A Real Estate Recovery in 2013

Economists speaking at the recent annual meeting of the National Association of Real Estate Editors said the housing market likely will not recover until 2013.

Stan Humphries, Zillow chief economist, said home prices continue to decrease, and he sees the “tremendous amount of shadow inventory” delaying recovery. “We think the market will be flat in nominal terms for three to five years,” remarked Humphries. “We are not going to hit bottom and see a V-shaped recovery.”

Meanwhile, Fannie Mae chief economist Doug Duncan said it will be another three years before new household formation and housing starts pick up. Duncan believes home prices will fall another 1 percent to 3 percent before bottoming out in the third quarter.

Both Humphries and Duncan said the federal home buyer tax credits shifted demand so that buyers took action earlier than they would have otherwise. “We’re going to see a payback in July and August,” noted Humphries.

NAR Praises House Passage of FHA Reform Bill

The National Association of REALTORS® applauded the House for overwhelming passage of FHA reform legislation that would allow the Federal Housing Administration to adjust monthly premiums on mortgage insurance.

This bill, H.R. 5072, FHA Reform Act of 2010, would strengthen the FHA loan insurance program while keeping it available and affordable to responsible home buyers. Allowing FHA to raise the monthly insurance premium would let FHA lower the up-front premium that places a burden on cash-strapped borrowers at closing.

“As the leading advocate for homeownership and housing issues, NAR is very pleased that FHA will be allowed to play its intended countercyclical role to provide qualified borrowers with access to prime credit. FHA is a critical part of our nation’s economic recovery,” said NAR President Vicki Cox Golder.

En route to passage, the House defeated an amendment that would have increased the FHA down payment from 3.5 percent to 5 percent, which would have disenfranchised more than 300,000 potential homeowners and would not have contributed significantly to FHA cash reserves.

“The current 3.5 percent down payment represents a significant financial commitment and sufficient investment to insure a borrower’s seriousness about homeownership,” said Golder. The proposed change could have an especially harsh impact on African American and Hispanic borrowers, who traditionally have much lower accumulated wealth and have benefited from the opportunities offered by fully documented, standard FHA loans with low down payments.

Post-Tax Credit Buyers May Save Money

Missing the tax credit deadline might have seemed like a big mistake to some home buyers, but waiting could have been the smartest thing to do.

Interest rates have fallen so dramatically since April 30th that the typical purchaser of a $350,000 home, financed with a $280,000 mortgage, would have saved a bundle by waiting until May.

At April’s average rate of 5.34 percent, a home buyer would have locked in a 30-year fixed rate loan with a monthly payment of $1,561.82.

The same borrower could have snagged a 30-year fixed rate loan at a rate of 4.625 percent in May and paid $1,439.59 per month.

That’s a $1,467 annual savings. Over 30 years, it’s a $44,003 savings, dwarfing the tax credit.

Strategic Defaulters Won’t Buy Again Soon

How long will it be before former homeowners who walked away from their mortgages can buy again?

Mortgage lenders are saying that in the future, losing a home because of illness or job loss will be seen differently than choosing to abandon a mortgage obligation for other reasons.

“If you made a strategic decision to default on paying your mortgage, it will work against you,” said Bill Merrell of the National Association of Review Appraisers and Mortgage Underwriters.

It will probably be seven or eight years before walkaways are able to buy another home, said Jay Brinkmann, chief economist for the Mortgage Bankers Association. “Credit scores are only one component of a complete credit decision,” Brinkmann said. “[In these cases] credit scores are not a good indicator of their willingness to continue to pay their mortgage.”

More People Are Choosing to Rent

More than 76 percent of people say they would prefer to rent a home than buy one, up 5 percent from 2009, according to this year’s survey from the National Apartment Association.

The survey also calculated that 60 percent of renters plan to continue renting in 2011, with only 12 percent planning to buy a home in the next year.

Some 64 percent of renters cited having no responsibility for major repairs or maintenance as the primary reason they prefer to rent, followed by 33 percent who cited not being impacted by an unpredictable real estate market or susceptible to foreclosure.

Comfortable Laundry Rooms Are a Must-Have

Convenient and comfortable laundry rooms are an increasingly popular feature among home buyers.

Tom Byrne, president of Rockville, Md.-based Chadsworth Homes Inc., says they are more popular than such features as studies and media rooms.

“In the past few years, 30 percent of the homes we build … have a laundry room with granite countertops, a single-level kitchen-style faucet, and the laundry tub will be an undercounter sink,” Byrne says.

Stephen Melman, director of economic services for the National Association of Home Builders, concurs.

“These rooms are becoming larger and more multifunctional, with organizers, a table for folding, ironing stations, and windows with a view,” Melman says.

Senate Passes Financial Reform Bill

The Senate approved the most extensive overhaul of the banking system since the 1930s.

The legislation must still be reconciled with the House bill passed in December.

Measures in both bills that directly affect property transactions include:

• Limits on the ability of mortgage lenders to penalize borrowers who pay off loans early.

• Stated-income loans would be effectively eliminated.

• Lenders would be required to obtain proof from borrowers that they can pay for their mortgages. Buyers would be required to provide tax returns, payroll receipts, or bank documents.

• Lenders and brokers will be prohibited from pushing borrowers to accept loans with higher interest rates or with risky features.

Stevens: “Incredible” Market Ahead

With the housing recovery still fragile, it’s hard to look ahead with anything but caution. However, the long-term prospects for the market are “incredible,” FHA Commissioner David Stevens told REALTORS® yesterday in the opening forum of the 2010 NAR Midyear Legislative Meetings & Trade Expo.

Young households today represent a demographic block larger than even the baby boomers, and their entry into the housing market promises to help build “an incredible real estate market in the future,” said Stevens. But first the housing market must move from recovery to stability and then to long-term growth, and that will only happen if investors regain confidence in the mortgage market. And for that to happen, the mortgage market must be reformed to reward transparent financing structures.

Stevens credited NAR’s role in helping Congress and the administration stabilize the market through its support of a “mosaic” of pragmatic policies, such as:

• The Federal Reserve’s $1.25 trillion dollar investment in Fannie Mae and Freddie Mac mortgage backed securities, which helped keep interest rates historically low.
• The home buyer tax credit, which has so far been taken by 2.2 million households for $16 billion in total returns
• The federal government’s foreclosure prevention efforts, which have helped 1.1 million households.

That mix of programs has led to today’s housing recovery but the job won’t be finished, he says, until the federal government steps out of the picture and the market stands on its own. “We constantly talk about exit strategy,” Stevens said, referring to the administration’s goal of unwinding its mortgage-market interventions.

To help protect the recovery, Stevens urged REALTORS® while they’re in Washington this week to convince lawmakers to pass FHA reform legislation under consideration in the House as soon as possible. That legislation, H.R. 5072, would enable FHA to lower the upfront mortgage insurance premium and instead fold a higher annual premium into the loan, a change that would align FHA with the approach used in the private sector. The legislation would also give FHA more tools for clamping down on bad lenders.

The changes in the mortgage insurance premium are needed to help FHA improve its financial picture and restore its reserves to its congressionally mandated level. Not having the authority it needs to change its premium structure “is costing FHA $300 million a month in money it’s not getting,” he said.

“You are the recovery,” he told the packed room of REALTORS®. “Now we’ve got to finish the job.”

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