Want New? A Finished Home Is Your Best Bet!

Today, when it comes to new construction, there is only one way to buy: a finished home, not a pre-sale wherein a home might just be getting started, or is still a vacant lot. Why? you might ask. Consider the following:

1. Nothing is more costly to a homebuilder than an unsold finished house. He is paying interest every day that a house is under construction. The interest rate and fees that builders pay is substantially more than homeowners pay for a mortgage. The meter starts running the day the builder closes on the building lot. But the interest is not accruing on the finished project, only on those monies that the builder has taken from the lender in the form of “draws”. The first draw may take into account the building lot, architectural and engineering fees, building permit and mitigation fees payable to the jurisdictional authorities. The second draw usually would be for clearing, excavation and foundation. As draws are taken from the construction loan the builder is paying interest the growing balance. When the house is done, he is paying interest, sometimes as high as 9.5%, on the finished product until it is sold and closed.

2. Builders do not have the luxury of living in their homes like the average home seller. He HAS to sell, and in this market will price finished homes to get rid of them.

3. If a builder sells a finished home, and doesn’t have too much unsold inventory, his lender will let him start another home. If a builder sells a pre-sale, most lenders in this market are not impressed. The pre-sale will not count as a sale in the lender’s eyes until it is finished and the sale closed, which could take months. A pre-sale offers little relief to most builders that have finished inventory with the interest meter running.

4. Not good: your pre-sale starts out OK, but the builder’s other finished houses are still not selling. Your house is coming along nicely in the middle of 50 vacant lots. The builder’s lender forecloses on the entire plat. Your house construction stops cold. It may take months for the lender to decide who to turn the construction over to, or who to sell it to. Your earnest money deposit, your $30,000 non-refundable deposit, and all of your non-refundable upgrade deposits are gone. The builder had formed an LLC for protection just in case such an event should occur. Your options for recourse are few.

So think twice about picking the perfect house for the perfect lot. It rarely turns out that great. Besides, once most builders have your money, your house gets all of the “B” crews, while the “A” crews continue to work on the unsold spec homes.

Housing Predictions For King County and South Snohomish

Everywhere we go people ask us the same question, “how are things in real estate?” Depending on our energy level at that point in time, our answer might take 10 seconds, or 10 minutes. Sometimes people ask because they are truly interested from a personal standpoint. Sometimes it’s too find out if we are suffering as much as the media says we should be. Sometimes I think folks want to know what Kind of person I am i.e., will I simply throw out a lot of optimistic BS, or am I real and will actually think about how to honestly respond.

After much reflection on our position and experience in the current market, combined with discussions with other agents and brokers that I highly respect, I have come to the following conclusions:

1. There is a current oversupply of new homes. These homes will be discounted and sold by the builders over the next 6 to 10 months.

2. The same builders will generally not be allowed by their respective lenders to start new homes until their current completed standing inventory is sold off as stated in number “1″ above.

3. These same builders that used to get the green light from their lender(s) to start 10 homes at a time will be limited to 3 starts at a time for the foreseeable future. Successive home starts will be dictated by closed sales e.g., “you may start 3 now, but you have to finish and close one sale before you will be financed to start a 4th home.” It used to be that a builder could start a new home as soon as a buyer put down earnest money on an incomplete home (pre-sale). I don’t think it’s going to work like that any more, at least for some time.

4. Due to the foregoing, the supply of new homes will be consumed, and the rate of re-supply constricted, within 12 to 18 months.

5. Builders will have to work hard to keep their vacant lots looking like a happy place with fencing, landscaping, etc., and not looking like abandoned developments.

6. The change in new home supply will have a direct effect, albeit slightly delayed, on the resale home market. It will take 18 to 24 months for upward price pressures to reappear in the resale market, but it will come back……..just about the same time the mortgage industry will have healed from recent and current problems.

7. When asked the question, “how far will the market drop?”, my reply is November, 2006. Appreciation could be readily justified to that point, not beyond. Some folks maybe got a little more than they should have for their home in the first half of 2007, and some maybe paid a little more than they should have. But the difference is no more than will be readily absorbed and smoothed out over the next 5 years.

Thant’s my story and I’m sticking to it……at least for now.

This Is As Bad As It Gets

As reported at CNN.com,  Youngstown, OH is demolishing scores of buildings that have remained abandoned in order to convert the costs of infrastructure and maintenance into open space.

“Under the initiative, dubbed Plan 2010, city officials are also monitoring thinly-populated blocks. When only one or two occupied homes remain, the city offers incentives – up to $50,000 in grants – for those home owners to move, so that the entire area can be razed. The city will save by cutting back on services like garbage pick-ups and street lighting in deserted areas.”

I wonder how close Renton has come to this over the years. [See the entire article]

Housing Pessimism: Get Over It….

