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.

Washington, D.C. Real Estate – Most Stable Metro for 2011?

What’s in store for the Washington, D.C. real estate market in 2011? According to some of the latest housing-market data and predictions, Washington, D.C. could be one of the most stable metropolitan areas in 2011.

Washington, D.C. Housing Market in the News

S&PThe most recent S&P / Case-Shiller home index (released at the end of December 2010) showed that home prices fell in all 20 of the monitored metro areas. But out of all 20 metropolitan areas, the Washington, D.C. real estate market fared the best. In both the monthly and yearly categories, home prices in Washington D.C. were the most stable.

The price drop from September to October was only 0.2 percent. The annual data showed a better picture, with a 3-percent rise in prices from October 2009 to October 2010. This was the strongest annual gain of all monitored metro areas.

VerosIn December of 2010, Veros Software, a California-based technology firm that serves the financial industry, predicted that Washington D.C. would be one of the strongest real estate markets in 2011. Specifically, they said it would be one of the five strongest metro areas in terms of appreciation. The company feels the D.C. metro area could see home-price gains of 2.5 percent, between now and December 2011.

Clear CapitalIn January of 2011, Clear Capital released a home-price forecast for 2011. Located in Truckee, California, Clear Capital provides appraisal / valuation services for the financial industry. Translation: They study home values for a living. According to their predictions, the Washington, D.C. real estate market could see the most home-price appreciation of any major metro area. An excerpt of their report is shown below.

As you can see, the company feels that home prices in Washington will increase even more in 2011 than they did in 2010. If this forecast holds true, it gives D.C. homeowners reason to celebrate.

Home Price Projections, Washington, D.C.

According to Jim Diffley, an economist at IHS Global Insight: “Given the area’s employment picture, we feel there is less risk of a [price] fall in the Washington region than in other parts of the country.”

Even as “far” back as February 2009, Forbes had listed Washington D.C. as one of the most stable housing markets in the country. That time frame could be viewed as the turning point for the D.C. real estate market, when home-price declines began to slow down considerably over the years prior.

2011 Market Drivers – Inventory and Unemployment

Row houses, Washington D.C.The question is, will home prices in Washington, D.C. decline, flat-line or increase in 2011? All of the sources mentioned above seem to agree that things are looking up.

For the most part, the answer lies within two key factors — unemployment and inventory. If the district experiences continued job growth in the new year, housing demand should rise. This would put upward pressure on home prices. But a large housing inventory (worsened by home foreclosures) could negate any upward ticks in housing demand.

Only time will tell, of course. But if I were a potential home buyer in Washington, D.C., I’d probably make my move in 2011. Mortgage rates are expected to remain below 5 percent for the first part of the year, and home prices are equally attractive. Add in a dose of market stability, and you’ve got prime buying conditions.

San Diego Real Estate Market in 2011 – Price Predictions

Advance summary: Brandon Cornett, the publisher of the Home Buying Institute, shares his local market research with San Diego home buyers.

San Diego

This is not the usual kind of story we publish. In fact, it’s not a news story at all. It’s a list of predictions and perspectives on the San Diego real estate market in 2011. You see, I’m actually in the market to buy a home in San Diego in 2011. So I’ve been doing quite a bit of research, to get a feel for what the market might be like next year.

Surely there are some other home buyers out there who can benefit from the information I’ve gathered. So, in the spirit of sharing, here are some thoughts and predictions about the real estate market in San Diego.

Real Estate Outlook for 2011

Here are some headlines relating to what the San Diego housing market might do in 2011. I’ve added some background information where it was necessary.

San Diego Market Forecast for 2011
KPBS Interview with Dr. Michael Lea, December 2010
On December 2, 2010, Maureen Cavanaugh from KPBS conducted an interview with Dr. Michael Lea. The subject of the interview was San Diego real estate, and what the housing market might do in 2011. Dr. Lea is the director of the Corky McMillin Center for Real Estate at San Diego State University.

In one part of the interview, Dr. Lea had this to say: “I think the bigger effect is you’re gonna see a weak market [in 2011] with declining house prices probably in the single digits … We’re not gonna really start to see a recovery until 2012, assuming that you can get the shadow inventory through the system.”

The so-called “shadow inventory” consists of bank-owned homes that are not listed for sale, as well as homes that are likely to be foreclosed upon in the near future.

