Nice of these guys to finally figure it out. Of course, they didn’t come to this realization until they had almost bled themselves dry of cash. Better to learn late than never:

From Market Watch, January 30, 2008:

Executives at Centex Corp. Wednesday said the builder is lowering home prices to reflect the new reality in the shaken U.S. mortgage market. The company wants to “attract the right kind of buyers, those who can afford the mortgage and the payment,” said Cathy Smith, chief financial officer, during a conference call. “Essential to selling homes is finding the right price where buyers can qualify for a mortgage. The average selling price will continue to decline … in the near term, reflecting our aggressive response to the tighter credit standards,” the CFO said. “We need to get back to pricing that is reflective of value,” said Centex Chief Executive Tim Eller during the call. “It’s also important to do that for financing reasons because right now what people can qualify for is generally a Fannie Mae, a Freddie Mac or increasingly only FHA, so it’s important to have a price that reflects the values that attract the customers that can qualify for those mortgages.”

Wonder how The King of Real Estate would spin this.  Even the hopeful statistic of December’s inventory being 16% lower than in August is erroneous; inventory always declines from Labor Day through New Year’s, and the 16% drop in 2007 is exactly the same percentage drop as in 2006!  From the “Bible” of New Jersey real estate statistical analysis, The Otteau Report, dated January 25, 2008:

HOME SALES DECLINE FURTHER AT YEAR END

The pace of home sales in New Jersey declined further in December providing compelling evidence that the housing market recession has not yet reached bottom. In December, Contract-Sales activity declined 24% below the November pace and was 31% less than in December 2006. When considered against the backdrop of high Unsold Inventory levels and a looming economic recession, it appears certain that existing-home prices will continue their decline into 2008. As a result, strategies of ‘waiting until Spring’ are ill conceived as overpricing inevitably leads to extended marketing times and lower prevailing market price levels. Best-Practices for a weakening housing market is to price ‘ahead of the decline curve’ to shorten marketing time and capture a higher selling price before prices drift even lower. From the new construction persepective however, many home builders have already embraced this strategy with Right Pricing! that reflects the current market realities. For the next segment on our Right Pricing! Strategy, register to attend our 2008 Spring Workshop Series next month.

Despite the ongoing market decline, some bright spots are emerging. Unsold Inventory declined for the fourth consecutive month and now stands 16% lower than in August, reflecting 12,000 fewer homes on the market. Also encouraging is that mortgage interest rates continue their descent providing a boost to home buyers’ purchasing power and helping to close the housing affordability gap in New Jersey. According to Freddie Mac’s latest Primary Mortgage Market Survey® (PMMS®), the 30-year fixed-rate mortgage averaged 5.48 percent for the week ending January 24, 2008, down from 5.69 percent the prior week and 6.25 percent last year at this time. The last time mortgage rates were lower was March 25, 2004, a time when home buying activity was at a frenzied pace. Another positive factor is yesterday’s announcement that President Bush and House leaders have agreed on an economic stimulus package that would allow Fannie Mae and Freddie Mac to raise the limit on the loans they purchase from $417,000 to $625,500. Similarly the FHA limit would be increased from $362,000 to $725,000. The effect of such increases would be to expand the pool of money for borrowers of so-called Jumbo Mortgages thus increasing liquidity and reducing interest rates for these loans in the process.

The take-away from all of these developments is that while the market has further to fall, the bottom point is getting closer. Home buyers should take notice of these developments as 2008 presents an unusual combination of being in the ‘driver’s seat’ of price negotiations at a time of record low interest rates. Those who wait too long will eventually find this opportunity window closed when higher interest rates and firmer pricing returns to the market.

Nice to start the New Year with some sunshiny optimism, courtesy of our local King of Real Estate:

“Going into 2008 mine may not be the only optimistic voice you hear, the majority opinion is that we have passed the worst of it. The National Association of Realtors is predicting a slight increase in existing home sales for 2008. While the market may not bounce back to what it was a couple of years ago, things are not expected to get any worse.”

