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Rental Market’s Big Buyers

October 12, 2012 By

Private-Equity Giant Blackstone’s $1 Billion Bet on Foreclosed Family Homes

By Craig Karmin, Robbie Whelan, and Jeannette Neuman

The Wall Street Journal – Blackstone Group LP has become the biggest U.S. investor in single-family rental homes by spending more than $1 billion since the start of 2012 to acquire more than 6,500 foreclosed houses in eight metropolitan areas, according to people briefed by Blackstone.

The firm also is finalizing a loan for at least $300 million from Deutsche Bank to support this business, these people said.

Numerous private-equity firms have crowded into the business, some as early as last year, looking for a way to bet on the recovery of the housing market. Blackstone’s growing commitment to this strategy offers fresh evidence that the purchases of foreclosed homes, which began as a mom-and-pop pursuit, is gaining legitimacy among the biggest private-equity firms.

The demand from these firms and other investors could help strengthen the housing recovery, analysts say. Earlier this year, the Federal Reserve expressed support for the strategy as a way to clear the backlog of foreclosures that has weighed down the market.

People involved in the market estimate that private-equity firms and other investors have raised $6 billion to $8 billion to invest in the sector, as they try to take advantage of prices that have fallen nationwide on average by more than a third. That could buy 40,000 to 80,000 properties, according to a recent report from Keefe Bruyette & Woods.

Of course, success is by no means assured for private-equity firms, especially given their high targets for investment returns in general and their lack of experience with this type of real estate. Used to buying office buildings, shopping centers and other big properties, they may struggle to find economies of scale in managing thousands of individual homes in neighborhoods that were hard-hit by foreclosures, but are showing signs of price stabilization.

Skeptics also have pointed out that bulk sales of repossessed homes are rarer and smaller than many investors had hoped. In many markets, firms are battling small investors at foreclosure auctions on courthouse steps, buying properties one by one, a tedious process. There also is little precedent for selling thousands of homes en masse, something the firms will need to do to cash out.

Blackstone and other firms are expanding rapidly partly because the housing market is firming up. In some markets, home prices have risen to the point that firms might not be able to achieve their initial return objectives from renting them out.

“I believe the smart thing to do is to ramp up really quickly, because I think the dynamics are going to change dramatically in the next 12 months,” said John Burns, an Irvine, Calif.-based housing consultant. “We’re going to see a lot of price appreciation at the low end of the market, which means lower cash yields.”

Among the private-equity firms crowding into the single-family home market are Colony Capital LLC, Oaktree Capital Group LLC, KKR, GTIS Partners and Och-Ziff Capital Management LLC, which have invested less money and bought fewer homes. On Wednesday, Waypoint Real Estate Group LLC, a real-estate investment firm in the single-family rental market, said it had secured a $245 million loan from Citigroup Inc., C -2.20% to expand its portfolio of more than 2,400 homes.

“We’re finally starting to see the private sector coming in and providing a solution. It was just equity and now it’s debt. We’re seeing meaningful price appreciation in a number of markets across the country,” as investors buy up more homes, said Waypoint managing director Gary Beasley.

But Blackstone, one of the biggest buyout firms in the world, has been able to muscle its way to the front of the pack by taking advantage of the $13.3 billion property fund it closed last month, the largest of its kind ever raised, and has already spent about one-third of it, say people who have spoken with Blackstone. It has paid an average of about $140,000 for each home in Phoenix, southern and northern California, Atlanta, Miami, Tampa and Chicago. Like other investors in this market, the firm is planning to fix up the homes, rent them and eventually sell them after the market rebounds.

Blackstone has previously said it expects to achieve initial yields of 6% to 7% on the rental income. But the firm also will need rents and home values to rise if it is going to hit the double-digit returns that it typically promises its investors.

Private-equity firms also are looking to boost returns by putting leverage on their portfolios. Blackstone is close to finalizing a loan from Deutsche Bank AG for $300 million, an amount that could expand to as much as $600 million, the people said. The loan is the largest made to a private-equity fund for this strategy so far, executives at several firms say.

As private-equity firms enter the single-home market, they have partnered with local property companies to buy, lease and manage properties. Blackstone, for example, has partnered with Dallas-based Riverstone Residential Group and Tempe-based Treehouse Group to form a new company, called Invitation Homes, to manage its single-family rental business.