Home Prices Expected to Rise in 40% of Metro Areas in 2011
Housing Wire, December 2010
Veros Software, a Santa Ana-based tech firm that serves the financial industry, recently shared some housing predictions for 2011. I know … I’ve never heard of them either. Their report said that San Diego should experience a 3.5 percent increase in home values in 2011. I’m not sure if this company has a vested interest in rosy outlooks. But theirs was the only forecast I found that suggested rising prices. Aside from San Diego real estate agents (who definitely have a vested interest in rosy outlooks), I could not find any upward pricing predictions for 2011.

Roundtable: Outlook Remains Bleak for 2011 Housing Market
The Daily Transcript, November 2010
In November of 2010, The Daily Transcript hosted a roundtable discussion about the residential real estate market in San Diego. On the panel were Borre Winckel (president of the San Diego Building Industry Association) and Rick Hoffman (president of Coldwell Banker Residential Brokerage in greater San Diego), among others. There wasn’t much optimism at the table. According to Andrew Keatts of The Daily Transcript: “The best anyone at the table could say for 2011 is that it can’t be much worse than 2010.” Well, maybe not much worse.

Housing Prices Facing a Double Dip
San Diego Union Tribune, August 2010
In August, the Union Tribune pointed out some data that suggested a double-dip in San Diego County home prices. They were reporting on data released by Zillow. According to Zillow, San Diego was one of the only metro markets where home prices declined in the third quarter of 2010, after five quarters of an increase. Of course, this kind of drop-off was expected. Those five quarters of rising home values were largely driven by state and federal tax credits for home buyers. But now the demand is down, even as inventories rise. This puts downward pressure on home values.

Price Reductions on San Diego Homes Increase
San Diego Union Tribune, August 2010
In August, the Union Tribune mentioned a report by Trulia.com that showed another disturbing trend for homeowners. From July to August, the number of price reductions on San Diego homes for sale increased from 20 percent (of all homes for sale) to 23 percent. San Diego had the fourth largest increase in the number of price reductions from July to August. This suggests two things: (1) many sellers are asking for more than the average buyer is willing to pay, and (2) housing demand may be shrinking.

Crystal ball disclaimer: These are just some tidbits I came across in the course of my research. Who can really say what the San Diego real estate market will do next year? Not me. But if I were a betting man, I’d put my money on some kind of home price decline in 2011. It’s a supply and demand thing. The expiration of the $10,000 home-buyer tax credit will reduce demand. And the post-moratorium renewal of home foreclosures will increase supply. Then there’s that whole unemployment thing. Given all of that, how could home prices in San Diego not decline in 2011?

Top Ten Signs You’re Ready to Buy a House in 2011

Thinking about buying a home in 2011? If so, you’ll find this top-ten list helpful. When you’ve completed most of the steps on this list, you’re probably ready to buy.

Buying in 2011

Home-buying activity is expected to pick up a bit in 2011, when compared to 2010. High inventory, low mortgage rates, and a slowly improving job market will bring more buyers off the bench. Will you be one of them? If so, there are certain things you need to know and do, before entering the market.

Here are ten signs that you are ready to buy a home in 2011:

1. You’ve made the decision to buy on your own terms.

You’ve probably heard this line before: Home ownership is the American dream. This notion was created by mortgage lenders and home builders. After all, these people stand to gain if you buy into the “dream.” While home ownership certainly has some advantages, it’s not a one-size-fits-all scenario. Buying a home makes sense for some folks, but not for others.

So if you’re planning to buy a home in 2011, you need to make sure it’s for your reasons — and not because someone else is selling you the dream. How will becoming a homeowner change your lifestyle? Will it make things better or worse? Do you have the financial stability that’s needed to buy a house? Or do you expect some job transition in the near future? Is home ownership even a priority for you? Answering these questions will help you gauge your emotional and financial readiness to buy.

2. You’ve been watching home prices in your area.

What’s the real estate market doing in your neck of the woods? This is something you need to know, before you pour your resources into a home purchase. Are you buying a home in a city that had a big bubble / bust over the last few years? If so, there’s a chance home prices will fall even further throughout 2011.

Or maybe you live in one of those fortunate few cities that experienced stable home prices, even during the housing bust. In that scenario, there’s a better chance your investment will hold (or gain) value in the coming years.

The point is you have to know what’s going on in your local market, before buying a home in 2011. You obviously can’t predict the future. But with an eye on the past and present, you can at least make an informed decision about your home purchase. This is what professional investors do, and it’s what you should so as well.

3. Home prices are stabilizing in your area.

This is an extension of item #2 above. The worst-case scenario is to buy a home in a declining market, where home values are still dropping. The best-case scenario is to buy at the “bottom” of the market, so you can ride the upward climb. In between the two is where price stabilization occurs. Almost every city in America suffered from housing depreciation after the 2008 collapse. Some of those cities have stabilized already, and a few are even seeing appreciation. But home prices in many more cities are expected to decline in 2011.