Well, the 10th largest bank in the US, National City, just closed its wholesale lending division today and cut its shareholder dividend by 50%. Other lenders, such as Countrywide, are discontinuing stated-income and low-downpayment programs on an almost daily basis. So…where are all the buyers going to come from that will sustain the market at its current levels?

There’s no more funny money available out there, and no more buyers will enter this market until prices take another radical dip lower. It’s not about rates anymore; it’s about affordability. And, NJ housing will need to drop another 20-25% in price- across the board- before we’ll see any significant uptick in sales.

Sellers in the current environment deserve some straight talk about what’s going on right now. And, what’s transpiring amounts to the beginning of the biggest real estate crash in American history. A seller’s best opportunity right now may be to get things done ASAP, thereby cashing out as much equity as possible, before things get worse. “The worst has passed”??? This thing hasn’t really even started yet. Every real estate boom in US history has been followed by a bust of equal proportion. That means a local market which ran up 100% from 2001-06 will retrace 50%. To date, we’ve only shaved maybe 15-20% off the highs of that market.

Of course, making a statement like the one I’ve made above doesn’t get you on MSNBC or get you invited to be a guest speaker to groups of real estate agents. However, consider that The King of Real Estate relies on a statement made by the National Association of Realtors to bolster his case. That’d be nice…except for the little problem NAR has with the accuracy of its predictions and its credibility. In 2007, NAR issued 12 (yep, one for every month) monthly housing reports, which were then followed by 12 monthly revisions of its forecast and outlook. That’s right: for the calendar year 2007, NAR batted .000. Of course, NAR finished off its stellar ‘07 by predicting a slight increase in existing home sales in ‘08. Amazingly, NAR’s new Chief Economist, Lawrence Yun (who, in mid-’07, replaced the totally discredited David Lereah) seems to have developed a projection algorithm based entirely upon hope and wish, as no statistical evidence exists to back his assertion.

I’m not down on the long-term ownership of real estate. I do not- as I have been accused- hate my own profession. There are narrow opportunities for both buyers and sellers in the current environment, and I do believe that falling prices will act as a purge that will ultimately strengthen the market by forcing a return to fundamentals in both financing and pricing of the asset class. 

The following table contains closed residential real estate transactions in Branchburg for October and November, 2007. However, unlike the inaccurate information promulgated by most agents and media sources, the “DOM” (Days on Market) column indicates the sum of days-on-market accrued through serial listings of the same home (it is a common agent “trick” to withdraw and re-list a home, in order to create the public impression of a “fresh” home that has seen fewer days on market). In addition, the “OLP” (Original List Price) column reflects the list price of each home at the time it was first offered for sale.

Sales statistics posted at Branchblog will always be cross-checked to provide the most accurate and unbiased housing market snapshot possible.

Please direct specific inquiries to Chip Hughes at (908) 334-2329 or chip.hughes@att.net. Better yet, leave a comment!

All information is deemed accurate, but not guaranteed, and is provided courtesy of Garden State Multiple Listing System:

AVERAGES: 153 Days-on-Market; SALE PRICE: 92% of original list price.   

I could be mistaken, but: 

1. The current Secretary of the Treasury is advancing a SIV/commercial paper bank bailout that sounds suspiciously similar to the kinds of things Enron did that put several of their execs in jail and deep-sixed the company. 

2. Goldman Sachs has announced that- unlike every other bank on the planet- they were, and are, in a short position on mortgages.  They expect no mortgage-based impairments.  However, they also hold Level 3 assets (assets which are so illiquid, they are marked-to-model, not marked-to market) of approximately 72 billion dollars. 

3. NAR has reduced its 2007 sales projections in all 11 months of 2007…while maintaining the market will return to health in 2008.  NAR is also pressing Congress to allow deadbeat homeowners to deed in lieu of foreclosure and face no adverse tax consequence for doing so. 

