Investing Curiouscatblog

Category: Real Estate

  • Housing Inventory Glut

    Housing inventory glut gets fatter

    Zip monitors 18 metro-area markets from all four regions of the country. For the 12 months ended July 31, only Boston and San Diego showed drops. Boston’s inventory fell 5.8 percent and San Diego’s dropped 2.1 percent. The average for the 18 cities was a 19 percent increase in homes on the market
    …
    The wait for tenants may be a long one. It’s much harder to get a loan these days for all but the best borrowers. Borrowers, for the most part, now must put more money down, document their income and assets, have few dings against their credit worthiness and show that they can afford the payments. Those tightened lending restrictions eliminate potential buyers from the market, reducing demand even as more supply hits the listings due to big jumps in foreclosures and builders finishing up projects initiated before the slump took hold.

    What does the current data show about the real estate market overall? Across the country in the last year the median price has actually increased slightly. It looks like the data for the calendar year 2007 will show a decline for about 2%. Some areas have been much harder hit with median prices dropping over 10% (Las Vegas, Florida, Phoenix…). Mortgages any of 1) questionable credit score 2) jumbo loan or to a lessor extent with little money down are becoming hard to come by. Foreclosures are increasing dramatically. Builders are having a great deal of difficulty selling new housing they have built.

    Still the decline in median prices is far from as dramatic as many feel (there have been large changes in the market but it still has not lead to a crash in home values or even a noticeable decline in most places). The increasing supply of houses for sale will put pressure on housing prices to decline. But without a significant continued increase in foreclosures (which is possible but it is still difficult to predict how large an increase we will see) I still do not believe we will see dramatic price declines in most of the country. The possibility (of say declines of over 15% in a year or two) is much higher now than it was in the last couple of years.

    Post from 2004 on the real estate bubble worries then – again prices would have to fall a great deal to fall below the prices in 2004 (possible but not very likely to happen in the coming years). The real estate problems are significant and pose a danger to the economy (they certainly are already decreasing economic growth) however that is much different than a crash in housing prices. And as bad as the credit markets have been and rising foreclosures, increased housing inventory the anticipated crash in prices has still not been seen nationwide – and I stand by my belief we won’t see it. Though I will admit less confidently than at any time so far – I would hedge my bet on this prediction at this point (if I actually had bet any money on that prediction – I have no desire to sell any of my 401k money invested in real estate, my rental property or my house).

  • Credit Crisis

    Well the credit crisis triggered by the fallout from lax mortgage lending is really making waves. It seems we are likely to have some real issues to deal with. The reduction of easy money can have serious consequences to an economy especially one so based on spending beyond what it is producing. I’m still not sure what the overall impact will be but the risks certainly seem to be worth watching.

    The world savings glut has overwhelmed the excessive borrowing done by the federal government and private sector and kept interest rates lower than seemed reasonable. That may finally change – or may not, isn’t economics great :-/

  • How Walkable is Your Prospective Neighborhood

    Walking to accomplish tasks (getting food, going to work, shopping, going to play basketball) provides a better quality of life than having to drive (getting stuck in traffic jams…) and saves money and protects the environment. Walk Score is a cool web site that lets you calculate a walkability score. I would imagine the better the walkability score the better for the prospects of a real estate investment. You still have to determine if the current price already reflects the long term benefits to quality of life (which are then represented in increased prices) – I think often they will not be providing an investing opportunity. My guess is that real estate would increase above the market if you invested in areas that show walkability score increases during your ownership.

    Related: Urban Planning and Real Estate Investing – Real Estate articles – 30 year fixed Mortgage Rates – Real estate blog posts

  • Ignorance of Many Mortgage Holders

    Mortgage ignorance rampant

    In the survey of 1,004 adults conducted by Gfk Roper, homeowners with mortgages were asked what type of mortgage they had. A stunning 34 percent of the homeowners had no idea. “That’s a symptom of the complexity of the mortgage market today,” says Ken Wade, chief executive officer of NeighborWorks America, a nonprofit organization that provides financing and training to neighborhood-based housing organizations.

    Sorry but that is a symptom of massive ignorance. Not knowing an incredible important aspect of your largest financial decision is like not know what days you are suppose to show up for work. There is a minimum amount of knowledge people should have that sign a mortgage. I think at least 34% of mortgage holders need to read this blog. Ok, I probably alienated all of them, so if that is the case then they should read some of the blogs we list in our blogroll.

    Nationwide, 36 percent of homeowners who now have an ARM said they planned to refinance to a fixed-rate loan when their ARM changes. Only 2 percent planned to refinance into another ARM.

    There is a big problem in that logic – it could maybe make sense if you had good reason to believe rates will be lower in the future than when you took out the loan (but that is a very questionable). I don’t know why someone would think that in the last couple of years – the risks have been much better than rates would go up a few hundred basis points than down that much. Basically I can see someone that is very financially savvy using an adjustable mortgage to qualify and if they know they will move in a fairly short period…

    Related: Learning About Mortgages – Mortgage Defaults: Latest Woe for Housing – How Not to Convert Equity – 30 year fixed Mortgage Rates

  • Fourteen Fold Increase in 31 Years

    chart of house price increases by country

    From 1975 to 2006 house prices in the UK increased 14 times. At 14 times that works out to about a 9% annual rate of return which is doesn’t sound nearly as impressive as a 14 fold increase to most people (I believe). The article does not mention if the chart is adjusted for inflation (a 9% return after inflation is incredibly good, a 9% return before factoring in inflation – which would reduce the rate of return – is good but reasonable) – my guess is that the chart is adjusted for inflation (meaning Britain’s owning real estate have been fortunate). Online calculator for annual rates of return over time.

