Housing Bust Part 2: Home Prices Fall 3 Percent

Over the last quarter, home prices in the United States have dropped 3 percent. That’s the most significant decline since the housing market first started to implode, back in 2008.

I previously reported that many economists were revising their housing outlooks in a negative way, abandoning all hope for a housing recovery in 2011. We won’t see any real recovery until at least 2012, said the experts.

But recent data shows that things could be even worse. As it turns out, a 2012 recovery might be wishful thinking.

Zillow just released its Real Estate Market Report for the first quarter, and it’s ugly. In the first quarter of this year, U.S. home prices dropped faster than they have in any quarter since 2008. You will recall that 2008 is when the housing market came crashing down. Nationwide, prices fell by 3 percent (Q4, 2010 – Q1, 2011). Detroit was one of the hardest-hit cities, with a quarterly price decline of 5.2 percent. Translation: The first quarter of 2011 was the worst for home values since the housing crisis began.

Zillow’s market report is compiled from public data sources in 132 Metropolitan Statistical Areas.

Stan Humphries, chief economist at Zillow, doesn’t expect home prices to hit bottom until 2012, at the earliest. In the meantime, he says prices could fall another 8 percent. He’s not alone in his pessimism (or realism). Last month, the chief economist from Fannie Mae predicted that home prices in the second quarter of 2011 would be at least 5 percent lower than the first quarter. He had originally predicted a price decline of only 2.6 percent.

The Vicious Cycle of Price Decline

We are in a vicious cycle again. The number of homes for sale greatly exceeds the demand. This puts downward pressure on home prices. In order for home values to stabilize, we need to see less inventory and more demand. The problem is that it could take years for the current glut of homes to work through the system. Given the current rate of absorption (homes being purchased), some analysts are predicting a five-year overhang of housing supply.

Of course, if the foreclosure rate continues to rise, any hope for housing recovery moves further down the road. And that’s the real problem here — foreclosures.

At the end of the first quarter, more than 28 percent of single-family homeowners were underwater in their loans. Homeowners with negative equity have three choices: (1) stay in the home and hope to regain some value, (2) sell the home at a loss through a bank-approved short sale, or (3) walk away and let the bank foreclose. Judging by the foreclosure numbers for the last few months, I’d say there’s an increasing number of folks choosing the third option. This will drive inventory up and push stabilization further down the road.

And what about home buyers? They represent the demand side of the equation. Why aren’t they snatching up all of these “discounted” properties? With a handful of exceptions, housing prices are still dropping in most areas. And home buyers know this. That’s why they are reluctant to move forward. I read their emails daily. One of the most common questions we receive from our readers is: “When will it be safe to buy a house in my market?”

Thus, the vicious cycle continues. Inventory rises. Prices fall. And in most cities, would-be home buyers are sitting on the sidelines waiting for the market to hit bottom. At this point, it’s safe to say there is no hope for a national housing recovery in 2011. There’s a glimmer of hope for a nationwide recovery in 2012. My money is on 2013.

4 Reasons Why the Current Housing Market Stinks

Underwater homeowners are hoping for a miraculous turnaround to restore their equity. Home buyers are waiting to see when prices will bottom, so they can make their move. Real estate agents are promising sunnier days ahead. Just don’t expect any of these things to happen in 2011.

If you gathered 100 economists and real estate analysts, and asked them how they felt about the current housing market, you’d have a pretty good idea what the rest of 2011 will be like. But don’t bother. This has already been done.

Toward the end of March, MacroMarkets released the results of its latest home-price survey. The survey collected responses from a variety of economists, real estate experts and market analysts — 111 of them. The general consensus was that the current housing market is still deteriorating.

This survey has been widely reported already. So instead of rehashing old news, let’s examine the four factors that led to the dismal outlook.

Top 4 Housing Market Killers

According to Robert Shiller (Yale economics professor and co-founder of MacroMarkets), the pessimistic views of the experts were mostly influenced by the following:

  1. High unemployment
  2. Supply overhang
  3. Ongoing foreclosure crisis
  4. “Constrained” mortgage credit

Let’s take a closer look at these four factors.

1. The Unemployment Rate

While there are glimmers of light in the labor market, unemployment is still hovering near 9%. Many analysts expect it to stay in this range for the rest of 2011. But it’s not just the jobless rate that’s suppressing the current housing market. It’s the fear of job loss.

I would wager that 90% of Americans over the age of 21 know someone who has lost a job in the last three years. I know four of these folks, off the top of my head. This strikes fear into the heart’s of would-be home buyers.

Before the recession, many of us took our jobs for granted. The idea of steady employment was viewed as a sure thing, like the rising of the sun each day. Today, we are all painfully aware of our financial vulnerability. We’ve seen how quickly the rug can be yanked out from under us.

This is clearly having an impact on the current housing market. A 2010 survey by the Home Buying Institute showed that fear of job loss was a big concern among home buyers.

2. The Housing Supply

How much housing supply do we have right now? This question has yielded all sorts of debate among real estate analysts. It really depends on how you define the word supply. Michael Feder, CEO of the real-estate research firm Radar Logic, measures the current supply overhang in years — not months.

During an interview with Bloomberg, Feder said:

“The reality which you add up all the houses for sale, houses vacant not yet on the market, houses underwater, seriously delinquent, in foreclosure, almost in foreclosure, the number is closer to 60 months, 5 years.”