If you’re in it for the long-haul, this might not be a big deal. Home values will head north again, sooner or later. But if you only plan to be in the home for a few years, you should avoid buying in a market that’s still declining. The savvy home buyer will wait until prices are stabilizing, before venturing into the market.

4. You’re putting money aside.

The days of reckless lending are behind us. For now, at least. That means the days of “zero-down mortgages” are also history. The VA and USDA loans are the only options for 100% financing these days. But those programs are limited to certain types of borrowers. Everyone else will need to make a down payment of some kind. When you buy a house in 2011, lenders will require you to have some skin in the game. For an FHA loan, you could put as little as 3.5 percent down (if your credit score is above 580). Most conventional mortgages will require at least 5 percent down.

The down payment is just one of the costs you’ll incur when buying a home. You’ll also have to cover your closing costs, and these can add up to $2,000 – $5,000, depending on where you live. Your lender will probably require you to have some cash reserves in the bank as well, above and beyond your closing costs.

Many first-time home buyers are caught off guard by the amount of money they have to spend. Don’t be one of them. Spend some time researching the full cost of buying a house in your area, and start saving your money early.

Related article: How much money should I save to buy a house?

5. You have a FICO credit score north of 600.

When it comes to mortgage approval, credit scores are more important today than in the past. This will be a key factor when taking out a loan to buy a house in 2011. In the current mortgage market, this single item can make or break your chances of getting a mortgage loan.

Maybe you’ve heard that the FHA allows you to have a credit score as low as 500, when using the FHA loan program. That may be true, but it’s sort of a moot point. You still have to be approved by an FHA-approved lender, and they won’t approve you with a score that low. In fact, two of the biggest lenders recently increased their credit requirements for FHA loans — from 620 to 640.

Having good credit will help you get approved for a loan. But the benefits don’t end there. A person with an excellent credit score will also qualify for a lower interest rate, which can add up to huge savings over the life of the loan.

6. You’ve established a home-buying budget.

Believe it or not, you can get approved for a mortgage loan that’s too big for you. It’s not as common today as it was during the housing boom. But it still happens. So before you start talking to mortgage lenders, you need to establish a monthly housing budget. This budget should factor in all of the other debts you have. The two biggest reasons for foreclosure are loss of income and poor budgeting. You can’t always control the first item, but you can certainly control the second. So do the math in advance.

7. You’ve researched your mortgage options.

Which is better for your situation, a fixed or adjustable-rate mortgage? This is one of the first things you’ll need to decide, when taking out a loan to buy a house. A lot of it depends on your long-range plans. Fixed-rate mortgages are better for longer stays, while an ARM loan can be used to reduce interest costs during a shorter stay.

Many of the mortgage horror stories you may have heard come from people who used ARM loans improperly. They stayed in their homes beyond the first adjustment phase, and they subsequently saw their mortgage payments swell. What can we learn from these people? That it’s critical to understand the different types of home loans, and how they work.

And what about these FHA loans you’ve heard so much about? Are they a good option when buying a home in 2011? Again, this will depend on your particular scenario. In many cases, the FHA loan can be an excellent path to home ownership. But they have their disadvantages as well (and you can learn about them here).

I recommend that you spend at least a week researching these topics, before you contact any lenders. Yes. It’s that important.

8. You’ve been pre-approved for a mortgage.

Mortgage pre-approval is when you sit down with a lender to see what options you have. The lender will review your financial situation and tell you how much they’re willing to lend you. Getting pre-approved for a home loan is useful for several reasons. It will help you identify any financing obstacles, such as income or credit problems. It will also make sellers more inclined to take you seriously.

It’s harder to qualify for mortgage financing these days. Most homeowners know this. As a result, they probably won’t entertain offers from a buyer who lacks a pre-approval letter. When we sold our house in the summer of 2010, my wife and I got an offer from some buyers who hadn’t been pre-approved by a lender yet. We basically ignored it, and accepted a qualified buyer’s offer two days later. Their agent should have told them not to waste our time, or their own.

9. Your debt doesn’t eat up too much of your income.

When buying a home in 2011, you can rest assured the lender will put your finances under the microscope. Your debt-to-income ratio (or DTI) is one of the first things they will examine. This is a comparison between the amount of money you earn each month, and the amount you spend on your various debts.

