Today, we have entered into what I call the ‘Perfect Storm' of Real estate where many factors have come together to cause this economic crisis that appears to have no end.
The House of Representatives , the Senate and the Bush Administration has continually approved legislation providing help to struggling homeowners and more importantly liquidity to the lending institutions, banks, AIG and giants Fannie Mae and Freddie Mac which was expected to renew confidence on Wall Street. It has not! The market dropped what feels like nearly 3000 points in the last several weeks.
In fact, we have now watched Fixed rate mortgage soar , though, they are still at historic lows.
The National Association of Realtor said existing sales resumed their decline in what (I think) is 7 stragith months after a slight rebound in May.
This is, how shall I say it, not upbeat news;
Typically, as home prices decline, sales will actually rise. (due to the cheaper bargain basement prices). This did not happen! and is is very shocking. And can only mean a likely a precursor to further and steeper declines in home prices or no sales.
It does not take more than having Internet access, network television or delivery of the Sunday newspaper to be aware of the fact that Real Estate is going through a difficult time here in Greater Phoenix and the surrounding towns of Scottsdale, Fountain Hills, Tempe, Peoria, Glendale, Mesa and many other cities in Arizona and unfortunately across many parts of the Country.
As real estate professionals, we cannot control the market. However, often have the task of being the bearer of bad news. And too often, people like to shoot the messenger.
If you are a real estate professional and your clients, friends and family ask. Do the difficult and be honest.
If you own a home and need to sell., Lower the price to where it needs to be to sell.
If you cannot sell, speak with a lender to Re-Fi while rates are low enough to make a difference; And before credit lending standards become possibly more strict.
Homeowners may not love to hear it. However, they will thank you later.
~~ James Wexler - Please don't shoot , I am just the messenger
Can a lot of homes for sale in the same neighborhood or same street ever be a good thing??
Sometimes, Yes! Let me explain....
Earlier this morning, I was showing a client a home for sale in Paradise Valley; a wonderful and exclusive township adjacent Scottsdale.
This home was everything the client wanted including a resort style backyard gorgeous views of Camelback Mountain sitting on a Golf Course lot.
However, as we drove the street, the Buyer noticed and commented about the number of homes with for-sale signs in front expressing reticence and an amount of concern. I shared with him that in certain areas, this is not always a bad thing.
A recent Associated Press article noted that in Finland, Sweden and other Northern European countries you can get "Text-Loans" - in which borrowers send text messages to lenders to receive money in minutes.
According to the Wire Report, a borrower would send a text message containing amount requested, their address, personal Identification number (SS#) and bank account number. The lender checks an on-line database and wires money if the applicant has a clean credit record.
Granted, the maximum loan amount is $300. However, this type of easy lending with extraordinary lending fees and interest rates is not so unfamiliar to the lending practices that took place here in the US housing boom.
In fact, this type of 'predatory' lending with extortionate interest rates or loan products (think, option ARM's) contributed to shocking abuse of the banking system.
The results of such lending practices has caused more than 300 major lending operations implode since the end of 2006; Most notably IndyMac Bancorp Inc, Lehman Brothers and Wachovia after withdrawals by panicked depositors led to the largest banking failure in U.S. history.
If there is immediate effort to prevent the failure of America's largest lenders which own or insure nearly all loans in the United States housing prices could continue to tumble as consumer confidence deteriorates further and could force the United States into a deep recession.
Unfortunately, until the government acts swiftly to avert a bigger crisis (which is never quickly enough) buyers will continue to sit on the sideline as loan defaults and foreclosures mount and home prices dive further. --------------------------
I have been a bit proponent of the FED supporting the Real Estate market. I have written blog after blog asking for help (bailout) of Fannie Mae and Freddie Mac.
However, with the stock market down 1,000 points this week (mid-day Thursday) , the FED needed a life preserver and gave them the promise of 1/2 Trillion dollars (sounds like more than $500 Billion doesnt it). Make that $700 Billion (3/4 Trillion dollars sounds better) proposed bailout.
This knee-jerk reactionhelps banks, bank shareholders, stock market, and consumer confidence.
In my opinion, it does little, if anything, to help real estate. In fact, it hurts Real Estate.
What's a GEO you ask??? will its my made up word to replace REO (bank owned real estate) to GEO or government owned real estate ( hat's more like GORE, I guess) . but anyway, I digress, ...
GEO , Government owned real estate, is what you will see flood the market, I expect.
Basically, the debt fund is going to buy bad debt or worthless loans from these banks. Many of these loans will default and the FED will be the proud owner of devalued real estate. (GEO's).
What will the government due with this real estate?
They will dump it on the market at steeply discounted prices, further driving down home values and more net worth.
Can anyone say "Buyer's Market"?
let me know what you think, maybe I just need some coffee to put me in a better mood.
They have increased the time period for which they will consider borrowers for loans after a short sale or foreclosure from 4 years to 5 years (as of June 1st).
The presence of a prior foreclosure action in the borrower's credit history is evidence of significant derogatory credit and increases the likelihood of future default. The lender should consider the presence of a foreclosure as an added risk element that represents a significantly higher level of default risk. The greater the number of such incidences and the more recently they occurred, the higher the credit risk.
We currently require four years to elapse after a foreclosure before we will consider the borrower to have a re-established credit history. With this Announcement, we are increasing that time period to five years.
We will continue to allow a lesser time period to elapse (three years in lieu of the current two-year requirement) for borrowers who can demonstrate documented extenuating circumstances that resulted in the foreclosure action.
