FED Rate Slashed

The FED just cut the target rate to between .25% and 0% and said it will do all things necessary to keep mortgage rates and the cost of money low. It will likely keep the target rate at this level for quite some time. The FED will also be aggressively buying mortgage-backed securities and does not appear to be concerned with inflation. (Source: CNBC)

My simple advice with regard to real estate: Buy! Buy! Buy! Upsize! Do not sell and/or downsize for the next few months. From a cyclical perspective and in light of the posturing of the FED, the market from a seller's perspective may look better in 3 or 4 months as mortgage rates are likely to decline, thus helping to stabilize prices. Again, I must stress - as I have in the past - that I am not overly optimistic with respect to a quick turnaround. I am looking for a bottom and then a very gradual uptick in prices and sales volumes.

Second Bailout Package

FED Chairman Ben Bernanke is currently testifying on Capitol Hill and giving his blessing to a second stimulus package should Congress deem it appropriate to pass such a measure. He is stressing that any package should focus on freeing up the credit market. In addition, Mr. Bernanke is encouraging Congress to ensure that any package be fashioned in such a way so as to not unduly burden the budget deficit. (Source: CNBC)

My understanding is that the first package (somewhere between $700 billion and $850 billion) was inclusive of the $250 billion that the government is in the process of funneling into the banks. Roughly half of that money will go to nine major banks with the other half being distributed to smaller banks. This action and the remainder of the first package was also intended to free up the money supply and/or credit.

My questions are as follows:

Where is the remainder of the money from the first package going and/or what are the remaining details of the first package? (There is talk of writedowns of principal on mortgages, restructuring of mortgages to certain homeowners and the purchase of certain debt on the open market.)

Should we not allow the first package to be fully implemented prior to passing a second package, or, at minimum, have a clear explanation as to why the first package will be insufficient?

How are we going to pay for these packages, particularly if the government buys bad debt at above market prices? Are we simply delaying the inevitable with regard to the cyclical nature of the economy, and thus causing a larger financial crisis in the not-so-distant future?

How long does the government intend to be an owner/investor in major financial institutions which have previously been the province of the private sector (excluding Fannie Mae and Freddie Mac)?

In my opinion, most importantly:

With respect to any writedowns of principal on mortgages, is this going to be done uniformly for all homeowners and, if not, what will protect the equity for homeowners who are excluded from the writedowns? Will the excluded homeowners not immediately lose equity as a result of writedowns on principal of similarly valued comparable properties?

In the event that these proposed writedowns are not uniform and certain homeowners are excluded, this will be tantamount to a vast redistribution of wealth. Whether one agrees with such actions by the government is not my concern for purposes of this blog, but let's be clear on what the intended and unintended consequences of these action will be on the economy as a whole, certain classes of people and you, the reader of this blog.

The Little Guy / Small Businessman

Here's what no one seems to be talking about...(those who are, aren't speaking loud enough, or aren't being heard!)

As the federal government picks and chooses which financial institutions will be saved and people debate "moral hazard", the issue remains liquidity. In the housing market, that means loans for builders and mortgages for consumers. From my perspective and for my benefit, I am in no rush to see more homes built with the supply as it is, so my concern is with access to mortgages.

As we all know, or should know, mortgages were being given out too liberally. This debt was ultimately packaged and sold on the open market through complex vehicles that no one understood. When borrowers started to default on mortgages and the end investors figured out that what they had bought was backed by no-documentation/no-verification loans, the money supply dried up. (simplistic, but basically accurate)

Here's the problem now...

As is often the case, the pendulum has swung way too far in one direction. There is/was a valid need for the loans discussed above. The small businessperson who uses legitimate tax planning tools is unable to justify his/her ability to pay back a loan and right now it is almost impossible for him/her to qualify for a mortgage.

I sincerely hope that the mortgage industry is able to create a mechanism by which these people can qualify for mortgages. In the alternative, the government must restructure the tax code so as to make it practical for small businesses to make a profit on paper. After all, small businesses employ roughly 70% of the workforce. Owning a small business has many drawbacks. Do we really need to create another by blocking access to home ownership for the people taking most of the risk and who act as the engine for our economy?

