Breaking News: Housing Recovery Starting To Happen? Popularity: 1% [?]

Home Sales INcrease!

Its been interesting reading all the conflicting reports regarding the economy and the ‘housing recovery’. It seems that the media is now (finally) figuring out what Harris Real Estate University students have known for well over a year..(we are in the eye of the ‘real estate storm’ and its realistic to believe that the real estate markets will get worse…in some cases MUCH worse…. before they get better)

Stocks of homebuilders have had an impressive run recently, thanks to a stream of improving macroeconomic data, including home sales and consumer confidence, climbing an average of 38% since March 9. But will the recovery last? Recent gains in long-dated U.S. Treasury yields augur rising mortgage rates, while the likelihood of increasing foreclosures could further bloat the housing supply in the months ahead.

New sales of single-family homes came in at a seasonally adjusted annual rate of 352,000 in April, down 0.3% from a downward-revised 351,000 in March, but 34% below the April 2008 estimate of 533,000, according to the U.S. Census Bureau and the Housing and Urban Development Dept.. But new home sales are down from 362,000 in February. The median sales price of new houses sold was $209,700, down almost 15% from a year ago.

One reason for the month-to-month improvement in the housing numbers for a couple of months earlier this year was the moratorium placed on foreclosures by many banks from November through February, says Robert Stevenson, an analyst at Fox-Pitt, Kelton Cochran Caronia Waller in New York. But since then, foreclosures have continued to rise, causing home sales to plateau.

Some of the positive data points have proved not to be sustainable, he says. “You haven’t seen as many sales as you would like coming out of the spring homebuying season and the very low mortgage rates and some of the tax stimulus,” he says. Still, homebuilders are feeling more optimistic. The National Association of Home Builders’ housing-market index, which measures both current and future sales conditions, climbed two points, to 16, in May after a five-point increase in April.
The “Better Areas” Are Going to Get Hit

Realtors, there are 2 kinds of agents…those who know how to easily list and sell short sales (and are making a fortune)  and those who refuse to learn anything new…struggle to stay afloat…and will probably not be in real estate for much longer. What kind of agent are YOU? Watch the FREE Agent Short Sale Secrets video then download the FREE Agent Short Sale Secrets book. Don’t wait, don’t procrastinate….FINALLY take action and learn how to become one of the agents who is THRIVING in this market.

Economists would like to believe the recent data indicate that the housing market has touched bottom, but prices have further to drop to reach some analysts’ peak-to-trough estimates of 43%. John Burns, a real estate consultant who advises major homebuilders, believes the median home price will fall an additional 5% or 6% and that will be the end of it. “The worst areas have been hit very hard” since that’s where most of the distressed selling has been, he says. “It’s the better areas that are going to get hit over the next 12 months” as foreclosures mount in those areas.

In Phoenix, which has experienced one of the worst drops in home prices from their peak of any U.S. city, sales-office traffic jumped 55% in the three months through the end of April after 11 consecutive quarters of decline, according to Jim Belfiore, president of Belfiore Real Estate Consulting, a market research firm in Phoenix. Traffic is a leading indicator of where home sales are headed, he says.

Builders’ sales in that area have at least tripled in the past 30 days, due to a big drop in prices from January through early March that narrowed the premium over prices of foreclosure properties to just 15% in most local sub-markets, says Belfiore. Meanwhile, the latest S&P/Case-Schiller data show prices of foreclosures on Phoenix’s multiple listing service up an average of $5 per square foot over the past 30 to 40 days, with demand currently outstripping supply.

Phoenix is being looked at as an indicator of what the nationwide housing market could look like 12 to 18 months from now, he says. The land and lots that most of the publicly traded homebuilders own in and around Phoenix comprise a significant portion of their total holdings, he adds.

Bottom-Fishing in Phoenix

Stevenson at Fox-Pitt characterizes most of those buying homes in Phoenix as “bottom-fishers” who are taking advantage of the supply glut that’s pushed prices to bargain levels. Other reasons the market has attracted buyers: Phoenix is likely to produce one of the higher levels of job growth over the next 10 years, and its climate makes it a preferred retirement destination, he says.

Belfiore concedes that a large percentage of the recent sales has been by investors rather than people planning to move in immediately, and most are resales of foreclosure properties. The majority of new-home sales have been by first-time home buyers, motivated by the federal tax credit of up to $8,000, which is set to expire in November.

The expected increase in foreclosures over the next few months will force homebuilders to lower prices on new homes to be able to compete. Builders who own the land end up building a house and selling it at a price that results in a negative margin just to get the money out of the land, says Stevenson. Normally, however, rather than build at a negative margin, companies will take an impairment charge, marking down the value of the land to where they can afford to sell the houses for less without killing their margins.

