Phil's Real Estate Blog

Mortgage rates are stuck just above 6 percent, but at least they're not blowing up or shut down along with the rest of the credit world. We and our peers are operating normally.

Passage of the rescue bill has pushed up long-term Treasury rates, as markets anticipate large sales of new Treasury bonds to raise bailout cash. The stock market has stopped nauseating freefalls twice this week. These moves also reflect hopes for coordinated global central bank rate cuts over the weekend and a Euro-zone version of our rescue package.

New economic data are awful, with GDP obviously contracting in September. Auto sales fell below 1 million last month, 26 percent below last year. The always-reliable purchasing managers' "ISM" manufacturing index plunged from an expected 50 reading to 43.5 (50 is a breakeven economy, 44 is recession). New claims for unemployment insurance are running a sustained half-million each week, double the rate in a healthy economy. Today's crusher: Payrolls fell 159,000 in September, half-again worse than forecast.

Before political and financial follies, the highest possible honor goes to Sheila Bair, FDIC head, for grace under pressure. She has gotten us out of WaMu and Wachovia with no hit to the insurance fund: no fuss, no mess, on time. To those of you worried about your bank accounts and stashing greenbacks: cool it. I think our banks are fine, now.

This week we have been in the worst moments of the largest "run" in history, nothing remotely comparable, in part because of these damned elections. Civilians and experts alike have been terribly confused, trying to understand what is happening.

Two things have complicated comprehension: Until the last two weeks' disaster, this was the slowest-moving run in history, starting 14 months ago. A "walk" on banks, no matter how massive, does not focus the mind of Main Street voters. Second, this run has been at wholesale, bank-on-bank, money-market fund on commercial paper, funds on munis ... but no lines of depositors, no deposits lost.

That missing panic on Main Street is the largest reason the House flinched on Monday, and "nay" voters still do not understand the fantastic and lasting harm they did. Rejection instantly caused the stock-market loss of $1.2 trillion and spread the run all over the world. There is only one way to stop a run, and that's with an unlimited mass of cash: Drive up with a big truckfull, and start throwing bales of it at old ladies in the run. Flinch, and even this redo loses force. The global element: The United States is the only domestic-driven economy on the planet; the rest of the world earns its rice and strudel by selling stuff to us. If our Congress appears locked in craniosacral inversion then the whole world is lost, and so it traded all week long.

More politics: The whole House faces re-election in 30 days, with many new Democrats from conservative districts, and many Republicans fighting a Democratic wave. President Bush is unable to fly top cover, to "go to the people" in a compelling speech. He is also the lamest duck of all time, and the House has no fear of him. One congressman said of Lyndon Johnson, "If he wanted your vote, and you resisted, you had the strong impression that electricity to your district would be cut off and never turned on again." In 30 days we will have a president-elect deserving fearful respect, order restored.

The bill has passed, but execution of the absurdly complex plan will take a month or more. A lot of people are coalescing around a simple and fast "Reverse Sutton." Willie Sutton focused his legendary work on removing cash from banks. Instead of all this horsing around with re-underwriting toxic securities one at a time, buying at auction and re-selling, just give banks the capital they need. Do it in exchange for ownership, long-term workout and by accounting fiction, not by selling new Treasurys.

Even then, we'll have to jump-start the system, get bankers back to making loans. So, let's invite the big dogs -- BofA's Lewis, Citi's Pandit, Morgan-Chase's Dimon -- down to Guantanamo for the weekend: "Gentlemen, meet the bucket and the board. …"

Lou Barnes

1. Peak-to-trough home price declines to date have been about 20%. Wrong. Measurements of home price declines can be skewed depending on which homes in which markets are being measured. For instance, the Case-Shiller Index, which indicates that home prices are down 20%, is heavily skewed towards homes with subprime loans and other distressed home sales. These troubled homes have experienced a steeper decline than home prices in general, says Yun, adding that both government data based on loans backed by Fannie Mae and Freddie Mac and data from the National Association of Realtors suggest much more modest price declines. TIP: If you’re selling your home, the best thing to do is price your home right.

2. The much smaller number of new homes now under construction indicates the dismal outlook for the housing market. Wrong. The inventory of homes on the market is very high, so the last thing we need now is more new homes being built. Home builders have cut back sharply on production, which will help lower inventories and stabilize prices. The builders have done exactly what market forces are dictating under current conditions, Yun says. TIP: With many new homes completed but not sold, you can find great opportunities.