Fannie/Freddie

As many of you may have heard, Fannie Mae and Freddie Mac, which own, or guarantee, roughly $5 trillion in U.S. mortgages are on the verge of being taken over by the federal government by way of conservatorship. (Source: WSJ)

This raises many issues:

Is this merely semantics? It is my understanding that both agencies are usually classified as quasi-goverment agencies. I suspect the stockholders may suffer, but what effect will this have on the average consumer applying for a mortgage? There will likely be a shakeup in the corporate hierarchy, but, again, what will the practical consequences be in the functionality and viability of these agencies?

I suspect that there will be a stabilizing effect on the mortgage industry and that rates will improve slightly over the short term. Of course, the converse could also hold true. The need for a government takeover could affect the psyche of the general public and institutional investors in such a way as to have a negative impact on the economy as a whole, including the availability and affordability of mortgages.

The practical implementation of this takeover in conjunction with the changes that follow should be closely scrutinized by anyone who has an interest in the subjects covered in this blog. This may be a non-event or could reverberate through the housing/mortgage industry for the next few years.

MASS June Housing Stats

The trend in Massachusetts housing continues as numbers on both sales volume and price for June improved month over month, but are worse with respect to a comparison with June of 2007. (Source: MAR)

Sales of single-family homes decreased by 14.9% (June '07 compared to June '08), but were up 21% when compared to May of this year. The median selling price of $334,900 was the highest since October of '07, but was off 8% when compared with June of '07. (Source: MAR)

Condominium sales decreased by 2o.3% in June '07 compared to June '08, but were up 14.4% when compared to May of this year. The median selling price of $296,000 was the highest since July of '07 and was off less than 1% when compared to June of '07. (Source: MAR)

Inventory of residential homes for sale is at the lowest level in a year at 8.3 months. Although at the high end of the spectrum, this is considered a healthy supply of inventory and shows marked improvement over May when inventory was at 9.8 months of supply. (Source: MAR)

Days on market for properties selling in June was 129 days and 140 days for single family homes and condominiums, respectively. (Source: MAR)

Finally, to those of you who braved last night's weather and joined my family and me for our annual Lowell Spinners outing, thank you for making it a great time!

Mixed Bag

As most of you are probably aware, last week was a tough week for banks. Indy Mac failed. There was the beginning of a run on Indy Mac as a result of depositors 'concerns and fear escalated as Freddie Mac and Fannie Mae were also in serious trouble. In addition, the confidence indicator for builders was at an all-time low. (Source: WSJ, CNBC)

This week, the stock market continued its downward spiral and then bounced back with, of all things, the banks leading a 2-day rally. Fannie and Freddie seem to be out of the woods for the time-being as the government has indicated that those institutions are, in fact, too big to be allowed to fail. This morning, JP Morgan reported better than expected results and Bank of America is showing signs of life notwithstanding the purchase of Countrywide. (Source: WSJ, CNBC)

In conjunction with the above, and just as important to the real estate market, is the fact that June housing starts were up 11.1%. Moreover, building permits for June were up 9.1%. (Source: CNBC)

As an aside, oil prices have come down a bit, and reserves for natural gas came in higher than expected. (Source: WSJ, CNBC)

What does all this mean? I am not sure if anyone knows. Stay tuned...

Dry But Promising

In the last week, some hopeful signs have developed with respect to Massachusetts real estate:

The best news by far was that home sales (overall volume) from April to May of this year had their greatest month to month percentage gain in the last 10 years! (Source: MAR, NEAR)

Although May sales on a year over year basis saw a decrease of 10.1% for single family homes and a decrease of 24.5% for condominiums, these decreases were still a vast improvement over the recent past. Meanwhile, single family home sales and condominium sales increased 24.5% and 27.5% respectively from April to May. (Source: MAR, NEAR)

A similar trend as to that which is referenced above occurred regarding prices. While single family and condominium sale prices were down 9.2% and 2.6% respectively year over year for May, April to May of this year saw sale price increases of 2.4% for single family homes and 2.7% for condominiums. (Source: MAR, NEAR)

Regarding the time it takes to sell a home, in May of this year, the average time on the market for single family homes was 143 days, as opposed to 139 days in May of 2007. The time on market for condominiums remained virtually unchanged, moving from 134 days in May of 2007 to 135 days in May of 2008. (Source: MAR, NEAR)

Although the statistical analysis may be mind-numbing, what is important is the future of the real estate market and what we might glean from these numbers. Simply put, the year over year slides in sales volume and prices were less drastic than in recent months. Both facts bode well for a gradual market stabilization. Moreover, the month to month positive gains in sales and prices strengthen this hypothesis.

