Sales of existing single-family homes decrease by 13%
The 2007 decline is the worst since a 17.7% drop in home sales in 1982.
Martin Crutsinger / Associated Press
WASHINGTON -- Sales of existing single-family homes plunged in 2007 by the largest amount in 25 years, closing out an awful year that saw median prices fall for the first time in at least four decades.
The National Association of Realtors reported Thursday that sales of single-family homes fell by 13 percent last year, the biggest decline since a 17.7 percent drop in 1982. The median price of a single-family home fell to $217,800 in 2007, down 1.8 percent from 2006.
It marked the first annual price decline on records that the Realtors have going back to 1968. Lawrence Yun, the Realtor's chief economist, said it was likely the country has not experienced a decline in home prices for an entire year since the Great Depression.
Private economists said the size of the sales plunge and the decline in prices underscored the severity of the housing slump. Last week, the government reported that construction of new homes fell by 24.8 percent in 2007, the second biggest decline on record, exceeded only by a 26 percent plunge in 1980.
"We are closing the book on the worst year for housing possibly since the Depression," said Joel Naroff, chief economist at Naroff Economic Advisors. "I keep thinking a bottom is near, but we haven't gotten there yet."
The year ended on an exceptionally weak note, with total sales of both single-family homes and condominiums dropping by 2.2 percent in December to a seasonally adjusted annual rate of 4.89 million units.
David Wyss, chief economist for Standard & Poor's, said he believed sales of existing homes would continue declining until the middle of this year with prices probably falling for all of 2008.
"When you look at the inventory levels, there are just a lot of unsold homes on the market that we have got to get rid of," Wyss said.
The report showed the inventory of unsold homes did fall 7.4 percent to 3.91 million units in December, but part of that probably reflected disappointed homeowners just taking their houses off the market.
The 13 percent drop in single-family home sales last year followed an 8.1 percent decline in 2006 that occurred after sales had set record highs for five straight years.
That housing boom fueled a speculative frenzy in many parts of the country, luring many investors into the market hoping to buy homes and flip them for quick profits as home prices in those areas soared at double-digit rates.
Friday, January 25, 2008
Assessments fall, tax bills may rise
Assessments fall, tax bills may rise
Lower home values hit owners, cities
Mike Wilkinson, Catherine Jun and Jim Lynch / The Detroit News
Property assessments in Metro Detroit last year fell further than they have in a quarter century, sparing only the poorest communities and triggering fears of a painful contraction in municipal services.
Many property owners getting their annual assessments in the mail over the next several weeks will catch an intimate glimpse of the widespread damage done by foreclosures, layoffs and a wobbling Michigan economy.
But for homeowners well aware that their house is worth far less than it was a few years ago, the biggest shock may be when their tax bill arrives in July: Although their assessment went down, many will still see their taxes go up.
"This is the dark side of Proposal A," said Tony Fuoco, who assesses property for five area communities.
The 1994 law tied assessment increases to inflation, insulating homeowners from steep increases in market value. That same protection created a gap between market value and "capped value," allowing inflationary increases even when assessments go down. This year, the taxable value can still go up by 2.3 percent.
Loraine Schobloher, 76, is a retired medical transcriptionist in Troy who relies on pension and Social Security checks to make ends meet. She's upset the assessment on her Parkview Drive home has fallen as her tax bill has grown.
"I'm on a fixed income," she said. "If the taxes keep going up, as it stands now you can't even get rid of your house. You can't win."
Annual real estate studies by area appraisers quantified the value losses that real estate agents and home sellers have known for months. The sales studies help establish property assessments, upon which property taxes are based.
Eight communities in the region saw double-digit drops, including Grosse Pointe Park and Grosse Pointe Woods. Only two communities -- Fenton and Royal Oak Township -- actually saw slight increases. For the counties and municipalities, the declining values will mean flat revenues, a trend likely to continue into 2009 and possibly 2010, said Steve Mellen, the equalization director for Macomb County.
And the drops in residential values mirror declines in other classes of property: industrial, commercial and agricultural. There were small gains in personal property.
"We're looking at (at) least two years for the tax system to recover," Mellen said. He's already told county officials, who are in negotiations with many of the county's employee unions, that they'll "be lucky" to collect as much in 2009 as they do this year.
In Center Line, where residential property values fell nearly 10 percent, city officials know that cuts loom. The only question remaining is how deep.
"Our situation is horrendous," said Center Line Mayor Mary Ann Zeilinski. "We've exhausted any reserve funds we had accumulated over the years."
Summer Minnick, director of state affairs for the Michigan Municipal League, said that drop in values will have a serious impact on municipal coffers. Areas that have a lot of new homes and communities that had more new residents move in recently will lose the most because their Proposal A "gap" is so narrow.
"It's very different from community to community," Minnick said.
But she said the long-term impact on communities will continue long after the economy recovers because assessments will be tied to lower values.
"Cities will be holding the bag on the market for a long time," Minnick said.
Over the next several weeks, property owners will receive their assessments in the mail. Most will find that their individual decrease -- or in rare cases an increase -- will not match their community's decline. That's because the changes are not uniform: In some neighborhoods and price brackets, property values held firm. In many cases, the most expensive homes saw the biggest declines, officials said.
In Detroit, Hamtramck, Highland Park and other communities with less expensive housing stock, the sales showed home values didn't change, seemingly unaffected by the thousands of foreclosures in the communities, said Gary Evanko, Wayne County equalization director.
But foreclosures in Northville, Canton and Plymouth had a bigger impact, where $600,000 homes went into foreclosure and were sold for $400,000.
"That's a big drop," he said.
Upset homeowners will get the chance in the next few months to challenge their assessments. That's when the local boards of review meet to consider adjustments.
Fuoco, who attends the review boards in the communities he works for, knows it could be a trying time as people try to make sense of the seemingly contradictory facts: Assessment down, taxable value up?
"People are going to be expecting a tax break and it's not going to happen," Fuoco said. He anticipates being "bombarded" at the boards of review. "It's going to be an education issue."
Before Proposal A, a decline in property value meant a decline in taxes. Conversely, an increase in value produced a bigger tax bill.
"The tough boards of review were before Proposal A," said Gary Evanko, director of Wayne County's equalization department. "It fueled the whole tax revolt."
Now, homeowners have protections during rising markets and municipalities during declining ones.
In Berkley, homeowners will take, on average, a 5.2 percent hit on their assessment. But many will still pay more. All told, the city budget will likely decline by $180,000, finance director David Sabuda said.
"We're watching the bottom line closely but we've got to prepare for the worst case scenario," Sabuda said.
To cut costs, the city is considering bulk purchasing of gas and oil with neighboring communities as well as leaving many city positions unfilled. Personnel make up about 70 percent of the general fund budget, he said. "We're looking at everything," he added.
While falling home values have created a buyer's market, the growing disparity with their tax levy is sobering some homebuyers, observed Jolie Levine Warpool, a Realtor in Oakland County.
"Somebody is going to be scared to death their taxes are going to jump up big time," she said.
That reality is keeping Joel Warren, 28, of Commerce Township from closing on homes that, based on their ticket price, are considered a steal. He and his wife have been looking for a home in South Lyon to raise their growing family.
One foreclosed home he was eying is listed at $240,000, down from $300,000 when it last sold in 2002. Once purchased, however, the taxes would remain at the 2002 level.
"That could be a difference of hundreds of dollars a month," Warren said. "It's hard to swallow."
Lower home values hit owners, cities
Mike Wilkinson, Catherine Jun and Jim Lynch / The Detroit News
Property assessments in Metro Detroit last year fell further than they have in a quarter century, sparing only the poorest communities and triggering fears of a painful contraction in municipal services.
Many property owners getting their annual assessments in the mail over the next several weeks will catch an intimate glimpse of the widespread damage done by foreclosures, layoffs and a wobbling Michigan economy.
But for homeowners well aware that their house is worth far less than it was a few years ago, the biggest shock may be when their tax bill arrives in July: Although their assessment went down, many will still see their taxes go up.
"This is the dark side of Proposal A," said Tony Fuoco, who assesses property for five area communities.
The 1994 law tied assessment increases to inflation, insulating homeowners from steep increases in market value. That same protection created a gap between market value and "capped value," allowing inflationary increases even when assessments go down. This year, the taxable value can still go up by 2.3 percent.
Loraine Schobloher, 76, is a retired medical transcriptionist in Troy who relies on pension and Social Security checks to make ends meet. She's upset the assessment on her Parkview Drive home has fallen as her tax bill has grown.
"I'm on a fixed income," she said. "If the taxes keep going up, as it stands now you can't even get rid of your house. You can't win."
Annual real estate studies by area appraisers quantified the value losses that real estate agents and home sellers have known for months. The sales studies help establish property assessments, upon which property taxes are based.
Eight communities in the region saw double-digit drops, including Grosse Pointe Park and Grosse Pointe Woods. Only two communities -- Fenton and Royal Oak Township -- actually saw slight increases. For the counties and municipalities, the declining values will mean flat revenues, a trend likely to continue into 2009 and possibly 2010, said Steve Mellen, the equalization director for Macomb County.
And the drops in residential values mirror declines in other classes of property: industrial, commercial and agricultural. There were small gains in personal property.
"We're looking at (at) least two years for the tax system to recover," Mellen said. He's already told county officials, who are in negotiations with many of the county's employee unions, that they'll "be lucky" to collect as much in 2009 as they do this year.
In Center Line, where residential property values fell nearly 10 percent, city officials know that cuts loom. The only question remaining is how deep.
