Tuesday, September 29, 2009

Inflationary pressure on housing prices; Lawrence Yun

An article at CNNMoney today claims that the leading home price index rose in July. But this trend may be only temporary according to the chief economist for the National Association of Realtors:
Yun points out that there will be another foreclosure spike over the next six to 12 months as the terms of option ARMs and interest-only mortgages reset, raising monthly payments for many borrowers and pushing some into delinquency. Foreclosed homes will continue to come back onto the market, padding supplies and dampening prices.

Lawrence Yun - National Association of Realtors

The downward tendency caused by foreclosure activity is being countered by the economic stimulus package passed in Washington in February. With hundreds of billions of new dollars being injected into the economy, the prices of all products will increase. The $8,000.00 first time homebuyers' credit adds to upward pressure on real estate prices:
The other major uncertainty is over the first time homebuyers' tax credit that currently gives back up to $8,000 to taxpayers who buy before Dec. 1 and who have not owned a home within the past three years.

An AP report today confirmed the potential inflationary pressures on the economy as a whole:
To prevent inflation from taking off, the Federal Reserve will need to start boosting interest rates quickly and aggressively once the economy is back on firmer footing, Fed officials warned Tuesday.

Any such action by the Federal Reserve may curb inflation, but will curtail loan activity as interest rates rise.

Long term price trends will depend on whether the FED's next rate hike and the next wave of foreclosures will take effect before the "stimulus" money has a chance to generate inflation.

See Bubble Meter for more information.

previous - Mortgage foreclosures - a catalyst for real estate fraud?

Monday, September 28, 2009

Home inspections as a remedy for real estate fraud.

I have written about the increased risk of misrepresentation by sellers of real estate in the current economic climate. As housing prices stagnate, sellers will resort increasingly to fraud in order to rescue their expected gains from the sale of their properties.

In order to protect themselves, buyers must increasingly use home inspectors in order to discover hidden defects in the houses they would purchase. A home inspection can reveal structural or other defects that might cost the buyer dearly once the transaction is complete.

But home inspections come with limitations. The home inspector will not look in obstructed areas of the house during his inspection. Sellers know this limitation and will find ways to obscure the various defects. Inspectors are not aggressive about seeking out defects or questioning sellers. Home inspections must be performed and presented to the seller within a certain time period. Sellers may dispute the results of a home inspection and attempt to retain the buyer's deposit if the buyer backs out of a deal because of a negative inspection report.

There are ways for a buyer to deal with all of these issues - ways that I will discuss in later posts.
update - home inspector organizations.

Sunday, September 27, 2009

Mortgage foreclosures - a catalyst for real estate fraud?

There are indications that a new wave of mortgage foreclosures may soon hit the already weak economy. The impact of those (and previous) foreclosures reaches far beyond the houses that are actually being foreclosed upon. As we have all learned, foreclosures tend to depress the price of all real estate, as lenders end up dumping large amounts of foreclosed real estate on the market in an attempt to cut their losses. The price effect of a few foreclosures spreads throughout the entire real estate market.

But prices fall slowly. Sellers are reluctant to lower the price of their house, as they harbor long held expectations of what their house is worth. Rather than lower the price of their house, many sellers will resort to misrepresentation and fraud in order to unload their property. There is hardly a characteristic of a house that a seller will not misrepresent. Fraud comes before price concessions.

We are told that the current real estate market is a “buyer’s market.” We are led to believe that buyers can obtain good deals by taking advantage of depressed prices. That theory is true only for those buyers who can withstand the gauntlet of misrepresentation that awaits anyone who attempts to obtain a bargain.

While specific cases of misrepresentation will have to await future posts, suffice it to say that buyers should assume that the road to a good bargain is paved with hidden costs. There are many ways for buyers to protect themselves, but they won't get this protection unless they assume the worst in each case. Stay tuned for details . . .

update -
Home inspections as a possible solution.

Saturday, September 26, 2009

Adjustable rate mortgage defaults and lending industry consolidation.

Reuters warned last week of the next round in the ongoing financial crisis:
The federal government and states are girding themselves for the next foreclosure crisis in the country's housing downturn: payment option adjustable rate mortgages that are beginning to reset.

"Payment option ARMs are about to explode," Iowa Attorney General Tom Miller said after a Thursday meeting with members of President Barack Obama's administration to discuss ways to combat mortgage scams.

The impact of this round of foreclosures could be severe:
The mortgages tend to be "jumbo," or for significantly large amounts, Goddard said, making it even harder for borrowers to sidestep foreclosure. He said he expected to see an increase in scams as distressed homeowners become more desperate to refinance big debts.

The loss for lenders on each "jumbo" mortgage foreclosure would be greater than the losses on smaller loans.

All of this bad news makes the following item even more interesting:
Peter Eavis, writing in the Wall Street Journal on Friday [September 18, 2009], noted: "More than half of US residential mortgages are being made by just three large banks. It is a stunning change, but is it good for the housing market, and to what extent will it boost profits over the long term for this elite trio: Wells Fargo, Bank of America, and JP Morgan Chase? Right now, housing remains on government life support. Treasury-backed entities are guaranteeing about 85% of new mortgages, while the Fed buys 80% of the securities into which these taxpayer-backed mortgages are packaged."

While this second item refers to new mortgages instead of the existing ARM mortgages of the first article, it should cause great concern that lenders are about to take another round of bad hits just as the mortgage industry seems to be consolidating into only three major institutions.

The articles cited above were speaking of national trends. But someday, this crisis has to reach the point where even the supposedly stable Central Pennsylvania market will feel the effects of the credit crunch more sharply than it has thus far.