Further, you should be aware that even after the new 5-year time frame, down payment and credit score guidelines have been increased:
according to Fannie Mae, "The borrower may obtain a new mortgage to purchase a principal residence with
minimum 10 percent down payment and a minimum credit score of 680.
Again, most foreclosures are a result of extenuating circumstances. As a result, lenders will be more lenient using a 3-year elapsed time period.
If you are facing difficult financial times foreclosure may be your last option.
However, be careful, if you are letting your home go into foreclosure as a result of value being less than what you paid,
The credit markets finally got a bailout bill, ... However,
Wall Street dropped almost 300 points from its highs on the day after the bailout was approved...
a troubling sign that lenders and investors believe the package will only be a baby step in the long road to economic recovery.
The House passed a revised version of it Friday following the Senate's approval earlier this week, but anxiety about its effectiveness kept demand for Treasury bills high and nearly nonexistent for other types of debt.
Overall, market participants have begun regarding the rescue plan as a medicine for what's ailing the financial system, but not a cure-all.
"At best, we can hope that it stems some of the more intense risk from the credit crisis. It prevents things from spiraling out of hand here," said JPMorgan Chase economist Michael Feroli.
Some are worried, though, that the plan will not work at all
soon, the Federal Reserve Bank, the "Fed" and its policy makers meet to announce/decide whether or not to lower key interest rates and more importantly, offer a glimpse into the future interest rate cut decisions by sharing their views of the US economy.
According to several sources , Most investors believe the Fed will lower rates by another quarter percentage point but will also suggest they are gearing up for a pause.
How does this affect mortgage rates? Fist of all, the rate cut is all but factored into the market. Remember the bond (for the most part) market indicates loan rates. The bond market has moved to reflect this 1/4 % point cut.
However, should the Fed give hints of further cuts, bond market would rally , thus causing interest rates to drop; further helping loan rates.
On the other hand, if the FED ‘minutes' suggest a pause in cutting rates,the bond market will drop and rates across the board will rise (how much depends on a lot of factors).
Depending on why you are purchasing real estate it is not 100% the case. However, in most situations, how you finance your home, can be significantly more important than the price you pay.
Leverage is the ability to borrow money with little down payment to buy something. It is what the majority of Home Buyers and real estate investors enjoy to buy real estate.
In this case, we will use Real Estate as our example of why you must be careful. Leverage can be your best friend or can be your worst enemy.
The law of compound interest shows you the wonderful nature of money increasing rapidly by adding interest to principal so interest is earned on interest, thus compounding rapidly.
However, there is a reverse implication and is arguably more important to be aware when investing.
This example should be the best and maybe the mot simple way to explain.
If you have $1.00 and it drops 50%. How much do you have??? 50 cents , right?
Well, in order to get back to $1, just to get back to break even, what percentage return do you need??
50 cents is what you know have, you need 50 cents more to get back to 1 dollar. So you need to double your money or 100% return. Just to break even
When money drops by a certain percentage, you need a bigger percentage return just to get your money back; before you start making money.
Leverage can be great. But be prudent. Evaluate risk, Before you evaluate profit potential. As we have unfortunately seen here in Scottsdale, Fountain Hills and the area towns of Metro Phoenix , Real Estate losses can take time to recover.
Fifty-four-year-old Don Gorske says he hit the milestone last month, continuing a pleasurable obsession that began May 17, 1972 when he got his first car.
Gorske has kept every burger receipt in a box.
He says he was always fascinated with numbers, and watching McDonald's track its number of customers motivated him to track his own consumption.
Note, that the losses were concentrated in Arizona, California, Florida and Nevada.
The news was especially disturbing for real estate and the economy as mortgage delinquinces spread past the sub-prime category into borrowers with good credit into what are called Alt-A mortgages.
Freddie Mac Chief Financial Officer Buddy Piszel told The Associated Press that the credit problems are emerging mostly in the company's Alt-A portfolio,
(Alt-A lonas) contain mortgages with high risk factors like undocumented borrower income or no down payments
Alt-A mortgages typically
Reduced borrower income and asset documentation (for example, "stated income", "stated assets", "no income verification")
Borrower debt to income ratios above what Fannie or Freddie will allow for the borrower credit, assets and type of property being financed
Loan to value ratios (percentage of the property price being borrowed) above agency limits for the property, occupancy or borrower characteristics involved In this way,
The big problem with Alt-A mortgages are the lack of proof and confirmation of the claims made on a mortgage application.
These are not poor quality borrowers (like sub-prime). Good borrowers, just not the best. Think "B" student in school.
Now, many of these Alt-A loans, are starting to feel the pressures of a slowing econonmy.
Also, many Alt-A loans are are Adjustable Rate mortgages, are adjusting to higher interest rates.
Homeowners are starting to have trouble either making the payment. Or, are just deciding not to make the payment at all on a depreciated asset.
Wall Street was taken back. However, that was just for the moment. They will be on to something else shortly, if not already.
Maybe I am eternally optimistic.
However, I think that this news is not a surprise to the powers that be.
Last wee, the housing rescue bill gave the Treasury Department gained unlimited power through 2009 to lend money to Freddie and Fannie and/or buy their stock if needed.
The problems existed then as they do today. Fannie Mae, Feddie Mac nd our Government acted with this new "Alt-A' Crisis in mind.
Jeff Stevenson
past the sub-prime category into borrowers with good credit into what are called 
;)
;)
