer who shares your taste in home style and neighborhood show up on day one or day 200?

Some Web sites -- including Zillow.com, HomeGain.com and Cyberhomes.com -- provide estimates of individual home values. These estimates are largely based on recent sales of nearby homes, and in some cases they are wildly off the mark. But they often provide a ballpark idea of a home's value.

You might come closer to the real value by talking to a local agent and looking at recent prices for homes that you know are very similar to yours. If you want to be more scientific and don't mind paying a few hundred dollars, hire a professional appraiser.

5. Does it matter whether I'm "under water"?

At least you have plenty of company. About 20% of owners of single-family homes with mortgages owe more than the current estimated value of their homes, according to Zillow.com.

If you can afford your monthly payment and don't need to move soon, that might not be a big problem. But it is hard, and sometimes impossible, to refinance a mortgage if you are under water, and you will take a bath if you have to sell the home now. Some people who can afford to make their monthly mortgage payments are deciding it doesn't make sense to do so because they don't expect their home values ever to recover to past peaks, and they could rent similar houses for much lower monthly costs.

6. If I lose my home to foreclosure, how long will it take to repair my credit record?

It probably will be three to five years before you can qualify for a home mortgage insured by the government, depending on your circumstances, and that assumes you have re-established a record for paying your bills on time. The foreclosure will remain a blot on your credit record for seven years, likely raising your interest costs even if you do get another loan. If you pay bills on time, keep your credit-card balances low and don't apply for too many cards, you can make a "slow, gradual improvement" in your credit score, says Tom Quinn, a vice president at Fair Isaac Corp., which provides tools for analyzing credit records.

7. If I'm renting, is now a good time to buy a house?

It may well be. Prices in most areas are well below their peaks, even if they haven't hit bottom. Don't kid yourself that you can time the bottom of the market perfectly. But don't feel any pressure to buy in a hurry, because the supply of housing is likely to remain ample for years in many areas.

Generally, it doesn't make sense to buy unless you expect to remain in the house for at least four or five years, because the transaction costs -- including commissions for real estate agents and mortgage fees -- are heavy.

But now is clearly a good time to rent. Many landlords need tenants badly. The national apartment-vacancy rate in the third quarter was 7.8%, the highest in 23 years, according to Reis Inc., a New York research firm. So landlords are cutting rents and offering such sweeteners as free flat-screen televisions or several months of free rent to retain or attract tenants. Some owners of condos will "cut their throats to get some kind of rental income to cover part of their expenses," says Jack McCabe, a real estate consultant in Deerfield Beach, Fla.

8. Can I get a tax credit if I buy a home now?

Under an expanded and extended program approved by Congress earlier this month, tax credits are available to many people who buy or sign a contract to buy a principal residence by April 30 and complete the purchase by June 30. The tax credit is up to $8,000 for first-time home buyers and $6,500 for people who already have owned a home for at least five consecutive years during the previous eight years. The credit is available for individual taxpayers with annual incomes of up to $145,000 or joint filers with incomes up to $245,000.

9. Can I get a mortgage on attractive terms?

Only if you have a good credit record, a moderate amount of debt in relation to your income and the ability to fully document your income. That last requirement is fairly easy for people who work for a salary and have had the same employer for more than two years, but it can be tough for self-employed people with incomes that vary substantially from year to year.

A borrower with a strong credit score of 740 or higher (on the scale of 300 to 850) and the ability to make a down payment of at least 20% could get an interest rate of about 5% with no origination fees on a 30-year fixed-rate mortgage, says Lou Barnes, a mortgage banker in Boulder, Colo. But if your credit score is 680, the rate jumps to about 5.5%.

People who can't make a down payment of at least 20% generally are being funneled into loans insured by the Federal Housing Administration. That means paying extra fees for the FHA insurance.

Borrowing costs are steeper at the high end of the housing market. For so-called jumbo loans -- those above $729,750 in areas with the highest housing costs or $417,000 in places with the lowest costs -- interest rates on 30-year fixed-rate mortgages last week averaged 5.95%, according to HSH Associates, a financial publisher.

10. Should I invest in foreclosed homes?

Probably not. A lot of investors chase these properties, and only the most experienced know how to deal with all of the pitfalls. Homes auctioned at trustee or sheriff sales are sold on an as-is basis, and there is no provision for an inspection before you take ownership. If after buying you find out that termites have been treating the floor joists as an all-you-can-eat buffet, that is your problem. You must pay for the full price within a day or two, so you need a lot of cash or access to special short-term loans for investors that come with interest rates of around 18%. This is a pursuit best left to people with a lot of time, nerve, cash and knowledge of the local market.

Builders Downsize the Dream Home

itenenchuk@gmail.com (The Future of Real Estate) — Sat, 14 Nov 2009 15:08:00 +0000

NOVEMBER 13, 2009, WSJ
By MICHAEL M. PHILLIPS

SMYRNA, Ga. -- For the first time in four decades in the luxury-home business, executives at John Wieland builders are thinking the unthinkable: Maybe houses in the South don't really need a fireplace.

They're also wondering whether new homes require 4,700 square feet of living space. Or private theaters with 100-inch screens. Or super-size-me foyers.

As they draw up blueprints for the house of the post-recession future, builders are struggling to distinguish among what home buyers need, what they want and what they can live without -- Jacuzzi by Jacuzzi, butler's pantry by butler's pantry.

"You have to keep taking things out until you hit a critical point where people reject your product," said Jeff Kingsfield, senior vice president of sales at Smyrna-based John Wieland Homes & Neighborhoods.

It's an experiment brought on by necessity. Two years ago, closely held Wieland was building 1,800 houses a year in posh subdivisions in Georgia, Tennessee and the Carolinas, selling for an average of $650,000 apiece. Today, the company is closing on just 600 homes annually, according to Wieland. It has slashed staff to 330 employees from 1,100.

The American housing market continues to drag, with the Mortgage Bankers Association reporting Thursday that applications for home-purchase loans have hit a nine-year low, plunging a seasonally adjusted 11.7% in the week ending Nov. 6 from the previous week. U.S. sales of newly built homes have fallen sharply as well, from 1.3 million in 2005 to 485,000 last year. The latest Census Bureau data suggest that this year's sales will be even lower. Just 294,000 new homes sold through the first nine months of this year.

More often than not, builders say, post-crash buyers of new homes want smaller and simpler. The average new single-family house peaked at 2,507 square feet in 2007 and has since slipped to 2,392 square feet, according to Census Bureau data.

Average prices are sliding, too, by 16% -- to $269,200 -- between the first quarter of 2007 and the third quarter of this year, the Census Bureau reports. Wieland has been hit worse than most. The company's average sales price has already dropped $153,000, to $497,000, or about 24%. And company executives expect that a year from now, 85% of its homes will go for less than $430,000.

That has forced Wieland to design a new range of compact homes and reconsider everything that goes into them. Replacing tiled tubs with fiberglass units can slice $4,000 off of the house price. Skipping the fireplace can slash an additional $3,500. In its place, Wieland is trying out a media wall -- essentially a place to hang a big television, surrounded by shelves.

Last year, Paula Bishop, one of the company's architects, designed the 4,700-square-foot Arden, a 107-foot-long, five-bedroom, three-stairway showcase planned for a lot near Suwanee, Ga. The laundry room was 10-by-7, the mudroom 12-by-8. Including the bedroom, bathroom and his-and-hers walk-in closets, the master suite stretched almost 40 feet. Above the garage was a guest suite with its own kitchen and rec room. A covered breezeway stood off the vaulted breakfast room.

Wieland never built the Arden.

"The price point has dropped in the neighborhood," Ms. Bishop explained.

So the company told her to squeeze 900 square feet and $60,000 out of the original $650,000 design.

The other day, Ms. Bishop sketched a new Arden on tracing paper. She erased the rear staircase and flattened out the bay window. She cut the 94-square-foot pantry in half. She turned the mud and laundry rooms into a mud-and-laundry room. The three-car garage remained, but she redrew it so two cars now had to be parked bumper to bumper.

"I haven't gotten to the second floor yet, but it will be a ton smaller," Ms. Bishop promised.

The trend toward smaller homes hasn't hit all builders evenly. Winchester Homes, a Bethesda, Md.-based unit of Weyerhaeuser Co., is launching five new floor plans between 1,973 and 2,800 square feet, the smallest homes the company has ever produced. Vintage Communities, a privately owned developer in Southern California, plans to unveil a 2,900-square-foot, $1 million-plus model when the market improves -- replacing a 3,600-square-foot house that it had priced as high as $1.5 million in Rancho Santa Fe.

Toll Brothers Inc., a Horsham, Pa.-based home builder whose average home sells for $600,000, reported this week that net contracts for new homes rose 42% in the three months ended Oct. 31. The company says its luxury customers are more skittish about buying than they used to be, but, when they do make a purchase, they still want large homes with all the frills.

Not so Aaron and Meredith Easley, who put aside the temptation to buy a foreclosed 4,500-square-foot manse and instead bought a 3,200-square-foot Wieland home in Pineville, N.C. "We weren't so concerned about square footage," said Mr. Easley, a 31-year-old trainer with BB&T Corp. "I'm not all about keeping up with the Joneses."

In fact, there are few Joneses to keep up with. The Easleys were the first family to move into what's planned to be an 800-home development, living alone amid empty model houses and expanses of graded land. Wieland executives were so happy to have someone move in that they finished the attic level and put in hardwood stairs for free.

"There's a lot more that comes with those McMansions," said Mr. Easley, whose wife is a kindergarten teacher. "There's a lot more cleaning. There's a lot more heating, a lot more cooling."

Wieland believes the market downshift reflects "a fundamental change in the way people are going to want to live," and not just a reaction to scarce credit and insecure jobs, said F. David Durham, senior vice president. "We're not waiting for things to return to the way they were."

The shift is visible at BridgeMill, a Wieland subdivision in Lancaster County, S.C. The early houses, built near the front gate during the go-go years early in the decade, are massive brick structures. Further inside come the post-boom homes, more cottage than mansion.

The juxtaposition can prove awkward for Wieland. The company's new, smaller homes sometimes compete for buyers with bigger houses it built just a few years ago that hard-pressed owners are now reselling at a discount.

The turbulent market has led the builders to ponder just where they -- and their customers -- went wrong. Easy credit allowed some buyers to purchase more house than they could afford. And, in reflective moments, Wieland officials wonder if the builders simply fell in love with the idea of creating giant houses loaded with cherry cabinets, body-spray showers and built-in wine coolers. Builders built them because they could; buyers bought them because they could.

Fearful that their market is evaporating, company executives have spent the past few months trying to figure out what buyers are willing to give up, and what they aren't. On the latter list are four bedrooms, a downstairs powder room, a garage that fits at least two cars, and granite countertops in the kitchen. "We feel that's one of the things homeowners are still holding onto," said Shane Roach, vice president of home-building operations.