Elevated supply puts downward pressure on prices. Economics 101. This is good news for future home buyers, because it could bring even bigger bargains down the road. But it’s bad news for anyone hoping for a recovery in the housing sector. If housing supply continues to outpace the absorption rate (i.e., purchases), we will see continued price erosion. This brings us to one of the major factors driving housing supply right now — foreclosures.

3. The Ongoing Foreclosure Crisis

Some people are talking about the foreclosure crisis in the past tense, as if it’s fading in the rearview mirror. Nothing could be further from the truth. In January, RealtyTrac was predicting a 20% rise in foreclosure filings for 2011.

According to Rick Sharga of RealtyTrac:

“We will peak in foreclosures and probably bottom out in pricing [during 2011], and that’s what we need to do in order to begin the recovery.”

He also mentioned the key factors that will drive the foreclosure rate this year. Sharga pointed to unemployment, weak lending, and the overhang of properties that should have been foreclosed on in 2010 (but weren’t because of the foreclosure freeze). Sound familiar? Those are the other three items on this list.

At the end of 2010, we saw a record number of homes going into foreclosure. This would suggest a spike in foreclosure inventory over the coming months. But that spike hasn’t happened yet. Why? Because we are delaying the inevitable. Mortgage lenders and servicers are facing a new round of scrutiny into their foreclosure practices. This has led to a decrease in foreclosure activity from January to February. But the rate of default does not seem to be slowing.

A pipeline analogy is in order here. Imagine a pipeline representing the foreclosure process.

  • On the “input” side of the pipe, you have the homeowners who are falling behind on their payments. Many of them will soon be foreclosed on.
  • The pipeline itself represents the legal process through which homes are foreclosed on, repossessed and resold.
  • On the “output” side, we have an increase in housing inventory, resulting from new foreclosure homes coming back onto the market.

The ongoing scrutiny of foreclosure practices has narrowed the output side of the pipeline. But homes are still entering the input side at the same rate. It’s a classic bottleneck scenario, and it’s going to delay normalization of the housing market.

4. The Tightening of Credit

When the housing market started tanking in 2008, mortgage lenders restricted their lending guidelines. Gone are the easy-breezy days of subprime mortgages and stated-income loans. If you want to qualify for a conventional mortgage loan in 2011, you better bring your credentials. This includes a credit score of 620 or higher, a down payment of at least 5%, and a manageable level of debt. Steady employment is also a must. Don’t expect a lender to take you word on any of this — they are scrutinizing documents like never before.

Of course, this is simply a return to the days of sensible lending. Remember those days? Once upon a time, homeownership was considered a privilege instead of a right. You had to work hard for it. You had to save money and maintain a clean credit record. Then came the housing boom, when many of these requirements got watered down by lenders. Now we are back where we started.

All of the items on this list are suppressing the current housing market. But only the first three items are truly problems. The tighter lending standards are part of the solution — at least, in the long term.

Falling Home Prices Keep Buyers on the Sidelines

At the end of 2010, many were predicting a steady rise in home-buying activity through 2011. That has yet to happen. In fact, purchase applications were down 0.7 percent in the most recent survey by the Mortgage Bankers Association. For the first three months of 2011, the U.S. real estate market has been similar to 2010. Slow.

But what gives? Home prices are the lowest they’ve been in years. Mortgage rates are still hovering below 5% (averaging 4.76% last week). Even the job market is starting to look up.

So why aren’t more people buying homes these days? In a word, depreciation.

Would-be home buyers are seeing a continuation of home-price declines across the country, and they’re sitting on the bench for now. They’re waiting for the dust to settle. Buyers are not convinced the market has hit bottom.

According to the Federal Housing Finance Agency, U.S. home prices fell 0.3% in January. That’s not a huge drop, obviously. But the key word here is “steady.” There appears to be another steady decline in home values, for most parts of the country. Prices dropped in December too.

Home Prices Falling Further in 2011?

Many analysts are predicting another drop for the February-to-March time frame. MacroMarkets surveyed 111 economists and housing analysts about their expectations for home prices. Most don’t expect the U.S. housing market to hit bottom until 2012. On average, the survey respondents expected home prices to fall another 1.4% in 2011.

Compare that to this time last year, when the panelists predicted home prices to rise by 1.3% in 2011. In terms of market expectations, they are kicking the can down the road.

According to Robert Shiller, co-founder of MacroMarkets and co-creator of the S&P/Case-Shiller report: “The sentiment among our expert panel regarding the U.S. housing market outlook continues to deteriorate.”

The Effect On Buyer Confidence

Are home buyers getting the word? Are they reading the same housing reports I read every day? Apparently, many of them are. Or else they’re getting second-hand accounts from the media. Regardless of where they get their information, home buyers are certainly aware of what’s happening in the housing world. We receive dozens of email questions from readers every month, and the latest Q&A trend is all about home prices.

These buyers all want to know the same thing: When will prices stop falling in my area? Where is the bottom? When does it make sense to buy a home?

Last week, the question came from a would-be home buyer in the San Francisco Bay Area. The couple were planning to move so the husband could be closer to work. But they were uncertain about the home price situation. This is the question of the year for buyers: Is the market going to hit bottom this year, or will it keep falling?

Obviously, no one can predict the future of home prices. [See the revised prediction among leading economists above.] But we can look at recent trends to get a slightly clearer picture. That is what I advised the Bay Area buyers to do. I pointed out that prices in their market had fallen for the last couple of months, and that the trend could likely continue in the coming months.