"Our situation is horrendous," said Center Line Mayor Mary Ann Zeilinski. "We've exhausted any reserve funds we had accumulated over the years."
Summer Minnick, director of state affairs for the Michigan Municipal League, said that drop in values will have a serious impact on municipal coffers. Areas that have a lot of new homes and communities that had more new residents move in recently will lose the most because their Proposal A "gap" is so narrow.
"It's very different from community to community," Minnick said.
But she said the long-term impact on communities will continue long after the economy recovers because assessments will be tied to lower values.
"Cities will be holding the bag on the market for a long time," Minnick said.
Over the next several weeks, property owners will receive their assessments in the mail. Most will find that their individual decrease -- or in rare cases an increase -- will not match their community's decline. That's because the changes are not uniform: In some neighborhoods and price brackets, property values held firm. In many cases, the most expensive homes saw the biggest declines, officials said.
In Detroit, Hamtramck, Highland Park and other communities with less expensive housing stock, the sales showed home values didn't change, seemingly unaffected by the thousands of foreclosures in the communities, said Gary Evanko, Wayne County equalization director.
But foreclosures in Northville, Canton and Plymouth had a bigger impact, where $600,000 homes went into foreclosure and were sold for $400,000.
"That's a big drop," he said.
Upset homeowners will get the chance in the next few months to challenge their assessments. That's when the local boards of review meet to consider adjustments.
Fuoco, who attends the review boards in the communities he works for, knows it could be a trying time as people try to make sense of the seemingly contradictory facts: Assessment down, taxable value up?
"People are going to be expecting a tax break and it's not going to happen," Fuoco said. He anticipates being "bombarded" at the boards of review. "It's going to be an education issue."
Before Proposal A, a decline in property value meant a decline in taxes. Conversely, an increase in value produced a bigger tax bill.
"The tough boards of review were before Proposal A," said Gary Evanko, director of Wayne County's equalization department. "It fueled the whole tax revolt."
Now, homeowners have protections during rising markets and municipalities during declining ones.
In Berkley, homeowners will take, on average, a 5.2 percent hit on their assessment. But many will still pay more. All told, the city budget will likely decline by $180,000, finance director David Sabuda said.
"We're watching the bottom line closely but we've got to prepare for the worst case scenario," Sabuda said.
To cut costs, the city is considering bulk purchasing of gas and oil with neighboring communities as well as leaving many city positions unfilled. Personnel make up about 70 percent of the general fund budget, he said. "We're looking at everything," he added.
While falling home values have created a buyer's market, the growing disparity with their tax levy is sobering some homebuyers, observed Jolie Levine Warpool, a Realtor in Oakland County.
"Somebody is going to be scared to death their taxes are going to jump up big time," she said.
That reality is keeping Joel Warren, 28, of Commerce Township from closing on homes that, based on their ticket price, are considered a steal. He and his wife have been looking for a home in South Lyon to raise their growing family.
One foreclosed home he was eying is listed at $240,000, down from $300,000 when it last sold in 2002. Once purchased, however, the taxes would remain at the 2002 level.
"That could be a difference of hundreds of dollars a month," Warren said. "It's hard to swallow."
Monday, January 21, 2008
2008 may be brutal again for Michigan real estate
2008 may be brutal again for Michigan real estate
Mich. housing slump may have hit bottom in 2007, but tough times remain, analysts say.
Nathan Hurst / The Detroit News
CLARKSTON -- Metro Detroit's real estate market was socked hard last year, marked by the largest drop in home prices since the Reagan administration, the third-consecutive drop in annual home sales, the lowest number of new home permits since at least 1969, and a massive wave of foreclosures that drove thousands from their homes.
It likely will be another tough year in 2008. While the downturn in the region's housing market may slow down, there isn't likely to be any noticeable rebound until the second half of the year, at the earliest, analysts say.
"I hate to say it, but the Detroit area, southeast Michigan, is one of the weakest parts of the U.S. economy," said David Seiders, chief economist for the National Association of Home Builders. "It depends on how the job market is going to perform, and I don't see that improving soon. I think the housing activity will remain low there for the next couple of years."
Data for Wayne, Oakland, Macomb and Livingston counties, compiled by Farmington Hills-based Realcomp, the region's largest multiple listing service, illustrate the damage in 2007:
• The number of homes sold in Metro Detroit dropped 3.6 percent. Since peaking at 44,185 homes sold in 2004, the number of sales has fallen 14.4 percent.
• The average price of a single-family home in the region dropped nearly 11 percent. Since its peak of $175,563 in 2004, the median home price in the region has fallen 17.3 percent, to $145,173, the steepest decline since the early 1980s.
• The number of homes on the market continued to surge, with an increase of 8.65 percent last year. The nearly 50,000 homes listed for sale in 2007 was 3 1/2 times the number listed in 2001.
• Construction of new homes and condos hit a nearly 40-year low, according to data from the Southeast Michigan Council of Governments.
• Home foreclosure filings in the four-county region surged in 2007, to nearly 93,000 through November. That's 65 percent higher than all of 2006.
Michigan's severe housing slump is a symptom of an economic downturn in the state that began in 2004. When automakers started cutting thousands of high-paying manufacturing jobs in a historic restructuring of the industry, the unemployment rate soared, thousands fled the state looking for work, consumer confidence plummeted and the housing market began to tank.
Last year, the national housing market fell into a funk, too. Home sales, new home construction and median sale prices fell, sometimes dramatically, in most parts of the country. And foreclosures skyrocketed as an alarming number of homeowners with adjustable rate mortgages, or ARMs, found they couldn't afford the higher payments when their mortgage rates reset.
Sellers give up
Many Metro Detroiters who put their homes on the market last year simply gave up trying to sell.
Out of desperation, Rob and Kelli Clifton of Ortonville tried swapping their lakefront home this summer without any luck. That was after they twice tried selling the home through a Realtor and reduced their asking price more than $30,000 since they first put it on the market in late 2006.
"It's tough," Kelli Clifton said. "We've tried selling it as a summer home. We've renovated. We've advertised everywhere. But right now, we're stuck."
Scott Cummings tried swapping an unsold house, too, to no avail.
Cummings purchased a four-bedroom home in Clarkston last spring and fitted it with premium fixtures and other fine touches in hopes of turning around the investment for a decent profit. After months of not selling at his asking price of $290,000, which would have provided a slim profit at best, he tried early this summer to swap the property with another homeowner to make another investment.
But it lingered on the market, even after a price drop, so Cummings now is renting the property, even though the income doesn't fully cover his costs.
"Better to stop the bleeding as soon as possible," said Cummings, who as president of Mid-American Mortgage in Auburn Hills has felt the impact of the housing slump in several ways. "At least something's coming in."
Bargains abound
If there's one bright spot in the slumping market, it's that there are plenty of bargains to be had, particularly for first-time buyers who don't have the burden of unloading their existing home.
Grace Brooks was one first-time home buyer who took advantage of the low prices.
In August, she purchased a three-bedroom house in Hazel Park for $90,000 after its price had dropped $35,000, the result of sitting on the market for nearly a year. Then in December, she purchased an investment property -- a two-family home in her neighborhood -- for just under $100,000. Its price had fallen about $25,000 since it was listed last May.
"I thought I'd end up being a lifelong renter," said the 37-year-old human resources administrator. "I didn't even think about buying property until the prices went down.
"It was too intimidating to buy before. Now there's more opportunities real people can afford."
That's the message local real estate agents are doing their best to spread. They believe there will be even more bargain hunters this year.
A 7 percent uptick in Metro Detroit home sales in December over the same month last year provides some evidence they could be right.
"In 2008, we're going to see opportunistic buyers getting some great deals," said Howard Fingeroo, managing partner of Pinnacle Homes, which is currently building subdivisions throughout Metro Detroit. "It's as bad here as anywhere, but we're all repositioning for an upswing."
Karen Kage, president and CEO of Realcomp, said the negative impact of foreclosures on home prices made 2007 a particularly difficult year for area Realtors. But, she too, sees a bright spot in the gloom.
"The prices have a lot of people worried, but the market will naturally find its equilibrium," she said. "There are great bargains to be had."
Low prices will help recovery
Don Grimes, senior economic researcher at the University of Michigan, does think the low, low prices will start to get more buyers' attention.
"We will probably see more trouble for the first half of the year," he said, "but as buyers scope out the low-priced homes, we can expect some upward movement in the second half of '08."
Still, Metro Detroit's housing market recovery will be slow to unfold.
"It's going to be a difficult recovery," Grimes said, "One that will take some time."
Whether it starts happening this year will depend on numerous factors, not the least of which are the health of the local job market and "if consumers have the long-term confidence," said Peter Allen, a real estate consultant and professor at the University of Michigan. "One more negative curve might be too much."
More job cuts at General Motors Corp. won't help matters. Last week, the automaker announced it will offer buyout packages to 46,000 blue-collar workers. It's unclear how many workers GM actually hopes to clear out, but it could be in the thousands.
Also pointing to a rough 2008 nationally is the March reset to higher rates of $110 billion in adjustable-rate mortgages. That's certain to drive foreclosures higher across the country, which in turn will put more homes on the market and further drive down prices.
That will certainly hit southeastern Michigan, said Bob Filka, CEO of Michigan Association of Home Builders. "We had originally hoped for a small upswing toward the middle and end of this year," Filka said. "But given some of the uncertainty of the national economy, I'm now saying there is only a dim light at the end of the tunnel."