The master bedroom must have its own bathroom, with separate tub and shower. The tub is still big, but the jets, standard equipment for at least a decade, are now optional in new models. It turns out few buyers used the jets more than a couple of times. The children get one-piece, fiberglass tub-shower combinations, instead of tiled walls.

The "home-management" center -- a built-in desk in the family room -- has disappeared from the newest plans. Such luxuries are now available at an extra charge. Window casings are 2¾ inches wide instead of 3½ inches wide in one scaled-down model that Wieland is just now putting on the market. In another, company officials want to move a master-bedroom window from the side wall of the house to the rear. Smaller houses come on smaller lots, and having a window on the side makes it hard to avoid noticing that the neighbor's house is just a few yards away.

The other day, Mr. Kingsfield, the company's sales chief, pulled into a golf-club development near Canton, Ga., and stopped at a lot where workers were listening to mariachi music as they stacked bricks to form the facade of a 3,335-square-foot home called the Madison.

A couple of years ago, a new house in this neighborhood would likely have had a two-story foyer that framed the curved staircase inside. But the Madison's staircase is neither grand nor visible from the front door. In fact, it climbs out of the mud room next to the garage.

"In an ego-driven market, it's where you walk in the door and impress friends with the staircase," Mr. Kingsfield said. "That's gone. It's not about impressing anymore. It'll still be nice. There will still be wood, still be trim. But it's more conservative."

The Madison is more rectangular than its predecessor, the 3,750-square-foot Coventry. Curves and corners add cost. The powder room doubles as the guest bathroom. A folding door will conceal the fiberglass tub from dinner guests.

Ms. Bishop, the architect, is in charge of designing a new series of 2,500-square-foot single-family houses, tiny by Wieland standards of old. They're so petite that the double garage -- 19 feet across -- takes up half of the facade. To combat ugliness, she puts a porch on the other half and decorates the garage doors with trompe l'oeil seams and handles to look like carriage doors.

There's no formal living room or grand entryway. So she joins the family room, kitchen and breakfast area into one open space, just visible down a narrow hallway from the front door.

"People enter and are in danger of being underwhelmed," admits Ms. Bishop.

That's what happened in the Oconee, one of the new economy designs. The master suite absorbed almost half of the second floor. That left little space for the other three bedrooms. The smallest was so cramped that buyers rebelled. Wieland sold one Oconee and then scrapped the design.

The Lowdown on Home-Buyer Tax Credits

itenenchuk@gmail.com (The Future of Real Estate) — Sat, 14 Nov 2009 14:55:00 +0000

NOVEMBER 12, 2009, WSJ
By LAURA SAUNDERS

Last week, President Barack Obama signed a law that extends through next spring a temporary tax credit of up to $8,000 for some first-time home buyers, which was due to expire Nov. 30. The law also adds a new tax credit of up to $6,500 for certain repeat home buyers. The package, which the government estimates will cost a total of $11 billion, is intended to help spur housing sales, a critical part of the economy.

Here are some answers to common questions about the new rules.

Q: What has stayed the same in the new law?

1) First-time home buyers still get a credit of as much as 10% of the purchase price, up to a maximum $8,000. "First-time" means people, including both partners of a married couple, who haven't owned a principal residence for three years before the purchase.

2) All taxpayers who claim a credit must use the home as a principal residence for the next three consecutive years.

3) The credits offer dollar-for-dollar reductions of tax and are refundable. This means that a taxpayer who doesn't pay enough tax to offset the credit can get a refund. For example, if you qualify for an $8,000 credit but only owe $5,000 in tax, you could receive a $3,000 check from the Internal Revenue Service.

4) Under the new law, as under the old, 2009 home buyers may claim the credit on either their 2008 or 2009 returns, and 2010 buyers may claim the credit on either their 2009 or 2010 returns.

5) Taxpayers do not qualify for a credit if they buy from a lineal ancestor or descendant, including parents or grandparents and children or grandchildren.

Q: What has changed?

Several important features took effect as of Nov. 6:

1) To take advantage of the tax credits, a buyer must have a contract in place before May 1, 2010, and the deal must close before July 1, 2010. No further extension is expected.

2) The price of the house is now capped. For purchases made after Nov. 6, no credit is available for any home costing more than $800,000.

3) There is now a tax credit for repeat buyers as well as for first-time buyers. Taxpayers who have lived in one residence for five consecutive years of the past eight can now qualify for a tax credit of as much as 10% of the purchase price, up to a maximum $6,500, of a new principal residence. The new home does not have to cost more than the old one.

4) Income limits for people who qualify for a tax credit are far more generous than under the previous law. For single filers, the credits now phase out between $125,000 and $145,000 of modified adjusted gross income; for married couples, the range is $225,000 to $245,000. For most people, modified adjusted gross income will be the same as adjusted gross income.

5) The new law contains anti-abuse measures designed to stem fraud, which became a problem with the previous home-buyer tax credit. Most buyers must be 18 or older, and no taxpayer may take a credit if he or she is claimed as a dependent on someone else's return. Taxpayers taking the credit will also have to furnish proof of purchase. According to Robert Dietz of the National Association of Home Builders, this will usually be a HUD-1 form.

6) People taking the tax credit, as under the old law, aren't allowed to buy a home from a lineal ancestor or descendant. The new law, applying to purchases made after Nov. 6, also says a person may not take a credit if the home is purchased from a spouse or the spouse's lineal relatives.

Q: If I bought a house last spring or summer, can I get a tax credit?

You qualify if you are a first-time buyer and meet the other requirements, but not if you are a repeat buyer. The new credit for repeat buyers applies only to purchases made after Nov. 6.

Q: What is the definition of "principal residence"?

If you own more than one home, your principal residence is usually the one where you spend most of your time. In determining residence the IRS may also consider where your family lives and your mailing address for bills and correspondence, among other factors.

Q: Can a principal residence be something besides a conventional house?

Yes. A principal residence may also be a condominium, co-op apartment, attached or semi-attached townhouse, or even—if it has eating, sleeping and toilet facilities—a boat, motor home or trailer. Manufactured homes qualify in some states.

Q: Does the person who claims the credit have to use the home as a principal residence?

Yes.

Q: If I buy a new home and live in it, do I also have to sell my old one in order to take advantage of the credit?

This is unclear. The law appears to allow repeat buyers to retain their old home, for which no tax credit was given, while claiming a credit for the new one. What is clear is that if you buy a new home using the credit, you must use it as your principal residence.

Q: How may the credits be allocated among two or more unmarried buyers?

This also is unclear. But if the IRS adopts the rules that applied to the previous tax credit, which are detailed in IRS Notice 2009-12, there is room for planning. The notice says that taxpayers may use "any reasonable manner" to allocate the credit. It even provides an example in which two unmarried buyers allocate the credit to the lower earner in order to qualify for it.

Q: I need the credit refund to help make the down payment. What can I do?

There's no rushing the IRS. But one option is to adjust your current withholding from your paychecks to reflect the fact that you will be taking the credit later. But be careful: If you don't make the purchase, then you may owe interest and penalties. Consult a tax adviser.

Q: Is it possible to qualify for a credit if I am building a home on a lot I already own?

Yes, according to the National Association of Home Builders. The purchase date is usually considered to be the date of first occupancy, so you would need to move in before July 1, 2010.

Q: May I take a credit if I am building a large addition to my home?

No; these credits apply only to the purchase of a home.

Q: Are there special rules for the military?

Yes. In general, members of the military and foreign service and intelligence communities who are serving overseas on "official extended duty" for at least 90 days during 2009 and the first four months of 2010 have an extra year to take advantage of these credits. Consult a tax adviser who specializes in this area.

Q: Where can I get more information?

Go to federalhousingtaxcredit.com, a Web site sponsored by the National Association of Home Builders. You can also look for links from the IRS's home page, www.irs.gov, or search for Homebuyer Credit. Another option is to consult a professional tax adviser.

Home prices, sales to grow

itenenchuk@gmail.com (The Future of Real Estate) — Sat, 14 Nov 2009 14:50:00 +0000

Trade association sees the recovery continuing next year

November 14, 2009 Detroit Free Press
BY ALEX VEIGA

Home prices are expected to grow modestly next year and sales will keep rising as the housing market continues to recover from the worst downturn since the Great Depression, the National Association of Realtors said Friday.

Home resales are projected to total 5.7 million next year, up from an estimated 5 million this year. Prices will climb about 4% after a projected decline of 13% this year, according to Lawrence Yun, chief economist for the trade association.

"Going into 2010, I anticipate that prices will also begin stabilizing or begin to modestly improve," Yun told the audience at the association's annual conference and expo in San Diego.

That should help ease buyers' anxiety. "I don't think the fear factor will be at play in 2010," Yun said.

The housing market's rebound has been aided by an aggressive federal intervention to lower mortgage rates and bring more buyers into the market. Home resales rose in September to the highest level in more than two years, something Yun said shows buyers are eager to get back into the market.

A federal tax credit of up to $8,000 for first-time homebuyers has helped stoke sales this year. The incentive was set to expire at the end of this month, but the NAR and other housing groups successfully lobbied to get the credit extended.

Now buyers can claim the credit if they sign a contract by April 30 and close the deal by the end of June. Lawmakers also expanded the program to include a $6,500 credit for existing homeowners who have lived in their current residence for at least five years.

First-time buyers accounted for a record 47% of home sales this year, up from 41% last year, the trade group said.

That surge helped drive traffic for real estate agents like Jan McGill of Omaha, Neb., and the extension makes her more optimistic about business next year.

"I've got to be positive," McGill said.

Yun estimated that about 2 million people took advantage of the tax credit this year and projects it will continue to lift the market.

However, some housing analysts said the NAR's forecast was overly optimistic, as it was during the housing bubble. Economists like Patrick Newport argue the tax credit has already enticed many buyers who otherwise would have waited until next year.

"It induced first-time homebuyers who were going to buy a home in 2010 to buy in 2009 because they thought it wasn't going to be extended," said Newport, an economist at IHS Global Insight.

Newport is projecting home prices will fall between 3% and 5% next year and sales of existing homes will be flat, at best.

"I don't think that second tax credit is going to create a lot of new homebuyers," he said.

But Yun supports his case by pointing to data from 2000, prior to the housing boom, when 11 million renters had the income necessary to buy a median-priced home.

This year, he said, there are 16 million renters in that position.

"This clearly shows that there's potential pent-up demand that could be tapped," he said.