The maximum allowable DTI ratio will vary from lender to lender. It also depends on the type of loan you’re using. There are actually two types of debt ratios. One includes your housing costs as well as your other debts. This is known as the back-end ratio. The other one, the front-end ratio, only includes your housing debt. Here’s what you really need to know. If your combined debts (including your mortgage payments) account for more than 36 percent of your gross monthly income, you might have trouble qualifying for a loan.

10. You’re considering bank-owned homes, as well as the “regular” homes for sale.

When shopping for a home, you shouldn’t ignore the bank-owned foreclosures that might be available. These homes can often be purchased for less than their true market value. And many of them are in decent shape, having been lived in right up until the foreclosure took place. In some places (like California and Florida), bank-owned properties make up more than 20 percent of the housing inventory.

Bank Owned

Many buyers are afraid of bank-owned homes. Perhaps they’ve heard a horror story about the buyer who went back and forth with the bank for six months, before walking away from the deal. But in reality, buying a bank-owned home is generally the safest bet (out of all the foreclosure stages). And given the fact there are many of these homes available, you shouldn’t rule them out. Most real estate agents are familiar with the process. How could they not be? So keep them in mind, when you’re shopping for a house in 2011.

The basic process of buying a home is the same in 2011 as it was in 2000. But many of the lending rules and requirements have gotten tighter. So the modern home buyer must be knowledgeable and realistic. I hope this article has given you some firm footing to start your journey.

The 5 States With the Most Underwater Homeowners

CoreLogic, a company that provides financial and property analytics, released its “negative equity report” for the third quarter of 2010. Among other things, the data shows that the five states hardest hit by the foreclosure crisis hold some other dubious distinctions as well. They also have the most underwater homeowners.

Definition: An underwater homeowner is somebody who owes more on their mortgage loan than the home is currently worth. Thus they are underwater in the mortgage. This is also referred to as being upside down in the loan.

The envelope please. Cue the drum roll. And the five states with the highest percentage of underwater homeowners are:

  1. Nevada – In many ways, the Silver State could be considered Ground Zero for the foreclosure crisis. And it still shows. Today, 67 percent of all mortgage holders are underwater in their loans. Home prices in Las Vegas fell 4.2 percent in the third quarter alone.
  2. Arizona – Another of the so-called “sand states,” Arizona was equally devastated by the housing crisis. As of December 2010, 49 percent of the state’s mortgage-holding homeowners were underwater in their loans. An Arizona State University study recently showed that Phoenix is experiencing a double-dip in home prices.
  3. Florida – Things don’t look sunny for homeowners in the Sunshine State. Florida is close behind Arizona, with 46 percent of mortgage holders underwater at the end of 2010. Home prices in Florida are expected to decline by as much as 9 percent in 2011.
  4. Michigan – Approximately 38 percent of Michigan mortgage holders are underwater in their homes. Michigan is also a national “leader” in terms of unemployment. Last month, the state had one of the highest unemployment rates in the country (12.8 percent), second only to Arizona.
  5. California – The Golden State used to rank higher on this list. But the number of underwater homeowners there has dropped to 32 percent. The California Association of Realtors expects a 2-percent rise in the median home price in 2011. Of course, this is an organization that relies on homes sales, so we can take this forecast with a grain of salt.

At the national level, many analysts and economists are predicting further price declines for most of the U.S., well into 2011. In contrast, there are certain places where prices are expected to rise next year. But on the whole, the 2011 housing scene could look very similar to 2010.

Morgan Stanley Sees Home Prices Declining in 2011

What will U.S. home prices do in 2011? It’s a common question, as we wrap up yet another painful year for housing. Property values have fallen considerably since the crisis began in 2008. And a recent prediction suggests they may have further to fall.

It’s good news for home buyers, and bad news for homeowners. Financial services firm Morgan Stanley expects home prices to decline by as much as 11 percent through 2011 and into 2012. Many had hoped the market would hit ‘bottom’ next year. But that may not be in the cards after all, if Morgan Stanley’s predictions are accurate.

To what do their financial analysts attribute this gloomy forecast? Supply and demand, of course. They feel that rising inventory and weak demand will push the current housing-market slump all the way into 2012. This jives with the consensus reached in our housing predict-o-meter, which shows that 2011 could be a lot like 2010.

Translation: Home prices will likely continue to decline in many parts of the U.S. next year, and possibly into 2012.

The Morgan Stanley analysts, led by Oliver Chang, said that tightened lending standards will continue to hamper home sales next year. “We see the trough occurring in 2012 instead of our previous call of 2011,” Chang told Bloomberg news, during a phone interview recently.