3. Even when the housing market recovers, home price growth will be only 4 to 6% per year — much less than historical average returns for the stock market. Most buyers put less than 20% of their own money into a home purchase; this borrowing power can translate to a greater rate of return. This is how Yun explains it: Home price appreciation historically has been about 1 to 2 percentage points higher than consumer price inflation, which translates into about 4 to 6% per year. But this growth rate cannot be viewed as a rate of return like the stock market. The reason is that most people do not buy a home for all cash, instead making a cash down payment and borrowing the rest. The leverage this borrowing creates can magnify returns — and losses. If price growth returns to historic norm, the price growth of 4% can easily turn into 20 to 30% rate of return if the home buyer makes a down payment of 10 or 20%. TIP: Get the fundamentals right when investing in real estate.

4. Impending baby boomer retirements and moves to small homes will cause a glut of homes on the market. Wrong. The first edge of the baby boomers has reached 60 years of age and the massive bulk of that generation will soon go into retirement, but far from trading down, many of these older homeowners are keeping their homes or moving to ones of comparable size. And even if more boomers do sell their larger homes in the years ahead, Yun points out, the rapidly growing U.S. population should absorb the inventory of existing homes on the market. TIP: Active seniors can find a retirement community that caters to their needs and interests.

5. The federal government takeover of secondary mortgage companies Fannie Mae and Freddie Mac is a bailout that will cost taxpayers bundles. Too soon to tell, says Yun. It’s conceivable that taxpayers may have to cover some losses. It’s also possible that the government takeover will result in no loss of taxpayer dollars. Even if taxpayer funds are used, the bailout would be preferable to the global economic problems that would have occurred if Fannie and Freddie had gone belly up. TIP: Uncle Sam is “bailing out” homeowners facing foreclosure. Find out more about the Hope for Homeowners plan.

6. The Federal Reserve controls mortgage rates. Wrong. Yun explains: The Fed’s activities influence mortgage rates but don’t directly control them. What the Fed sets is a very short-term interest rate called the Federal Funds Rate. Mortgage rates are determined by global savings as well as credit spreads and inflationary pressures. Over the past two years, the Fed has raised the Fed Funds Rate to 5.5%, and then cut it deeply to around 2%. All the while, the 30-year mortgage rate has averaged in the 6 to 6.5% range. TIP: Today’s rates don’t look bad compared to the 10% we saw in the early ’90s and 17% in the ’80s.

7. It’s the wrong time to buy. Wrong. All real estate is local. For those who are financially and mentally ready to buy, there has never been a better time to be a buyer in many markets. An abundant selection of homes and historically low interest rates give buyers an edge over sellers. The recently passed $7,500 federal tax credit for first-time home buyers creates an added incentive. For someone with a long-time horizon, Yun says, there is very little worry about home values since homes have historically provided a solid foundation for wealth accumulation. TIP: Compare the pros and cons of renting vs. buying to see what makes sense for you.

8. It’s the right time for everyone to buy. No. All real estate is local, and everyone is unique. Someone who is not emotionally or financially ready should not be forced or induced to join the rank of homeowners, even when a market presents good buying opportunities. Potential homeowners clearly need to understand that the decision to move up to ownership requires sacrifices, like saving up for down payment and elevating their credit scores. Homeowners who lose their home to foreclosure serve no one’s interest, Yun adds. TIP: Take a good hard look at your financial status and create a homeowner’s budget to see if you’re ready to buy a home.

9. It’s a terrible time to sell. Wrong. In markets where home sales are picking up strongly, a seller can easily get an offer if the property is priced correctly. Also, Yun says, for those looking to trade-up, selling low on an existing home is more than offset by buying the new move-up home at a lower price. When the market recovers, home price appreciation on the traded-up home will bring bigger bang for the buck. TIP: Homebuyers want bargains in this market. If you price your home much lower than your competition, you might end up with a bidding war.

10. With the advent of the Internet, more and more homes are being sold by owners (FSBOs), and real estate practitioners are becoming obsolete. Nope. According to Yun, the share of home sellers who choose to go it alone when selling their home has actually decreased from about 20% in the late 1980s to about 12% today. Even after these sellers successfully complete a transaction, only 4 in 10 say they would sell their next home without the assistance of a real estate professional. TIP: You don’t have to sign a listing contract to talk to a Realtor. Ask family and friends for referrals and interview a few. You might even get some free advice.

