BluefoxToday blog : August 2008

Investors are returning to the residential real estate market and that is a sign of a turnaround in the making. It may not happen tomorrow, but it's coming. There are all sorts of investors who desire to take advantage of the slumping market. In Las Vegas, for instance, they are looking around for single-family houses, condominiums and townhomes to buy and are finding bargains up and down the valley. Some might purchase just one or two of them while others go for a block of attractively-priced property.

These investors certainly are helping in reducing the glut of homes currently available for sale not only in Las Vegas but also in many other areas of the country and their activity is working well towards restoring a viable supply-demand equilibrium to the market.

Another class of an investor is about to enter the picture, however. The more of them the struggling market attracts, the sooner it'll find its footing and recover. All groups of investors are warmly welcome.  

This other class of investors is normally made up of large financial entities and they play with big money. They are called listed hedge funds, private equity firms and closed-end distressed asset funds. They participate and provide financing in many different industries and are now turning their sights on the mortgage business. The present credit crunch has generated a bunch of mortgage-backed assets that often are valued way below par and that, of course, means opportunity. And they are smelling it now. Good.

Some of them have already raised billions of dollars and are waiting to put the money to work in the near future. They are now spending time to understand exactly what types of mortgage securities are out there and which ones make sense for their particular portfolios. One of the famous finance vehicles of the recent past is the CDO, or collateralized debt obligation, that uses chopped-up home loans as its backbone. These investors are now checking them out closely, as they can be quite complicated.

This development is undoubtedly good news for the real estate and mortgage industries. Even though these securities will be bought on the cheap, it'll still bring fresh capital to the coffers of mortgage lenders and consequently will allow consumers to secure home loans and then go out and buy homes. Once these investors decide to enter the scene in full force, it could well be more stimulus than what the government actions have done so far.

FHA has made a remarkable comeback in the last several months. Many of the creative home loan products that fueled the recent boom, especially those under the banners subprime and Alt-A, are rapidly being swept into the dustbin. FHA has stepped into the vacuum, offering low down payment options to borrowers who are itching to buy a property while prices are still as attractive as they are. FHA's market share in 2006 was about 2%, rather trivial number, and now it's around 23% and is expected to climb to 30% by the year's end, according to Inside Mortgage Finance.

But FHA is facing challenges, too, as it's seeking to restore its place in the huge mortgage market. The near future at least, and probably longer than that, is going to be dominated by an unhealthy amount of foreclosures. FHA, as an insurer that home loans will be paid, is projecting that it'll have to pay substantial sums of money to mortgage lenders and investors in the coming years as loans keep going bad.

To cope with that prospect, the agency just announced that it'll raise the upfront premium for most borrowers from 1.5% to 1.75%, starting October 1, 2008. It comes to $3,500 for a $200,000 mortgage and $5,250 for a $300,000 loan. That is a substantial sum of money for many buyers and refinance candidates. The current annual premium is scheduled to stay at 0.50% to 0.55% of the existing loan balance.

FHA is forced to do this to shore up its reserves so it can meet the upcoming payout demands. By doing it, though, it'll also risk pricing itself out of reach for many borrowers. Its role as the main player to help out struggling homeowners to find affordable financing could now be jeopardized. There is already talk in Washington that FHA may need to ask Congress for money in case current mortgage default pace persists for several more months. Either that, or push the premiums even higher and possibly watch its market share start dwindling again.

The agency has to walk a fine line now and keep a keen eye on the market. It's possible that its sudden rise to prominence could stall.

The green housing movement appears to be making further gains as the consumer is becoming increasingly aware of how valuable its contributions are to the reduction of energy consumption and greenhouse gas generation. Concordia Homes, a Southern Nevada developer for years, was recently recognized by Las Vegas Business Press as the Developer of the Year in the green building category.

Concordia has for a long time produced homes using Energy Star guidelines, but then it reached a point where it felt it needed to do better than that. Energy-savvy home buyers were looking for more and it wanted to respond, so when it launched the Sommerset Community in Henderson, Nevada, it was going to go another step or two beyond Energy Star. As a result the signature equipment at the 48-unit development turns out to be the roof-based solar system installed in every home as a standard feature. To read the entire article, please click on the link in the first paragraph.

Very little appears to have changed with appraisers over the last several months when it comes to the value they establish on a home that's up for sale or refinance. Many of them feel pressured by someone involved in the transaction to come up with the right price, or hit the number, usually meaning it should be inflated to satisfy their needs, says the Appraisal Institute. It could be a mortgage originator doing it, a real estate agent or even the nice lady whose flower beds are immaculate. Or another source. Anyone who could benefit from a higher valuation.