Generally, the bigger homebuilders are still reporting impairment charges between $100 million and $400 million per quarter this year, including the cost of walking away from options on land they don’t own and goodwill remaining from past acquisitions, he says.
more foreclosures than new homes

Metrostudy, a national housing market research firm in Houston, is still projecting 490,000 U.S. housing starts for 2009, below the 520,000 to 550,000 forecast by many general economists. Brad Hunter, chief economist and national director of consulting at Metrostudy, recently cited three reasons for the low level of starts: the inventory overhang builders are trying to work off, denial of credit by some builders’ banks even if they’re current on their loans, and the depressed price levels that make it hard for some builders to sell homes profitably.

Housing inventory fell to 10.1 months of supply from 10.7 in March and was well below the peak 13 months of supply, After a couple of strong months, there was a lull in purchases of homes priced between $150,000 and $200,000, which had had the strongest growth, Goldman Sachs said in a May 28 research note. The key to further paring excessive housing supply is a slowdown in foreclosure filings, which Goldman doesn’t see as likely. In March, foreclosure filings were 15% higher than the total inventory of new homes for sale, Goldman said, citing RealtyTrac data.

Realtors, there are 2 kinds of agents…those who know how to easily list and sell short sales (and are making a fortune)  and those who refuse to learn anything new…struggle to stay afloat…and will probably not be in real estate for much longer. What kind of agent are YOU? Watch the FREE Agent Short Sale Secrets video then download the FREE Agent Short Sale Secrets book. Don’t wait, don’t procrastinate….FINALLY take action and learn how to become one of the agents who is THRIVING in this market.

Do stock-market pros like any names in the battered industry? D.R. Horton (DHI) is one of the stocks favored by James Wilson, an analyst at JMP Securities in San Francisco, who rates it as outperform. He said he expects the company to be among the first to return to profitability starting in fiscal year 2010. “Over 50% of its customers are first-time home buyers, who will be the first, in our view, to enter the market as prices begin the bottoming process and sales start to pick up in certain markets,” he wrote in a May 6 research note.

D.R. Horton had $1.5 billion in cash at the beginning of May and said it was terminating a $275 million revolving credit line due to lack of anticipated need, and as a result saving $3 million in annual non-use fees. The company generated $161 million in operating cash flow in the second fiscal quarter and $978.6 million for the first six months of fiscal 2009. “This puts Horton in a very favorable position to capitalize on attractive land deals as banks and private builders begin to unload assets on the cheap,” Wilson said in his note.

While the company said it’s trying to work down current inventory and is not considering any joint-venture deals, at some point land will become too cheap to ignore, Wilson said. After two straight quarters of impairments below $60 million, the company is nearing the end of its impairments, he said. He expects an additional $65 million in impairments for the current fiscal year, which should bring Horton’s assets close to being in-line with current market values. However Credit Suisse analyst Daniel Oppenheim is less optimistic about the stock, which he rates as underperform, citing risk from mounting foreclosures.

Wilson reaffirmed his outperform rating on MDC Holdings (MDC) on May 11, citing the company’s strong balance sheet and much lower-than-expected impairments in the first quarter. With MDC perhaps $30 million away from the end of its impairments, he lowered his net loss forecast for fiscal 2009 to $2.25 from $2.75 a share, but reduced his estimate for fiscal 2010 from breakeven to a loss of 50¢ a share based on lower revenue from a lower-than-expected backlog plus higher corporate overhead costs.
Pressure on Margins

Even though MDC slashed it speculative sales by 173 units from the fourth quarter of 2008 to the first quarter of this year, its remaining 648 spec sales are too high compared with backlog of just 629 units, which will put pressure on margins, according to Credit Suisse (CS). In a May 8 note, Oppenheim rated MDC as underperform, saying that with sales, general, and administrative expenses at 29.3% of revenue, the builder needs significant further cuts or higher sales volumes to become profitable again.

Although he sees MDC as one of the best-managed home builders, Oppenheim said he expected weaker sales and lower prices due to greater competition from foreclosures in the short term to put pressure on the stock and also pointed to the risk associated with its premium valuation to its peers.

Oppenheim downgraded KB Home (KBH) to underperform from neutral in April, citing “risks from weak demand, falling home prices, and increased competition from other builders at the low end of the market where KB Home competes with its new lower-priced ‘Open Series’ product.” His $10 target price is based on a 10% premium to his adjusted book value estimate.

While a lot of the data suggest the housing market is close to bottoming out in some ways, there’s really no recovery on the horizon, says Burns. That’s because mortgage rates are being held artificially low for now and are going to trend up in the months ahead, which will prevent a strong recovery. Meanwhile, any pent-up demand from renters who want to become owners will be overwhelmed by the rising number of foreclosures. “It’s going to take a couple years to work our way through this [inventory],” he says.

Popularity: 1% [?]

Realtors, Be Prepared For What Is Happening Next | Realtor Coaching Popularity: 2% [?]

Home Values Shedding Value

This is one of those posts that I Know will generate  negative comments from our readers.

And I am OK with that.

We are criticized all the time for sharing info like this with our students..here is an example.

True Story: I received an email over the weekend from a Real Estate Coaching company whom many of you would consider a competitor of ours. The coach (who is a friend of mine so I wont use his name) was very critical of our blog…and the fact that we don’t pump the usual ‘Its a great time to buy a house’ propaganda.