However, so as not to cause irrational optimism, keep in mind that the condition of the local real estate market is far from healthy from the seller's perspective. We will not see properties flying off the market at the speed at which they did at the market's peak a few years ago for quite some time. After all, there is a difference between a bottom and a recovery. (The interchangeable manner in which these terms are used by the media and analysts alike is disconcerting.) I am seeking the former for the time being.

Finally, keep in mind a few simple rules when contemplating your particular situation. All real estate is local. Each sale depends on marketing and pricing, not necessarily in that order. Pricing must be based on market conditions and in consideration of comparable properties. Pricing has nothing to do with (or should not have anything to do with) what a seller owes, or what a seller needs to net in order to purchase another property. The market is what the market will bear.

Interest Rates & Bank-Owned Properties

Interest Rates

FED Chairman Bernanke gave a speech yesterday wherein he made an abrupt change from his former policy of not commenting on the dollar as, per his prior position, it is not within the province of the FED. By raising his concern over the weak dollar, as well as the lagging economy, he seemed to be posturing for future interest rate increases, or at minimum a freeze of the rate (2%) for the immediate future. (Source: MSNBC, WSJ)

Keeping the above in mind, for anyone contemplating a refinance, now may be your best opprtunity.

Bank-Owned Properties

On another note, I am seeing a bottom in multi-unit investment property prices, albeit artificially determined. It appears the banks are looking at individual properties and determining a floor price at which they are willing to sell each property. If a property does not sell at that price, they will then auction the property with the predetermined floor price being the minimum they will accept at auction. I am told that, if a bank does not obtain its floor price at the auction, it will then bundle the property with similar properties and sell the bundle to a large (institutional) investor.

What are the ramifications of the above? They are twofold:

First, this should stop the bleeding for those of you who own multi-unit properties in that the bank-owned properties will not remain on the market as a continuous drag on values. In theory, your property value will be determined by this floor price per unit in conjunction with the relative condition of your property. Without this process in place, your property would continue to decrease in value until such time as the floor was determined on the open market. This would naturally be lower than the floor price set by the banks.

Second, for those of you investing in these properties, keep an eye out for the unit price at which these properties are taken off the market in your area and compare the different prices/properties against one another. If the per unit price is fairly consistent taking into acount condition of the respective properties, you have a pretty accutate indication of the bottom and what you should expect to pay per unit.

Self-Employed

Yesterday's Wall Street Journal had a front-page article about Countrywide Financial Corp. and its loan delinquencies that got me thinking. The beginning of the article quoted all the problems with sub-prime loans and the delinquency rates. (Old news...but bad news sells papers.) However, buried in the article was the fact that "fast and easy" loans (no income verification/no documentation loans) through Countrywide currently have a lower percentage of delinquencies than do traditional full-documentation loans. This was attributed to the fact that, in order to qualify for "fast and easy" loans, borrowers need higher credit scores than they would for full-documentation loans. (Source: WSJ)

This leads me to my query: Assuming that the above is indicative of the industry as a whole, why are "fast and easy loans" disappearing along with sub-prime loans, thus penalizing small business owners who try to minimize their income through legitimate tax planning means?

Sounds to me like throwing the baby out with the bath water.

Home Market

Nationally, existing home sales rose 2.9% in February (month to month) and, according to today's CCI report, the number of people who intend to purchase homes in the next 6 months has increased. However the CCI number as a whole was dreadful. The CCI measures consumers' confidence in the economy. (Source: WSJ, CNBC)

As a whole, I take the above to indicate that, although consumer sentiment with respect to the state of the economy as a whole is not favorable, consumers are realizing that the prices in this market present too good of an opprtunity to pass up.

Glass 1/2 Full or 1/2 Empty?