But what about the axiom that those first in a recession are first out? That won't apply to Michigan this time, Filka said.
"We've been going through profound structural change, not a cyclical change," he said. "We have to keep that in mind, changes are being made for long-term benefits, but, now we may get wrapped up in a cyclical national downturn. This also dampens my enthusiasm for the year."
Mortgage crisis contributes
The foreclosure crisis that started building in Michigan two years ago and erupted across the nation last year has only made a bad housing market worse.
Contributing to the problem in Michigan was the proliferation of subprime adjustable-rate loans, but also the auto industry downsizing that led to the loss of jobs of thousands in the state.
The foreclosures exacerbated the oversupply of houses on the market, and the sale of foreclosed homes at bargain-basement prices depressed prices even further.
According to data provided by Realcomp, the 1,989 recorded foreclosure sales in Oakland County -- which averaged $115,000 -- sunk the median sale price for the entire county to $177,722. With those sales excluded, the median price is $192,000.
The housing slump also dramatically drove down the pace of home building in Metro Detroit. Only 3,482 single-family houses or condos were built in the four-county region last year. That compares to 19,417 in 2004.
That pullback, though, may actually speed Michigan's housing recovery.
Fewer new homes means less competition for those already on the market, and a greater chance they'll find a buyer.
And once home sales pick up, prices eventually will follow.
Mich. housing slump may have hit bottom in 2007, but tough times remain, analysts say.
Nathan Hurst / The Detroit News
CLARKSTON -- Metro Detroit's real estate market was socked hard last year, marked by the largest drop in home prices since the Reagan administration, the third-consecutive drop in annual home sales, the lowest number of new home permits since at least 1969, and a massive wave of foreclosures that drove thousands from their homes.
It likely will be another tough year in 2008. While the downturn in the region's housing market may slow down, there isn't likely to be any noticeable rebound until the second half of the year, at the earliest, analysts say.
"I hate to say it, but the Detroit area, southeast Michigan, is one of the weakest parts of the U.S. economy," said David Seiders, chief economist for the National Association of Home Builders. "It depends on how the job market is going to perform, and I don't see that improving soon. I think the housing activity will remain low there for the next couple of years."
Data for Wayne, Oakland, Macomb and Livingston counties, compiled by Farmington Hills-based Realcomp, the region's largest multiple listing service, illustrate the damage in 2007:
• The number of homes sold in Metro Detroit dropped 3.6 percent. Since peaking at 44,185 homes sold in 2004, the number of sales has fallen 14.4 percent.
• The average price of a single-family home in the region dropped nearly 11 percent. Since its peak of $175,563 in 2004, the median home price in the region has fallen 17.3 percent, to $145,173, the steepest decline since the early 1980s.
• The number of homes on the market continued to surge, with an increase of 8.65 percent last year. The nearly 50,000 homes listed for sale in 2007 was 3 1/2 times the number listed in 2001.
• Construction of new homes and condos hit a nearly 40-year low, according to data from the Southeast Michigan Council of Governments.
• Home foreclosure filings in the four-county region surged in 2007, to nearly 93,000 through November. That's 65 percent higher than all of 2006.
Michigan's severe housing slump is a symptom of an economic downturn in the state that began in 2004. When automakers started cutting thousands of high-paying manufacturing jobs in a historic restructuring of the industry, the unemployment rate soared, thousands fled the state looking for work, consumer confidence plummeted and the housing market began to tank.
Last year, the national housing market fell into a funk, too. Home sales, new home construction and median sale prices fell, sometimes dramatically, in most parts of the country. And foreclosures skyrocketed as an alarming number of homeowners with adjustable rate mortgages, or ARMs, found they couldn't afford the higher payments when their mortgage rates reset.
Sellers give up
Many Metro Detroiters who put their homes on the market last year simply gave up trying to sell.
Out of desperation, Rob and Kelli Clifton of Ortonville tried swapping their lakefront home this summer without any luck. That was after they twice tried selling the home through a Realtor and reduced their asking price more than $30,000 since they first put it on the market in late 2006.
"It's tough," Kelli Clifton said. "We've tried selling it as a summer home. We've renovated. We've advertised everywhere. But right now, we're stuck."
Scott Cummings tried swapping an unsold house, too, to no avail.
Cummings purchased a four-bedroom home in Clarkston last spring and fitted it with premium fixtures and other fine touches in hopes of turning around the investment for a decent profit. After months of not selling at his asking price of $290,000, which would have provided a slim profit at best, he tried early this summer to swap the property with another homeowner to make another investment.
But it lingered on the market, even after a price drop, so Cummings now is renting the property, even though the income doesn't fully cover his costs.
"Better to stop the bleeding as soon as possible," said Cummings, who as president of Mid-American Mortgage in Auburn Hills has felt the impact of the housing slump in several ways. "At least something's coming in."
Bargains abound
If there's one bright spot in the slumping market, it's that there are plenty of bargains to be had, particularly for first-time buyers who don't have the burden of unloading their existing home.
Grace Brooks was one first-time home buyer who took advantage of the low prices.
In August, she purchased a three-bedroom house in Hazel Park for $90,000 after its price had dropped $35,000, the result of sitting on the market for nearly a year. Then in December, she purchased an investment property -- a two-family home in her neighborhood -- for just under $100,000. Its price had fallen about $25,000 since it was listed last May.
"I thought I'd end up being a lifelong renter," said the 37-year-old human resources administrator. "I didn't even think about buying property until the prices went down.
"It was too intimidating to buy before. Now there's more opportunities real people can afford."
That's the message local real estate agents are doing their best to spread. They believe there will be even more bargain hunters this year.
A 7 percent uptick in Metro Detroit home sales in December over the same month last year provides some evidence they could be right.
"In 2008, we're going to see opportunistic buyers getting some great deals," said Howard Fingeroo, managing partner of Pinnacle Homes, which is currently building subdivisions throughout Metro Detroit. "It's as bad here as anywhere, but we're all repositioning for an upswing."
Karen Kage, president and CEO of Realcomp, said the negative impact of foreclosures on home prices made 2007 a particularly difficult year for area Realtors. But, she too, sees a bright spot in the gloom.
"The prices have a lot of people worried, but the market will naturally find its equilibrium," she said. "There are great bargains to be had."
Low prices will help recovery
Don Grimes, senior economic researcher at the University of Michigan, does think the low, low prices will start to get more buyers' attention.
"We will probably see more trouble for the first half of the year," he said, "but as buyers scope out the low-priced homes, we can expect some upward movement in the second half of '08."
Still, Metro Detroit's housing market recovery will be slow to unfold.
"It's going to be a difficult recovery," Grimes said, "One that will take some time."
Whether it starts happening this year will depend on numerous factors, not the least of which are the health of the local job market and "if consumers have the long-term confidence," said Peter Allen, a real estate consultant and professor at the University of Michigan. "One more negative curve might be too much."
More job cuts at General Motors Corp. won't help matters. Last week, the automaker announced it will offer buyout packages to 46,000 blue-collar workers. It's unclear how many workers GM actually hopes to clear out, but it could be in the thousands.
Also pointing to a rough 2008 nationally is the March reset to higher rates of $110 billion in adjustable-rate mortgages. That's certain to drive foreclosures higher across the country, which in turn will put more homes on the market and further drive down prices.
That will certainly hit southeastern Michigan, said Bob Filka, CEO of Michigan Association of Home Builders. "We had originally hoped for a small upswing toward the middle and end of this year," Filka said. "But given some of the uncertainty of the national economy, I'm now saying there is only a dim light at the end of the tunnel."
But what about the axiom that those first in a recession are first out? That won't apply to Michigan this time, Filka said.
"We've been going through profound structural change, not a cyclical change," he said. "We have to keep that in mind, changes are being made for long-term benefits, but, now we may get wrapped up in a cyclical national downturn. This also dampens my enthusiasm for the year."
Mortgage crisis contributes
The foreclosure crisis that started building in Michigan two years ago and erupted across the nation last year has only made a bad housing market worse.
Contributing to the problem in Michigan was the proliferation of subprime adjustable-rate loans, but also the auto industry downsizing that led to the loss of jobs of thousands in the state.
The foreclosures exacerbated the oversupply of houses on the market, and the sale of foreclosed homes at bargain-basement prices depressed prices even further.
According to data provided by Realcomp, the 1,989 recorded foreclosure sales in Oakland County -- which averaged $115,000 -- sunk the median sale price for the entire county to $177,722. With those sales excluded, the median price is $192,000.
The housing slump also dramatically drove down the pace of home building in Metro Detroit. Only 3,482 single-family houses or condos were built in the four-county region last year. That compares to 19,417 in 2004.
That pullback, though, may actually speed Michigan's housing recovery.
Fewer new homes means less competition for those already on the market, and a greater chance they'll find a buyer.
And once home sales pick up, prices eventually will follow.
Wednesday, January 16, 2008
Wealthy may be next in line in U.S. home crisis
Wealthy may be next in line in U.S. home crisis By Nick Carey
A house in this wealthy Chicago suburb is far beyond the reach of most Americans.
Unfortunately, Hinsdale may also now be too expensive for some of the people who already live here.
"There is a section of the population here that over-extended themselves to buy here and then keep up the facade of wealth," said Sharon Sodikoff, a broker associate at local real estate agency Prudential Homelife Realty. "In the next year or so they'll be forced out in dribs and drabs."
With a picturesque little downtown area and large, expensive houses -- according to the Headrick-Wagner Consulting Group, the average home sale price here in the 12 months to September 30, 2007, was around $1.15 million -- Hinsdale seems a world away from the housing slowdown that may have brought the U.S. economy to the brink of a recession.