A Good Investment Doesn’t Always Need a “Bottom”

Home buyers are keeping an eye on home prices, waiting for the right time to buy a house. But how do you define the “right time” to buy? First of all, it doesn’t have to be when the market bottoms. And it has everything to do with your long-term plans. Buyers should be asking two key questions:

  • Will this house be a good investment for me, for most of the time I live in it?
  • Will I be happy in this house?

These days, it seems a lot of people are forgetting about the second question. A house is an investment, but it’s also a home. As for the first question, buyers should avoid the kind of “bottom fixation” that can lead to financial tunnel-vision. Sure, it would be nice to buy at the absolute bottom of a market, when there’s nothing but sunny days of appreciation ahead. But it’s not necessary.

Consider the following example:

John and Jane buy a house in May of 2011. From June to November, home prices in their area drop by one percent. The market value of their home goes from $350,000 to $346,500. But they still have positive equity because they made a down payment of 10%. During the next five years, home prices in their city appreciate by 3.5%. So their property value rises to around $359,000. That’s a gain of $9,000 over the original purchase price, in spite of a slight dip during the latter part of 2011. So they’ve actually gained equity in a relatively short time. The home has turned out to be a good investment. And if the couple are happy in the home, they’ve got a check in that box as well.

Good Time to Buy a House
Want to use this graphic? Feel free. Please link back to the source.

Buying at the bottom of the market would be nice. It’s just not as necessary as many people think. If all the signs point to a stronger local market in the coming years, then it could be a good time to buy. The diagram above shows three of the most important factors when making a home-buying decision.

Home buyers should put on their research hats to learn about their local markets. Don’t trust what the real estate agents tell you (they’re biased toward a positive outlook). Don’t trust what “some guy with a blog” tells you. Do your own research. Be your own advocate.

Disclaimer: This story contains forward-looking statements about home prices in the United States. These statements should not be taken as matters of fact. They are projections based on current market conditions. Every real estate market is different, so this commentary will not apply to all areas. We encourage you to research home prices and real estate trends in your local market, before making any buying decisions.

Fannie and Freddie to Increase Down-Payment Requirements

The federal government is crafting a plan to phase out Freddie Mac and Fannie Mae, and it could mean higher down-payment requirements for home buyers.

Fannie Mae & Freddie Mac, in a Nutshell

Fannie Mae is the shortened name for the Federal National Mortgage Association. Freddie Mac is shorthand for the Federal Home Loan Mortgage Corporation. These two government-sponsored enterprises (GSE’s) purchase mortgage loans from lenders, and then sell them to investors. This all takes place in the secondary mortgage market — the primary mortgage market is where the loans are originated.

Fannie and Freddie were created by the U.S. government in 1938 and 1970, respectively. For the last few decades, they operated as publicly traded companies. But then in 2008, in the midst of the housing crisis, both Fannie Mae and Freddie Mac were placed into conservatorship (a form of government control).

How They Dictate Mortgage Guidelines

Fannie Mae and Freddie Mac buy mortgages from lenders in the primary mortgage market. If these primary lenders want to sell their loans, they must ensure that the loans meet certain guidelines established by Fannie and Freddie. These are referred to as conforming loans, because they conform to the established guidelines.

This is how Fannie Mae and Freddie Mac affect home buyers in the primary mortgage market. When a home buyer applies for a mortgage loan, the lender will use conforming loan criteria as an evaluation tool. These criteria include the borrower’s credit score, down payment, debt-to-income ratio and more. If the borrower meets or exceeds the minimum requirements in these areas, then he or she has a good chance of getting the loan.

In short: Borrowers who want to qualify for a mortgage in 2011 will have to meet the minimum guidelines set forth by Freddie Mac and Fannie Mae. Lenders might even impose their own guidelines on top of this.

Beginning of the End for Fannie and Freddie

The Treasury Department recently submitted a proposal for the future of Fannie Mae and Freddie Mac. The report, entitled Reforming America’s Housing Finance Market, was presented to Congress last week. Congress will weigh in on the three proposals, and then a final plan will be hammered out. Regardless of what the final option looks like, the future of Freddie Mac and Fannie Mae seems clear. The government wants to “wind down” these organizations. This could mark the beginning of the end for Fannie and Freddie.

Treasury Secretary Tim Geithner
Treasury Secretary Tim Geithner (left) discusses changes to housing market, 2/11/2011

The report’s introduction states: “The Administration will work with the Federal Housing Finance Agency (FHFA) to develop a plan to responsibly reduce the role of [Fannie Mae and Freddie Mac] in the mortgage market and, ultimately, wind down both institutions.”

Higher Down-Payment Requirements for Borrowers

The joint report from Treasury and HUD also spells out some new requirements for down payments. Specifically, they want to increase the down-payment requirements for conforming mortgage loans — loans that can be sold to Fannie and Freddie. The plan is to gradually phase in a 10-percent down-payment requirement for mortgage loans that can be sold into the secondary mortgage market.

To quote the report: “Going forward, we support gradually increasing required down payments so that any mortgage that Fannie Mae and Freddie Mac guarantee eventually has at least a 10 percent down payment.”

This means home buyers will need to put down at least 10 percent of the home’s purchase price, unless they can find a lender who is willing to offer a non-conforming loan. Most lenders adhere to the conforming loan requirements established by Fannie Mae and Freddie Mac. So the forthcoming 10-percent rule would essentially be the new norm.

The big question is, when will this happen? So far, the timeline is mostly vague. The administration wants to implement these changes gradually, at a “stable and measured pace,” as the housing market heals. When we reach this level of healing is anyone’s guess. But the writing is on the wall. The 10-percent down payment will eventually become the new norm.

Is Now a Good Time to Buy a House?