Fewer homes unsold in Detroit area

itenenchuk@gmail.com (The Future of Real Estate) — Wed, 11 Nov 2009 17:02:00 +0000

Number of metro Detroit houses for sale falls closer to normal

November 11, 2009
BY GRETA GUEST
FREE PRESS BUSINESS WRITER

In what could be good news for home sellers, metro Detroit's housing supply is inching closer to normal.

In the third quarter, inventory stood at an 8.4-month supply, near the three- to six-month level considered normal. The number of unsold homes might be higher if not for banks and the government, said Dan Elsea, president of brokerage services for Real Estate One in Southfield.

Unsold homes for the same period in 2008 were at a 13.4-month supply.

"The inventories are artificially low because of banks holding back and the 90-day moratorium on foreclosures in Michigan ... and the tax credit brought buyers out," Elsea said.

That could help Menhem Aouad, 38, of Center Line, who has been trying to sell his home for two years. The five-bedroom, 1.5-bath home is competing with area foreclosures.

"We love the layout and the inside architecture," Aouad said. He and his wife, Lisa, hope to find a larger house.

Wayne County inventories were the lowest for the three months ended Sept. 30 with a 7.2-month supply. Macomb County had a supply of 8.3 months, followed by Washtenaw with a 9.1-month supply, Oakland with 9.5 months and Livingston with a 10.9-month supply.

Fewer homes unsold

Lower inventories of unsold homes could mean more stability and rising prices in the local real estate market, said Dan Elsea, president of brokerage services for Real Estate One in Southfield.

The firm reported that unsold inventory for the third quarter was 34,657, or an 8.4-month supply at the current sales pace, compared with 49,742, or 13.4 months in the same period a year ago. Metro-area home prices, down more than 22% through August from a year ago, have also enticed more buyers into the market.

"The next stage to the housing market recovery is not the first-time homebuyer," Elsea said. "It is the move-up buyer."

The bulk of homes sold locally in the past year have been priced under $250,000 to investors and first-time homebuyers, some enticed by lower home prices and the $8,000 tax credit.

Local inventories won't go back to normal just yet, Elsea predicted. He expects another wave of foreclosures to trickle back into the market after January.

"There are fewer people putting their homes on the market for the first time," Elsea said. "As much as inventories are plentiful, we are getting complaints from buyers that they can't find good stuff."

Jason Matt, a Realtor with Coldwell Banker Weir Manuel in Plymouth, said he continues to spend time educating sellers about what is really moving houses.

"We have to look at what it is going to take to sell the house, not what it is worth," Matt said. "A lot of buyers right now are denying themselves the luxuries that make a house special because they want to get the best deal. That is a challenge."

One house he recently listed in Wixom is owned by a Staples executive and his wife, a former marketing executive. The home backs up to a pond on one side and a protected wetlands on another.

"I know every seller says this, but this is absolutely the best lot in that subdivision," Matt said. "The location is what is going to sell this house."

The home is not a foreclosure or short sale, but it has to compete with them, he said.

The owners, Melissa and Derek Traver, are asking $320,000 for the three-bedroom, 3.5-bath house with 2,376 square feet. It includes access to Loon Lake and a number of updates including a finished basement, granite countertops in the kitchen and hardwood floors.

Derek Traver, 37, is being transferred to Seattle to work as a regional sales director for Staples. The couple have two small children.

The house has been on the market for just two weeks and they are hopeful it will sell quickly, said Melissa Traver, 36.

"We know we will have a huge loss with this house," she said. "The only thing we are hoping is we don't have to write a check. All we want to do is break even."

Menhem Aouad, 38, a school psychologist trying to sell his Center Line home, hopes for a break-even deal as well. He and his wife, Lisa, 36, a schoolteacher, moved into the house in 2001. They have invested in new windows, landscaping and refinished woodwork.

The couple have three children under 5 and want to buy a larger home.

"We followed the traditional model of buying your house, invest in it and it will pay you back," Aouad said. "By the time we started to look to move, we noticed the market started to change. Houses selling for $160,000 were then selling for $120,000, $100,000."

It's been on the market for two years and competing with foreclosures in the area that sell for less than $30,000. His asking price is now at $99,900.

Kathy Coon, a Realtor for Great Lakes GMAC Real Estate in Rochester Hills, said the Aouads face the same dilemma as many other potential move-up buyers in that they struggle to sell their existing homes.

"He is struggling to get a bigger, nicer house for his family," she said. "We could probably give it away, but he can't afford that."

Aouad was laid off last year and found a similar position at a school in Battle Creek. So he has gotten an apartment there while commuting home on weekends and hoping the house will sell.

Coon said she sees the light at the end of the tunnel for the local real estate market. She said that many homes listed with her company are getting multiple offers from buyers, pushing some over the asking price.

"Energy in the market, I think, is there, and it is exciting," Coon said, noting that an extension of the first-time homebuyer's tax credit will drive sales.

Foreclosures Continue to Put a Damper on Home Prices

itenenchuk@gmail.com (The Future of Real Estate) — Wed, 11 Nov 2009 16:37:00 +0000

NOVEMBER 11, 2009, WSJ
By CONSTANCE MITCHELL FORD

Home prices continued to decline across the nation as sales of heavily discounted foreclosed properties weighed down the market.

Median prices of existing homes fell in 123 of 153 metropolitan areas during the third quarter compared with a year earlier, according to the National Association of Realtors. The national median price was $177,900, down 11.2% from the third quarter of 2008.

Distressed sales -- mainly foreclosures and short sales -- accounted for 30% of transactions in the third quarter, according to the NAR, which pulled down average prices because foreclosed homes sell at steep discounts. Short sales are transactions in which at-risk borrowers sell their homes for less than the loan amount, with the lender's approval.

Metropolitan areas in Florida and Nevada continued to see the most severe price declines. In the Cape Coral-Fort Myers area, median prices were down 40% during the third quarter from a year earlier, to $98,000. In Las Vegas, median prices were down 34.5% in the third quarter to $138,500. In 2006, median prices were $268,200 in the Cape Coral-Fort Myers area and $317,400 in the Las Vegas area.

Still, home sales rose 11.4% nationwide to a seasonally adjusted annual rate of 5.3 million units during the third quarter, up from 4.76 million units in the second quarter.

Lawrence Yun, the NAR's chief economist, attributed rising sales to the federal tax credit of up to $8,000 for first-time home buyers. "We can't underestimate just how powerful a catalyst the first-time home buyer tax credit has been for the housing sector," he said in statement.

President Barack Obama signed a bill last week extending and expanding the federal tax credit to include buyers with higher incomes and those who are existing homeowners.

Mr. Yun said that while foreclosures will continue to depress the market, "rising sales from the expanded tax credit should stabilize home prices by next spring."

Even the Rich Are Treating Their Houses Like Piggy Banks (Really, Really Big Piggy Banks)

itenenchuk@gmail.com (The Future of Real Estate) — Sat, 07 Nov 2009 16:13:00 +0000

November 7, 2009, WSJ
By JOHN R. EMSHWILLER

LOS ANGELES -- In recent years, millions of Americans looked at their houses and saw big, fat piggy banks. And it occurred to them to take out big, fat new mortgages.

Few did it on the scale of Ronald Burkle.

Mr. Burkle, the grocery-store billionaire, has $56 million in loans against two houses, including $9 million added last year. One is his iconic Beverly Hills mansion, "Green Acres," a 44-room Italian Renaissance palazzo built in the 1920s by silent-film star Harold Lloyd that more recently was a favorite overnight rest stop for Mr. Burkle's buddy, Bill Clinton.

Mr. Burkle declined to say how he is using the money. There is no indication he needs it to pay the water bill.

Traditionally, the super-rich didn't really bother with mortgages. Home loans were for people who carry lunch buckets, not captains of industry.

That changed in the boom years -- and it is still going on. Recent big-time home borrowers include fashion entrepreneurs, hedge-fund titans and baseball-team magnates.

Home loans "are a really good source of cheap capital," says Robert Maguire, a real-estate tycoon who built some of the tallest officer towers in L.A. He has borrowed some $50 million against several properties, including his beach house, which features huge picture windows framing the Pacific near Santa Barbara, Calif.

He has been raising money with an eye toward regaining control of his property firm, Maguire Properties Inc., which he lost during the real-estate bust. Even as he borrows against his beach retreat, Mr. Maguire is trying to sell it for $29 million.

By hocking the house, so to speak, he and others say they are simply borrowing low in hopes of investing in something they believe will yield a high return.

'Green Acres,' top, was built by silent screen comedian Harold Lloyd, shown below left in a scene from the film 'Safety Last.' Now the house belongs to billionaire Ron Burkle, above, who has used it to raise cash.
'Green Acres,' top, was built by silent screen comedian Harold Lloyd, shown below left in a scene from the film 'Safety Last.' Now the house belongs to billionaire Ron Burkle, above, who has used it to raise cash.

And mortgage rates are near historic lows. In April, Mr. Burkle renegotiated his $56 million in adjustable-rate mortgages down to 3.25%, which was in line with adjustable home loans of a more mortal size. Recently, his rate adjusted down to about 2.25%, based on publicly available documents.

It puts Mr. Burkle's mortgage interest charge at $105,000 a month, give or take.

Like ordinary home loans, megamortgages flourished during the boom earlier in the decade. The number of home mortgages in the $3 million-and-up category soared to about 3,000 in 2007, from only 1,100 or so in 2004, according to LPS Applied Analytics, a unit of Lender Processing Services Inc.

Not surprisingly, mammoth home loans got scarce during last year's near-unraveling of the world economy. But now they are showing signs of coming back.

U.S. Trust, which is the private wealth-management arm of Bank of America Corp., has seen a 33% rise this year in home loans, compared to last year, with the average size over $3 million. Jan Reuter of U.S. Trust says clients are using the cash to buy stocks and other assets. Other major lenders tell a similar story.

The federal tax code doesn't smile upon giant mortgages. It allows mortgage interest to be deducted only on home borrowings of about $1 million or less.

But there are ways around that, says David Adamo of Luxury Mortgage Corp., a mortgage-banking firm in Stamford, Conn. If the cash is used for investment purposes, the loan interest could be used to reduce taxes on income from the investments, he says.

Of course, plenty of rich people still avoid home loans. Partly, it is an image thing. Maria Elena Lagomasino of GenSpring Family Offices LLC, a Palm Beach Gardens, Fla. wealth-management firm, says a mammoth mortgage implies to her that someone is "borrowing because they have to."

One rub for zillionaires who value their privacy: Mortgages are a matter of public record.

One of New York City's classiest new addresses is 15 Central Park West -- which along with the requisite pool, health club and movie-screening lounge, offers "30 climate-controlled wine rooms" with "solid oak cabinetry." Since the start of last year, five buyers there have taken out mortgages ranging from $10 million and $35 million, according to public information collected by First American Corps.' RealQuest data service.