Homeowners who can't afford their mortgage payments may not find much in the way of rescue or relief in the U.S. government's $700 billion bailout of the financial markets.

But while the feds have fearfully sat on their hands and watched a severe credit crunch turn into a major crisis, a number of states have introduced their own foreclosure prevention programs, as detailed in "Defaulting on the Dream: States Respond to America's Foreclosure Crisis," a report by the Washington, D.C.-based Pew Center on the States.

"The jury is still out about whether and to what extent (these approaches) will be effective. Still, several states among those hardest hit by foreclosures also have been among the most assertive in trying to address the problem," the Pew study stated.

The seven "hardest-hit" states are California, Florida, Michigan, Ohio, Texas, New York, Georgia, Illinois, Indiana and Pennsylvania. Two of them, New York and Ohio, along with Maryland and Massachusetts, have committed the most money to anti-foreclosure programs, according to the study.

These and other states have experimented with a variety of "innovative but as yet unproven approaches" to ward off foreclosures, the study said. Generally, these approaches aim to educate and aid homeowners, regulate mortgage lenders and brokers, and mitigate the damage that foreclosures can cause to state budgets and local municipalities.

Specifically, states have:

• committed millions of dollars in mortgage refinance funds to help borrowers avoid foreclosure,
• encouraged lenders to modify loans on which homeowners have defaulted,
• launched media campaigns to educate overextended homeowners about how to seek help,
• forced lenders to give borrowers who are in danger of defaulting early notice about available assistance,
• required or recommended consumer education and counseling,
• worked with a national nonprofit foundation to staff 24-7 homeowner counseling hotlines,
• implemented new regulations to try to prevent foreclosure rescue scams,
• regulated high-cost loan products,
• obligated mortgage brokers who recommend mortgage products to consider or represent the borrowers' interests, and
• set up task forces to work on solutions to foreclosure problems.

The Pew Center's 51-page report is a must-read for anyone who wants to know more about governmental responses to the foreclosure crisis. It contains a number of useful charts and maps, explanations of the various programs and sound recommendations on ways to measure their effectiveness. (Incidentally, if you believe the mortgage crisis will end this year, take a look at Exhibit B-1 on page 44 of this report.)

To be fair, some state programs are funded with federal dollars that are distributed in the form of block grants or earmarks for state-level agencies or programs, and the federal government has several of its own foreclosure-prevention and rescue programs, namely, FHASecure, Hope Now and Hope for Homeowners.

Hope Now, a U.S. government-sponsored "alliance" of mortgage companies, recently said mortgage servicers completed more than 189,000 mortgage workouts in August. One month doesn't comprise a trend, but for argument's sake, that figure represents a run-rate of 2.27 million workouts this year.

Critics charge that that pace is too slow, that many loan workouts offer only a repayment plan or temporary interest-rate freeze but no reduction in the amount the homeowner owes, that many workouts only postpone the still-inevitable foreclosure, and that workouts targeted toward "avoidable" or "preventable" foreclosures don't aid those homeowners who are in the most dire situations.

Hope for Homeowners, which comes now as the latest incarnation, not unlike Scrooge's ghost of Christmas future, is too new to have a track record. But critics have already complained that the guidelines are too strict and that lenders won't want to participate because the program requires principal reduction. The New York Times editorial board went so far as say this program was "looking like a lead balloon."

The bottom line is that while the federal government has thrown $700 billion at Wall Street financiers and investors, states are trying to help real people with actual real problems. The Pew study argues that states "cannot go it alone" due to the size and complexity of the crisis and says "it makes little sense to have 50 separate and specific responses." The federal government still could give the states more support for their programs. The track record is still short, but there's a real opportunity to make a difference in the lives of many more homeowners.

Marcie Geffner

Evidence of a bottom

1. Escrow index. Last week, pending home sales, as measured by the National Association of Realtors pending home sales index, were up unexpectedly to 89, the highest since October of last year. A leading indicator of sales, it shows buyers may be coming off the sidelines.

2. Sellers market in lower price ranges? While overall U.S. months-of-inventory remains over 11, the figure appears to be dropping at the lower price ranges. In the Sacramento market, for instance, a previously overheated market, homes under $500,000 are seeing months of inventory between three to four vs. 12 or 13 for higher price ranges.