The pending home sales index, which measures homes under contract (but which have not yet closed), remained steady from December to January, which is a sign of market stabilization. This latest piece of data supports the notion that the market may see the beginning of a gradual recovery as early as the middle of this year. However, limiting the amount of foreclosures dragging down home prices is a key component to a recovery. (Source: WSJ, NAR, MSNBC)

Federal Reserve Chairman Ben Bernanke had a simplistic, bold and somewhat innovative suggestion a few days ago when he advised that institutions holding mortgages should consider lowering the principle of such loans. (Source: WSJ, MSNBC)

While at first glance this seems to be an insane suggestion, it may actually make sense. People are more apt to make their mortgage payments if they have equity in their homes. Conversely, no matter how low mortgage rates go, many people will default if they owe more on their homes than their homes are actually worth. Depending on the amount of any reduction in principle, this option is likely more profitable than the foreclosure process. Moreover, foreclosures will ultimately feed the current cycle of home devaluation. Devaluation of collateral is an investor's worst nightmare!

A caveat to the above is that any such program needs to be administered on an equitable and voluntary basis so as to maintain stability and foster faith in the real estate/mortgage market. Speaking of which, how much faith will investors have if bankruptcy courts are given the power to unilaterally rewrite mortgage terms, as some are suggesting, as a solution to the current mortgage problem? (Source: WSJ)

As an aside and in keeping with my recent entries, if you are in a position to buy, do so now. Most often analogized to the stock market and apropos to the housing market, predicting the absolute bottom is like trying to catch a falling knife. Further, the cuts in the prime rate made by the FED recently have not had the desired effect on fixed mortgage rates over the last few weeks. In fact, mortgage rates are on the rise. With that said, I am hopeful that the FED will drop prime another 1/2 point at its next meeting in approximately two weeks. Perhaps such a drop will convince lenders to be a little more free with their money in the not so distant future.

Opportunities-Pitfalls/Subprime/Jumbo Loans

I've seen a tremendous drop in per unit costs for multi-unit residential properties in the last 12-18 months. My experience is that per unit costs in the Merrimack Valley seem to have dropped 20-25% on lower end 2-4 unit properties. That said, a word of caution before anyone considers taking advantage of these "buys".

By way of example, say an investor finds a 3 unit property listed at $170,000 in Methuen which, believe it or not, actually exists. A savvy (or not so savvy) investor thinks he/she can purchase this property for $150,000 and get the steal of the century.

Maybe...maybe not.

These properties often have many hidden costs associated with them. Some common issues are lead paint and mold, to name just a few. It would not be unusual for a neglected property to have renovation costs of $30,000 per unit. Investors, especially novice investors, may be better off paying $225,000 for a similar property with de-lead certificates and in move-in condition. It is all a risk vs. reward analysis. The $225,000 property may yield a similar return to the property listed at $170,000 (with minimal risk) once renovation costs are factored into the investment. Renovation costs are always an unknown and even the most experienced investors sometimes underestimate these projects. Remember that "sweat equity" involves opportunity costs.

In short, my point is that you need to do your homework and know what you are getting into so that you reap the rewards of your investment. With that said, I am a firm believer in investing in real estate and am always available to assist investors through this process.

As an aside, Countrywide Financial Corporation appears to be expanding its efforts to mitigate the fallout from the subprime mortgage mess. Do not hesitate to contact your mortgage company in this regard, irrespective of whether or not it happens to be Countrywide, as other mortgage companies are sure to follow suit. (Source: WSJ)

Finally, it appears that President Bush on Wednesday will raise the limits on jumbo loans from approximately $417,000 to as much as $725,000. Given the market in my geographic sphere of influence, this is very good news! Anyone who needs to sell, or wants to buy, a home in the $550,000-$800,000 range will be in a much better position if this adjustment is indeed signed into law. (Source: NAR, CNBC)

Bernanke/Countywide/Mortgage rates

Yesterday, Ben Bernanke gave every indication that the FED will lower rates at its next meeting. Most experts expect a 1/2 point reduction and as much as 1 1/2 points in total reductions by the end of March. Moreover, Mr. Bernanke alluded to the fact that the FED will not hesitate to intervene in between meetings if more negative economic indications develop. He was particularly focused on declining home values, ongoing liquidity issues and the jobless rate. Along with future rate cuts, Mr. Bernanke announced that the FED will auction an additional 60 billion dollars in 28 day loans over the next month to financial institutions. (Source: CNBC, WSJ)

Bank of America has acknowledged its intent to buy Countrywide Financial Services. (Source: WSJ)

On average, mortgage rates dropped from 6.07% to 5.85% over the last week. (Source: WSJ)

For qualified buyers, it just keeps getting better, but low rates and low home prices do not usually coexist for lengthy periods of time.