Not all megamortgages have happy endings. Since mid-May, about a dozen home loans of $3 million to $9 million have been involved in default or foreclosure actions in Malibu, Beverly Hills and other fancy areas around Los Angeles, according to public data gathered by First American. None of the giant mortgages over $10 million examined in detail are in default.

Max Azria, chief executive of privately held BCBG Max Azria Group Inc. clothing company, took out a $25 million mortgage in April 2008 on a 12-bedroom, 13-bath West Los Angeles mansion, once home to the late TV producer and novelist Sidney Sheldon, according to public records. He bought the house in 2005 for about $16 million.

Last year, Moody's Investors Service, the credit-rating company, said BCBG could face a cash crunch without financial help from Mr. Azria. A BCBG spokesman said Mr. Azria used the mortgage money for renovations and "additional personal liquidity," and that the company restructured and improved its finances this year without funds from him.

Israel Englander, who runs the Millennium Management LLC hedge-fund operation in New York, last year pledged a home in a wooded, estate-filled section of Greenwich, Conn., as part of the collateral for a revolving credit line of up to $100 million.

Mr. Englander declined to comment. There is no indication he needed the money for anything other than investment purposes.

Besides signing multimillion-dollar baseball players, Frank and Jamie McCourt have accumulated homes with multimillion -- dollar mortgages since moving to Los Angeles in 2004 to run the Los Angeles Dodgers. They bought homes and adjacent properties in both West Los Angeles and Malibu.

Their 15,000-square-foot, 10-bath L.A. manse, located in the prestigious Holmby Hills neighborhood across the street from the Playboy Mansion, was purchased in 2004 for about $20 million. For good measure, the McCourts spent $14 million to upgrade the place, including tearing out the tennis courts to install an indoor, Olympic-size swimming pool.

All told, the homes carry some $28 million in mortgages. The houses, which are in Mrs. McCourt's name, are now part of a nasty divorce battle between the couple, who are fighting for control of the Dodgers.

The McCourts declined to comment.

Amid the acrimony, the estranged couple did agree on one housekeeping matter at a court hearing Thursday: Mrs. McCourt could have exclusive access to the indoor Olympic pool. Swim hours for her are between 6 a.m. and 2 p.m.

More walk away from homes, mortgages

itenenchuk@gmail.com (The Future of Real Estate) — Tue, 03 Nov 2009 16:53:00 +0000

November 3, 2009
By Stephanie Armour, USA TODAY

When Sharon Sakson was laid off recently from her job as a television writer and producer, she burned through her savings to pay the $2,400 monthly mortgage on her home. But she soon decided it didn't make sense: Her home was worth thousands less than the mortgage she carried on it.

The home had been appraised at $390,000 when she refinanced in 2006, but she estimates it's not worth the $320,000 it initially cost in 2004. So Sakson did what a growing number of homeowners are doing today: She stopped paying and decided to let the bank take her home.

"I'm walking away from my house," says Sakson, 57, who stopped making payments about six months ago on her home in Pennington, N.J. "The bank can have it."

What Sakson did is called a strategic default, or a voluntary foreclosure, and it's fast becoming a major challenge to the government's $75 billion effort to keep distressed borrowers in their homes. Walking away from a mortgage is serious business — it can knock 100 points off your credit score and make you ineligible for a new mortgage for seven years. Yet, about 588,000 borrowers walked away from homes last year, double the number in 2007, according to a recent study by credit-scoring firm Experian and management consultants Oliver Wyman. While home prices are rising, the increases pale compared with overall drops in home prices since 2005 that threaten to push millions more homeowners into Sakson's predicament, owing more than their homes are worth and seeing little chance of rebuilding equity soon.

More will walk away, which will hamper the housing recovery, reinforce lenders' tight credit policies and drag on the economy's recovery, economists say.

"It's increasingly a more important factor driving the foreclosure crisis," says Mark Zandi, of Moody's Economy.com. "As we move forward, the job market will stabilize, and the big thing will be strategic defaults. People are going to determine it doesn't make financial sense to hold on to their homes. That's going to be a significant problem. Strategic defaults mean foreclosures could be high for a long time."

It's not just economists who are concerned about strategic defaults.

The mortgage unit of Citigroup says one in five borrowers who defaults does so willingly, even though they're able to pay the mortgage. "It's a very large number, and it's a very, very significant risk to the housing recovery," says Sanjiv Das, CEO of CitiMortgage, adding that new government programs to curb strategic defaults may be needed.

Waiting for prices to stabilize

How bad the strategic defaults issue gets may depend on how much more home prices fall and whether the government does more to help homeowners with mortgages larger than their homes' value. Both Zandi and Das suggest further actions to reduce mortgage principal for underwater borrowers.

"A better way to do it may be an incentive to stay current for a period, and after two years of being current, they get a principal reduction," says Das.

The government's current Making Homes Affordable program for mortgage modifications disqualifies borrowers whose unpaid mortgages are more than 125% of the home's market value.

Nationally, median prices have fallen about 25% from their peak in late 2005, although prices recently have risen compared with prior months this year. The median price in the second quarter — $170,000 — was at roughly the level it was in autumn 2003.

But price declines have been worse in some markets. A closely watched barometer of home prices, the Standard & Poor's/Case-Shiller 20-City Composite Index, shows they have fallen more than 25% in 12 markets and more than 50% in two — Phoenix and Las Vegas — from peaks hit in 2006 or 2007.

Fifteen out of the 20 metro areas saw a rise in prices from July to August, but those increases are not anywhere close to the losses that have already occurred.

The number of borrowers who walk away is expected to increase, along with the rise in homeowners who owe more than their homes are worth. An unprecedented 16 million homeowners currently are underwater, according to Moody's Economy.com. That's about a third of all homeowners with a first mortgage.

Moody's Economy.com estimates the number of underwater borrowers will peak at 17.4 million in the third quarter of 2010.

An even higher estimate comes from Deutsche Bank, which predicted in an August study that the number of homeowners underwater will grow from 14 million (or 27% of all homeowners with mortgages) in 2009 to 25 million homeowners, or 48% of all those with a mortgage, by the time home prices stabilize.

Not coincidentally, strategic defaults have been highest where prices have plunged most, such as California and Florida.

From 2005 to 2008, the number of strategic defaulters went up by 68 times in California, according to the Experian-Oliver Wyman study published in September. During that same time period, the median price for existing, single-family homes in California fell from $522,670 in 2005 to $346,410, according to the California Association of Realtors.

In other geographic regions, the increase in strategic defaulters ranged between 3 times and 18 times more.

The Experian-Wyman study found borrowers with higher credit scores when they applied for their loan were 50% more likely than other types of borrowers to walk away from a mortgage only because they were underwater, even though they could afford to pay. The study was based on an analysis of about 12 million borrowers.

No household would default if the equity shortfall is less than 10% of the value of the house, according to another study this year, done by the University of Chicago, Northwestern University and the European University Institute. But 17% of households would default, even if they could afford to pay their mortgage, when the equity shortfall reaches 50% of the value of their house. That means the market value of a mortgage property is that much below the amount of loan taken against it.

There also appears to be a contagion effect. Borrowers who know someone who defaulted are 82% more likely to declare their intention to do so.

Growing acceptance

"The most disturbing aspect of this is that it's becoming acceptable to do," says Joel Naroff, an economist with Naroff Economic Advisors. "What does that mean down the road for housing and the economy if people are happy to walk away and destroy their credit? They're saying, 'Why pay a high amount if they can get something, even a rental, for less?' "

Because of the time and expense involved in completing a foreclosure, borrowers who decide to walk away often wind up staying in their homes for months after they stop paying their mortgage.

In most states, lenders can go after homeowners for past-due payments, but many fail to take such action when borrowers abandon their properties, because the legal costs are so high.

Short sales, in which lenders agree to the sale of a home for less than the balance of the mortgage, is an alternative to a strategic default. Many lenders are now encouraging them, but Zandi says that alternative may seem too time-consuming for borrowers who want to quickly get out from under their homes.

Janet Speer, 51, isn't happy to be walking away from her 200-year-old home in Royersford, Pa., but she doesn't feel ashamed. Speer says she was paying about $1,400 a month for her home, which was appraised at about $155,000.

After getting laid off last year, Speer said, she tried to modify her mortgage to more affordable terms but was denied because her unemployment benefits and alimony didn't count as income. Speer stopped paying on her mortgage in September 2008.

She is still living in the home and waiting to be foreclosed upon. Speer is saving her unemployment benefits for an apartment once the bank takes over her home.

"I got letters and calls from the bank at first, but they stopped," said Speer, who now earns commission income from a job in the health care industry. "I have a three-story house. It's way too big. I just want a little two-bedroom apartment. I don't want this place anymore. I would never have chosen to do this, but it's going to work out."

Five Reasons the U.S. Doesn't Need More Home-Buyer Perks

itenenchuk@gmail.com (The Future of Real Estate) — Mon, 02 Nov 2009 20:42:00 +0000

NOVEMBER 2, 2009, WSJ
By JACK HOUGH | SmartMoney

Congress is working on a new and even more generous set of perks for house buyers. A tentative deal in the U.S. Senate would extend the closing deadline for an $8,000 subsidy for first-time buyers to July 1 from Nov. 30. It would also boost the program's income limits for singles to $125,000 from $75,000 and for couples to $250,000 from $150,000, and would offer a new $6,500 reward for existing homeowners who buy again.

The National Association of Realtors has called such an extension "essential." The Mortgage Bankers Association agrees. The National Association of Home Builders says, "Failure to act now could derail the fragile housing recovery even before it has time to take root."

I respectfully disagree for perhaps a dozen reasons. Let me offer five.

* Subsidies raise prices, and house prices are already too high.

Consumer subsidies puff up buying power, which artificially increases demand, which raises prices. With most goods, manufacturers respond by increasing supply, which brings costs back down. Some goods face constraints to new supply, though. We can build more colleges, but we can't magically make more of the longstanding, prestigious kind. We can make more pills, but we can't violate drug makers' patents on popular ones. And we can build new houses, but there's only so much space (or building permission) in the choicest locations. That produces a paradox: America's government has for decades spent mightily on affordability initiatives for college courses, health care and houses, and yet prices for all three goods have increased faster than the rate of inflation, resulting in less affordability.

In April 2007 I wrote that houses had gotten so expensive that renting had come to make more financial sense. In July, with prices down about 30% nationwide, I charted them against rents and incomes to show that the country was closing in on its historical level of housing affordability, but wasn't quite there yet. It never did get there. Prices in most markets have increased each month since then. We're moving away from normal, not toward it. When the National Association of Home Builders speaks of a "fragile housing recovery," it means an increase in prices. But what about a recovery of the ability of ordinary Americans to buy houses at fair prices? That recovery might have to wait.