“Tim, why do you post so much doom and gloom?”

He didn’t understand why we post articles like this one….

SO, for our competitors, our students and our future students…here is why we share info with you that may cause some of you to be alarmed and even angered with us.

We do it because no one else seems to have the courage to tell agents the truth about what may happen next in our respective real estate markets.

YOU SIMPLY MUST BE PREPARED FOR WHAT MAY BE COMING NEXT.

It would be vastly easier for us to tell you to ‘get back to the basics’ or ‘its all about how you think’. But, that would be a lie.

Selling homes, being a Realtor is an honorable profession. You are helping people solve a problem and accomplish an emotional and financial goal. Your job (as a Realtor) is to become a great sales person and an even better business person. When you are prepared for the worst but, hopeful for the best..you have an advantage. Once you have that mindset you will do a better job serving your real estate clients.

Here is the question we ask all of our Graduate Coaching students that I want you to ask yourself now: (Warning: reading what comes next may cause anxiety and doubt….but, if you read the whole thing you will find inspiration and strength).

Ask yourself…..

“What if I knew with 100% certainty that the real estate markets were going to get worse…far worse….in the next 6 months…what 3 things would I be doing differently NOW?”

Don’t be afraid of that question…take it seriously. If you KNEW that housing sales were going to plummet what 3 things would you be doing NOW…

If you knew for sure that the darkest days for real estate were still ahead of us…what would you be doing now?

IDEAS:  Price reductions, taking FAR more listings, stronger focus on pre-qualifying, master Short Sale listings (finally), become a REO listing agent, follow a schedule?….what would you do if you knew FOR SURE real estate sales were going to decline further? Heres a thought, how about getting the education that you know you must have to learn the skills that this market demands. Make you own list. That is your plan of action for NOW.

Bottom line, Realtors are the only true hope for homeowners….this market is about agents with the skill set to serve and the mindset to be of service.

Next super tough revealing question….

“What are you doing now that you would stop doing if you knew that home sales were going to become far more challenging”

IDEAS: Maybe you would stop waiting for the phone to ring (and make it ring), you would stop waiting for the sellers to ask for a price reduction and start listing homes with pre-planned and agreed upon price changes, maybe you would stop mailing stuff to homeowners in hope that some day…they will call. What 3 things would you STOP doing now if you knew for sure that the real estate markets were going to become much worse?

Maybe now you get it.

If you are prepared for the worst…and the worst never happens…you are in better position.

We don’t want the real estate markets to slide any further. Its truly horrible what is happening to our country. Nothing would make us happier than telling all of you that the worst days for the real estate markets are behind us. Until that day happens we promise to tell you the truth, the whole truth and nothing but the truth. If that offends some of you (and we know it does) we sincerely apologize.

Please don’t be afraid of whats next.

The fact is that if you are still in the real estate business (especially after the epic national washout of thousands of Realtors that took place over the last 2 years) you have already proven that you have the chops to make it through the end of this historic ‘correction’. Be mentally, emotionally and financially prepared for this correction to take another 3-5 years.

HREU Students (and future students) if you need any help…request a Free Coaching Call.

Here is the article from The New York Times.

As job losses rise, growing numbers of American homeowners with once solid credit are falling behind on their mortgages, amplifying a wave of foreclosures.

In the latest phase of the nation’s real estate disaster, the locus of trouble has shifted from subprime loans — those extended to home buyers with troubled credit — to the far more numerous prime loans issued to those with decent financial histories.

With many economists anticipating that the unemployment rate will rise into the double digits from its current 8.9 percent, foreclosures are expected to accelerate. That could exacerbate bank losses, adding pressure to the financial system and the broader economy.

“We’re about to have a big problem,” said Morris A. Davis, a real estate expert at the University of Wisconsin. “Foreclosures were bad last year? It’s going to get worse.”

Economists refer to the current surge of foreclosures as the third wave, distinct from the initial spike when speculators gave up property because of plunging real estate prices, and the secondary shock, when borrowers’ introductory interest rates expired and were reset higher.

“We’re right in the middle of this third wave, and it’s intensifying,” said Mark Zandi, chief economist at Moody’s Economy.com. “That loss of jobs and loss of overtime hours and being forced from a full-time to part-time job is resulting in defaults. They’re coast to coast.”

Those sliding into foreclosure today are more likely to be modest borrowers whose loans fit their income than the consumers of exotically lenient mortgages that formerly typified the crisis.

Economy.com expects that 60 percent of the mortgage defaults this year will be set off primarily by unemployment, up from 29 percent last year.

Robert and Kay Richards live in the center of this trend. In 2006, they took a 30-year, fixed-rate mortgage — a prime loan — borrowing $172,000 to buy a prefabricated house. They erected the building on land they owned in the northern Minnesota town of Babbitt, clearing the terrain of pine trees with their own hands.

Mr. Richards worked as a truck driver, hauling timber from a nearby mill. His wife oversaw the books. Together, they brought in about $70,000 a year — enough to make their monthly mortgage payments of $1,300 while raising their two boys, now 11 and 16.