Inflated appraisals are one reason to the current housing and mortgage turmoil currently sweeping the land. As a result of that discovery, Washington recently established new regulations to combat bribes, interference and intimidation in the business, but obviously its impact so far has been less than desired. The pressure is still there, although, as some say, it has assumed a softer tone.

It's a tough environment to work in now anyway as home prices have dropped quite a bit in this city, like Las Vegas, and maybe a little less in that town, like Mesquite, Nevada. Whether values are stabilizing or not is hard to figure out in this volatile landscape. There can even be clear differences between adjoining neighborhoods within a city when recent comps are looked at. It's hard on the appraisers.

Everybody involved in a purchase would like the appraisal to arrive at the contract price and then there would be a relatively quick close. But today lenders are often challenging the figures they see and refuse to approve loans. They were burned badly when the famous bubble burst and are now extra cautious. So, frequently, hitting the number doesn't work. Sellers in these cases, of course, fume. Buyers, on the other hand, probably wouldn't mind grabbing homes at discounted pricing like this. And mortgage providers and real estate agents would succumb into rolling their eyes sensing promising deals about to fall through.   

The Las Vegas real estate market has turned into a rather disjointed spectacle. As the July stats show, compiled by local housing specialist SalesTraq, existing home sales continued on its recent accelerating pace by recording 3,173 closed transactions in July, which is a nice 56.5% jump from July of last year. What's important to keep in mind, however, is that around 60% of these sales were foreclosure-related. Banks have been pricing their REOs, real estate owned, with passion just to get rid of the non-performing inventory and that is one large reason why resales are doing so well now.

On the other hand, new home sales are heading in the opposite direction. In July there were only 731 units closed, reports SalesTraq. It's a bone-chilling 57.5% drop from the year before. Why such an inconsistency?

A lot is explained by how each category's price levels have shaped up in the last several months. Influenced heavily by bank-owned homes, the median sales price at the resale segment leveled at $210,000 in July, whereas the median price for new homes comes in at $262,185. It represents over a $50,000 advantage to the existing home category. This is not small change. The economy being as weak as it is, the buyer is more conscious about value than ever and will undoubtedly run for the existing property so long as he gets a nice house at a rock-bottom price. And he is getting it right now.

This trend is probably going to persist another few months until a point is reached where foreclosures start losing the current dominant share of closings.

The two mortgage heavyweights have been the backbone of U.S. housing finance scene for decades and have provided the intended liquidity to the market. This in turn allowed more people to buy a home to live in, the ultimate goal of the system. Then in the early 2000's the real estate market grew hot, piping-hot in select states like California, Florida, Nevada and Arizona, and as history suggests all out-of-control booms come to a crashing halt sooner or later. Like now. To fuel the boom, mortgage lenders, large and small, jumped head first on the housing bandwagon to make enormous amounts of money with fancy loan products. The activity during these years was fast and furious wherever one looked.

As things were unfolding. Fannie and Freddie were watching all of this from the sideline and eventually the desire to increase their profits overruled prudence and they joined in on the feast. To make a long story short, now they are grappling with heavy losses, just like most banks are, from these boom-time loans and are nearly insolvent.

Washington and think tanks and others in the know are presently debating what to do with these bleeding mortgage players. Obviously they need to be restructured in some way to keep this from happening again. A few experts call for their nationalization, some suggest they should be sold in pieces and some would reduce their role in the vast mortgage finance system.

Whatever is decided, it should happen after the markets have returned to some kind of normalcy. If something is done now, as some experts suggest, it would just add to the credit scene volatility, causing more harm and prolong the long-anticipated recovery.

Moreover, the GSE, or Government Sponsored Enterprise, setup did work for a long time. The current turmoil is then clearly the responsibility of Fannie's and Freddie's boom-time leadership who were more influenced by profit prospects than following the mandates each institution had. And where were the federal regulators tasked with overseeing them? There were a few warning voices heard in Washington early in the decade but they were quickly shouted down and the show, unfortunately, went on.

Now is a good time to buy residential real estate in the U.S. as prices are softening nicely in many regions and there is plenty of inventory to choose from. Mortgage money still remains affordable, although several loan products have been tossed and underwriting guidelines have become tougher. This development has been also noticed abroad and those aspiring to own property here have made a serious move to get something.

According to a NAR, or National Association of Realtors, study in which it surveyed 4,000 agents 26% of them had a minimum of one foreign customer and roughly a half of these prospects ended up purchasing something. The report covered the 12-month period ending in May of 2008. The foreigner usually buys a vacation home or an investment property, as anyone would expect.