I suppose it is not fair to ask today’s prospective home buyers what all the fuss is about. Given the daily onslaught of negative media coverage of housing and the economy, it is permissible to be concerned about whether or not to take the plunge. However, I don’t understand the hand-wringing, mind warping fear that has gripped many home shoppers to the extent that they can’t make a decision. Analysis paralysis is how I reference the condition wherein folks talk themselves out of making an offer as fast as they decided to buy. There is nothing wrong with being analytical about a home purchase, but the human factor cannot be dismissed.

A home is where babies are raised to be children, puppies become dogs, we celebrate Thanksgiving, birthdays, have barbecues with neighbors and friends, plant a garden, paint a room, start a hobby, read a book. All of these things can be done in an apartment or a rental home, but they are never the same as when they take place in your own home. There is not the same feeling of permanency, of family, when life takes place in a building owned by someone else. Yes, there is some stress and work involved. But I think you will find that most homeowners wouldn’t have it any other way.

It’s accepted that no one wants to be the buyer that bought at the top of the market. Conversely, often it is the fool that sets their sights on buying at the bottom.

Buyers have more choices today in the Puget Sound Region than they have had in 5 years. The whining, the crying, and moaning that went on for those 5 years while buyers had little to choose from stands in stark contrast to the attitudes of today’s buyers that seemingly can’t make up their mind about anything. Is it because they have too many choices? Perhaps. More likely it is because they lack focus. “What are the reasons for buying home now. What will change in the future that will impact my decision today?”

Interest rates may go up……or down.

Home prices may go down……..or up.

The days of buying and selling within 2 or 3 years are well behind us. If you’re not going to stay put for at least 5 years, don’t bother. That has been the traditional standard for over 50 years. Five years is enough to absorb the inevitable dip in value along the way and still achieve enough appreciation to cover the selling costs when it is time to move on.

So if you are worried about buying, get over it. Be smart, don’t overbuy, pay for a thorough inspection, know the costs of needed repairs, get a conservative loan, then move in and get on with your life’s business of growing memories.

WaMu: From Bad To Worse…….

A few quotes from today’s Seattle Times article:

“It’s always emphasized growth over all other aspects of its business.”

“they had to reach down to a new level of the marketplace. They had to seek out a lower quality of customer than they were used to dealing with.”

“Even though there was weakness in the market, they put their foot on the accelerator, because they were losing business to Countrywide and other lenders.”

I was impressed with the Sunday article about Washington Mutual by Rami Grunbaum, wherein a former WaMu executive, and insider, revealed his thoughts about the company’s current problems. It was interesting to read what I and many of my colleagues have suspected for some time. But today’s article by Drew DeSilver blows the doors wide open. Can you imagine anything more audaciously arrogant, from a banking perspective, then counting the growing principal on negative amortization loans as PROFIT?!?  Let me explain: rather than viewing the unpaid interest on neg am loan when borrowers chose to make just the minimum payment, not enough to cover the principal and interest on a 30 year amortization schedule, WaMu literally counted the money that was not received as profit! How weird is that! From a Bank!

This is all very sad for a venerable local institution. Maybe you are old enough to remember the ads that touted Washington Mutual as, “The friend of the family”. This is sort like finding out that the friend of the family is an addicted gambler.

Hallelujah!

After 3+ years of refuting, critiquing and criticising the writings of The Seattle Time’s Elizabeth Rhodes on real estate matters, the Times has finally heard our pleas and replaced her with a new, actual Real Estate Editor. Meet Cindy Zetts. In her first article for the Times in yesterday’s Real Estate section, Cindy quickly demonstrates that “SHE GETS IT!” She has experienced multiple real estate transactions and has taken the time to study, and thus understand, how real estate works.

I am both thrilled, and relieved, that Ms. Rhodes has been demoted in what appears to be a lateral move with the new title of “Business Reporter”. Great! Let her torture the business sector for a few years with her uninformed, poorly researched, and otherwise confusing and misleading articles.

Unless you are in the business, my zeal for this improvement may seem over-emphasized. Allow me to explain: The time that we have spent explaining Ms. Rhodes inaccuracies and wrong-headed view of real estate over the last 3+ years to confused clients and prospects has been frustrating, to say the least. Now we can fully focus on the tasks that matter, helping people navigate the real estate buying and selling processes without fighting the rip tides caused by Ms. Rhodes.

Although it is early in the game, if the first article by Ms. Zetts is any indication, Western Washington may finally have a columnist that will help them in their quest to understand real estate.

Skin In The Game

It makes sense. If we are to believe that there is a simple preventative measure which will reduce the chances of another mortgage market meltdown, “skin in the game” is a good place to start. Getting rid of 100% financing is a foregone conclusion. But what about the 97%, 95%, and 90% loans? It requires little change in the market for a homeowner to claim, “I’ve lost all my equity” when it was only 5% to begin with.

One of the many dynamics causing increased foreclosures is the very perception on the part of first time homeowners that because their home may be worth less than they owe, they should lay down the keys and walk away. Nothing could be further from the truth. Bear in mind that I am not speaking of those that have toxic loans with payments that have escalated beyond a homeowner’s means. I am referring to people that are getting along OK with a fixed rate loan and payment, but are throwing in the towel prematurely, thanks in part to the media that is telling them they were losers to start with because they bought with low, or no, down payment mortgages.