But their truck driving business collapsed last year when the mill closed. Mr. Richards has since worked occasional stints for local trucking companies. His wife has failed to find clerical work.

“Every month that goes by, you get a little further behind,” Mr. Richards said.

Last June, they missed their first payment, and they have since slipped $10,000 into arrears. They are trying to persuade their bank to cut their payments ahead of a foreclosure sale.

Realtors, learn how to easily list and sell short sales. Watch the FREE Agent Short Sale Secrets video and then grab you FREE Short Sale Secrets book NOW

From November to February, the number of prime mortgages that were delinquent at least 90 days, were in foreclosure or had deteriorated to the point that the lender took possession of the home increased more than 473,000, exceeding 1.5 million, according to a New York Times analysis of data provided by First American CoreLogic, a real estate research group. Those loans totaled more than $224 billion.

During the same period, subprime mortgages in those three categories increased by fewer than 14,000, reaching 1.65 million. The number of similarly troubled Alt-A loans — those given to people with slightly tainted credit — rose 159,000, to 836,000.

Over all, more than four million loans worth $717 billion were in the three distressed categories in February, a jump of more than 60 percent in dollar terms compared with a year earlier.

Under a program announced in February by the Obama administration, the government is to spend $75 billion on incentives for mortgage servicing companies that reduce payments for troubled homeowners. The Treasury Department says the program will spare as many as four million homeowners from foreclosure.

But three months after the program was announced, a Treasury spokeswoman, Jenni Engebretsen, estimated the number of loans that have been modified at “more than 10,000 but fewer than 55,000.”

Learn how to mod your own home loan now. Watch the FREE Agent Loan Mod Secrets video now. Lower your own house payment now..save yourself $100s per month and $1000s per year. Next, start your own Loan Mod Business. Make money helping others save money! Watch the FREE Agent Loan Mod Secrets video NOW.

In the first two months of the year alone, another 313,000 mortgages landed in foreclosure or became delinquent at least 90 days, according to First American CoreLogic.

“I don’t think there’s any chance of government measures making more than a small dent,” said Alan Ruskin, chief international strategist at RBS Greenwich Capital.

Last year, foreclosures expanded sharply as the economy shed an average of 256,000 jobs each month. Since then, the job market has deteriorated further, with an average of 665,000 jobs vanishing each month.

Each foreclosure costs lenders $50,000, according to data cited in a 2006 study by the Federal Reserve Bank of Chicago, so an additional two million foreclosures could mean $100 billion in lender losses.

The government’s recent stress tests of banks concluded that the nation’s 19 largest could be forced to write off as much as a fresh $600 billion by the end of 2010, bringing their total losses to $1 trillion. The Federal Reserve concluded that these banks needed to raise another $75 billion.

Many economists pronounce that assessment reasonable, while cautioning that it could become inadequate if foreclosures continue to accelerate.

“The margin for error is not that big,” said Brian Bethune, chief United States financial economist for HIS Global Insight. “It’s kind of like, ‘Let’s keep our fingers crossed that we’ve seen the worst.’ ”

Among prime borrowers, foreclosure rates have been growing fastest in states with particularly high unemployment. In California, for example, the unemployment rate rose to 11.2 percent from 6.4 percent for the year that ended in March, while the foreclosure rate for prime mortgages nearly tripled, reaching 1.81 percent.

Even states seemingly removed from the real estate bubble are seeing foreclosures accelerate as the recession grinds on.

In Minnesota, three of every five people seeking foreclosure counseling now have a prime loan, according to the nonprofit Minnesota Home Ownership Center.

In Woodbury, Minn., Rick and Christine Sellman are struggling to persuade their bank to reduce their $2,200 monthly mortgage on their five-bedroom home.

Mr. Sellman, a construction worker, found some work putting in asphalt driveways last summer, but he is now receiving unemployment. Ms. Sellman’s scrapbooking businesses shut down last summer. Since then, they have slipped $19,000 behind on their mortgage.

“We were always up on our house payments,” Ms. Sellman said. “You work so hard to keep what you have, and because of circumstances beyond our control now, there’s nothing we can do about it.”

Popularity: 2% [?]

Making Money Now With Buyers (Listen and Learn NOW) Popularity: 1% [?]

Hello,

You are going to love this….listen now to the Making Money With Buyers Now teleseminar replay…

We are giving you the simple, easy to follow step-by-step process to conduct a First Time Home Buyers Seminar. Clearly, first time buyers are a powerful segment of the real estate markets. Attend this event and you will learn exactly how-to conduct your own first time home buyers seminar.

Here are a few of the comments we received about this call:

Regina Zabarte-San Jose
Thank you! That was great! Yes, I highly recommend your webinars to other agents.

Louise-Las vegas Thanks so much!

Darlene-Beverly Hills Awesome information!! I will have a seminar at my open house Sunday. Advertising as we speak! Thanks for the ideals

Breayle-Huntington Beach, CA COMMENT: Thanks so much for everything, I am looking into getting into Real Estate and you two have really pointed me in the right direction.