Reader Q&A: Josh from Cincinnati wanted to know if now is a good time to buy a home. Here’s an expanded version of my response to him.

It will be one of the biggest questions among home buyers in 2011. Is this a good time to buy a house? It’s certainly a valid question to ask. After all, a lot has happened in the housing market over the last few years. We’ve seen lenders fail, mortgage products disappear, and lending standards tighten. That’s not to mention the robo-signing scandal, the government seizure of Freddie Mac and Fannie Mae, or the new rules imposed by federal regulators.

It’s a different mortgage market today than we’ve had in the past — and it’s still evolving. This is what creates such confusion and uncertainty among home buyers. First-time buyers in particular have a lot of questions about the process. But in this article, I’ll focus on Josh’s question: Is now a good time to buy a house?

Good Time to Buy a House

When it Might Make Sense to Buy

The image above gives you a general idea of when it makes sense to buy a home. You’re in a stable real estate market. You’ve saved enough money for your down payment and closing costs. Mortgage rates are affordable. If you have all three of these things in your favor, then it might be a good time to buy a house. But these are just the financial factors. There are certain lifestyle and emotional considerations as well.

In order to figure out the best time to buy, you need to ask yourself a series of questions. Below, I’ve created a checklist to help with this task.

Checklist: A Good Time to Buy

Is this a good time to buy a house? Answer the six questions below, and you’ll have a pretty good idea.

  • Will owning a home improve or hinder your lifestyle? Home ownership is not right for everyone. People who move around a lot are usually better off renting. The same goes for people who don’t handle financial responsibility well (you know who you are). Don’t listen to the lenders and home builders who tell you home ownership is the American dream. This is just marketing nonsense. Before you take on the responsibility of owning a home, you need to make sure it’s your dream.
  • Are home prices stabilizing or rising in your area? In 2011, a handful of housing markets will see some appreciation. But most markets will either see flat prices or continued depreciation. This is the majority consensus among economic analysts. If prices are stabilizing or starting to rise in your area (and you’ve answered the other questions on this list), then it might be a good time to buy a house. On the contrary, if home prices are still falling in your area, you should probably take a wait-and-see approach. It’s rarely a good idea to buy a home in a declining market.
  • Have you checked your credit score lately? If you’re using a mortgage to pay for the house, your FICO credit score will come into the picture. Lenders will use your credit score to determine two things: (1) whether or not you qualify for a mortgage, and (2) what kind of interest rate you’ll get. So instead of asking if this is a good time to buy a house, maybe you should be asking a different question: “Can I even qualify for a mortgage loan?” If you check your credit and find out you have a score of 500, the rest of this article is moot. You won’t qualify for a home loan. If your score is in the mid-600 range or higher, you’re probably in good shape. Learn more about credit scores.
  • Do you have a home-buying budget? A lot of first-time home buyers skip the budgeting process altogether. “Why should I bother? The lender will do this for me.” Wrong. The lender will not establish a budget for you. It’s not their job to do this. The only thing they can tell you is how much of a loan they’re willing to give you. You should have a budget in mind before talking to a mortgage lender. And you should stay within your budget, no matter what the lender offers you. In other words, don’t take on a mortgage loan that’s going to squash your quality of life. Learn more about budgets.
  • Have you saved for a down payment? If you qualify for a VA or USDA home loan, you might be able to avoid the down payment. All other borrowers will have to make a down payment of some kind. The days of zero-down mortgages are gone for now. For an FHA loan, you could pay as little 3.5% down. For a conventional mortgage (one that’s not government-insured), you’ll probably need to make a down payment of at least 5% — maybe even 10%. If you have plenty of money saved for a down payment, then it might be a good time to buy a house.
  • Can you afford the closing costs? The down payment is just one of your home-buying expenses. You’ll also have to pay a variety of mortgage-related fees. These are collectively referred to as closing costs. You’ll have to pay these expenses during the closing process. So it’s another thing you have to save up for, just like the down payment. Average closing costs range from $3,000 to $6,000, though they could exceed this amount.
  • Will mortgage fees increase in the future? This isn’t really something you can answer, without the benefit of a crystal ball. But I want to put it on your radar. There is some talk about getting rid of Freddie Mac and Fannie Mae, the two organizations that buy mortgages from lenders. If this happens, we will likely see higher mortgage fees in the future, and even tougher lending standards than what we have today. This is why so many people are saying now is a good time to buy a home. We’re just not sure what the mortgage market will look like a few years down the road.

Is now a good time to buy a house? Answer the questions listed above, and you’ll know if it’s time. If you’ve got your finances together, and your local real estate market is stable, then 2011 might be a good time to move forward. But there’s no rush. Don’t get swept up in the home-buying mania. Forget about home ownership being the “American dream.” It needs to be your dream. Do the math and ask the tough questions. Proceed when ready.

Related article: Top 10 Signs You’re Ready to Buy

Where to Learn More

This website offers thousands of articles on the home-buying process. If you would like to learn more about any of the topics discussed in this article, you can use the search tool at the top of this page. It will give you access to a vast library of information. You might want to check out our list of home buyer FAQs as well.

Remember, you are the only person who can decide if this is a good time to buy a house. You’re the one who will be held responsible for the mortgage payments. No one else can make this decision for you. Local market conditions may apply to all home buyers, but there are plenty of personal considerations as well. You need to take all of these factors into account before entering the market.

Houston Home Prices Show Promise for 2011

Last month, I suggested that Houston’s housing market could be one of the strongest in the country in 2011. Recent data regarding Houston home prices reinforces this prediction.