But even here, far from the housing crisis' epicenter, high earners with good credit may be heading for trouble as their adjustable rate mortgages (ARMs) adjust beyond their means, local real estate agents and others say. In a normal housing market they'd be able to sell, but now they are stuck.
"The next wave of problems will come from prime borrowers who bought too much house or borrowed too much against it," said Michael van Zalingen, director of home ownership services at Neighborhood Housing Services of Chicago. A "prime" borrower is one with good credit.
Real estate agents warn that some high-income borrowers have already been forced to sell or leave their homes and more will follow. Especially those who used their homes as ATMs, withdrawing cash via home equity loans.
"For those who utilized home equity loans for five to ten years to finance their lifestyle, the chickens are coming home to roost," said Chicago-based real estate agent Marki Lemons.
There are also signs some lenders are warily eyeing "prime" borrowers. Tom Kelly, spokesman for Chase Home Lending, a unit of JPMorgan Chase & Co, said the company raised its reserves for possible home equity loan loss for subprime and prime borrowers by $635 million in the second and third quarters last year.
"The concern is people who have borrowed a large percentage of the equity (in their homes)," Kelly said. "Now the value of their homes is falling and they can't refinance."
"Some just stop paying and walk away," he added.
SHORT SALE
Getting into property during the boom was easy, with mortgages freely available for no money down.
Then came the subprime crisis and the credit crunch, slowing the market, pushing prices down and home inventories up. In Hinsdale, for instance, the supply of homes on the market rose to more than 17 months in early October from less than 6 months in January 2006.
While it's apparently a buyers' market, Lawrence Yun, chief economist at trade group the National Association of REALTORS, says high-end borrowers are put off by the high interest rates now applied to so-called "jumbo" mortgages, those for $417,000 or more.
"Potential buyers say 'no way am I buying at that price,"' Yun said. "If people can't enter the market, this slows everything down and puts pressure on foreclosures."
If some borrowers can't get into the market, there are others who can't sell to get out. Home owners who bought recently with no money down are the ones most likely to abandon a property when they fall behind on the mortgage.
"I've seen people who bought less than a year ago and have no equity in their homes simply walking away with no regard for the consequences," said Genie Birch, a real estate agent at Chicago-based Koenig & Strey GMAC who covers the city's wealthier districts.
Real estate agents say speculative investors who bought to make a profit are also walking away as the rents they charge fall behind the mortgage payments as their adjustable-rate mortgages readjust.
The home owners who find it harder to walk away are those who took out large home equity loans before prices started falling and now owe far more than their home is worth.
"It's difficult for home owners in that situation to sell as they'll still be left owing money," said Dave Hanna, managing partner of Prudential Preferred CRE, which owns Prudential Homelife Realty in Hindsale.
Unlike subprime borrowers, however, wealthy home owners are more likely to try to cut a deal with their lender, rather than end up in foreclosure. The alternative solution available to them is to opt for a short sale.
Under a short sale agreement, the borrower sells below the mortgage value and the lender writes off the difference. The lender gets less than originally anticipated, but is not stuck with a foreclosed property. The borrower's credit rating is damaged, but not as badly as if they had lost the home.
"You won't see many foreclosed homes here because that would involve public embarrassment," Prudential Homelife Realty's Sodikoff said. "But they will call their realtor and get them to quietly broker a deal to get out of their homes."
A house in this wealthy Chicago suburb is far beyond the reach of most Americans.
Unfortunately, Hinsdale may also now be too expensive for some of the people who already live here.
"There is a section of the population here that over-extended themselves to buy here and then keep up the facade of wealth," said Sharon Sodikoff, a broker associate at local real estate agency Prudential Homelife Realty. "In the next year or so they'll be forced out in dribs and drabs."
With a picturesque little downtown area and large, expensive houses -- according to the Headrick-Wagner Consulting Group, the average home sale price here in the 12 months to September 30, 2007, was around $1.15 million -- Hinsdale seems a world away from the housing slowdown that may have brought the U.S. economy to the brink of a recession.
But even here, far from the housing crisis' epicenter, high earners with good credit may be heading for trouble as their adjustable rate mortgages (ARMs) adjust beyond their means, local real estate agents and others say. In a normal housing market they'd be able to sell, but now they are stuck.
"The next wave of problems will come from prime borrowers who bought too much house or borrowed too much against it," said Michael van Zalingen, director of home ownership services at Neighborhood Housing Services of Chicago. A "prime" borrower is one with good credit.
Real estate agents warn that some high-income borrowers have already been forced to sell or leave their homes and more will follow. Especially those who used their homes as ATMs, withdrawing cash via home equity loans.
"For those who utilized home equity loans for five to ten years to finance their lifestyle, the chickens are coming home to roost," said Chicago-based real estate agent Marki Lemons.
There are also signs some lenders are warily eyeing "prime" borrowers. Tom Kelly, spokesman for Chase Home Lending, a unit of JPMorgan Chase & Co, said the company raised its reserves for possible home equity loan loss for subprime and prime borrowers by $635 million in the second and third quarters last year.
"The concern is people who have borrowed a large percentage of the equity (in their homes)," Kelly said. "Now the value of their homes is falling and they can't refinance."
"Some just stop paying and walk away," he added.
SHORT SALE
Getting into property during the boom was easy, with mortgages freely available for no money down.
Then came the subprime crisis and the credit crunch, slowing the market, pushing prices down and home inventories up. In Hinsdale, for instance, the supply of homes on the market rose to more than 17 months in early October from less than 6 months in January 2006.
While it's apparently a buyers' market, Lawrence Yun, chief economist at trade group the National Association of REALTORS, says high-end borrowers are put off by the high interest rates now applied to so-called "jumbo" mortgages, those for $417,000 or more.
"Potential buyers say 'no way am I buying at that price,"' Yun said. "If people can't enter the market, this slows everything down and puts pressure on foreclosures."
If some borrowers can't get into the market, there are others who can't sell to get out. Home owners who bought recently with no money down are the ones most likely to abandon a property when they fall behind on the mortgage.
"I've seen people who bought less than a year ago and have no equity in their homes simply walking away with no regard for the consequences," said Genie Birch, a real estate agent at Chicago-based Koenig & Strey GMAC who covers the city's wealthier districts.
Real estate agents say speculative investors who bought to make a profit are also walking away as the rents they charge fall behind the mortgage payments as their adjustable-rate mortgages readjust.
The home owners who find it harder to walk away are those who took out large home equity loans before prices started falling and now owe far more than their home is worth.
"It's difficult for home owners in that situation to sell as they'll still be left owing money," said Dave Hanna, managing partner of Prudential Preferred CRE, which owns Prudential Homelife Realty in Hindsale.
Unlike subprime borrowers, however, wealthy home owners are more likely to try to cut a deal with their lender, rather than end up in foreclosure. The alternative solution available to them is to opt for a short sale.
Under a short sale agreement, the borrower sells below the mortgage value and the lender writes off the difference. The lender gets less than originally anticipated, but is not stuck with a foreclosed property. The borrower's credit rating is damaged, but not as badly as if they had lost the home.
"You won't see many foreclosed homes here because that would involve public embarrassment," Prudential Homelife Realty's Sodikoff said. "But they will call their realtor and get them to quietly broker a deal to get out of their homes."
Monday, January 7, 2008
Ways to cope despite real estate's dire outlook
Ways to cope despite real estate's dire outlook
BUYING OR SELLING A HOME?
Does the housing downturn have you confused and uncertain about what to do? Want advice about how much you can afford, or how to fix up and market your home?
MONEY TIPS & ADVICE
IMPROVE YOUR CREDIT SCORE: Steps to take to protect and raise your rating.
SAVE FOR A DOWN PAYMENT: Options to put your money to help you save.
IN A TERRIBLE FINANCIAL BIND?: Tapping your 401(k) may not be your smartest move.
SUBPRIME ARM LOAN RATES
Almost half of subprime ARM loans are concentrated in a handful of states, which are expected to suffer increasing foreclosures as the loans reset to higher rates. States and their percentage of the nation's subprime ARMs:
Alabama 0.9%
Alaska 0.1%
Arizona 4.3%
Arkansas 0.4%
California 17.3%
Colorado 1.9%
Connecticut 1.3%
Delaware 0.3%
Dist. of Columbia 0.2%
Florida 12.3%
Georgia 3.3%
Hawaii 0.4%
Idaho 0.5%
Illinois 4.9%
Indiana 1.8%
Iowa 0.5%
Kansas 0.5%
Kentucky 0.7%
Louisiana 0.8%
Maine 0.3%
Maryland 2.9%
Massachusetts 1.8%
Michigan 3.6%
Minnesota 1.7%
Mississippi 0.5%
Missouri 1.8%
Montana 0.1%
Nebraska 0.3%
Nevada 2.0%
New Hampshire 0.4%
New Jersey 2.7%
New Mexico 0.4%
New York 3.5%
North Carolina 1.9%
North Dakota 0.1%
Ohio 2.6%
Oklahoma 0.6%
Oregon 1.3%
Pennsylvania 2.7%
Rhode Island 0.4%
South Carolina 0.9%
South Dakota 0.1%
Tennessee 1.7%
Texas 5.7%
Utah 1.0%
Vermont 0.1%
Virginia 2.4%
Washington 2.6%
West Virginia 0.2%
Wisconsin 1.4%
Wyoming 0.1%
If you'd asked housing economist David Seiders at this time last year to forecast the real estate industry's future, he would have told you to expect "a recovery year" in 2008.