Indeed, it is harder to qualify for a home loan today than it was before the housing collapse. During the boom, nearly anyone with a steady paycheck could qualify for a mortgage. But things have changed dramatically since then. Today, risk-averse mortgage lenders require higher credit scores, more documentation proof of income, and lower debt levels. This shrinks the pool of qualified home buyers, weakening the demand side of the housing equation.

Also restricting demand is the fear of falling prices. For decades, we operated under the assumption that home values would always go up. This was viewed as an unshakeable truth. Now we know better. Just look at California, Florida and Arizona, the states hit hardest by the housing crash. Real estate values plummeted in those markets, and are falling still. This puts hear in the hearts of would-be home buyers. It’s a legitimate concern. Who wants to spend hundreds of thousands of dollars on an asset, only to see it depreciate from day one?

We have problems on the supply side as well. Millions of foreclosure properties flooded the market after the crash. There is not nearly enough demand to absorb them all. It’s the kind of situation that is measured in years, not months. What’s worse, these distressed properties are often sold for less than market value. This puts downward pressure on property values across the board, even for non-distressed homes.

Of course, none of this comes as news to the folks at Morgan Stanley. They are intimately familiar with the many woes of housing. It’s what led to their bleak predictions for next year.

Some markets will take longer to recover than others. We are seeing this even now, as the level of depreciation lessens in some markets and worsens in others. Speaking broadly, however, I would not expect to see a national rebound in home prices until mid 2012, at the earliest.

Morgan Stanley is a financial services firm that was founded in 1935. They offer a variety of investment banking, securities and wealth management services. They are headquartered in New York and serve clients worldwide.

Home Value Killers of 2011: Inventory and Unemployment

2011The current consensus seems to be that home values in most parts of the U.S. will decline, as we head into 2011. This should come as little surprise, when you consider the current level of housing inventory and unemployment.

But we may find ourselves surprised by the full scope of the price erosion. Once hailed as the “year of recovery” for the housing market, 2011 could be very similar to 2010.

Housing Inventory = Downward Pressure on Home Values

According to the S&P/Case-Shiller home-price index, home values nationwide fell 0.7 percent from August to September of this year. There was also a quarterly decline in values from the second to third quarters of 2010. That’s not to say there weren’t pockets of positivity, as in Washington D.C. where prices actually rose during the same period. But nationally speaking, the current trend is downward.

The foreclosure freeze will prolong the high inventory of homes, and probably add to it as well. If the listing of new homes continues to outpace the purchase of those homes, the inventory will rise in the coming months. Absent a major spike in home-buying activity, this will drive prices down in most areas. Supply and Demand 101.

Unemployment: Other Half of the Double-Whammy

The latest unemployment figures (as of December 2010) were unchanged over the previous month, still hovering at 9.6 percent. Some states, such as California, have more than 12 percent unemployment. This will continue to be a drag on the housing market in 2011.

Thankfully, though, we are starting to see some positive trends in the employment world. The unemployment rate in Virginia has fallen steadily over the last few months, and now sits at 6.8 percent. There are other cities and states with similar scenarios. So we will certainly see some job growth in 2011. But it will be a trickle.

What This Means for Homeowners

If you’re not planning to sell or refinance your home in the near future, this doesn’t affect you very much. Sure, your home values might drop a bit more over the next year or so. But they’ll trend upward again — eventually.

If you do plan to sell your house in 2011, you need to be realistic about how you price it. If you bought your home more than three years ago, there’s a good chance your home value has dropped since then. If you live in California, Arizona, Florida, Nevada or Detroit … well, I don’t need to tell you, do I?

The point is, you need to find out what your home is worth in the current market, and price it accordingly. It doesn’t matter what you paid for the home. It doesn’t matter how much you owe on your mortgage. Buyers and their agents will use recent sales data to evaluate your asking price. If you’ve overpriced the home out of desperation or wishful thinking, they’ll know. And they won’t give you the time of day.

What It Means for Home Buyers

If you can qualify for a mortgage loan, 2011 looks like another great year to buy a home. While home values might continue to drop in some areas, they probably don’t have far to fall. Karl Case, retired economics professor and co-creator of the S&P/Case-Shiller Index, recently said: “If I were betting even odds, I’d bet that we don’t have much further decline, but that we bounce along the bottom.”

So even if home values drop a bit after you buy, they’ll start upward again … and probably sooner rather than later. Additionally, mortgage rates will likely stay below 5 percent for most of 2011. So you have a combination of low home prices, a low cost of borrowing, and plenty of inventory. It’s a pretty good scenario for qualified home buyers.