* The house subsidy has little value as economic stimulus.

The current $8,000 payment to house buyers was proposed as more than a simple perk. The law that created it is titled the American Recovery and Reinvestment Act of 2009. Proponents cited the spillover effect of house purchases on the rest of the economy. Putting aside the matter of whether stimulus spending helps (until item No. 3), the most useful stimulus spending does one or both of these two things well: It begets more spending then it provides, or it leaves behind something useful. Food stamps create $1.73 in economic activity for every $1 we spend, reckons Moody's Economy.com. That makes sense. The poor spend just about everything that falls into their hands, and the money they spend at food markets leads grocers to spend with suppliers, and suppliers to spend with farmers, and so on. A dollar spent on unemployment benefits creates an estimated $1.63 in economic activity and one spent on infrastructure, $1.59. The result of these things? Bellies are filled, the jobless are given a lift and roads and power grids are upgraded (and, of course, a bit is wasted along the way).

Ted Gayer of the Brookings Institution, a think tank, estimates that only about 15% of house buyers who've received $8,000 payments to date wouldn't have bought houses without the payments. The good news is that suggests the payments have played only a minor role in house prices reversing, and so we might not get much more of a run-up in prices from extending the plan. The bad news is that we're wasting money. A dollar spent on the housing credit creates an estimated 90 cents of economic activity. That's not a multiplier effect. It's a divisor effect.

* The benefits of stimulus spending are unproven.

There's a reason economics is categorized as a social science in course catalogs and such. It's to differentiate it from actual sciences, like physics and chemistry. While economists use scientific methods, much of what they study can't be tested in a highly controlled setting, and so can't be known for sure. On the subject of large, industrialized nations spending government funds to hasten the end of a severe economic slowdown, there are only two applicable case studies. One is Japan over the past two decades and the other is America during the Great Depression. Japan's economic woes haven't ended. And the Great Depression isn't called "great" because of how quickly we fixed it.

Maybe the sudden rise in gross domestic product reported Thursday is a sign the stimulus efforts have worked, or maybe it means we've paid dearly for a temporary blip in the numbers.

* America has no money.

Perhaps I should have mentioned this earlier. America was last debt-free in 1835. The last year it spent less than it collected from taxpayers was 2001. In the government's fiscal 2009, which ended Sept. 31, it overspent by an estimated $1.4 trillion, more than ever before in dollars, and more than any year since 1945 in proportion to the size of the economy. Perks for house buyers don't come from the government, ultimately. They come from taxpayers, either this year or in future years when the debt is paid.

By Nov. 30, the government will have spent an estimated $8.5 billion on its current round of house-buyer payments. (A Treasury Department inspector estimates that $139 million of that went to fraudsters who didn't actually buy houses, but I'm trying to keep my list of grievances to five.) Early projections for the proposed extension say it will cost close to $12 billion. Together, the programs would cost the average household more than $170 if the bill were paid right away. But it's borrowed money. The interest rates charged to America for its debt at the moment are blessedly low--about 3.5% on 10-year loans. The average since the 1960s is 6.9%. Let's split the difference and assume the nation will pay roughly 5% on its debt over the next 30 years, the time it might take one of those $8,000 subsidy recipients to pay off the mortgage. By then the program's true cost will have increased more than fourfold.

* We already spend plenty on housing stimulus.

We already have programs that draw funds from all taxpayers and divert them to house buyers. The mortgage interest deduction does just that, only its benefits are reserved for those who borrow to buy houses, and for those whose incomes are high enough to make hunting for deductions come tax time more worthwhile than claiming the standard deduction. The interest deduction is what's called a tax expenditure. It will cost just over $100 billion this year, or about $850 per taxpaying household. Not enough? There's more. Interest rates are kept low at the moment by aggressive buying of mortgage securities by the Federal Reserve. We can't say for sure how much that will cost. It depends on how many of the underlying borrowers make good on their payments, which depends in part on how much of their own money they put into the deal to begin with. Did I mention that the $8,000 house-buyer perk can be used for a down payment?

Detroit Casinos Fare Surprisingly Well in Tough Times

itenenchuk@gmail.com (The Future of Real Estate) — Mon, 02 Nov 2009 16:06:00 +0000

OCTOBER 30, 2009, WSJ
By A.D. PRUITT And SHARON TERLEP

Detroit has lost jobs, residents and much of its auto industry. But its gambling business is doing surprisingly well.

While the city's unemployment is 29%, gaming revenue at its three casinos has been off only 2% from a year ago so far this year. Atlantic City's gaming revenue has fallen 14%, and the Las Vegas Strip is down 14%.

Detroit casino operators credit their relative good fortune to everything from new hotel rooms to the smoking ban in nearby Ontario, which has caused some Canadian gamers to migrate across the Detroit River to gamble.

At the Greektown Casino Hotel, owned by the Sault Ste. Marie Tribe of Chippewa Indians, revenue is up 6.1% this year. Cutting its hotel-room prices to $99 a night and dropping its all-you-can-eat buffet to $9.99 from $19 has helped it draw more business. "We feed four times as many people as we used to," said Randall Fine, who became Greektown's chief executive in April.

Detroit's other casinos, the MotorCity Casino and the MGMGrand, are also faring better than most casinos in Atlantic City and Las Vegas, with year-to-date revenue declines of 4.5% and 5.7%, respectively. In total, Detroit's three casinos took in $1.4 billion in revenue from gaming in 2008 and $1 billion in the first nine months of 2009, according to the state regulator.

Opponents say the casinos make hard times harder for families strapped for cash. But proponents note that the three casinos, which employ about 8,200 people, are one of the few sources of new jobs and have helped to increase tourism, convention business and city revenue.

Charles Beckham, chief administrative officer for Detroit, acknowledges that patrons are often the ones who can least afford to lose money. "I'm amazed that with the unemployment rate we still have people going to casinos," he said.

But casino revenue provides critical financial support to Detroit. Last fiscal year, it provided the city $189 million, the second largest source of revenue after support from the state. The facilities have also agreed to do their best to hire more than half their workers from among Detroit residents. "We're better off with them than without them," Mr. Beckman said.

Late Tuesday afternoon, 20 card tables at Detroit's Motor City Casino Hotel were packed with poker and Texas hold ' em players. At least 50 more gamblers crowded around a roulette table. Richard Knoll, a retired truck driver, said he was at Motor City because of the casino's giveaway of 20 cars in 20 days. He used to be a regular in Las Vegas and Atlantic City, he said, but now he sticks to Detroit and occasionally visits Atlantic City.

Destination resorts like Las Vegas and Atlantic City have been particularly hard hit because gamers, tourists and conventioneers aren't traveling as much. The dire conditions have led to some high-profile bankruptcies. Last week, MGM Mirage announced it was taking a $955 million write-down on its $8.5 billion City Center project scheduled to open by year-end.

Detroit's casinos are faring better partly because they don't rely as heavily on out-of-town visitors. MGM's Lorenzo Creighton said most patrons come from within 50 miles of the casino. To retain market share, the casino has created a new ad campaign targeting the urban market, showing, for example, a husband and wife at a grocery store deciding to go to the MGM Grand.

The down side of this local focus is that it's hard for Detroit's casinos to fill the hotel rooms they were required to develop as part of their licenses. MGM Grand, for example, has just a 40% occupancy rate. But most of the casinos' revenue comes from gaming so the impact from the low occupancy is limited.

Despite their relatively good performance, Detroit casinos haven't avoided financial problems. Greektown was forced to seek bankruptcy protection in the spring of 2008, partly because of delays in constructing its permanent facility. But its profit was up 38% in September over the same period in 2008 and, according to Mr. Fine, it's on track to come out by year-end.

Detroit's casinos may face more competition soon. In November, Ohio voters will vote on whether to allow casinos in the Buckeye State. Similar measures have been defeated four times in the past 19 years. But supporters hope the state's rising unemployment rate will sway voters.

Landlords Offer Incentives to Stay Put

itenenchuk@gmail.com (The Future of Real Estate) — Mon, 02 Nov 2009 16:01:00 +0000

NOVEMBER 2, 2009, WSJ
By DAWN WOTAPKA

Amid the jobless recovery, some landlords are showering flat-screen TVs, cash, rent cuts and other incentives on tenants to encourage them to renew their apartment leases and thus avoid the expense of filling empty units.

The rise in unemployment has prompted tenants to seek roommates, move home or trade down to cheaper units. In the third quarter, the national apartment-vacancy rate hit 7.8%, a 23-year high, according to Reis Inc., which tracks vacancies and rents in the top 79 markets.

"Many companies are doing whatever they can to keep units occupied, especially heading into the seasonally slower leasing period," said Paula Poskon, an analyst with Robert W. Baird & Co.

The trends are taking a toll on the bottom line. Apartment Investment & Management Co., which owns and operates roughly 150,000 units nationwide, reported Friday that its funds from operations, a key REIT metric, fell to 19 cents a share from 60 cents a year earlier. UDR Inc., which has about 45,000 units on the West Coast and in Washington, D.C., reported earlier this month that its funds from operations dropped 42% to 19 cents.

"We do need job growth in order for our business to prosper," said David Neithercut, chief executive of Equity Residential, the country's largest apartment REIT by market capitalization. "I think 2010 will be another year of doing the best we can."

Some of the large REITs were able to keep their occupancies up. UDR managed to increase occupancy to 95.6% from 95% a year earlier. Colonial Properties Trust, which operates 35,000 Sunbelt apartments, said its third-quarter occupancy fell to 94.4% from 96%a year earlier.

But landlords attracted and retained tenants by offering incentives and rent cuts. Equity Residential said new tenants in the third quarter paid 9% to 10% less rent than the previous residents. AvalonBay Communities Inc., an upscale operator, said its decline was about the same.

Owners are focusing on keeping existing tenants because when apartments become vacated they can sit empty for months and often require marketing, painting, brokerage commissions and other expenses to attract new tenants. Denver-based UDR is offering renewing tenants a flat-screen TV, new carpet, kitchen upgrade or, $300 in cash. The money is the most popular choice, said Chief Executive Thomas Toomey,

Mr. Neithercut said Equity Residential doesn't initially offer rent cuts to existing tenants to persuade them to renew. But if the tenant plays hardball, the company asks: "What can we do to keep you?" he said.

One problem for landlords is that existing tenants can easily check the Web to see what deals new tenants are being offered. And new tenants are getting incentives like a waived pet deposit or two months' free rent.

Some landlords have also become more open-minded about tenants with credit issues involving home foreclosures. In the past, a foreclosure on a credit record could have meant an automatic denial. Now such blemishes are so commonplace that the stigma is easing. Equity Residential looks for reasonable credit history "outside of a problem that they've had with a single-family home," Mr. Neithercut said.