"That outlook has been cut dramatically from what I was saying a year ago," Seiders, chief economist for the National Association of Home Builders, concedes. He's slashed his projection for home construction by 35% and says 2008 will be "another down year" for housing overall.
How far down? Most economists caution that their real estate forecasts for this year stand on shaky ground. The depth of the downturn will depend on whether the overall economy slips into recession, how fast and how sharply home prices fall, whether more turmoil rocks the credit markets and how many more foreclosures lie ahead.
"We're really in a danger zone in terms of overall economic activity," says Seiders, who sees a 40% chance of recession this year, up from his earlier estimate of 30%.
Mark Zandi, chief economist at Moody's Economy.com, calls the current real estate recession the gravest since World War II. He expects home sales to hit bottom in the first half of this year, with prices continuing to fall until early 2009.
FIND MORE STORIES IN: Mortgage Bankers | Interest rates
An even more pessimistic economist, David Rosenberg at Merrill Lynch, goes so far as to warn, "Real estate pricing in general can expect to be in the doldrums through 2012."
The biggest problem is the glut of homes for sale — more than 10 months' worth. And about 2 million of those homes (about 2.6%) are vacant, with banks or builders trying to get them off their hands.
The number of vacant homes is expected to rise further this year because a record number of homes are entering foreclosure. And hundreds of thousands of homeowners with subprime, adjustable-rate loans will face higher monthly payments. For some, it will be the last financial straw.
Meanwhile, many would-be buyers are having trouble qualifying for loans.
Half of senior loan officers surveyed by the Federal Reserve in October said they had tightened their standards from July. Gone are loans for people who have trouble paying their bills on time. Gone are mortgages for 100% of the home price. Gone are loans requiring no proof of income or assets.
The stricter rules will deliver an especially severe punch to such areas as Arizona, California, Nevada, Florida and in and around Washington, D.C., and Manhattan, where those types of mortgages accounted for about 60% of purchase loans last year, according to Economy.com.
"A lot of (buyers) haven't come to the realization that the subprime market no longer exists," said Ritch Workman of Workman Mortgage in Melbourne, Fla. "Mortgage brokers are turning away more and more borrowers."
That isn't likely to change. The Federal Reserve last month issued hand-slapping rules for all lenders and mortgage brokers to end the riskiest lending practices. The new rules will take effect early this year, after a public comment period.
For buyers who have built up stellar credit and lots of cash in the bank, there are loans aplenty. Interest rates also remain historically low, and falling prices in many areas are making homes more affordable for more families.
In such a risky market, what's a buyer or seller to do? What follows are some strategies for buyers, sellers and homeowners that will help, no matter how grim the housing recession gets.
Here are some strategies for sellers, buyers and homeowners in a high-risk real estate market:
Buyers
Get that credit score up
If you're among the would-be buyers still finding themselves locked out of the market:
•Raise your credit score by paying your bills on time. Don't open any new credit card accounts or buy a car with a new loan. Don't buy anything, such as furniture, with a "no payments or interest for 90 days"-type of plan. With such plans, even if you pay off the entire amount in three months, your credit score will still take a hit.
•Forget belt-tightening; get a full-fledged corset. Most lenders now require buyers to put down at least 5% of the purchase price (that's about $10,500 on the national median home price of $210,200). The main exceptions are loans insured by the Federal Housing Administration, which require only 3%, and loans guaranteed by the Department of Veterans Affairs, which may cover the entire purchase price.
•Don't change jobs, if you can help it, until you've been formally approved for a mortgage. Lenders increasingly see job stability as a vital factor in creditworthiness.
•Recognize that you have the upper hand in bargaining. Consider asking the seller to help pay for any repairs, or to help pay for closing costs or to cover any homeowners' association fees for a few months. If it's a new home, ask the builder for even more freebies than it offered to get you in the door.
Sellers
Wait if you can or spruce it up
Lots of sellers are getting a harsh refresher in a lesson from Economics 101: the relationship between supply and demand. A record 4.3 million existing homes are for sale. In areas where there's too much supply, prices must fall.
This week, economists for Freddie Mac released their latest economic forecasts, which show home prices falling nearly 8% this year and not rising again before the end of 2009.
Prices in 11 major metro areas posted record declines in October, led by Miami, Tampa, Detroit and San Diego, according to the S&P/Case-Shiller index.
More than 1 million homeowners nationwide are expected to lose their homes through foreclosure. Lenders, trying to cut their costs of maintaining and marketing homes, typically sell foreclosed homes for 20% below the market price.
"I tell sellers if they don't need to sell right now, just remove their home from the market," says Ron Shuffield of Esslinger-Wooten-Maxwell Realtors in Miami.
All of which means that to sell your house, you probably need to get it in near-perfect condition, price it right and market it aggressively.
Of course, not every U.S. real estate market is in the tank. Areas that never saw head-spinning price increases to begin with aren't seeing big price drops now. In the third quarter, government data showed that prices actually rose in 204 of the 287 metro areas surveyed. And in nearly every city, there are neighborhoods, or coveted condo developments, that seem immune to local and national trends.
But for most homeowners who need to sell, here are some tips:
•Start your spring cleaning now. Every surface should sparkle. Every groove should be dirt-free. Above all, wash the windows. Declutter the house by packing up family photos, stacks of paper, medicine bottles on the bathroom counter, the books overflowing the bookcase. Hide trash cans, ashtrays, the laundry hamper, the kitchen sponge, the cat's litter box and food dishes.
•Paint. Dark walls tend to make a house look smaller. Walls should be off-white or have earthy tones if the room draws lots of light. Real estate agents suggest that the carpet be light beige. Open or take down curtains, so the rooms will absorb as much light as possible.
•Most rooms contain too much furniture, which makes rooms look smaller. Reduce the number of pillows on the couch. Remove afghans and blankets. Scale back the number of paintings on the walls. Remove the leaves from your dining table and put no more than four chairs around it. Reduce the number of dishes in the china cabinet, leaving only a few.
•Keep the lawn mowed and the edges neat. Trim shrubs, especially around windows. Put flowering plants near the front door. Does the house need painting? Consider painting or staining the front door; it's one of the least expensive ways to spruce up the entry. If there's furniture on the porch, make sure it isn't plastic but rather good-quality wicker or wrought iron. Power-wash or stain the deck. Remove or hide old cans and bottles, auto parts, boats and RVs.
•What's your marketing strategy? If using an agent, make sure she or he is using the Internet as a major part of the advertising campaign. Tempt buyers by offering to help pay closing costs. Or better still, offer to lend the buyer part of the money they need, with what's called "carry-back financing."
Homeowners
Check your documents
Dig out your mortgage documents and triple-check what kind of loan you have. Specifically, you want to know whether it has an adjustable interest rate, how often the rate can rise and the maximum it can rise to. Is there a penalty for paying off the loan early? If so, when does the penalty expire?
Nearly 2 million homeowners have subprime, adjustable-rate mortgages (ARMs) that will reset before July 2010. The average borrower will see monthly payments jump by about $350, to $1,550. Already, one in five homeowners with a subprime ARM was behind at least one payment at the end of the third quarter, according to the Mortgage Bankers Association.
Last month, Treasury Secretary Henry Paulson announced a deal with lenders that would help thousands of homeowners with subprime ARMs. Under the plan, homeowners who got their loans between Jan. 1, 2005, and July 31, 2007, would either be put on a fast-track program to refinance their loan to a fixed-rate mortgage at a lower rate, or have their rate frozen for five years.
But there are many exclusions to the program. In addition, millions of borrowers with prime ARMs aren't eligible. Neither are most of those with exotic adjustable-rate loans that let them pay only the interest portion or even less each month.
Dan Przewlocki is one of them. He refinanced his home outside Detroit in 2004, so he doesn't qualify for the rescue plan. Przewlocki, 52, got what's called an option-ARM. It lets him choose among payment options each month. The less he pays, the more the principal balance grows.
He's been paying the highest option and hasn't missed one payment. Yet his rate has been rising nearly every month, catapulting Przewlocki's monthly payment to $2,700 from $1,200 initially.
Washington Mutual, his lender, won't refinance the $310,000 loan because the home's value has sunk below the value of the loan, to $250,000, Przewlocki said.
He works in an auto maintenance plant and looks for handyman jobs and temporary work at Kelly Services. But his house payments eat up nearly 70% of his gross income. And Przewlocki, a tech sergeant in the Air Force reserves, knows he'll fall behind on his payments once he's deployed to the Middle East this year.
"If the mortgage company wants to take the house," he says, "the keys are going to be on the kitchen table."
Sara Gaugl, a spokeswoman for Washington Mutual, says the amount of Przewlocki's loan and the current value of his house "put him out of scope for a refinance under WaMu's credit guidelines. However, we will continue to work with Mr. Przewlocki to determine if there are other options available to him."
If you're in a similar situation, or think you might be soon:
•Contact your lender as soon as you know your payment will be late. If you want free credit counseling, you can also call the Homeownership Preservation Foundation at 888-995-HOPE (888-995-4673).
•If you can't renegotiate the terms of your loan, and your home is worth less than you owe, consider a "short sale": If your lender approves, you can sell your property at an agreed upon price, and your lender will forgive the remaining balance on your mortgage.
That's much better than wrecking your credit with a foreclosure. And under a law signed by President Bush last month, sellers no longer have to pay taxes on the amount of the forgiven debt. The law is retroactive to Jan. 1, 2007, and is scheduled to expire at the end of 2009.