This isn't good news for sellers of higher priced homes, but it does show the market is starting to clear at the bottom. It also supports my hunch that the dismal year-over-year price declines reported by the S&P Case-Shiller home price index and others may be overstated. They simply reflect more homes sold in the lower price ranges, many out of foreclosure. When the price mix returns to normal, reported average and median prices should rise.

3. Foreclosures down? New federal and state laws mitigating the foreclosure process should help reduce foreclosures. Foreclosures were down 3% in June from May but then shot up 8% in July. The experts disagree about what's next, but I feel there's a good chance we'll stabilize or turn the corner by the end of the year.

4. Rate resets on subprime loans to drop. Subprime rate resets are a big foreclosure driver, and according to research firm First American CoreLogic subprime resets should drop dramatically by October.

Flies in the ointment?

1. Some principal payments required. Many option loans allowed borrowers to defer principal payments for several years. As those years go by, principal payment requirements could act like subprime resets, pushing some owners over the edge.

2. Interest rates up. Inflation risk and Fannie Mae and Freddie Mac turmoil have helped push up rates to the highest point in 12 months, near 6.5% for a 30-year fixed mortgage. Further increases could nip a recovery in the bud.

What to do

1. Watch the lower-cost end carefully. Your local media or a real-estate professional should be able to read months of inventory by neighborhood and by price range. Where those figures indicate a buyer's market (usually a figure below six) you may be approaching a bottom.

2. Look for bargains this fall. At least three factors should lead to a price nadir this fall, if it hasn't happened already, and the typical seasonal fall sales decline will magnify the effect:

• REO-holding banks get more desperate. A lot of banks have been holding a lot of real estate for a long time, and you know what that means.

• Investors sell for tax reasons. A lot of investors hoped for better but may throw in the towel to capture tax write-offs.

• Homebuilders clear inventory, to get it off the books and start 2009 fresh.

As always, you should approach all predictions, including mine, with caution.

Years of bad decisions and stupid mistakes have created an economic nightmare in this country, but $700 billion in new debt is not the answer. As a tax-paying American citizen, I will not support any congressperson who votes to implement such a policy. Instead, I submit the following three steps:

Common Sense Plan.

I. INSURANCE

A. Insure the subprime bonds/mortgages with an underlying FHA-type insurance. Government-insured and backed loans would have an instant market all over the world, creating immediate and needed liquidity.

B. In order for a company to accept the government-backed insurance, they must do two things:

   1. Rewrite any mortgage that is more than three months delinquent to a 6% fixed-rate mortgage.
      a. Roll all back payments with no late fees or legal costs into the balance. This brings homeowners current and allows them a chance to keep their homes.
      b. Cancel all prepayment penalties to encourage refinancing or the sale of the property to pay off the bad loan. In the event of foreclosure or short sale, the borrower will not be held liable for any deficit balance. FHA does this now, and that encourages mortgage companies to go the extra mile while
working with the borrower—again limiting foreclosures and ruined lives.

   2. Cancel ALL golden parachutes of EXISTING and FUTURE CEOs and executive team members as long as the company holds these government-insured bonds/mortgages. This keeps underperforming executives from being paid when they don’t do their jobs.

C. This backstop will cost less than $50 billion—a small fraction of the current proposal.




II. MARK TO MARKET

A. Remove mark to market accounting rules for two years on only subprime Tier III bonds/mortgages. This keeps companies from being forced to artificially mark down bonds/mortgages below the value of the underlying mortgages and real estate.

B. This move creates patience in the market and has an immediate stabilizing effect on failing and ailing banks—and it costs the taxpayer nothing.




III. CAPITAL GAINS TAX

A. Remove the capital gains tax completely. Investors will flood the real estate and stock market in search of tax-free profits, creating tremendous—and immediate—liquidity in the markets. Again, this costs the taxpayer nothing.

B. This move will be seen as a lightning rod politically because many will say it is helping the rich. The truth is the rich will benefit, but it will be their money that stimulates the economy. This will enable all Americans to have more stable jobs and retirement investments that go up instead of down. This is not a time for envy, and it’s not a time for politics. It’s time for all of us, as Americans, to
stand up, speak out, and fix this mess.