Another sign of the times: In New York City, landlords are paying broker fees. Typically in New York, which has traditionally been a tight rental market, tenants have to pay fees as high as 15% of a year's rent. But so far this year, Equity Residential has paid about $1.5 million in such commissions.

Apartment landlords say that one benefit of the bad market is that it has practically halted new construction. New completions are expected to be 98,000 next year and 109,000 in 2011, compared with 188,000 last year and 204,000 this year, according to Green Street Advisors Inc.

But when loss rates are taken into account—the removal of units because of obsolescence—the actual addition will be immaterial. That means that when the economy rebounds, the supply will be tight, increasing landlord profits.

"I have utmost confidence in our ability to be successful when we get to there," said Mr. Neithercut. "I just don't know how far away 'there' is."

Banks Get New Rules on Property

itenenchuk@gmail.com (The Future of Real Estate) — Sat, 31 Oct 2009 17:13:00 +0000

OCTOBER 31, 2009, WSJ
By LINGLING WEI

Federal bank regulators issued guidelines allowing banks to keep loans on their books as "performing" even if the value of the underlying properties have fallen below the loan amount.

The volume of troubled commercial real-estate loans is skyrocketing. Regulators said that the rules were designed to encourage banks to restructure problem commercial mortgages with borrowers rather than foreclose on them. But the move has prompted criticism that regulators are simply prolonging the financial crisis by not forcing borrowers and lenders to confront, rather than delay, inevitable problems.

The guidelines, released on Friday by agencies including the Federal Deposit Insurance Corp., the Federal Reserve and the Office of the Comptroller of the Currency, provide guidance for bank examiners and financial institutions working with commercial property owners who are "experiencing diminished operating cash flows, depreciated collateral values, or prolonged delays in selling or renting commercial properties." Restructurings are often in the best interest of both lenders and borrowers, the guidelines point out.

The new rules don't reverse existing rules. Rather they are more explicit than regulators have been in the past about how banks should deal with restructuring issues. Banks in recent months have been peppering agencies with questions about this as the number of problem loans has soared.

Regulators have been expressing increasing concern that problems in commercial real estate could unglue the nascent economic recovery by slamming financial institutions with billions of dollars in new losses. FDIC Chairman Sheila Bair told a Senate subcommittee earlier this month that reworking the terms of these loans could help banks avoid larger losses. She likened it to the push regulators made last year for banks to rework troubled residential mortgages.

About $770 billion of the $1.4 trillion commercial mortgages that will mature in the next five years are currently underwater, according to Foresight Analytics. As of last week, 106 banks had failed this year, the most since 1992—the peak of the savings-and-loan crisis. Regional and community banks especially have been paying dearly for their aggressive push into commercial real-estate lending during the boom years.

The new guidelines are targeted primarily at the hundreds of billions of dollars worth of loans that are coming due that can't be refinanced largely because the value of the properties have fallen below the loan amount. In many of these situations, the properties are still generating enough income to pay debt service.

Banks have generally been keeping a lid on commercial real-estate losses by extending these mortgages upon maturity. However, that practice, billed by many industry observers as "extending and pretending," has come under criticism by some analysts and investors as it promises to put off the pains into the future.

Now federal regulators are essentially sanctioning the practice as long as banks restructure loans prudently. The federal guidelines note that banks that conduct "prudent" loan workouts after looking at the borrower's financial condition "will not be subject to criticism (by regulators) for engaging in these efforts." In addition, loans to creditworthy borrowers that have been restructured and are current won't be reclassified as "high risk" by regulators solely because the collateral backing them has declined to an amount less than the loan balance, the new guidelines state.

Critics say the new rules are yet another example of a head-in-the-sand approach by regulators, pointing to the relaxed accounting standards last year that enabled banks to avoid marking the value of the loans down. This is doing long-term damage to the economy, they say, because it ties up bank capital, preventing them from resuming lending.

Critics say a wiser approach would be for regulators and banks to deal with problems quickly like the Resolution Trust Corp. did in the early 1990s during the last commercial real-estate crash. Back then, the RTC helped purge the financial system of toxic mortgages.

The new guidance "gives people a long time to figure out they're not going to pay it back," said Douglas Durst, a leading New York City developer. "We are in a period where nothing is happening," he said, adding that banks are "not making any new loans because they have this bad debt on their books and not writing it down and getting rid of it."

Why Homeowners Are Raising the Roof

itenenchuk@gmail.com (The Future of Real Estate) — Sat, 31 Oct 2009 17:08:00 +0000

OCTOBER 28, 2009, WSJ
By M.P. MCQUEEN

People who refrained from splurging on big home-improvement projects during the housing boom are reaping the rewards now.

Depending on the region and the job, some homeowners are paying as much as 20% less for home-remodeling projects than they would have a few years ago. Many contractors are willing to accept smaller jobs and "handyman" projects that they used to snub. And more projects are being delivered on time and on budget—a stark contrast from the boom years.

Kim and Chandra Sobieski of Cat Spring, Texas, considered expanding their home two years ago, but thought the contractor's $380,000 estimate was too high. Earlier this year, Mr. Sobieski, a 54-year-old retired title-company executive, called the same contractor and got a quote for a slightly revised expansion for 20% less. The couple wound up paying $300,000 to add 1,500 square feet to their old 3,400-square-foot home, including installing a new roof, converting a garage to an entertainment room and adding a new garage.

"We caught them at a time there was more downtime, and it seemed to work to our advantage," says Mr. Sobieski, who adds that the project was finished ahead of schedule.

The Sobieskis' contractor agrees that timing made the difference. "Three years ago, if you asked someone for a discount, they'd laugh at you," says Jeff Hunt, vice president of Brothers Strong, the Houston firm that did the project.

Remodeling prices are down an average 5% to 10% across the U.S. from their peak, firms say, largely due to bidding wars among contractors idled by the housing slump and lower costs for some materials, such as plywood, lumber and insulation, because of lower global demand.

The remodeling industry has also been hurt by sluggish sales of new and existing homes; most remodeling is done within 18 to 24 months of the purchase of a home, studies indicate. Tighter credit and falling home values also hurt the industry, as many big jobs are financed with home-equity loans or other borrowing. Some new-home builders are now competing for home remodeling jobs, helping to force down prices even more.

In the year ended the first quarter of 2009, the most recent data available, $118.2 billion was spent on home-improvement projects, down from $146 billion in the year ended the third quarter of 2007—the national peak of remodeling activity—according to a report issued this month by the Harvard Joint Center for Housing Studies. The center said it expected spending declines to moderate through the end of this year and begin to rise early next year.

To be sure, there are still remodelers who aren't cutting prices drastically. Building materials represent only about one-third of their costs, and taxes and insurance premiums, including workers' compensation, have continued to rise. Fuel prices also remain high, and prices for some petroleum-based building products, such as asphalt shingles, rose in 2007 and 2008, although that trend started to reverse last spring, according to the National Association of Home Builders.

Bristling at Homeowners

Some contractors bristle at homeowners who demand deep discounts. "Why are you asking if you can get a $300,000 project for $175,000 when nothing has changed except that you can't get financing for it?" asks William Carter, president of the National Association of the Remodeling Industry and a certified kitchen and bath remodeler in Sacramento, Calif. He acknowledges that he has lost several jobs because he refused to lower his fees by more than 5%.

The lowest bidders don't necessarily offer the best value, Mr. Carter says. Some bid too low and then can't finish the job at the quoted price, leading them to cut corners, ask for more money or even abandon the job. Some are moonlighting amateurs or otherwise unqualified, he says.

Local Better Business Bureaus typically receive thousands of complaints every year about construction and remodeling contractors, says Alison Southwick, a spokeswoman for the national Council of Better Business Bureaus Inc. in Arlington, Va. Homeowners should get multiple bids and ask to see several recent examples of builder's completed work and talk to previous clients before signing a contract, she says. (You can find reliability reports for local contractors at www.bbb.org.)

Some established contractors who specialize in renovations are skeptical of moves by new-home builders to seek remodeling jobs. Remodeling contractors contend builders often win jobs by bidding low, but their estimates are based on their experience erecting houses on vacant lots, not working in homes with decades-old wiring occupied by arguing couples and wandering pets.

"You can't do a $100,000 project for $69,000, but they don't realize it until they are two-thirds through," says Rocco Sinisgalli, president of Oneida Builders in Dunwoody, Ga., a remodeling firm that faces increasing competition from local homebuilders. Remodeling prices in his area are down about 10% to 12% from 2006, says Mr. Sinisgalli, who also runs a course in remodeling for home builders.

David Crowe, chief economist of the National Association of Home Builders, confirms that more home builders are seeking remodeling work, and that remodeling contractors—who are also represented by the organization—were concerned about it.

"I think it's possible that the smaller builder that has not done remodeling in the past could be mistaken in the amount of effort it takes to remodel an existing structure," Mr. Crowe says. "But I don't think that is widespread."

Occupied Houses

Michelle Aube, 42, says she and her husband relied on a custom new-home builder to redo their 3,000-square-foot house in Fairfield, Conn. in 2007, and the project took much longer than the builder said it would take. She says the builder seemed unfamiliar with the tribulations of renovating an occupied house.

"I chose him because out of three contractors he gave me the best bid," Ms. Aube, a homemaker, says of the $200,000 remodel and expansion. "It was supposed to be a six-month job, and it ran into a nine- or 10-month job," she says, but it was "worth it in the end."

Other homeowners have gotten deals from established remodeling specialists because of the tough economy. Jessica Levy Buchman, a 39-year-old executive at a real-estate brokerage, estimates she saved 20% to 25% off prerecession prices when she and her husband renovated a house they bought in December in Sag Harbor, N.Y. Some roofers wanted $7,000 for a repair job. She paid $1,500, which wasn't even the lowest bid.

Says Ms. Buchman, "I feel we are getting rewarded for riding it out and having the guts to spend a little money."

Mixed Data Show Recovery's Rocky Path

itenenchuk@gmail.com (The Future of Real Estate) — Sat, 31 Oct 2009 16:57:00 +0000

OCTOBER 29, 2009, WSJ
By CONOR DOUGHERTY

New-home sales fell but orders for durable goods rose in September, according to two government reports released Wednesday that show the economy remains on a wobbly path upward.

Sales of new homes fell 3.6% in September as the effect of the federal government's tax credit for first-time home buyers faded, the Commerce Department said Wednesday. A separate Commerce report showed that orders for big-ticket items such as cars and washing machines increased 1% in September and that a key measure of business spending rose, suggesting consumer demand and business confidence are inching back.

The recovery thus far has been heavily supported by federal money, casting a question mark over the economy's underlying strength as government support dwindles. A better picture of the economy's health comes Thursday, when third-quarter gross domestic product is released. Economists forecast growth of about 3% after four consecutive quarters of contraction.