4. Scads of local Realtors have their homes on the market. 

5. The Chairman of the Federal Reserve told Congress that he thinks it’d be pretty cool if there were a GSE- a la Fannie Mae or Freddie Mac- to do nothing but package jumbo mortgages.  I guess Fannie and Freddie’s stellar recent performances have inspired the Chairman to expand these enterprises.  Oh…Fannie Mae lost over 1 billion dollars in its most recent quarter. 

6. Inflation is not growing…at least, by a standard of measurement that assumes people can eat plasma TVs. 

If I had more time, I could keep adding to this list, but these six items are enough to make me think that we’re entering the endtimes.  I mean honestly, what are these people thinking?  We Realtors have been upfront and vocal in screaming for all kinds of handouts, bailouts and do-overs.  Now, it appears that it may come true.  And, the cruelest irony of all is that the handouts may be the thing that finishes off the market for good. 

From Bloomberg, Thrusday, November 15:

Freddie Mac, the second-largest source of money for U.S. home loans, joined Fannie Mae in introducing or raising fees on mortgages the company buys from lenders because of the increased risks in slumping housing and mortgage markets.

Freddie Mac is primarily setting new fees for mortgages made to borrowers with credit scores below 680, whose loans exceed 70 percent of their property’s value. The new charges range from 0.75 percent to 2 percent depending on credit scores, according to a bulletin by the company. The changes take effect March 1.
…
Freddie Mac’s changes are “in response to continuing volatility and turmoil in the mortgage market, including the deteriorating performance of higher-risk mortgage products,” the McLean, Virginia-based company said in a letter on its Web site.

It also said mortgages from markets with falling prices must now have loan-to-value ratios at least five percentage points below normal requirements for mortgages with the same attributes.
…
Under Freddie Mac’s new fee system, a lender selling a mortgage to the company from a borrower with a credit score of 675 who made less than a 30 percent down payment for the purchase of a $300,000 home will forfeit $2,250 in charges. The lender, which would typically make less than $3,000 on the sale, could get paid more by raising the interest rate on the loan.

From the Wall Street Journal:

The Subprime FHA
By JOHN BERLAU
October 15, 2007; Page A23

…
FHA-backed loans are being touted for their “safety” — to consumers and the financial system. “If we can get people into the FHA rather than to some of the other kinds of loans they have, everybody will be better off,” argued Rep. Barney Frank (D., Mass.), chairman of the House Financial Services Committee, during a hearing this year.

Although differing on details, Bush administration officials agree with Mr. Frank on the basics. Secretary of Housing and Urban Development Alphonso Jackson, whose department is parent to the FHA, has described the loans the agency backs as a “safe alternative to . . . exotic subprime loans.”

Both Mr. Frank and President Bush support major increases in the limits on the value of loans the agency can make, which are contained in a bill that passed the House of Representatives last month. Only 72 Republicans, mostly members of the conservative Republican Study Committee, voted against the bill. A similar bill cleared the Senate Banking Committee 20-1.

But before the FHA’s loan spigots are opened up, a little due diligence by the political sector is in order. The FHA’s recent credit history shows it is far from the prudent institution it is said to be. By its own estimate, next year the agency expects to be in the red, paying out more for defaulted loans than borrowers pay to it in insurance premiums. “Because of adverse loan performance,” the FHA states in its budget submission for 2008, “total costs exceed receipts on a present value basis, and therefore would require appropriations . . . to continue operation.”

The agency poses more than just a threat to taxpayers. The collapse of whole segments of the housing market can be traced to FHA-subsidized mortgage products. Despite its decreasing market share, the FHA appears to have played a significant role in the current mortgage “meltdown” attributed to subprime loans.