Right now, the Democratic House of Representives is considering lowering the FHA down payment requirement from 3% to 0%. The Seante is working on a 1.5% requirement. John McCain is touting the need to increase the downpayment to 5%. (See Ken Harney’s Sunday Seattle Times article) I think they’re both wrong.

FHA loans have been a special resource for first time buyers for many years. They are not part of the problem, thus I believe that they should not be tapped, or modified, in order to be the cure. It is a staple of the home loan industry that isn’t broken, so why fix it. A buyer needs to come up with about $19,500 (3% down + closing costs) to buy a $300,000 home. Here is a breakdown:

1. $9,000 down payment
2. $4,500 One Time Mortgage Insurance Fee [1.5% of loan amount]
3. $3,000 Loan Origination Fee [1% paid to who put the loan together]
4. $2,000 for Title Insurance and Escrow Fee
5. About $1,000 for “Pre-Paids” i.e., monthly mtg insurance and interest

A couple of wrinkles that are new:

1. The 1.5% One Time Mortgage Insurance Premium MAY be added to the base loan amount of $291,000, thus making the total loan amount $295,500
2. The borrow will pay Monthly Mortgage Insurance in an amount equal to 0.5% of “base” loan amount: 0.5% of $291,000=$1,455, divided by 12=$121.25
3. Lenders MAY charge a “discount fee” of 0.5% or more, of the base loan amount. This will vary from lender to lender and is something that borrowers need to look out for.

$19,500 buys a decent car. It shouldn’t be too much for someone that is serious about buying a home. Yet the buyer has enough “skin in the game” that will compel them to improve and maintain their property and not throw back the keys at the first sign of negative market changes. With the down payment increased to 5%+closing costs, the same buyer would need over $25,000 to buy the same $300,000 property. It is my opinion that crossing the $20,000 line is both a financial and psychological barrier for many would-be home buyers.

On the other hand, reducing the down payment to 1.5%, if combined with the option of adding the 1.5% Mortgage Insurance Premium to the loan amount, makes it too easy for buyers to get themselves into trouble, which in turn also makes it too easy for them to walk away. It would effectively be a return to 100% financing.

California Dreamin’/Burnin’

We set out for the Los Angeles area last week to get a little first hand knowledge from local real estate agents on the state of their market. I was fortunate enough to meet Denine Kerns, CRS of Prudential California located at Corona del Mar, a toney oceanside community about 40 minutes South of L.A. Denine specializes in estate properties and is a member of the Prudential President’s Circle. When asked the difference in  volume over the last year Denine said they were down about 40%. (Not bad considering their average listing is about $1.5M) Her location and quality of clientele have somewhat insulated her business from the woes that afflict newer, outlying communities, but it is still much slower than usual. As we talked it was apparent that there are more similarities than differences between our markets. The greatest challenge is the unpredictable mortgage market. As in King County, Denine has seen deals flip due to financing more than any other cause.

When you hear of sales failing due to financing on highere priced properties, it is rarely because of anything that the buyer did, or did not do. It is rarely the fault of the mortage broker or loan officer either. Deals are getting kicked out by underlying lenders, the companies that actually supply the money, then sell the loan to the secondary market. It is hard to know where the sticking points are, but mortgage brokers tell me of loan programs that are presented to them on-line in the morning, and are gone by the same afternoon. Borrowers may get approved for a certain loan and terms, but have no guarantee that the loan they are approved for will stick around. Even with a “lock” on the interest rate I’ve heard of lenders pulling the program to the dismay of brokers and borrowers alike. Denine concurs that basic jumbo loans are the staple of her business and will be a bumpy ride until some uniformity for large loans emerges.

Just as the increased “conforming” loan limit in King County is a bit of a laugher at $529,000, the $729,000 loan limit for Denine’s market is not much help either.

This is a NASA photo dated October 25, 2007. Ironically, this is about the time recent home buyers near the burn areas realized their mortgages were also catching fire and burning up their cash flow beyond their means. This is toxic loan central. During 2004 through 2006 home builders armed their respective sites with agressive sales agents, and even more agressive loan representatives. Homes priced from $450,000 to $750,000 were snatched up by buyers with little or no credit, or down payment. Any wonder there is a problem? These are the walk-away buyers that never had enough skin in the game to begin with. They knew little about what they were buying, or why they were able to pull it off. If it sounds too good to be true………

Who knew something so good could go so bad, so fast? In their hearts, the buyers knew it. The people that put together the loans never doubted it would go bad. Their mission was to do as many deals as humanly possible before it tipped over. Appraisers and underwriters were caught up in the flow i.e., the quality of the deals took a back seat to the quantity. Big lenders like WaMu had been delusional for too long to rein in the frenzy. They feared being left out.

There are some ideas being discussed right now in Congress. Jack Guttentag, aka The Mortgage Professor wrote an insightful article in Sunday’s Seattle Times. He is concerned that government intervention at this point in the game will further gum up the works and further delay the healing process.