    Real estate rate of returns (when calculated on the total price) also underestimate the “real return” most investors experience because investors often only put down a portion of the investment. So the real rate of return is increased dramatically to the investor as a result of the the multiplier effect of buying on margin. Of course, real estate also has expense related to upkeep and the advantage of providing a place to live…

    The graph (from the economist – see: Through the roof) shows other countries, USA: about 6 times, France 9 times… Remember these rates are averages for entire countries some areas in each country will have far exceeded these rates.

    The graph could be a bit better if they didn’t make several of the colors almost the same.

    Related: More Non Bubble Bursting in Housing – Europe and USA Housing Price Boom – How Not to Convert Equity – 30 year fixed Mortgage Rates

  • Study on Real Estate Sales With and Without Realtors

    Realtors take a large percentage of a home’s sale price for their services. It has never made much sense to me. It does not seem like the services are proportional to the sales price. I don’t see how it costs 5 times more to sell a $1,000,000 house than a $200,000 house. The Freakonomics authors have commented on the problems caused by the way realtors charge for services.

    Study Offers Provocative Comparison of Selling a Home:

    The research suggests that some sellers seem to be better at getting a favorable price. They might be better at marketing and bargaining or are more patient; they also are more likely to choose to use FSBO. “Sellers in Madison appear to sort themselves as expected across platforms, the more patient and astute ones going to FSBO, and those who need more help or a quick transaction going to MLS,” said Ortalo-Magné.

    “Our results are good news for buyers,” he said. “The price buyers pay appears to be driven entirely by the characteristics of the property and of the seller. Whether the property is sold through FSBOMadison.com or a realtor appears to make little difference in terms of purchase price.” “Realtors undoubtedly can provide value to sellers,” Nevo concluded. “But our research shows that for-sale-by-owner Web sites increasingly are making selling your own home more appealing and offering a viable alternative to realtors.”

    Study: The Relative Performance of Real Estate Marketing Platforms: MLS versus FSBOMadison.com (pdf)

  • Example of Mortgage Payments Depending on Credit Score

    Example 30 year mortgage rates (from myfico.com – see site for current rate estimates):

    FICO score APR Monthly payment*
    760-850 5.860% $2,362
    700-759 6.082% $2,419
    660-699 6.366% $2,493
    620-659 7.176% $2,709
    580-619 8.820% $3,167
    500-579 9.679% $3,416

    Amounts shown for borrowing $400,000 and rates as of May 7th. For scores above 620, the APRs above assume a mortgage with 1.0 points and 80% Loan-to-Value Ratio. For scores below 620, these APRs assume a mortgage with 0 points and 60 to 80% Loan-to-Value Ratio.

    FICO scores are determined by your:

    • Payment history – 35%
    • Amounts owed – 30%
    • Length of credit history – 15%
    • New credit – 10%
    • Types of credit used – 10%

    Related: 30 Year Fixed Rate Mortgage Rates – Learning About Mortgages

  • Victim of Real Estate Bust: Your Pension

    Victim of Real Estate Bust: Your Pension – Part 2:

    The skeptics also point out that credit spreads for junk bonds are so low today because we’ve had several years of historically low bond default rates. But anyone who’s ever opened up a book on economic history will tell you that most bad loans are made when times are good and the markets are complacent, not when times are bad and Wall Street is full of fear.

    The central premise of this post is that risk is being mispriced by the market (by failing to account for the risks bonds… are overpriced). And that when those risks are exposed (for example, as the sub prime crisis builds, recession…) prices will fall. Historically markets do exhibit this pattern – when times are good risks are not fully factored into prices, then those risks are appreciated and prices decline.

    Related: adjustable rate mortgage – investment risks – Mortgage Defaults: Latest Woe for Housing – Coming Collapse in Housing? – How Not to Convert Equity – Saving for Retirement

    This interesting graph, shows the amount of adjustable rate mortgages due for interest rate adjustments (which will increase mortgage payments for millions of people).
    (more…)

  • Bernanke Calls for Stronger Regulation of Mortgages

    Bernanke Calls for Stronger Regulation of Fannie, Freddie

    Federal Reserve Chairman Ben S. Bernanke said yesterday that the scale of Fannie Mae’s and Freddie Mac’s mortgage investments could pose risks to the financial system, and he called for them to limit their holdings almost exclusively to loans for affordable housing.
    …
    His solution: “Tying the portfolios to a purpose that provides measurable benefits to the public would help to ensure that society in general — not just GSE shareholders — receives a meaningful return in exchange for accepting the risks inherent in the portfolios,” Bernanke said in the text of remarks prepared for delivery by satellite to a gathering of community bankers in Hawaii.

  • Learning About Mortgages

    Signing a mortgage document is one of the biggest financial actions you will take in your life. Taking the time to understand what you are getting into is important. I suggest you don’t act until you actually understand what it is you are taking on. And if that takes hours or days of reading and research so be it. Don’t find yourself with remorse for acting without understanding what you are doing with such an important financial decision.

    On the Curious Cat Investment Dictionary mortgage page we have defined some common mortgage terms and provided links to some excellent resources from the Federal Reserve and HUD as well as several articles from Business Week, including: Understanding the Mortgage Process from the Federal Reserve and Nightmare Mortgages from Business Week.