The increase in orders for durable goods -- products designed to last more than three years -- was the second in three months. Orders of so-called core durable goods, a category that excludes orders for civilian planes and defense capital goods, also returned to growth, increasing 0.5% in September after a 0.4% drop in August.

Businesses continued to reduce their inventories of durable goods, but have eased up from the deep reductions over the past few months. Inventories decreased 1% in September, slower than the 1.5% pace in August. "While inventories will continue to decline in the months ahead, the rate of liquidation is likely to moderate," Joshua Shapiro, chief U.S. economist at research firm MFR Inc., wrote in a note to clients.

The decline in new-home sales, to a seasonally adjusted annual rate of 402,000, may be an omen of slower home sales in the coming months if the $8,000 housing tax credit expires -- though Senate negotiators had reached a tentative deal Wednesday to extend the credit.

Despite a bumpy road to recovery and the support of a tax credit, many analysts believe the housing market is at or approaching a bottom. Thursday's report showed that the supply of new homes was at 7.5 months in September, down from 9.5 months in May, assuming the current sales pace. While still high, that is down considerably from the depths of the housing bust.

Home Prices Rose in Most Major Cities in August

itenenchuk@gmail.com (The Future of Real Estate) — Tue, 27 Oct 2009 14:11:00 +0000

OCTOBER 27, 2009, WSJ
By JOAN E. SOLSMAN and KATHLEEN MADIGAN

U.S. home prices logged their third monthly increase in August, but a separate measure of consumer sentiment turned gloomier in October.

The S&P Case-Shiller indexes showed prices in 10 major metropolitan areas fell 10.6% in August from a year earlier but rose 1.3% from July. In 20 major metropolitan areas, home prices dropped 11.3% on the year but were up 1.2% from the previous month.

Compared with the previous month, only Charlotte, Cleveland and Las Vegas posted declines. Month-to-month gainers were led by Minneapolis, which posted a 3.2% gain, and San Francisco, which rose 2.8%. Cleveland fared worst, falling 0.5%.

Twelve of 20 major metropolitan areas posted price declines of more than 10% from a year earlier, with Las Vegas continuing to post the worst results. Nationally, home prices are at levels similar to the autumn of 2003.

As of August, the 10-city index is down 30.2% from its mid-2006 peak, and the 20-city is down 29.3%.

For the 17th straight month, every region posted year-over-year declines, although all except Cleveland showed an improvement over the previous month's figures. Las Vegas was again the worst performer year-over-year, which posted a drop of 30%. Phoenix and Detroit followed with declines of 25% and 23%, respectively. The best year-on-year performer was Dallas, which posted a 1.2% decline.

The latest numbers come amid recent mixed data on the housing market. Last week, the Commerce Department said new-home building rose a third time in four months during September but didn't erase all the declines in August.

The National Association of Realtors said demand for previously owned homes surged in September, but the National Association of Home Builders gauge of builders' confidence slipped in October for the first time in four months because of the looming expiration of a big tax credit.

Fed appraisal rules sink home values

itenenchuk@gmail.com (The Future of Real Estate) — Sat, 24 Oct 2009 13:30:00 +0000

New regulations kill home sales, industry groups say

October 24, 2009
Louis Aguilar / The Detroit News

Federal actions intended to stabilize inflated real estate prices that led to last year's financial meltdown are instead depressing prices and killing some sales in an already weak market.

At issue is the Home Valuation Code of Conduct for mortgages securitized or held by Fannie Mae or Freddie Mac, which deal with about 70 percent of U.S. mortgages.

The new rules, which took effect May 1, were intended to prevent cozy relationships between appraisers, agents and brokers that could lead to bias, fraud and inflated home values.

But a chorus of industry groups representing builders and real estate agents say the new rules have damaging, unintended consequences: Some appraisers, they say, are unfamiliar with communities and neighborhoods, so they undervalue property. And that can kill a deal when the agreed-to sales price was significantly higher than the appraisal.

The National Association of Realtors says 20 percent of its members report losing more than one deal because an appraisal came in well below the purchase price agreed to by the buyer and seller. The National Association of Home Builders contends the code is impeding new construction as well. More than half of the 500 builders who responded to a recent survey said at least one of their new homes was appraised at less than the cost of construction.

Metro Detroit real estate agents tell horror stories about the new appraisal rules.

An out-of-state appraiser, for example, valued a Grosse Pointe home at $270,000, although the seller and buyer agreed to $360,000. A lakefront home in St. Clair Shores listed at $480,000 was appraised at just over half that. And three appraisals on a new home in Detroit's Woodbridge Estates ranged from $150,000 to $230,000.

"We lost the sale because the couple didn't know what to believe," Realtor Todd Craft, of City Life Realty in West Bloomfield, said of the Woodbridge properties. "That's what we are dealing with now."

If an appraisal falls below the negotiated sales price, the lender can refuse to finance the deal or require the buyer to come up with the difference. Or the seller may lower the price.

While home sales are up in Metro Detroit, thanks to the buyer's market, prices continue to plummet. The median sales home price in Metro Detroit in Sept. was $65,500, a 23 percent drop from a year ago, according to Realcomp II Ltd., a Farmington Hills-based real estate listing service.

Existing and new home sales aren't the only ones that are affected. The new rules also impact homeowners who want to refinance their mortgages, because they need to get an appraisal as part of the process.

"In a city like Metro Detroit, where there are pockets of stable and upcoming areas, the new appraisals make it tougher for someone who doesn't know the area to come in and get an accurate gauge," said Brian Cooley, a Realtor with O'Connor Realty Detroit in Corktown.

Banks use new system

Under the old rules, mortgage brokers, who act as intermediaries in selling loans on behalf of individuals or businesses, also arranged appraisals.

But critics say the relationship between brokers and appraisers was too cozy, and that likely contributed to inflated appraisals. Under the new rules, mortgage lenders are in charge of that part of the appraisal process. The lender can use an in-house appraiser or farm it out to an appraisal management company that may or may not be local, or have knowledge of the community.

The new appraiser may not know, for example, about upscale neighborhoods of mansions in Detroit, just blocks from seriously run-down areas where houses are going for next to nothing.

Michigan banks have adopted the new system.

"We're using it for all our (home) loans," said Gail Madziar, vice president of communications for the Michigan Bankers Association. "Banks are used to compliance and adherence guidelines and these are the new rules."

Banks neither lobbied for the new code, nor are they expressing opposition to it, now that it's been in effect for several months.

But housing industry groups such as the National Association of Home Builders and the National Association of Realtors are howling mad. The two groups support a U.S. House bill that would slap an 18-month moratorium on the new rules of the Home Valuation Code of Conduct.

Two Michigan representatives, Democrat Gary Peters of Bloomfield Township and Republican Fred Upton of St. Joseph, are among 110 co-sponsors of the bill. It was introduced in late June but hasn't budged in committee.

Most industry people want changes, said Norm Thomas, president and chief appraiser of R. S. Thomas & Associates Inc. of Livonia. The veteran appraiser is former president of the Detroit chapter of the American Society of Appraisers and a current board member of Michigan Council of Real Estate Appraisers.

"It's something that needs to be refined," Thomas said. "The biggest issue, I think, is the lack of geographic competence among some of the outside appraisers."

Many Realtors say new appraisals rely too heavily on the prices of foreclosed homes and "short sales" -- houses that sell for less than what the homeowner still owes on them.

Foreclosures and short sales can artificially depress other home values in an area, and lead appraisers to undervalue nearby homes on the market as well. And in an area hard hit by foreclosures, as Metro Detroit is, it's a significant factor.

The Grosse Pointe home that was listed at $360,000 but appraised at $270,000 was "distorted because of a foreclosure and its proximity to Detroit," Craft said.

"Everybody is just scared," said Hugh Gedrich, founder and president of the Complete Appraisal Co. in Southfield.

There's also a financial issue for appraisers, and consumers.

"The general effect has been to get these appraisals in fast, and do it for as low as price as you can," said Gedrich, who has no choice but to accept the new rules. "People are now turning (appraisals) around in two, three days and for about half the amount we used to make. That may prevent fraud, but it doesn't mean thoroughness." The appraisers may be getting paid less, but the consumer can end up paying more, Gedrich and others say, because they often have to request multiple appraisals.

Fannie Mae and Freddie Mac, the nation's two largest mortgage finance lenders, stand by the new practices. So does the Federal Housing Finance Agency, the agency that oversees Fannie and Freddie.

Tax Credit Fuels Rise in Home Sales

itenenchuk@gmail.com (The Future of Real Estate) — Sat, 24 Oct 2009 13:26:00 +0000

OCTOBER 24, 2009, WSJ
By CONOR DOUGHERTY and JOHN D. MCKINNON

Sales of existing homes surged 9.4% in September to a seasonally adjusted annual rate of 5.57 million units, as lower prices and the looming expiration of a federal tax credit lured more buyers into the market.

Amid alleged fraud and administrative problems in the first-time homebuyers tax-credit program, the News Hub panel discusses whether it should be extended.

The data, released Friday by the National Association of Realtors, portrayed a housing market that continues to stabilize across the country and gives ammunition to those trying to extend the $8,000 tax credit for first-time home buyers.

Prospects for extending the credit remain mixed. On Capitol Hill, there are deep concerns about the program's cost. While many lawmakers support some form of extension, they want the credit's substantial cost to be offset by tax increases or spending cuts.

Extending the current credit would cost about $1 billion a month, according to congressional estimates. Some lawmakers are backing an expanded credit that would last through June and cost about $16.7 billion.

Senate Majority Leader Harry Reid of Nevada has been trying to reach an agreement for a 13-month extension that would provide up to the full $8,000 for four months, and gradually reduce the credit's value over the remainder of 2010.

Aides say Mr. Reid aims to have a vote on the measure as part of next week's debate over extending federal unemployment insurance benefits. The package also is likely to include bigger tax refunds for businesses that have suffered operating losses during the downturn.

The new sales data could help backers of the credit, scheduled to expire Nov. 30. But the improvement also could undercut a key argument of backers -- that the recovery remains fragile enough to require an extension. It also doesn't alleviate concerns the credit has been subject to widespread abuse, as the Internal Revenue Service pursues more than 100,000 suspected improper claims.

Existing homes sales were up across the country, the NAR reported. The median price of an existing home has fallen 8.5% year-over-year, but prices have stabilized from their free-fall during the worst months of the recession.

The spike in demand reduced housing inventories to a two-year low. Housing inventory was down 7.5% to 3.63 million homes in September, reducing the nation's housing supply to 7.8 months from 9.3 months in August, assuming the current sales pace.