According to Clear Capital (a company that provides real-estate appraisal services to the mortgage industry), Houston was one of the highest performing markets during the last quarter. Their data shows that home prices in Houston rose 1.7%, based on quarter-over-quarter rankings. The yearly price gains were even more significant, with a 5.6% rise over this time last year.

Houston Home Prices 2011

Like most of Texas, Houston avoided the kind of real estate bubble-and-bust cycle that wrecked other housing markets in the country. Thus, Houston home prices were never overheated or overinflated. At the same time, population growth in the city has helped sustain demand for housing. Between 2000 and 2009, Houston ranked #2 in terms of population growth (nationwide).

This combination of realistic home values and steady population growth has had an insular effect on the Houston real estate market, protecting it from the devastation we have seen elsewhere. While other cities saw a plummet in home prices during the bust, Houston experienced more of a “dip.” Now, it would seem that prices are headed north again.

Plenty of “Fuel” for the Housing Market

Cities that attract a higher percentage of young people usually have stronger housing markets — all other things being equal. The reasons for this are fairly obvious. The first-time home buyer demographic is primarily made up of people in their late 20s to early 30s. Attracting this demographic can result in a steady influx of housing demand, which can help sustain (and elevate) home prices. This is what we are seeing in the Houston metro area, as well as several other cities in Texas.

The image below shows the five metro areas that attracted the highest percentage of young people, between 2007 and 2009. Houston was ranked #4 on this list. This trend will likely continue for the near future, and it will help boost Houston home prices in 2011 and beyond.

Houston attracts young people

The data above was compiled by demographics researchers at the Brookings Institution.

Home Price Predictions for 2011

The data shown above is historical in nature. But what about the future of home prices in Houston? According to Clear Capital (the same company that produced the report above), Houston could see some of the largest price gains in 2011. In fact, Houston ranked #2 in terms of home-price predictions for 2011, second only to Washington, D.C. See chart below.

Houston Home Price Forecast

Carlos Bujosa, chairman of the Houston Association of Realtors, likes these positive signs. But he tempers his enthusiasm with a wait-and-see attitude: “We need to carefully watch how the Houston real estate market performs over the next couple of months before being able to truly determine how 2011 might pan out,” Bujosa said.

Disclaimer: This story contains forward-looking statements and predictions about 2011 home prices in the Houston area. These statements are not to be taken as fact. We make no guarantees about the future of Houston’s housing market.

Consumer Negligence is Missing from FCIC Report

On January 27, 2011, the Financial Crisis Inquiry Commission (FCIC) released its long-awaited report detailing the “causes, domestic and global, of the current financial and economic crisis in the United States.”
FCIC Blame Game
As one would imagine, there was plenty of blame to go around. The commission cited critical failures made by policymakers, banks and investors.

Surprisingly, though, it didn’t have much to say about the biggest elephant in the room — greed and negligence at the consumer level. Consumers had a major role in all of this, after all. But that role was scarcely mentioned in the report.

I’m still trudging through the 600+ pages in the report. So far, the blame for the financial crisis seems to be centered on Wall Street, mortgage lenders, and the government officials that received so many campaign contributions from these lenders.

The Federal Reserve got slammed as well. The report cited the Fed’s “pivotal failure to stem the flow of toxic mortgages” by setting certain guidelines and standards for the lending industry. The Federal Reserve, said the commission, was the only organization with the power to prevent this kind of reckless lending. But it failed to do so.

I would agree with most of this. But I don’t understand why the subject of American greed was largely ignored in the report. In other words, why weren’t consumers given their fair share of the blame? Perhaps it’s because some members of the commission are public officials. Wagging a finger at their supporters and constituents would hardly be prudent, from a career standpoint.

Sometimes, Home Buyers Blindfold Themselves

There is a widely held notion that the housing crisis was created solely by unethical mortgage lenders. Certainly, these modern-day robber barons had a role in all of this. But that’s just the supply side of the equation. We must not forget the demand side, and the lessons to be learned there.

During the housing boom, there were plenty of well-intentioned home buyers who were lied to by mortgage lenders and brokers. But there were just as many (and perhaps more) buyers who knowingly bought homes they could not afford. These borrowers were often given adjustable-rate mortgages with low “teaser” rates for the first few years. In some cases, they were even allowed to choose the size of their monthly payments through the (now vilified) pay-option ARM loan.

You know the rest of this story. The full interest cost of these loans got pushed down the road. Many homeowners even saw their loan balances grow from one month to the next, through negative amortization. Monthly payments doubled, and sometimes even tripled, when the ARM loans began to adjust. The rest is history.

There are three sides to this triangle, and they all deserve some of the blame. Policymakers and regulatory agencies failed to predict and prevent this colossal meltdown. Lenders gave mortgage loans to an army of high-risk borrowers — people who would never qualify for a loan under current guidelines.

The third side of the triangle is the one you don’t hear about very often. It’s the consumer side. Many home buyers took on a level of mortgage debt they knew they couldn’t handle. They blindfolded themselves with greed, denial, and the expectation of financial options that never came to fruition. “I should be getting a raise in a year or so, and that will help me afford the larger payments.” Or this old chestnut: “Home prices will never go down, so I’ll be able to sell or refinance the home before my rate starts to adjust.”

Sometimes, the desire for bigger and better can override a person’s common sense. It overshadows the mathematical reality of the situation.