For the past three years, delinquency rates on the oh-so-safe mortgages insured by the FHA have consistently been higher than even those of the dreaded subprime mortgages. In the last quarter of 2006, for instance, the delinquency rate for subprimes had increased to 13.33% in the National Delinquency Survey compiled by the Mortgage Bankers Association. But in the FHA category, the rate had risen to 13.46% — “a new record.”

Nationally, FHA-backed loans do have a lower foreclosure rate than subprimes do, but one that’s nearly twice as high as the rate for all mortgages. And in certain regions, FHA-insured loans account for a disproportionate share of mortgage woes.
…
FHA-insured loans have also been at the center of some of the worst excesses of the housing boom, including mortgage fraud, loans made without income verification, and property “flipping” with inflated appraisals. Last month, in a case brought by federal prosecutor Patrick Fitzgerald, a Rockford, Ill., real-estate agent pleaded guilty to conspiring to defraud the U.S. government through the use of phony pay stubs and credit letters to obtain FHA loans for home-buying clients.

Several similar schemes involving FHA-backed loans have been documented by congressional probes and newspapers such as the Baltimore Sun. GOP Sen. Susan Collins of Maine, who supervised a 2001 Senate subcommittee investigation of mortgage fraud, said bluntly that “the federal government has essentially subsidized much of this fraud.”

How could an agency with a reputation for being so conservative have made loans that turned out to be so problematic? Part of the answer rests in a foolish quest to compete with the private sector for “market share.” In both the Clinton and Bush administrations, the FHA’s response to private alternatives for low-income borrowers was to aggressively compete with them — by making the agency’s own lending standards even more “subprime” than those of the private sector.

Since its inception in 1934, the FHA has required a down payment — originally 20%, but gradually whittled down to 3% — for a home loan. The down payment requirement was to help ensure that borrowers were responsible, even if they didn’t have perfect credit histories.

But in 1997, home sellers and buyers started to get around this rule by donating money to foundations that provide down-payment assistance to buyers. Since the FHA does not count assistance from these foundations as a seller inducement — as many non-FHA lenders do — seller-funded charities can contribute virtually unlimited amounts to borrowers to cover down payments, closing costs and even FHA borrower insurance premiums. A recent paper by HUD researcher Austin Kelly notes that, since 2000, studies by HUD’s Office of Inspector General “have found that sales prices of homes using seller-funded nonprofits tend to reflect the assistance” provided by the charities.

In other words, the buyer’s assistance is frequently rolled into the home price, inflating the value of the home and leaving the FHA — and ultimately the taxpayer — holding the bag for a defaulted loan. And studies also indicate that the FHA will be picking up the tab at a higher level for these loans.
…
Despite these trends, HUD Secretary Jackson’s biggest concern has appeared to be not the FHA’s solvency, but the government agency’s loss of business to the private sector. “I am absolutely emphatic about winning back our share of the market,” he told the Washington Post in 2005.

Looking at the agency’s dismal performance over the past few years, we can predict that, if the FHA racks up more “wins,” taxpayers and low-income home buyers will likely be suffering the losses.

It is important to note that the vast majority of home mortgages, FHA-backed or otherwise, are not in danger of foreclosure. Overly burdensome regulation of any type of lender would be counterproductive. But those concerned with the fiscal health of the mortgage market and the U.S. Treasury should be emphatic in opposing the expansion of a government agency that added so much fuel to the current “meltdown.”

Perhaps the song “Jingle Bells” should be retitled “Jingle Mail” if this bill can get thru the Senate and is signed by Dubya.

As always, the people who pay will be honest, upstanding folks who pay their bills, mortgages and taxes.

Hard to believe the cost of this will only be $2,000,000,000. As always, the idea is: privatize gain, socialize loss:

The U.S. House of Representatives Thursday overwhelmingly approved legislation providing tax relief to homeowners facing a foreclosure.

Under the bill, which was approved by a vote of 386-27, any debt forgiven to homeowners unable to repay their mortgage would no longer be treated as taxable income.

“It simply makes good sense to do this,” said Rep. Richard Neal, a Massachusetts Democrat.