Anthony J Crecco-New York thank you tim and julie. great info.

Annie-Westlake Village, CA. You really educated AND entertained me! You guys are just great! I took lots of notes, laughed and got really motivated! This was a very informative superstar interview, Thank you so much!!!

You can listen to the replay of this powerful call NOW:
http://instantTeleseminar.com/?eventid=7214349

Remember, stay connected with Harris Real Estate University.

Speak with you soon!

Tim and Julie Harris.

P.S. Would you like to schedule a free coaching call with a HREU coach?
Go here now to schedule: http://harrisrealestateuniversity.com/freestuff.php

P.S.S. Earn money now when you send a new student referral to HREU. Here is how it works…email us the same time
(more or less) they are signing up.. coachjulieharris@gmail.com and we will pay you $97! Easily pay for your coaching
programs from sending us referrals!

Popularity: 1% [?]

53% Of ALL Home Sales Short Sales and Foreclosures Popularity: 1% [?]

In this market there are two kinds of agents…

Agents who get it and those that won’t. I say ‘those who won’t’ because the simple fact is that by the time they finally accept that fact that all the rules of real estate have changed it will be too late. They won’t have the opportunity to change because they will be out of real estate.

Sad but, true.

Nearly 2 years ago we warned  HREU Students that knowing how to do short sales and take REO listings was no longer optional. At the time we predicted that over 50% of the US housing market would be the so-called ‘distressed’ home sales.

Well, March numbers are out….53% of all home sales are ‘distressed’.

Agents who were ahead of the curve and learned how to list short sales and take REO listings tare having their best years ever. Clearly, there never has been a time where caring. competent and skilled agents have been so needed.

Now, its your turn.

Read this great article from the the Walls Street Journal.

Is real estate cheap yet – or is it still expensive?

Maybe it’s both.

The latest data from the National Association of Realtors, which rattled nerves on Wall Street this week, showed national home sales are still weak. But they also showed how home sellers nationwide have split into two camps.

Call them “the haves” and the “don’t haves.” As in: Those who have to sell, and those who don’t have to.

The haves are the distressed sales. These include those in foreclosure, and those in pre-foreclosure “short sales.” Such sales are now booming – at bargain prices.

Realtors, learn how to easily list and sell short sales. Stop fighting with all of the best priced buyer baited short sales. Watch the FREE Agent Agent Short Sale Secrets video and then download the FREE Agent Short Sale Secrets book. Do this NOW.

On the other hand, those who don’t have to sell are often hanging on to 2006 prices. And they are hanging on to their homes.

Prices aren’t dropping. And homes aren’t selling.

This could be ominous. It suggests – though it does not prove – that another shoe could be about to drop in real estate, as those who don’t have to sell realize they need to compete more aggressively with those who do.

The latest housing numbers tell a story.

According to the Realtors, there were 360,000 second-hand (aka “existing”) home sales last month. As the headlines noted, that was down about from a year ago, when sales were 375,000.

But remarkably, distressed sales – foreclosures plus short sales — now account for more than half of all turnover nationwide.The figure was 53% in March.

“This is the first month that has gone over 50%,” says Realtors association spokesman Walter Molony. “It was stable for five months at about 45%.”

Agents, did you read that? 53% of ALL home sales were ‘distressed’. Short Sales and REOs. It just makes sense that you would know how to become a REO Listing Agent. The best opportunites for REO listings may be coming this year. Watch the FREE Agent REO Secrets video and download the FREE Agent REO Secrets book now.

That means March saw about 190,000 forced sales. No wonder prices are in free fall.

A year ago, says Mr. Molony, distressed sales made up just 18% of the 375,000 transactions. That’s about 68,000 sales.

In other words, the number of distressed sales has nearly tripled in a year.

That’s the good news. That’s a market clearing, at last. Distressed sales are taking place at prices at least 20% below the rest, the association says.

On the other hand, look at those who aren’t in foreclosure or a short sale. They’re selling their homes while still solvent. This used to be called the normal housing market.

Prices haven’t come down much. In some premium neighborhoods they have may even be rising.

But the volume of those “normal” sales is down sharply. They make up just 47% of 360,000 second-hand home sales. That’s 169,000 transactions.

How little is that?

Even a year ago, when the housing market was already in the tank, these non-distressed sales accounted for 82% of 375,000 second-hand home sales nationwide. Or 308,000 transactions.

It’s like the old joke about the man with the million dollar dog (”Well, I haven’t sold him yet!”).

When a real estate market collapses, volumes die first. Prices fall later. So news that volumes are drying up for non-distressed sales has to be an ominous sign.

Translation: MORE Foreclosures…MORE Shortsales coming. Agents expect the number of so-called distressed home sales to increase dramatically..Clearly, you must know how to easily list and sell Short Sales. Next, learn how to become a REO Listing agent.