If a Loan Sounds Too Good to Be True…

During the housing boom, a lot of mortgage loans seemed too good to be true. That’s because they were. These loans were the result of investor demand for mortgage securities, and the lending industry’s desire to serve that demand. When there were no more reasonably qualified borrowers left, the industry created alternative mortgage products to serve the unqualified borrowers.

I know what you’re thinking: “But these so-called ‘exotic mortgages’ are a thing of the past. I have nothing to fear today. The lending industry uses common sense again.”

Yes, the riskiest loan products are gone for now — but not forever. Just wait a few years, and they’ll be back. Of course, they won’t be called subprime loans, payment-option ARMs or stated-income mortgages. Those things all have negative connotations these days. But there will eventually be a new crop of high-risk mortgage products. Because American greed never sleeps. And our lawmakers are constantly and heavily lobbied by the financial industry.

Mortgage lending is huge business, especially in the secondary market where bundled loans are bought and sold. So you can rest assured that “creative financing” options will manifest again in the future. The best thing a home buyer can do is know what to expect from the lending industry. And that brings me to my final point.

What You Can Expect from Mortgage Lenders

What is the role of the mortgage lender? What is their responsibility to the borrower? What is the borrower’s responsibility? These are all valid questions, and the prudent home buyer will consider each of them carefully.

Here’s what a home buyer should expect when dealing with mortgage lenders:

  • Lenders are looking out for their own financial interests, not yours.
  • Lenders want to make as many loans as possible, while minimizing their own risk. So they look at you in terms of risk versus reward, not as a person with hopes and dreams.
  • Lenders want to maximize their profits by charging interest and fees on every loan they make. This business model does not include any concern for your long-term financial success. It’s just business.
  • It is not the lender’s job to counsel you, or to help you establish a realistic budget for yourself. That is your responsibility alone.

In other words, your mortgage lender is not your financial advisor. This is something every home buyer needs to realize. I believe that if all home buyers went into the mortgage-application process with this fundamental truth in mind, we would see a significant reduction in the number of foreclosures.

Reader Q&A: Why is My House Not Selling?

Reader question: “I have had my house on the market for nearly eight months now. I know homes are selling in my area, because I’ve seen the ‘sold’ signs. Our house is similar to some of those that have sold recently. Why is my house not selling, and what can I do to expedite the process?”

House not sellingWithout seeing your house firsthand, I can only offer suggestions that may help it sell more quickly. If homes have sold in your area recently, we know there’s some buyer activity. What I’d like to know is whether or not these buyers have visited your house as well.

If people are visiting your house but no one is making an offer, then it could either be a pricing problem or bad presentation. But if no one is even visiting your house, then it’s most likely a pricing problem. In order to fix either of these problems, you must learn to look at them objectively.

Reasons Why a House Doesn’t Sell

I just touched on two of the three most important factors when selling a house — pricing and preparation. These are two of the “three P’s” of home selling. The third ‘P’ is for promotion. If your house is not selling, there is a 99% chance you are missing one or more of the three P’s. So let’s discuss each of these three factors.

Problem #1 – Overpricing the Home

When somebody asks, “Why is my house not selling?” the first thing I want to know is how they set the asking price. If they based it on what they paid for the house several years ago, then the house is probably overpriced. The same goes for pricing the home to pay off your mortgage balance. If you used one of these two pricing “strategies,” then you’ve probably set your asking price too high. This could be the reason your house is not selling.

Related: How to Sell a House Quickly in 2011

It’s time for some hard truth. Your home’s value in the current market has nothing to do with the amount you paid for it, or the amount you currently owe on your mortgage. The market value of the house is mostly influenced by recent comparable sales. You’ve already mentioned that homes are being sold in your neighborhood. Are they similar to your house? If so, you need to find out how much they sold for. In real estate lingo, this is referred to as a comparable sale, or a comp for short.

When buyers are considering your home, they will look at recent sales in the area to determine if your asking price is reasonable. If your home is priced well above comparable sales in the area, most buyers won’t give you the time of day. The exception, of course, is when a house has unique features that make it stand out from other homes in the area. For example, if you’ve done a major kitchen renovation, and you now have the nicest kitchen in the neighborhood, you might be able to set your price above the comps. In fact, it might be hard to find a truly comparable sale in this scenario. So you would have to start with the houses that most closely match yours, and then factor in the upgrades. Other items that can justify a higher asking price include a larger lot, a better view, swimming pool, etc.

But since your house is not selling, I would venture a guess that the price does not match the property. So take a good hard look at those comparable sales. And then ask yourself how your house is priced in comparison to the other homes that have sold recently. This is usually where the disconnect can be found.

Problem #2 – Poor Preparation / Lack of Staging

Why is my house not selling? Let me answer your question with another question: How well is your home staged? If you’re not familiar with the concept of home staging, then your house probably isn’t staged well. If you want to get an offer on your home in a buyer’s market, you have to make it stand apart from the competition. And that’s what this is, a competition. You are competing with other homeowners in the area who are trying to sell their homes as well. Buyers will be attracted to the homes that are staged well and priced realistically.

Effective pricing is enough to bring buyers to the house. But you need to follow through with good home staging (here’s how). In my opinion, this is one of the most neglected steps in the home-selling process. People think they can put a reasonable price tag on the house and leave it at that. Nothing could be further from the truth. In 2011, most real estate markets will have plenty of housing inventory but not enough buyers. This means that a buyer has plenty of homes to choose from. And with that in mind, consider the following scenario.