The legislation was passed in response to a subprime mortgage crisis that has reduced property values and left a growing number of homeowners unable to pay rising interest costs on their loans.

To cover the roughly $2 billion 10-year cost of the bill, the bill would change tax rules on the sale of vacation homes and rental property that were used as a principal residence.

The bill now heads to the Senate.

The following table contains closed residential real estate transactions in Branchburg for August, 2007. However, unlike the inaccurate information promulgated by most agents and media sources, the “DOM” (Days on Market) column indicates the sum of days-on-market accrued through serial listings of the same home (it is a common agent “trick” to withdraw and re-list a home, in order to create the public impression of a “fresh” home that has seen fewer days on market). In addition, the “OLP” (Original List Price) column reflects the list price of each home at the time it was first offered for sale.

Sales statistics posted at Branchblog will always be cross-checked to provide the most accurate and unbiased housing market snapshot possible.

Please direct specific inquiries to Chip Hughes at (908) 334-2329 or chip.hughes@att.net. Better yet, leave a comment!

All information is deemed accurate, but not guaranteed, and is provided courtesy of Garden State Multiple Listing System:

AVERAGES: 181 Days-on-Market; SALE PRICE: 91% of original list price.

Great Society Part II: Fed Tries to Save Itself From…Itself

Posted on Aug 24th, 2007, at Seeking Alpha:

David Roskoph submits: The scuttlebutt is that FHA (Federal Housing Administration) is being retooled to assume lots of the bad paper issued by those nasty sub-prime lenders. Now that the proverbial fan is mired with economic reality, the options are bleak. Tap dancing from the Feds let us know that this problem is obviously too big to be rescued by an airdrop of cheap money. The choice is foreclosing on hundreds of thousands of new home owners and preparing for the economic and social tsunami or saving the day with something like a “Great Society II”.

The scuttlebutt is that FHA (Federal Housing Administration) is being retooled to assume lots of the bad paper issued by those nasty sub-prime lenders. Now that the proverbial fan is mired with economic reality, the options are bleak. Tap dancing from the Feds let us know that this problem is obviously too big to be rescued by an airdrop of cheap money. The choice is foreclosing on hundreds of thousands of new home owners and preparing for the economic and social tsunami or saving the day with something like a “Great Society II”.Such an unprecedented number of foreclosures will not only disrupt the financial order but perhaps the social order too. In as much as all those new loans invited many of the “have-nots” to become part of the “haves” through home ownership. That is, after all, the definition of a sub prime mortgage. Just like Katrina’s anti-government backlash, so too will these forlorn foreclosures find the Government ultimately to blame. The last time we’ve seen this degree of (potential) wholesale displacements was the Great D and we were, by and large, much more appreciative of just how wonderful life was in these great states. That’s not quite the case today.

Cynicism is pervasive and far too many Americans are both on the Government dole and quite convinced that the government is morally obligated to underwrite their folly as well as their happiness. So you have to at least entertain the idea of “what if”.

LBJ sought mass compensation for the institutionalized imbalances through lots of well intended programs. A trillion was transferred from the “haves” to the “have-nots” and that redefined the concept of “opiates or the masses”. It felt good but left the systemic problems untouched (if not exacerbated), Great Society I. Considering the magnitude of this debacle, maybe it’s time for another dose of opiates. President Bush hasn’t much of a legacy so why not tack on “no home owner left behind” plan? After all, if you’re not quite up to a conforming loan, you’ve been preyed upon by those unscrupulous mortgage companies who virtually forced you get in over your head, you’ve suffered institutional oppression. You deserve a fix and this is America. A newly expanded FHA would consume a goodly portion of the bad loans to quell the public (and the markets), pay the defaults by fiat, and thus avert a catastrophe. It feels good, keeps the peace and forgets the binge ever happened, Great Society II.

Only, where do you think all that inflation came from in the 70’s?