Even if you don't keep your New Year's resolution to shed 20 pounds, getting out from under an unaffordable mortgage will take a huge weight off your shoulders.
BUYING OR SELLING A HOME?
Does the housing downturn have you confused and uncertain about what to do? Want advice about how much you can afford, or how to fix up and market your home?
MONEY TIPS & ADVICE
IMPROVE YOUR CREDIT SCORE: Steps to take to protect and raise your rating.
SAVE FOR A DOWN PAYMENT: Options to put your money to help you save.
IN A TERRIBLE FINANCIAL BIND?: Tapping your 401(k) may not be your smartest move.
SUBPRIME ARM LOAN RATES
Almost half of subprime ARM loans are concentrated in a handful of states, which are expected to suffer increasing foreclosures as the loans reset to higher rates. States and their percentage of the nation's subprime ARMs:
Alabama 0.9%
Alaska 0.1%
Arizona 4.3%
Arkansas 0.4%
California 17.3%
Colorado 1.9%
Connecticut 1.3%
Delaware 0.3%
Dist. of Columbia 0.2%
Florida 12.3%
Georgia 3.3%
Hawaii 0.4%
Idaho 0.5%
Illinois 4.9%
Indiana 1.8%
Iowa 0.5%
Kansas 0.5%
Kentucky 0.7%
Louisiana 0.8%
Maine 0.3%
Maryland 2.9%
Massachusetts 1.8%
Michigan 3.6%
Minnesota 1.7%
Mississippi 0.5%
Missouri 1.8%
Montana 0.1%
Nebraska 0.3%
Nevada 2.0%
New Hampshire 0.4%
New Jersey 2.7%
New Mexico 0.4%
New York 3.5%
North Carolina 1.9%
North Dakota 0.1%
Ohio 2.6%
Oklahoma 0.6%
Oregon 1.3%
Pennsylvania 2.7%
Rhode Island 0.4%
South Carolina 0.9%
South Dakota 0.1%
Tennessee 1.7%
Texas 5.7%
Utah 1.0%
Vermont 0.1%
Virginia 2.4%
Washington 2.6%
West Virginia 0.2%
Wisconsin 1.4%
Wyoming 0.1%
If you'd asked housing economist David Seiders at this time last year to forecast the real estate industry's future, he would have told you to expect "a recovery year" in 2008.
"That outlook has been cut dramatically from what I was saying a year ago," Seiders, chief economist for the National Association of Home Builders, concedes. He's slashed his projection for home construction by 35% and says 2008 will be "another down year" for housing overall.
How far down? Most economists caution that their real estate forecasts for this year stand on shaky ground. The depth of the downturn will depend on whether the overall economy slips into recession, how fast and how sharply home prices fall, whether more turmoil rocks the credit markets and how many more foreclosures lie ahead.
"We're really in a danger zone in terms of overall economic activity," says Seiders, who sees a 40% chance of recession this year, up from his earlier estimate of 30%.
Mark Zandi, chief economist at Moody's Economy.com, calls the current real estate recession the gravest since World War II. He expects home sales to hit bottom in the first half of this year, with prices continuing to fall until early 2009.
FIND MORE STORIES IN: Mortgage Bankers | Interest rates
An even more pessimistic economist, David Rosenberg at Merrill Lynch, goes so far as to warn, "Real estate pricing in general can expect to be in the doldrums through 2012."
The biggest problem is the glut of homes for sale — more than 10 months' worth. And about 2 million of those homes (about 2.6%) are vacant, with banks or builders trying to get them off their hands.
The number of vacant homes is expected to rise further this year because a record number of homes are entering foreclosure. And hundreds of thousands of homeowners with subprime, adjustable-rate loans will face higher monthly payments. For some, it will be the last financial straw.
Meanwhile, many would-be buyers are having trouble qualifying for loans.
Half of senior loan officers surveyed by the Federal Reserve in October said they had tightened their standards from July. Gone are loans for people who have trouble paying their bills on time. Gone are mortgages for 100% of the home price. Gone are loans requiring no proof of income or assets.
The stricter rules will deliver an especially severe punch to such areas as Arizona, California, Nevada, Florida and in and around Washington, D.C., and Manhattan, where those types of mortgages accounted for about 60% of purchase loans last year, according to Economy.com.
"A lot of (buyers) haven't come to the realization that the subprime market no longer exists," said Ritch Workman of Workman Mortgage in Melbourne, Fla. "Mortgage brokers are turning away more and more borrowers."
That isn't likely to change. The Federal Reserve last month issued hand-slapping rules for all lenders and mortgage brokers to end the riskiest lending practices. The new rules will take effect early this year, after a public comment period.
For buyers who have built up stellar credit and lots of cash in the bank, there are loans aplenty. Interest rates also remain historically low, and falling prices in many areas are making homes more affordable for more families.
In such a risky market, what's a buyer or seller to do? What follows are some strategies for buyers, sellers and homeowners that will help, no matter how grim the housing recession gets.
Here are some strategies for sellers, buyers and homeowners in a high-risk real estate market:
Buyers
Get that credit score up
If you're among the would-be buyers still finding themselves locked out of the market:
•Raise your credit score by paying your bills on time. Don't open any new credit card accounts or buy a car with a new loan. Don't buy anything, such as furniture, with a "no payments or interest for 90 days"-type of plan. With such plans, even if you pay off the entire amount in three months, your credit score will still take a hit.
•Forget belt-tightening; get a full-fledged corset. Most lenders now require buyers to put down at least 5% of the purchase price (that's about $10,500 on the national median home price of $210,200). The main exceptions are loans insured by the Federal Housing Administration, which require only 3%, and loans guaranteed by the Department of Veterans Affairs, which may cover the entire purchase price.
•Don't change jobs, if you can help it, until you've been formally approved for a mortgage. Lenders increasingly see job stability as a vital factor in creditworthiness.
•Recognize that you have the upper hand in bargaining. Consider asking the seller to help pay for any repairs, or to help pay for closing costs or to cover any homeowners' association fees for a few months. If it's a new home, ask the builder for even more freebies than it offered to get you in the door.
Sellers
Wait if you can or spruce it up
Lots of sellers are getting a harsh refresher in a lesson from Economics 101: the relationship between supply and demand. A record 4.3 million existing homes are for sale. In areas where there's too much supply, prices must fall.
This week, economists for Freddie Mac released their latest economic forecasts, which show home prices falling nearly 8% this year and not rising again before the end of 2009.
Prices in 11 major metro areas posted record declines in October, led by Miami, Tampa, Detroit and San Diego, according to the S&P/Case-Shiller index.
More than 1 million homeowners nationwide are expected to lose their homes through foreclosure. Lenders, trying to cut their costs of maintaining and marketing homes, typically sell foreclosed homes for 20% below the market price.
"I tell sellers if they don't need to sell right now, just remove their home from the market," says Ron Shuffield of Esslinger-Wooten-Maxwell Realtors in Miami.
All of which means that to sell your house, you probably need to get it in near-perfect condition, price it right and market it aggressively.
Of course, not every U.S. real estate market is in the tank. Areas that never saw head-spinning price increases to begin with aren't seeing big price drops now. In the third quarter, government data showed that prices actually rose in 204 of the 287 metro areas surveyed. And in nearly every city, there are neighborhoods, or coveted condo developments, that seem immune to local and national trends.
But for most homeowners who need to sell, here are some tips:
•Start your spring cleaning now. Every surface should sparkle. Every groove should be dirt-free. Above all, wash the windows. Declutter the house by packing up family photos, stacks of paper, medicine bottles on the bathroom counter, the books overflowing the bookcase. Hide trash cans, ashtrays, the laundry hamper, the kitchen sponge, the cat's litter box and food dishes.
•Paint. Dark walls tend to make a house look smaller. Walls should be off-white or have earthy tones if the room draws lots of light. Real estate agents suggest that the carpet be light beige. Open or take down curtains, so the rooms will absorb as much light as possible.
•Most rooms contain too much furniture, which makes rooms look smaller. Reduce the number of pillows on the couch. Remove afghans and blankets. Scale back the number of paintings on the walls. Remove the leaves from your dining table and put no more than four chairs around it. Reduce the number of dishes in the china cabinet, leaving only a few.
•Keep the lawn mowed and the edges neat. Trim shrubs, especially around windows. Put flowering plants near the front door. Does the house need painting? Consider painting or staining the front door; it's one of the least expensive ways to spruce up the entry. If there's furniture on the porch, make sure it isn't plastic but rather good-quality wicker or wrought iron. Power-wash or stain the deck. Remove or hide old cans and bottles, auto parts, boats and RVs.
•What's your marketing strategy? If using an agent, make sure she or he is using the Internet as a major part of the advertising campaign. Tempt buyers by offering to help pay closing costs. Or better still, offer to lend the buyer part of the money they need, with what's called "carry-back financing."
Homeowners
Check your documents
Dig out your mortgage documents and triple-check what kind of loan you have. Specifically, you want to know whether it has an adjustable interest rate, how often the rate can rise and the maximum it can rise to. Is there a penalty for paying off the loan early? If so, when does the penalty expire?
Nearly 2 million homeowners have subprime, adjustable-rate mortgages (ARMs) that will reset before July 2010. The average borrower will see monthly payments jump by about $350, to $1,550. Already, one in five homeowners with a subprime ARM was behind at least one payment at the end of the third quarter, according to the Mortgage Bankers Association.