John and Jane are shopping for a home in Richmond Virginia. They are looking for a house in the $300,000 price range. One week, they visit two homes in the same neighborhood. The prices are similar — only a $2,000 difference between them. The first house they visit is immaculate, inside and out. Looking at the front yard, it seems like the landscapers just left. The lawn looks like a putting green, and all of the bushes have been recently trimmed. All of the windows in the house are sparkling clean.

John and Jane are impressed right from the start. And their good first impression continues inside the house. There is a fresh coat of paint on all the walls, and the carpet is either brand-new or recently cleaned. All of the excess clutter has been removed from the house, making it look like a model home in a new neighborhood. The furniture has been strategically placed to maximize the flow, and to give the impression of a larger space. All of the light fixtures have been upgraded from the original “builder grade” fixtures. The same goes for the hardware in all of the bathrooms. It’s pretty clear the homeowners have made an effort to modernize the house.

Since they’re already in the neighborhood, John and Jane visit the other house that’s for sale, just down the street. The yard gives the impression of a foreclosure home, even though it’s not. Weeds are sprouting up everywhere, competing with various brown patches for dominance. The bushes have all grown together into one big wall of green. There’s an old bicycle, a couple of boxes, and about a dozen spiderwebs on the front porch. The windows look like they haven’t been cleaned since the home was built.

Right away, John and Jane have a bad feeling about the second house. The inside is more of the same. There are personal photographs, knickknacks and other forms of clutter all over the place. It doesn’t look like a home for sale at all — it just looks like someone else’s home. John and Jane have a hard time picturing themselves in this house, because everywhere they look they see pictures of the current homeowners. The rooms are overcrowded with furniture and other accessories. This makes them seem small, cramped and dark. The kitchen sink is dirty and the hardware is rusty. The same goes for all of the bathrooms. The light fixtures seem outdated when compared to the first house. John and Jane take a quick look around since they’re already inside, and then they are right out the door again. They scratch this house off their list.

I told you there was a $2,000 difference between these two homes. What if I told you that the first house John and Jane looked at was the more expensive one? Which one do you think they would make an offer on? I would put my money on them choosing the first house. The combination of landscaping, painting, home staging and upgrades would make the first house seem like it was worth a lot more than the second house. So the homeowners could easily justify the slightly higher asking price. The second house, on the other hand, seems to be a project in waiting. John and Jane would have to get the yard under control, which is no small feat. They would have to spend a lot of time cleaning and painting. And if they wanted the upgrades that were available in the first house, they would have to spend money they probably wouldn’t have after the down payment, closing costs, etc.

Let’s get back to the question at hand: Why is my house not selling? We’ve covered two of the most important factors when selling a house — pricing and preparation. Have you priced your house realistically, in relation to comparable sales? Have you staged your home to make it stand out from other houses in the area? If you have even a moment’s hesitation on these two questions, the answer is probably no. And that’s why your house is not selling.

Problem #3 – Not Enough Marketing

I said there were three P’s of home selling, and so far we have only talked about two of them. The last one is promotion. If you want to sell your house in a slow market, you need to make sure every buyer in your area knows about it. Fortunately, this is the easiest of the three P’s. If you put your home on the Multiple Listing Service (MLS), you’re off to a flying start. This will put your house on the radar of almost every real estate agent in town, as well as their clients.

Next, you should consider putting the house on at least one of the major real-estate listing websites. I recommend listing the house on Realtor.com, if it’s not there already. To get maximum exposure, you might want to list it on Zillow.com and/or Trulia.com as well. And, of course, make sure you have a yard sign with property flyers attached.

Proof is in the Pudding

I’m living proof that this strategy works. I sold my home last year, and we were under contract within nine days. Several of my neighbors were in the same situation you’re in right now. Their houses were not selling, and a couple of them had been on the market for over six months. When they saw the “sold” sign in my yard in less than two weeks, they wanted to know how we did it so quickly.

“Did you lowball the asking price for a short sale?” one of my neighbors asked.

In reality, we sold the home for market value and made a reasonable profit from it. He told me that whatever I did, I should bottle it up and sell it. I bottled it up all right, but I’m giving it away for free. Here’s a case study on how we sold our house so quickly. You’ll notice that it focuses on the same three concepts covered in this article. The three P’s of selling a home — pricing, preparation and promotion. If you’re missing one or more of these things, then you know why your house is not selling. Mystery solved!

Houston Real Estate Market in 2011 – I’d Buy There

The Houston real estate market was one of the strongest in the country last year. In 2011, it could enjoy the same distinction. This is the general consensus among many real estate and economic analysts. Here’s what people are saying about the Houston housing market in 2011.

Home Prices in Houston

Clear Capital, a company that provides real estate valuation services for the mortgage industry, recently released a report showing home-price projections for major metro areas in the U.S. In addition to the forecast for 2011, their report showed actual home-price data for 2010. The Houston real estate market was ranked #2 for 2011, in terms of home values. The city had another distinction as well. Only a handful of cities that experienced price increases in 2010 are expected to do so again in 2011 — Houston was one of them.

Houston Home Price Forecast

The image above is an excerpt from the January 2011 report released by Clear Capital. The red circles and rectangle have been added for our purposes, to highlight their predictions for the Houston housing market in 2011.

Credit Suisse, an international finance company, recently released their monthly housing survey. As with the previous report mentioned above, the survey covers fifty of the largest real estate markets in the United States. The data showed price changes from November to December 2010 (most recent data available). Of the top five markets in terms of price increases, two of them were in Texas. Austin was ranked #2, and Houston was ranked #4. This further supports the notion that the Houston real estate market could be one of the strongest in the country, for 2011 and beyond.