Those who live in premium neighborhoods often fancy that they are immune from the slump. “Oh, good quality will hold up,” they say. It’s true good quality may hold up for awhile. But that doesn’t mean anyone’s immune.

And over long terms, different real estate markets have to maintain some reasonably persistent connections. Otherwise many people would move to the cheaper neighborhoods.

Popularity: 1% [?]

Why a 50% Drop In Housing Is Not the Bottom… Popularity: 1% [?]

One of the top questions Julie and I hear everyday from HREU Students is….”what are you and Julie reading to stay sooo in front of the real estate markets?” The honest answer is Julie and I read and study the real estate markets 24/7. Everyday we read 10+ real estate, several national newspapers…you name it. Our goal is to always be your source for real estate related information. I re-posted an article from Charles Hugh Smith last year and received great feedback…..in our opinions this guy is truly exceptional. He does an impressive job of combining studies, translating the data and producing a clear and easily understandable result. Read this post..and share with us what you think. What you think matters to us! We encourage you to check his blog out. OfTwoMinds.com Why a 50% Drop in Housing Is Not the Bottom (April 16, 2009) The psychology behind the idea that a 50% reduction in bubble-era housing prices constitutes a “bargain” is flawed for a number of reasons. I recently saw a few minutes of a Nightly Business Report program on PBS in which a Florida broker was observing that homes which once commanded $350,000 at the bubble top were selling briskly now at $169,000 to investors from every part of the globe. In other words: “These homes are half off! They’re screaming bargains! They can’t get any cheaper than this!” The psychology behind this euphoria is accessible to us all. It’s easy to forget where housing prices were before the bubble and focus instead on how much they’ve dropped from the bubble peak. The same is true in any bubble, be it collectables, real estate, stocks, or tulip bulbs. But valuation realities have no relation to bubble top pricing. Thus we should ground our analysis of housing valuations and what constitutes a “bottom” in metrics other than “it’s 50% off it’s top price.” Let’s start by considering just how high the bubble took housing valuations: This chart reveals that housing in California more than tripled at the bubble top. A fall of 50% from that peak (i.e. $275,000) is still 60% above the starting point. Let’s consider a model of all bubbles, regardless of the asset or the era: No model can predict the timing, highs or lows of any bubble, but bubbles tend to follow a pattern traced in human psychology: 1. As euphoria grabs hold, prices rise in a steep ascent to a point at which “everyone” believes there is no end to the trend. 2. The initial descent from the bubble peak is a “shock” which leaves the bubble mentality intact, i.e. the Bull Market in tulip bulbs, real estate, tech stocks, etc. is only suffering a standard retracement/indigestion; the trend higher is still in place. 3. In housing, this psychology is embedded in such chestnuts as “they’re not making any more land,” “real estate always rises over time,” “population growth means demand for housing will always rise,” “the house is the foundation of middle class wealth appreciation,” and so on. 4. At some point speculators who were left out of the initial explosive rise jump in because “prices are a real bargain now.” 5. This buying pushes demand above supply briefly, and prices start rising again. 6. But the realities beneath price action have changed, and this bargain-hunting burst soon fades as demand falters, supply rises and prices renew their descent. 7. Speculators and investors’ memory of the tremendous profits made on the way up remain firmly embedded, forming an “investment memory” which locks them into the view that the upward trend will resume at some point. This drives wave after wave of bottom fishing in which speculators buy into an apparent bottom only to be disappointed/ wiped out by a renewal of the downtrend. 8. At some point, all the bottom fishers have expended their capital and prices retrace to the pre-bubble levels, or even lower. This is what can be called “the real bottom.” 9. But the memory of past glories still remains in the minds of speculators/investors, and so a subdued uptrend starts as “hope springs eternal” buying kicks in. 10. Eventually this institutional/cultural “memory of an uptrend” fades as the “recovery” in prices fails. The truisms which fed the brief bubble and long post-bubble decline and recovery–that tech stocks were the future, real estate only goes up, the South Seas is the epic investment of all time, etc. are repudiated and lose favor. This is the ultimate bottom. Can a 10-year bubble reach this “ultimate bottom” in a mere two years? History suggests not. Then there’s the preponderance of other evidence that the underpinnings of the housing bubble have irrevocably shifted. Let’s review some charts: Household balance sheets are in terrible shape: This chart only reflects the extreme reached in 2006; it’s undoubtedly even worse now. Personal savings rates have risen recently, but Americans will need to start saving roughly a trillion dollars a year to return to historic savings rates: and that means not borrowing a spending a trillion but withdrawing it from consuming. Meanwhile, the equity extraction game is over, and the stands are littered with broken dreams and busted bets: Mortgage debt has tripled from $4.2 trillion in 1997 to over $12 trillion: This explosion of debt is economy-wide, and is not limited to residential housing: How an economy foundering beneath stupendous debt can forcefeed housing prices higher via ever greater debt is unknown. Just as a refresher on the extremes the housing bubble reached even when adjusted for inflation: A significant percentage of this debt comes due in the years just ahead: Another standard measure of valuation, the price-to-rent ratio, also reached historic highs. In some areas of the nation, this might have already returned to the mean, but with property taxes skyhigh and the cost of renting dropping, it may well be the cost of renting is still significantly cheaper than owning. While this graph is a few years old, the trend to historic highs in property taxes is clearly illustrated. Yes, you can petition your county to lower your appraisal, but unless your state is protected from fast-rising property taxes via a Prop 13-type law, then brace yourself for local governments to make up their declinign tax revenues on the backs of property owners–plummeting prices be darned. With reports of banks holding some 600,000 foreclosed or distressed properties on their books and off the market in the news, it is a foregone conclusion that any blip up in demand for homes will be met with a tide of new supply. After the current “bargain buying” dries up, inventory will exceed demand and prices will resume their fall. And last but not least, let’s note that we’re dealing not just with the aftermath of one historically extreme bubble, but three: one in stocks (shown here), one in housing (shown above) and another in bonds which have skyrocketed as yields drop to near-zero. The net result of declining asset values across all asset classes but gold is that there will be a global reduction in borrowing against assets. So add up the financial contexts which control real estate valuations: 1. Extreme bubble valuations must eventually retrace to the starting point, and in many cases they drop below the starting point. 2. Housing and real estate are based on the availability of cheap, plentiful debt. As economy-wide debt loads are at historic extremes, it is prudent to ask what conditions will enable trillions more in debt to be issued to buy inflated housing. 3. As the Federal government borrows trillions of dollars on the open market to fund its mega-stimulus-bailout debts (in the trillions and counting), then the government is competing with private borrowers for a dwindling pool of capital/savings. That will drive up rates, making mortgages more expensive. And since prices drop as rates rise, this global push on interest rates is a profound headwind for housing prices globally. 4. Paying a mortgage requires steady income, which for most citizens means a steady job. Rapidly rising unemployment reduces the pool of potential buyers and adds to the inventory as those losing their incomes also lose their homes. In short: with the national and household balance sheets at historic extremes of indebtedness it is difficult to see what fundamental financial foundation exists for higher housing prices. The only conclusion to be drawn from the above charts is that those currently buying “at bargain prices” will very likely be disappointed as prices renew their downtrend in the near future.