Last month, Treasury Secretary Henry Paulson announced a deal with lenders that would help thousands of homeowners with subprime ARMs. Under the plan, homeowners who got their loans between Jan. 1, 2005, and July 31, 2007, would either be put on a fast-track program to refinance their loan to a fixed-rate mortgage at a lower rate, or have their rate frozen for five years.
But there are many exclusions to the program. In addition, millions of borrowers with prime ARMs aren't eligible. Neither are most of those with exotic adjustable-rate loans that let them pay only the interest portion or even less each month.
Dan Przewlocki is one of them. He refinanced his home outside Detroit in 2004, so he doesn't qualify for the rescue plan. Przewlocki, 52, got what's called an option-ARM. It lets him choose among payment options each month. The less he pays, the more the principal balance grows.
He's been paying the highest option and hasn't missed one payment. Yet his rate has been rising nearly every month, catapulting Przewlocki's monthly payment to $2,700 from $1,200 initially.
Washington Mutual, his lender, won't refinance the $310,000 loan because the home's value has sunk below the value of the loan, to $250,000, Przewlocki said.
He works in an auto maintenance plant and looks for handyman jobs and temporary work at Kelly Services. But his house payments eat up nearly 70% of his gross income. And Przewlocki, a tech sergeant in the Air Force reserves, knows he'll fall behind on his payments once he's deployed to the Middle East this year.
"If the mortgage company wants to take the house," he says, "the keys are going to be on the kitchen table."
Sara Gaugl, a spokeswoman for Washington Mutual, says the amount of Przewlocki's loan and the current value of his house "put him out of scope for a refinance under WaMu's credit guidelines. However, we will continue to work with Mr. Przewlocki to determine if there are other options available to him."
If you're in a similar situation, or think you might be soon:
•Contact your lender as soon as you know your payment will be late. If you want free credit counseling, you can also call the Homeownership Preservation Foundation at 888-995-HOPE (888-995-4673).
•If you can't renegotiate the terms of your loan, and your home is worth less than you owe, consider a "short sale": If your lender approves, you can sell your property at an agreed upon price, and your lender will forgive the remaining balance on your mortgage.
That's much better than wrecking your credit with a foreclosure. And under a law signed by President Bush last month, sellers no longer have to pay taxes on the amount of the forgiven debt. The law is retroactive to Jan. 1, 2007, and is scheduled to expire at the end of 2009.
Even if you don't keep your New Year's resolution to shed 20 pounds, getting out from under an unaffordable mortgage will take a huge weight off your shoulders.
10 Steps To Sell More Quickly In Stalled Markets
10 Steps To Sell More Quickly In Stalled Markets
Jan 07, 2008, 12:00 pm PST
We're well into the prime real estate selling season for much of the country, a marketplace less certain in many areas than in the past few years.
We don't fully know what will happen in 2008, but to date many markets have stalled if not declined. For most long-term owners selling in such a marketplace, appreciation from past years assures profitable sales, but perhaps not as profitable would have been the case in 2006.
But still, owners in all cases would like to maximize their profits. What to do? If you're a seller, there are 10 negotiating steps you can take to make sure your home has the best chance for a top price and a quick sale.
Step 1: Get a local broker. In a slow market there are relatively fewer buyers. It follows that to generate the most demand you want your property exposed to as many purchasers as possible. Who do buyers contact when they want a house? Brokers. Figures from the National Association of Realtors show that 85 percent off all buyers rely on real estate brokers when buying a home while 80 percent rely on the Internet. Who posts real estate information on the Internet? Local brokers.
Step 2: Read the sale agreement. Virtually all jurisdictions have a standardized real estate contract which over the years have become lengthy and complex. If you use one then you're automatically agreeing to all unmodified terms and conditions, so read the entire agreement so you know what is being said.
But is there something in the proposed agreement that should be changed, removed or added? Brokers should provide a copy of the sale agreement they expect to use at listing presentations and this document should be read to avoid surprises and misunderstandings. Since these are form agreements, anything not required by law can be changed with a suitable cross-out or addenda. For details, speak with your broker or attorney.
Step 3: Know the marketplace. In terms of negotiation it's not good enough to know recorded sale prices because they frequently don't tell the whole story. For instance, two homes may both have recorded sale prices of $500,000. One may actually have sold for $500,000 while the other sold for $500,000 but the owner gave a 3 percent seller credit to the buyer for a new roof and appliances -- that's $15,000 off the top. Local brokers who actually make sales know the innards of recent transactions are thus are in the best position to provide negotiating advice.
Step 4: Know your terms. You know your property will sell at some price point, but rather than a given price it's best to think of a home as a package of price and terms. For instance, in a slow market it may be better to pay a "seller contribution" to help buyers off-set closing costs than to lower the sale price. In many cases, the seller contribution may be smaller than a price reduction and much more attractive to buyers who need cash to close.
Step 5: Reduce deposit requirements. To make a contract work there's a need for a buyer deposit, the "consideration" necessary to bind a deal. If you're a seller you want the largest possible deposit, but in a slow market you may have to settle for less. Buyers, for their part, want to make the smallest possible deposit if only because a big deposit represents a huge psychological commitment -- and a financial one.
Less consideration may be appropriate if the buyer is pre-approved for a loan, the purchasers have a strong interest in the property and no better offer is in the picture.
Step 6: Throw in stuff. Do you really want to move a swing set or a washer/dryer? In some cases it may be best to "reluctantly" part with such items if only a buyer will make an offer.
Step 7: Update MLS photos. If it's August and your MLS photo shows a home with four feet of snow in the front yard then buyers can guess that the home has been for sale for a long, long time -- meaning the price and terms are, um, flexible. Perhaps more "flexible" than you would like. Have your broker post newer photos.
Step 8: Review the marketing plan. The marketing plan developed by your broker should be reviewed as often as necessary to assure that; one, it is being followed and; two, it is changed as necessary.
Step 9: Visit open houses. It's always good to visit open houses or, as they're otherwise called, the competition. It's not easy to be objective, but is there something other owners are offering which might work for your property? Something you can make into a bargaining point? Maybe an offer to re-paint the living room in a color of the buyer's choice is not a bad idea.
Step 10: Have context. It's silly to worry about small costs and concessions when your core goal is to sell the home.
In one situation, a buyer demanded an extra $500 to resolve some alleged concern just before closing. We thought this was simply an example of buyer's remorse and said yes, got an otherwise terrific price, and closed. Soon thereafter the local market slowed and prices softened. It was far cheaper to "lose" $500 then to locate another buyer a few weeks or months later when the market was harsher and our final sale price might have been many thousands of dollars less.
Would we have rather not paid the $500? Sure. But $500 was a small cost in the context of a rapidly changing market, one where delay could have meant a serious price reduction.
Jan 07, 2008, 12:00 pm PST
We're well into the prime real estate selling season for much of the country, a marketplace less certain in many areas than in the past few years.
We don't fully know what will happen in 2008, but to date many markets have stalled if not declined. For most long-term owners selling in such a marketplace, appreciation from past years assures profitable sales, but perhaps not as profitable would have been the case in 2006.
But still, owners in all cases would like to maximize their profits. What to do? If you're a seller, there are 10 negotiating steps you can take to make sure your home has the best chance for a top price and a quick sale.
Step 1: Get a local broker. In a slow market there are relatively fewer buyers. It follows that to generate the most demand you want your property exposed to as many purchasers as possible. Who do buyers contact when they want a house? Brokers. Figures from the National Association of Realtors show that 85 percent off all buyers rely on real estate brokers when buying a home while 80 percent rely on the Internet. Who posts real estate information on the Internet? Local brokers.
Step 2: Read the sale agreement. Virtually all jurisdictions have a standardized real estate contract which over the years have become lengthy and complex. If you use one then you're automatically agreeing to all unmodified terms and conditions, so read the entire agreement so you know what is being said.
But is there something in the proposed agreement that should be changed, removed or added? Brokers should provide a copy of the sale agreement they expect to use at listing presentations and this document should be read to avoid surprises and misunderstandings. Since these are form agreements, anything not required by law can be changed with a suitable cross-out or addenda. For details, speak with your broker or attorney.
Step 3: Know the marketplace. In terms of negotiation it's not good enough to know recorded sale prices because they frequently don't tell the whole story. For instance, two homes may both have recorded sale prices of $500,000. One may actually have sold for $500,000 while the other sold for $500,000 but the owner gave a 3 percent seller credit to the buyer for a new roof and appliances -- that's $15,000 off the top. Local brokers who actually make sales know the innards of recent transactions are thus are in the best position to provide negotiating advice.
Step 4: Know your terms. You know your property will sell at some price point, but rather than a given price it's best to think of a home as a package of price and terms. For instance, in a slow market it may be better to pay a "seller contribution" to help buyers off-set closing costs than to lower the sale price. In many cases, the seller contribution may be smaller than a price reduction and much more attractive to buyers who need cash to close.
Step 5: Reduce deposit requirements. To make a contract work there's a need for a buyer deposit, the "consideration" necessary to bind a deal. If you're a seller you want the largest possible deposit, but in a slow market you may have to settle for less. Buyers, for their part, want to make the smallest possible deposit if only because a big deposit represents a huge psychological commitment -- and a financial one.
Less consideration may be appropriate if the buyer is pre-approved for a loan, the purchasers have a strong interest in the property and no better offer is in the picture.
Step 6: Throw in stuff. Do you really want to move a swing set or a washer/dryer? In some cases it may be best to "reluctantly" part with such items if only a buyer will make an offer.