Property Values Rising

In the first week of January 2011, Harris County officials sent out their updated property assessments. Nearly all of the assessments for Houston showed an increase in property values. Overall, assessments in Houston increased from $252 million in 2010 to $269 million in 2011 (as of January). The appraisers who come up with these values look at many factors, but real estate market trends weigh in the most.

Like most cities in Texas, Houston avoided the kind of bubble-to-bust cycle that wrecked so many other housing markets in the country. According to Ana Orozco, an economist with IHS Global Insight: “Texas wasn’t as hurt by the recession because it didn’t having the housing price bubble in the pre-recession years.” Because Houston home prices were never inflated to begin with, they didn’t suffer much depreciation during the housing “crash” of 2008.

Positive Signs in Job Market

The job market in Houston is also growing much faster than the national average. In 2010, the Houston area gained nearly 10,000 new jobs. That’s not ideal. But when you consider the 100,000+ jobs lost a year ago, it’s certainly a positive sign.

The state of Texas as a whole is expected to add 1.5 million jobs by 2016. Much of this economic growth will take place in cities like Houston, Austin and Dallas. This brings in new residents from elsewhere in the state, and from across the country. Many of these new residents are educated and upwardly mobile young people (the 25 – 34 demographic is booming).

Magnet for the Upwardly Mobile?

The image below shows the metro areas that attracted the highest percentage of young people, during the later part of the 2000s. Of all the major metro areas in the United States, Houston ranked #4 in terms of attracting this demographic. This trend will likely continue for the first part of 2011, and possibly beyond that. This will give the Houston real estate market a steady stream of potential home buyers, which will support home values for years to come.

Houston attracts young people

The data above was compiled by demographics researchers at the Brookings Institution.

Houston Real Estate Market is Attractive

This is all good news for homeowners in the Houston area. It also gives hesitant home buyers a reason to move forward with their purchases. Mortgage rates are expected to stay below 5 percent for the first part of 2011, and home prices in Houston are equally attractive. But all of the current data suggests that home prices will rise steadily in the coming months. Mortgage rates may very well do the same. You hear the phrase “now is the time to buy” thrown around a lot. But in Houston, that phrase actually applies.

Objectivity Notice: We do not have any stake in the Houston real estate market — personal, financial or otherwise. This article is simply an objective review of (what could very well be) one of the strongest housing markets in 2011. We encourage home buyers to do ample research before entering the market. This article is a great place to start.

Austin Real Estate Market Looks Good for 2011

In 2011, the Austin real estate market could be one of the most stable in the country. Some housing analysts are predicting a small price decline in the first part of the year, followed by years of growth and stability.

It could truly be a happy new year for Austin-area homeowners. Having avoided most of the housing-related drama of the last few years, the Austin real estate market has been relatively stable. Austin home prices are likely to appreciate in the latter part of 2011, barring any unforeseen catastrophes.

Ingredients for Housing Stability

Like many cities in Texas, Austin never experienced much of a housing bubble. This is one of the factors that spared it from the housing crash that devastated the rest of the United States. Population and job growth have also played a big role.

Over the last few years, the population in the Austin metro area (including nearby Round Rock) has grown considerably. Between 2000 and 2009, the population grew by 34 percent. This props up housing demand at a time when it’s shrinking in other metro areas. A relatively low foreclosure rate has kept home inventories in check. All of this helps balance the scales between supply and demand. It also sets the stage for a stronger Austin real estate market in 2011.

Austin, Texas skyline
Image source: Wikipedia. Licensed under Creative Commons 3.0.

Credit Suisse, an international finance company, recently released their monthly housing survey for the 50 biggest real estate markets in the U.S. The report showed changes in home prices from November to December 2010. Out of all 50 metro areas, Austin was ranked in the top three in terms of home-price increases. This and other reports seem to suggest that the Austin real estate market could be one of the strongest in 2011.

Austin draws in plenty of younger migrants from other parts of the country. According to data released by the Brookings Institution, the capital city attracted the largest numbers of young Americans (25 – 34) from 2007 to 2009. This is a prime demographic for first-time home buyers. Translation: The Austin real estate market is fueled by a steady influx of upwardly mobile young people.

Austin attracts young people

The data above was compiled by demographics researchers at the Brookings Institution.

The job market in Austin is also one of the best in the country. Much of this comes from the tech sector. According to Grubb and Ellis, a market research firm, Austin will have one of the strongest commercial real estate markets for the next several years.

LegalZoom, the Los Angeles-based provider of online legal documents, recently chose Austin as the future home of its regional headquarters. And they weren’t alone in this decision. According to the Greater Austin Chamber of Commerce, 2010 was a banner year for business recruitment. In that year, 27 companies relocated their headquarters or other operations to Austin. This means more jobs, more economic growth, and more home buyers to fuel the Austin real estate market in 2011.

Austin Real Estate in 2011

This is not to say that Austin home prices won’t fall in 2011. It’s still a possibility. In November of last year, Moody’s Analytics predicted that housing prices in the U.S. would decline though the first half of 2011. They predicted the worst declines in Las Vegas, Fort Lauderdale and Riverside, California. The least severe declines, said the report, would happen in places like Austin, Texas (which has more price stability than the rest of the country).

What will the Austin housing market look like by the end of 2011? Only time will tell. But if I were a potential buyer in the Austin area, I would make my move sooner rather than later. Mortgage rates will likely stay below 5 percent for the next few months, and home prices are equally attractive (Austin is one of the most affordable real estate markets in the country). Add in a dose of market stability, and you’ve got a pretty good scenario for home buyers.