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Is FHA The New Subprime….? (You won’t believe this) Popularity: 1% [?]

Realtors, pay attention to this story….we have been telling HREU Students for months to pay attention to the default rate for FHA loans. Being that FHA Loans would be an indicator as to the overall health of the real estate markets. This story is from WSJ.com.

Defaults on home mortgages insured by the Federal Housing Administration in February increased from a year earlier.

A spokesman for the FHA said 7.5% of FHA loans were “seriously delinquent” at the end of February, up from 6.2% a year earlier. Seriously delinquent includes loans that are 90 days or more overdue, in the foreclosure process or in bankruptcy.

Since the collapse of the subprime mortgage market in 2007, most home loans for people who can’t afford a sizable down payment are flowing to the FHA. The agency, which is part of the U.S. Department of Housing and Urban Development, insures mortgage lenders against the risk of defaults on home mortgages that meet its standards. FHA-insured loans are available on loans with down payments as small as 3.5% of the home’s value.

The FHA’s share of the U.S. mortgage market soared to nearly a third of loans originated in last year’s fourth quarter from about 2% in 2006 as a whole, according to Inside Mortgage Finance, a trade publication. That is increasing the risk to taxpayers if the FHA’s reserves prove inadequate to cover default losses.

As of January, the cities with the highest FHA default rates in December were Punta Gorda, Fla., at 18%; Detroit, 15.6%; Flint, Mich., 15.1%; Fort Myers-Cape Coral, Fla., 15%, and Elkhart-Goshen, Ind., 12.1%, according to a HUD report.

Foreclosed FHA homes owned by HUD totaled 39,687 in January, up 22% from a year earlier.

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$500,000 Is The New $1,000,000 | $1Mil Is A Lot Of Money Again | Realtor Coaching And Training Popularity: 1% [?]

Remember when owning a million dollar home was seen as the birthright of only movie stars and royalty?

Well, that all changed during the loosey-goosey credit years. It seemed like it was every Americans national duty to be in debt, have a huge mortgage and maxed out cards. At least that’s what millions of Americans were lead to believe. Everyone was ‘rich’…at least on paper. This paper wealth gave permission for people to embrace their post manufacturing based economy label…as a consumer. And , do American ever know how to consume.

Americans have an insatiable desire for homes. Its part of this American pathology to always want a better home…heck, owning a home is ‘The American Dream’…owning a $1,000,000 home just seems…somehow…dreamier.

So, Americans went on a buying spree. We felt rich, had access to easy credit..nothing was out of reach. It was all psychological. And during the recent boom years, Americans became reckless consumers, buying cars, houses, clothes and much more that they couldn’t really afford. The dream of a $1 million home, once so distant, became tantalizingly reachable. Afterall, that new leased BMW had to be housed in a new garage of the newest, must have community.