The housing market is still in rough shape: The supply of homes is still about three months bigger than normal, and distressed sales, such as foreclosure auctions, continue to drag down prices. But many analysts say the broad rebound in sales shows the market is being driven by more than first-time buyers lured by the tax credit.

Sam Khater, senior economist for First American CoreLogic Inc., said sales would likely decline only marginally if the tax credit were allowed to expire. He argued that other programs of the Federal Reserve and Federal Housing Administration have played a larger role in luring buyers.

Fewer McMansions on the Horizon

itenenchuk@gmail.com (The Future of Real Estate) — Sat, 24 Oct 2009 13:24:00 +0000

Builders Have Little Incentive to Create More McMansions and Hardly Anyone is Buying. There are Deals Out There, But You Better Act Fast.

October 24, 2009, WSJ
By JUNE FLETCHER

If you're looking to buy a brand-new McMansion in the 'burbs, you'd better act fast. With home prices this low there's not much incentive for builders to start new houses. And inventories are getting razor-thin: Economists and analysts at the National Association of Home Builders fall construction conference in Washington, D.C. on Wednesday pointed out that the current 7.3-month supply of new homes is the lowest it's been since 1992.

Moreover, most of the summer's pickup in home sales and starts, which has since abated, could be attributed to the $8,000 first-time home buyer's tax credit. With that credit slated to end on Nov. 30—and with continuing problems securing money to build—builders have little incentive to ramp up their production of new homes.

Many places will take years to rebound. Rockville, Md. builder Robert Mitchell says these days he'll only build a home when he has contract in hand, because his lenders won't advance money for speculative building. "We sold off our standing inventory," he says.

Normally, short supply means higher prices. But consumers have been so battered by job losses and falling home equity, many are unwilling to commit to buying. Mark Zandi, chief economist of Moody's Economy.com, notes that "homes are as affordable as they've ever been," based on household income. However, he says that continuing layoffs and foreclosures will continue to depress prices, which have fallen 32% since their 2006 peak, according to S&P/Case-Shiller's composite 10-city index. He predicts that prices will fall another 5% to 10% before stabilizing in the middle of next year.

When the market does start to pick up, the NAHB sees that happening two years from now, the landscape will be changed, literally. After a long run-up in median new home size, peaking at 2,309 square feet in 2007,home sizes shrank to 2,091 square feet in 2009. "It's the largest decline ever seen," said NAHB's chief economist David Crowe. Since first-time buyers and their parents, the empty-nesters, will be the dominant demographic groups over the next decade, builders will cater to those groups more modest needs. Already, big builders like Toll Brothers have introduced models that look more like cozy carriage homes and four-squares than their usual English manor-style homes.

In the meantime, the next couple of years are going to be strange for those who want to buy new and have the means to do it. Sure, interest rates are likely to remain favorable (in the 5% to 6% range, according to Mortgage Bankers Association chief economist Jay Brinkmann). But you may have to settle for an already-built home in a builder's inventory if you want a bargain. Demand is so weak and prices so low, that for many builders, creating a new home to your specifications just isn't worth the effort. The NAHB's Mr. Crowe noted that 56% of builders the trade group surveyed recently reported that appraisals for their homes fell below the cost of building.

The U.S. Metros Least Touched by Recession

itenenchuk@gmail.com (The Future of Real Estate) — Fri, 23 Oct 2009 13:02:00 +0000

A combination of stable home prices and sizable sectors in health care, energy, government, and education kept these metropolitan areas relatively stable

October 22, 2009, BUSINESSWEEK
By Prashant Gopal

America's strongest economies have one thing in common—home prices that never got too hot or too cold.

Home prices in metros such as San Antonio, Oklahoma City, Pittsburgh, Rochester, Little Rock, Ark., and Baton Rouge, La., remained steady through boom and bust. Although no metropolitan area entirely avoided the economic downturn, the most resilient metros were protected by a potent mix of recession-resistant jobs.

The upstate New York areas of Syracuse, Rochester, Albany, and Buffalo suffered from declining jobs in manufacturing, but got significant boosts from sizable health-care, education, and government sectors. Construction is booming in Baton Rouge, Louisiana's capital, as firms take advantage of financing for post-Katrina hurricane recovery work and service-related companies expand to meet the needs of a growing population. Omaha and the state of Iowa have relatively strong insurance sectors.

Texas, the last state to enter recession, has been bolstered by its oil and gas industries—which have also helped Oklahoma, North Dakota, and Louisiana. Texas also has many other things going for it, including affordable home prices and relatively low wages, which attract corporations.

BusinessWeek.com used data and analysis from the Brookings Institution's new MetroMonitor to come up with the nation's 40 strongest economies. The MetroMonitor, which measures the nation's health on a quarterly basis, ranks the top 100 metros based on job growth, unemployment, gross metropolitan product, and home prices.

A relative boom in Baton Rouge

"No place has been untouched by this recession. This is a change from previous recessions," said Alan Berube, a senior fellow and research director of the Brookings Metropolitan Policy Program. "But there's a big difference in losing one-tenth of a percentage and losing 15% of jobs."

Baton Rouge, which was ranked No. 6, "grew jobs every month until August 2009 and in August it only lost nine-tenths of a percent, compared to 5.1% nationally," said Lauren C. Scott, professor emeritus of economics at Louisiana State University.

Scott said $5.1 billion of construction projects have been announced or are under construction in the Baton Rouge metro, including a new plant for French chemical company SNF and the expansion of an ExxonMobil chemical plant.

"One nice thing after another thing happened that has countered what's happening in the rest of the country," Scott said.

Ernie Goss, an economist at Creighton University in Omaha, who studies much of the nation's energy and farm belts, said the strong dollar early this year hurt farm exports. "But the dollar has now weakened significantly and that will be good for the farm sector and energy commodities," Goss said. "I think 2010 is going to be much better than 2009. But we are still not going to have a lot of job gains.

A 22-year unemployment high in Texas

Although the metros in the ranking are strong by relative standards, their unemployment rates in many cases are now peaking because they entered the recession late. Texas, which had 5 metros in our top 10, including No. 1 San Antonio, is a good example.

The unemployment rate in Texas hit 8.2% in September, rising above 8% for the first time in 22 years. But that's a very low unemployment rate, compared to the national rate of 9.8% or to Nevada's 13.3% rate.

Texas is unlikely to face a prolonged downturn, said Terry Clower, an economist at the University of North Texas. The state's affordable cost of living make it attractive to new residents and corporations, the largest of which tend to be based near Houston and Dallas.

"It's perceived as a low-cost place to do business," Clower said. "Because housing is affordable, the wage rates reflect that."

Marisa Di Natale, a director at Moody's Economy.com, said late arrivals to the recession will generally face mild downturns.

These metros "haven't had a big erosion in housing wealth, which has kept consumer spending stronger than it would otherwise be," Di Natale said.

Click here to see the 40 strongest metros in the U.S.

Inspector Cites Widespread Fraud in Home-Buyer Tax Credit

itenenchuk@gmail.com (The Future of Real Estate) — Fri, 23 Oct 2009 13:01:00 +0000

As Congress discusses an extension of help for first-time buyers, a watchdog says thousands may have illegally received payments

October 22, 2009, BUSINESSWEEK
By Prashant Gopal

Even as support grows in Congress for an expansion of the soon-to-expire $8,000 first-time home-buyer tax credit, a Treasury Dept. inspector told lawmakers on Oct. 22 that illegal immigrants, children as young as age 4, and thousands of others might have illegally received payments.

The credit, which is limited to buyers who have not owned a home for the past three years, is due to expire Nov. 30. But several bills to extend the credit have been introduced, including one co-sponsored by Senate Banking Committee Chairman Chris Dodd (D-Conn.) that would extend the credit to June 30, 2010, and expand it to include buyers who previously owned homes.

About 1.4 million borrowers have claimed a total of about $10 billion in credits through the program, which was approved in February. But 19,351 people who filed electronic tax returns for the 2008 tax year claimed credits of more than $139 million for homes that had not yet been purchased, J. Russell George, U.S. Treasury Inspector General for Tax Administration, told the House Ways & Means Committee.

It's unclear how many paper returns had similarly inappropriate claims, he said. George said another 70,005 taxpayers appear to be previous homeowners based on their returns, which included mortgage interest, real estate taxes, and other home-related items. And more than 580 taxpayers under age 18 claimed nearly $4 million in credits, including some 4-year-olds. George suggested that their parents might have been trying to get around income restrictions (the full credit is available only to single taxpayers earning up to $75,000 and couples earning $150,000).

IRS Freezes 10,000 Refunds

George said that he's concerned about the IRS' ability to "effectively administer" the applications for tax credits being claimed before the existing deadline, "let alone those claimed before future deadlines" if the credit is extended.

Linda Stiff, the IRS deputy commissioner for services and enforcement, said the tax credit went into effect in February during the busy tax season and it took time to develop filtering mechanisms that were later put in place to catch questionable claims.

The IRS has frozen 10,000 refunds pending audits, identified 167 criminal schemes, and launched 115 criminal investigations relating to suspicious claims.

The reported fraud in the system comes when the fate of the tax credit is still uncertain. Mark Zandi, chief economist for Moody's Economy.com (MCO), said allowing the tax credit to expire would be a serious mistake even though it is "one of the least efficient ways" the government has to support the housing market.

According to Zandi, only about 400,000 additional homes will sell because of the credit by the time it expires. And about 1.8 million buyers will have claimed the credit. Expanding the credit to include previous homeowners and extending the credit through June will cost about $30 billion, on top of about $8 billion that would have already been spent.

"The market is literally on life support—it's fragile," Zandi said. "If we take it off, we risk taking a big step back."

Reelection Politics

Jaret Seiberg, policy analyst with Concept Capital's Washington research group, said the fraud that was uncovered isn't enough to stop the extension, which has strong bipartisan support, particularly from lawmakers in districts where home prices are plunging.

Senate Majority Leader Harry Reid, who is facing a difficult challenge in his home state of Nevada, co-sponsored a bill to extend the existing credit by six months. Dodd, another strong supporter, is also facing reelection in Connecticut in 2010.

"The Inspector General's report is going to force Democrats to include more safeguards in the extension," Seiberg said. "But it doesn't change the underlying politics. Incumbents in both parties need it enacted to get reelected."

Senator Johnny Isakson (R-Ga.), who is co-sponsoring the extension with Dodd, said that the problem tax returns represent a small fraction of those who received the credit and his bill will include measures recommended by the Treasury Inspector General and the IRS to minimize fraud in the future. Among the proposed safeguards: a requirement that borrowers attach documents verifying that they purchased the home and proof of age of the claimant. "Any fraud is unacceptable," Isakson, a former Realtor, said. "Nobody is against stopping fraud."