The top states by popularity are Florida, California and as a small surprise Texas. Right behind them come Nevada, probably heavily favoring Las Vegas and all the entertainment it has to offer, Arizona, Washington and New York. All in all, about 150,000 to 190,000 homes were closed by international buyers during that time frame, estimates NAR. That certainly offers some relief to our current stagnant marketplace.

But there is one statistic that is noteworthy. The same survey from the year before reports that 32% of agents had a foreign client, meaning the trend is now losing steam. The half of foreigners who did not buy anything were mostly bothered by the prices. Or more likely the volatility of them. It's a good bet that it wasn't because they were too high but rather that they may go even lower in the coming months, so their attitude might be to wait and see. Whether they drop further than this, like in Las Vegas, is anyone's guess. Regardless, there is now good housing value in the states mentioned above and other states, too. It truly is as an attractive buyer's market as any in recent memory, also because the US dollar continues to be relatively weak.  

The way the residential real estate market today is going in Southern Nevada it's no surprise that raw land values here are heading south. Demand for land is way down as the housing sector struggles with a large inventory of new and resale homes. Even if a builder wanted to purchase acreage for a project, getting financing now would be a challenge in this lending environment. The slowing economy doesn't help much either. 

In the second quarter median vacant land price stood at $570,279 per acre which turns out to be $148,232 less than at the same time last year, or a 21% decline, reports Applied Analysis, a local market research firm. The frenzied speculation of a few years ago has come to a stop and actually reversed course. Prices are now somewhere near where they were about three years ago.  

But there is a big difference if resort corridor dirt is included in the picture. The median price leaps now to over $4.08 million an acre which makes for a whopping 135% increase from the same quarter the year before. Some might scratch their heads at that because a few Strip projects have lately experienced difficulties in securing financing and Echelon actually decided to temporarily halt construction on its site where Stardust used hold court. Nevertheless, parcel prices are reaching for new highs and the reason is that there isn't that much land left for development sitting in prime location and zoned for gaming, hotel and condominium use.

The resort development community seems to feel comfortable about the long-range outlook for Las Vegas. They are already focusing on what will it be like ten years from now. The current economic, housing, mortgage and commercial finance struggles will be resolved down the road and they are counting on their current land investments paying off sometime in the future when it still makes business sense.   

All along it has looked as if the general real estate slowdown here in the Las Vegas valley would leave the high-end segment largely unmarked. Mortgage lenders felt confident for a long time about the viability of the luxury market and kept underwriting loans here for those who needed them. Many, of course, were able to close a purchase by bringing in a sack of cash and that was it.

The outlook has changed, though, quite a bit in the last year or so. The segment has slowed down considerably and is now going through the same type of adjustment that the rest of the market started couple of years ago. The evident overbuilding, the tighter mortgage environment and the slow economy are now adversely touching on it. To read the entire article, please click on the link in the first paragraph.

Fannie Mae, the giant player in the secondary mortgage market where it buys loans and either keeps them in its own books or packages them for resale, just announced a hefty second quarter loss of $2.3 billion. A loss was expected but this was much more than what experts had anticipated. Anyway, that's one thing. The other is that this will result in some painful adjustments to its lending practices toward Alt-A loans.

Alt-A mortgage falls in between the prime and subprime products and is normally applied for by borrowers with a nice credit background but can't or won't disclose income or assets, or both. Now, Alt-A amounted to about 11% of Fannie Mae's mammoth portfolio of single-family loans, a whopping $2.7 trillion, by the end of June, 2008, and the killer is that almost half of the second quarter losses came from Alt-A alone. And that spurred company executives to action.

The changes start with an increase in fees for these mortgage loans Fannie Mae will buy in the future. That's a standard response nowadays when something like this happens. The fees can range from .25% to over 1.00% per home loan, depending on the down payment and the borrower's credit score and other criteria. The bottom line is that money is becoming more expensive for Alt-A. And come January 2009, Fannie Mae will cease buying them altogether. This will definitely take a decent share of liquidity out of the market, but won't necessarily wipe it out. 

Alt-A's decline will hurt all sorts of buyers, as if they weren't squeezed enough already. Second and vacation home shoppers often liked to use Alt-A and now the remaining options they'll find on the market will become more expensive. People with generous tip income, like many in Las Vegas have, will also discover fewer choices and higher costs. As is obvious, the mortgage market continues to be volatile and that slows the nice recovery momentum everybody is looking forward to.