Drive through the post-boom housing markets across the US and one thing becomes clear. The party is over. Las Vegas was the prototypical housing boom story. New developments were announced early every week. People would stand in line to toss down their hard borrowed cash for a place in line for the right to ‘invest’. Luxury condo buildings are now nearly vacant. The gold-plated golf course  laden communities with tree lined streets are now being sumplemented with endless “For Sale” signs…now those signs are all adorned with the ominous subtitle “Foreclosure, Bank Owned” or “Short Sale”. In Riverside California there are literally acres of ‘Master Planed Communities’ that have been left to decay.

Other asset prices are returning from orbit as well. In the credit induced, consumer drunk boom times what were once considered to be luxuries became mandatory house hold staples. In Southern California’s  sea side ‘Gold Coast’ which comprises some of the most beautiful and expensive real estate in the world, it was common to see oceans of ultra expensive exotic cars. Matter of fact, the top selling Lamborghini dealer in the world was located in this area. Even this elite financial class of consumers are subject to the crash. Exotic cars, luxury ‘assets’ are now selling for 40+ less than they were just 90 days ago. To put that into perspective, that Lamborghini dealer, the #1 selling Lambo dealer in the world, closed its doors recently.

Housing became the de-facto place to splurge. Home priced skyrocketed. In less than 36 months some real estate markets doubled in value.

Now that has all changed.

In 2006, that $1,000,000 house that had 14 offers in the first day it was offered for sale…is now languishing on the market. The current asking price is $575,000 with no takers. Because those sellers re-financed and spent all of their equity they are now hopelessly ‘upside down’ in their homes. Only a skilled short sale agent will save these sellers from a foreclosure. Of course, agents who have taken the time to learn how to help sellers with a short sale are in huge demand.

While certain pockets, such as Manhattan, San Francisco and Boston, remain high, real-estate prices around the country have fallen dramatically. The downside to this, of course, is that many people now owe more money on their home than their home is worth. The upside is that valuations are much more realistic — and affordable. Yesterdays $1,000,000 home is todays $500,000 home..and falling.

Until recently, sellers in wealthy neighborhoods were somewhat protected from the subprime credit crisis and were still drawing buyers with high salaries, good credit scores and a cushion of savings. But the problems worsened after global financial-services giant Lehman Brothers collapsed on Sept. 15. Credit markets froze, corporate giants laid off thousands of highly paid workers, and the stocks that padded the portfolios of the wealthy plummeted.

Case in point. In La Jolla, California where the average sales price is still around $1,000,000. It’s common to have international buyers in this market who are investing in their 3rd of 4th homes. After the AIG collapse there were dozens of ‘In Escrow’ homes fall out of escrow. In other words, even the most well heeled buyers weren’t willing to close on homes in this economy. Many walked away from huge earnest money deposits.

Even once seemingly impervious markets such as New York City, Florida and California, which had attracted well-heeled international buyers looking to take advantage of a weak dollar, began to struggle as the global economic slowdown washed over Europe, Asia and even the Middle East.

Most economic forecasts are now calling for this seemingly endless housing correction to bottom as late as 2013. The original forecasts of a housing bottom in 2009-10 didn’t take into account the global recession and massive job losses.

Barron Rothschild said, ‘When There Is Blood On The Streets, Buy Real Estate’.

With that said, its probably not a great time to buy real estate unless you plan on staying in the home for at least 5 years. It will take at least 5 years for any sort of sanity to return to the housing markets. Smart buyers (and investors) are looking for bargains. As prices for homes continue to fall a new breed of buyers is entering the market. Buyers with significant downpayments, good jobs and credit. Buyers who aren’t buying to ‘make a fast buck and move up’ but, buyers looking to settle into a community and make it their home.

And longer term? Over the next 10 to 20 years, housing economists expect prices will rise again — but, on average, probably not nearly as much as they’ve averaged over the past decade. That isn’t to say that some places won’t experience booms (and busts). But, the experts say, you should generally expect house prices to rise just a bit more than inflation and roughly in line with household income.

Karl Case, an economics professor at Wellesley College whose name adorns the S&P Case-Shiller home-price indexes, has studied U.S. house prices going back to the 1890s. Over the long run, he says, home prices tend to increase on average at an inflation-adjusted rate of 2.5 percent to 3 percent a year, about the same as per capita income. He thinks that long-run pattern is likely to continue, despite the recent choppiness.

Other experts make similarly modest predictions. William Wheaton, a professor of economics and real estate at the Massachusetts Institute of Technology, says he expects house prices to increase at a rate roughly one percentage point higher than inflation over the long term. Celia Chen, director of housing economics at Moody’s Economy.com, a research firm, expects house prices to increase an average of around 4 percent a year over the next couple of decades.

Some experts say it’s a bad idea to count on your home rising in value at all. People should think of their own homes mainly as places to live, not as investments, advises Kenneth Rosen, chairman of the Fisher Center for Real Estate at the University of California, Berkeley. Sure, home mortgages provide tax benefits, and most homes appreciate in value over the long run, he says, but there is always risk.

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