Step 7: Update MLS photos. If it's August and your MLS photo shows a home with four feet of snow in the front yard then buyers can guess that the home has been for sale for a long, long time -- meaning the price and terms are, um, flexible. Perhaps more "flexible" than you would like. Have your broker post newer photos.
Step 8: Review the marketing plan. The marketing plan developed by your broker should be reviewed as often as necessary to assure that; one, it is being followed and; two, it is changed as necessary.
Step 9: Visit open houses. It's always good to visit open houses or, as they're otherwise called, the competition. It's not easy to be objective, but is there something other owners are offering which might work for your property? Something you can make into a bargaining point? Maybe an offer to re-paint the living room in a color of the buyer's choice is not a bad idea.
Step 10: Have context. It's silly to worry about small costs and concessions when your core goal is to sell the home.
In one situation, a buyer demanded an extra $500 to resolve some alleged concern just before closing. We thought this was simply an example of buyer's remorse and said yes, got an otherwise terrific price, and closed. Soon thereafter the local market slowed and prices softened. It was far cheaper to "lose" $500 then to locate another buyer a few weeks or months later when the market was harsher and our final sale price might have been many thousands of dollars less.
Would we have rather not paid the $500? Sure. But $500 was a small cost in the context of a rapidly changing market, one where delay could have meant a serious price reduction.
Pain Street USA: '08 housing outlook
Pain Street USA: '08 housing outlook
The forecast is for a longer, deeper home-price slump than previously expected, with double-digit declines in many markets.
By Les Christie, CNNMoney.com staff writer
NEW YORK (CNNMoney.com) -- The United States is deep in its worst housing slump since the Great Depression, and according to a new report, it's not going to get better any time soon.
In a new survey, Moody's Economy.com says many metro areas will record losses of 20 percent or more during the downturn, with the national median price for single-family homes dropping 13 percent through early 2009. Factoring in discount offers from sellers, the actual price decline would be well over 15 percent.
Eighty of the 381 metro areas covered by the report will record double-digit losses, according to the report. Most of the worst-hit markets are in once high-flying areas, such as California and Florida.
Home spiff-ups for all seasons
The steep losses were bound to arrive sometime. Throughout the housing slump, which began in the summer of 2006, experts kept expecting prices to tumble, but it wasn't until recently that they dropped substantially, according to Mark Zandi, chief economist for Moody's Economy.com.
"There has been a sea change in seller psychology since the subprime shock this summer," he said. "Sellers now realize they have to drop their prices to make a sale and prices are coming down very rapidly in some markets."
One such place is Punta Gorda, Fla. In Moody's outlook, prices there will undergo the steepest correction of any U.S. market. From their peak during the first three months of 2006, to their bottom, forecast for the second quarter of 2009, prices will decline 35.3 percent. That's in nominal dollars; adjusted for inflation, the loss will be even greater.
Other metro areas expected to go through crushing price drops include: Stockton, Calif., where prices are forecast to drop 31.6 percent, Modesto, Calif. (-31.3 percent), Fort Walton Beach, Fla. (-30.4 percent) and Naples, Fla. (-29.6 percent).
The worst hit market outside the Sun Belt is expected to be Ocean City, N.J. where prices will fall 24.9 percent, according to Moody's. Prices in St. George, Utah (-21.8 percent), Grand Junction, Colo. (-18.9 percent) and Atlantic City, N.J. (-18.6 percent) will also suffer. In the Washington, D.C. metro area, Moody's forecasts a decline of 18.4 percent.
Home prices are being pulled down by an even more severe decline in home sales, which Moody's expects to bottom out in early 2008, when unit sales will be down more than 40 percent from their peak.
Home builders continued to add to inventory even as the slump got well under way, contributing to what is now an 11-month back-log of homes for sale, according to the National Association of Realtors.
Many of these homes are sitting completely empty: The Census Bureau reported a total of 2.1 million vacant homes for sale. Vacant homes add pressure on prices because owners of these houses are usually more willing to slash prices to move the properties. They cost out-of-pocket cash each month while providing neither income nor shelter.
Even though home construction has now contracted severely - the Census Bureau reported Tuesday that new housing starts were down to an annualized rate of 1.187 million units in November, the lowest in 16 years - it will take time to work through the excess inventory.
The housing slump will have a substantial impact on the overall economy, according to Moody's, which says it will depress real gross domestic product by more than a percentage point this year and by 1.5 percentage points in 2008.
Speculative investment in the mid-2000s helped fuel the current slump. Zandi pointed out that 16 percent of mortgage originations during 2005 were for non-owner-occupied housing, twice the number of a few years earlier.
"And that's a very conservative estimate of investor demand," he said. "Many home buyers lied on their mortgage applications." That's because interest rates are lower for owner/occupied dwellings.
Buying for investment was especially prevalent in many resort areas, such as Ocean City, N.J. Many buyers were betting they could hold onto the property for a short time and sell it for a quick profit, a difficult feat to finesse, considering the high transactional costs. Many speculators came late to the party and got caught in the slump. Now their properties are adding to mountainous inventories.
Another factor was excessive new home construction, especially in once hot markets. As prices skyrocketed, builders rushed to take advantage of the increases, contributing to the now high inventories.
Also adding homes to markets was the increase in foreclosure filings. When lenders take back properties, they put them back on the markets. Foreclosures have just about doubled this year.
For the slump to end, much of the excess inventory will have to be worked through. Zandi doesn't envision that happening much before 2010, which he forecasts to be a very modest recovery year with low, single-digit growth.
The forecast is for a longer, deeper home-price slump than previously expected, with double-digit declines in many markets.
By Les Christie, CNNMoney.com staff writer
NEW YORK (CNNMoney.com) -- The United States is deep in its worst housing slump since the Great Depression, and according to a new report, it's not going to get better any time soon.
In a new survey, Moody's Economy.com says many metro areas will record losses of 20 percent or more during the downturn, with the national median price for single-family homes dropping 13 percent through early 2009. Factoring in discount offers from sellers, the actual price decline would be well over 15 percent.
Eighty of the 381 metro areas covered by the report will record double-digit losses, according to the report. Most of the worst-hit markets are in once high-flying areas, such as California and Florida.
Home spiff-ups for all seasons
The steep losses were bound to arrive sometime. Throughout the housing slump, which began in the summer of 2006, experts kept expecting prices to tumble, but it wasn't until recently that they dropped substantially, according to Mark Zandi, chief economist for Moody's Economy.com.
"There has been a sea change in seller psychology since the subprime shock this summer," he said. "Sellers now realize they have to drop their prices to make a sale and prices are coming down very rapidly in some markets."
One such place is Punta Gorda, Fla. In Moody's outlook, prices there will undergo the steepest correction of any U.S. market. From their peak during the first three months of 2006, to their bottom, forecast for the second quarter of 2009, prices will decline 35.3 percent. That's in nominal dollars; adjusted for inflation, the loss will be even greater.
Other metro areas expected to go through crushing price drops include: Stockton, Calif., where prices are forecast to drop 31.6 percent, Modesto, Calif. (-31.3 percent), Fort Walton Beach, Fla. (-30.4 percent) and Naples, Fla. (-29.6 percent).
The worst hit market outside the Sun Belt is expected to be Ocean City, N.J. where prices will fall 24.9 percent, according to Moody's. Prices in St. George, Utah (-21.8 percent), Grand Junction, Colo. (-18.9 percent) and Atlantic City, N.J. (-18.6 percent) will also suffer. In the Washington, D.C. metro area, Moody's forecasts a decline of 18.4 percent.
Home prices are being pulled down by an even more severe decline in home sales, which Moody's expects to bottom out in early 2008, when unit sales will be down more than 40 percent from their peak.
Home builders continued to add to inventory even as the slump got well under way, contributing to what is now an 11-month back-log of homes for sale, according to the National Association of Realtors.
Many of these homes are sitting completely empty: The Census Bureau reported a total of 2.1 million vacant homes for sale. Vacant homes add pressure on prices because owners of these houses are usually more willing to slash prices to move the properties. They cost out-of-pocket cash each month while providing neither income nor shelter.
Even though home construction has now contracted severely - the Census Bureau reported Tuesday that new housing starts were down to an annualized rate of 1.187 million units in November, the lowest in 16 years - it will take time to work through the excess inventory.
The housing slump will have a substantial impact on the overall economy, according to Moody's, which says it will depress real gross domestic product by more than a percentage point this year and by 1.5 percentage points in 2008.
Speculative investment in the mid-2000s helped fuel the current slump. Zandi pointed out that 16 percent of mortgage originations during 2005 were for non-owner-occupied housing, twice the number of a few years earlier.
"And that's a very conservative estimate of investor demand," he said. "Many home buyers lied on their mortgage applications." That's because interest rates are lower for owner/occupied dwellings.
Buying for investment was especially prevalent in many resort areas, such as Ocean City, N.J. Many buyers were betting they could hold onto the property for a short time and sell it for a quick profit, a difficult feat to finesse, considering the high transactional costs. Many speculators came late to the party and got caught in the slump. Now their properties are adding to mountainous inventories.
Another factor was excessive new home construction, especially in once hot markets. As prices skyrocketed, builders rushed to take advantage of the increases, contributing to the now high inventories.
Also adding homes to markets was the increase in foreclosure filings. When lenders take back properties, they put them back on the markets. Foreclosures have just about doubled this year.
For the slump to end, much of the excess inventory will have to be worked through. Zandi doesn't envision that happening much before 2010, which he forecasts to be a very modest recovery year with low, single-digit growth.
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