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Why Rental Activity Remains ‘A Bright Spot’ for Housing

June 26, 2012 By

By: Tory Barringer

While the lights of the housing market continue to flicker, rental market activity has been a bright spot, said Freddie Mac’s U.S. Economic and Housing Market Outlook for June.

The Enterprise’s report, released Tuesday, showed that newly formed households seem more interested in renting over owning as the economy struggles to get back on its feet. Freddie Mac expects this trend to continue for the near future.

“Further increases in rental demand are likely in the coming year as newly formed households postpone homeownership decisions until the economy strengthens and they have accumulated sufficient savings,” said Frank Nothaft, VP and chief economist for Freddie Mac. “Overall apartment market trends may show further vacancy declines and rent gains, with property values improving as well.”

The report showed that over the year ending March 2012, an additional 1.5 million households moved into rental housing, a 4 percent increase in a year. The Census Bureau has also reported that rental vacancy rates in buildings with at least five apartments have dropped more than two percentage points over the past two years. In addition, both Reis and Axiometrics have reported increases in occupancy rates during the two years through the first quarter of 2012.

Rents have begun to rise in a number of metropolitan areas as rental markets tighten. A broad market measure prepared by the Bureau of Labor Statistics shows a rent increase of 2.5 percent during Q1 2012 compared to a year ago. Reis found a 2.8 percent gain in its markets during the same period, while Axiometrics reported a 4 percent rise in nominal rents. However, average rent adjusted for inflation stayed below where it was for most of the decade prior to the Great Recession.

The increase in rental demand has helped enhance property values, on average up about 25 percent during the past two years from the low during Q1 2010. This level is still 14 percent below the pre-Great Recession peak, but the increase has prompted a supply response from developers.

Starts of buildings with at least five apartments have increased 48 percent in the first five months of 2012 when compared to the same period in 2011. The National Association of Home Builders reported that its Multifamily Production Index jumped to its highest reading since 2005, and its index for market-rate rental construction reached its highest level since the series’ start eight years ago. Construction of rental apartments in buildings containing at least five dwellings is expected to add nearly 200,000 in 2012, the highest increase in one year since 2008.

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HOAs, condos exempt from ban on private transfer fees

March 27, 2012 By

Fannie and Freddie will still buy loans on units with covenanted fee

By Ken Harney, Tuesday, March 27, 2012.

Inman News®

How big a federal bullet did millions of residents living in communities with homeowners associations just duck?

“Massive,” says Andrew Fortin, head of government relations for the Community Associations Institute, which represents 30,000 associations around the country for owners of homes, condominiums and cooperatives.

About 11 million unit owners could have found selling or financing their homes extremely difficult, and as a result their property values would have taken a significant hit, he told me last week.

The bullet in question came from the loaded gun wielded by the Federal Housing Finance Agency, overseer of Fannie Mae, Freddie Mac and the Federal Home Loan Banks. In 2010, FHFA proposed a controversial regulation that would have effectively prohibited Fannie and Freddie from buying or guaranteeing mortgages in communities that imposed deed-based transfer fees on home resales.

Transfer fees of this type — often ranging from 0.25 percent to 0.75 percent of the price of the property being resold — are a traditional method used by homeowners associations to fund capital improvements, property maintenance and other services that directly benefit residents.

Imposition of the fees on periodic resales takes pressure off the association to rely solely on their regular assessments to pay for essential community functions.

The FHFA’s primary target in its proposed ban was actually a different type of private transfer fee — one designed to put money into the pockets of developers and bond investors without benefiting residents. But FHFA’s proposed rule instead took a wholesale swipe at the entire spectrum of transfer fees, including the ones levied by HOAs.

In its proposal, the FHFA criticized homeowner association fees for often being “unrelated to the value rendered” to residents, and unfair to unit owners who are forced to pay them “even if the property’s value has significantly declined” since the house was first purchased.

Stung by 4,200 mainly critical comment letters from the boards of directors and management of condominiums and large master-planned communities like Hilton Head in South Carolina and Rancho Sahuarita near Tucson, Ariz., the FHFA revised its proposal last year, and on Feb. 15 came out with its final rule.

The good news for millions of unit owners, sellers and the real estate professionals who assist them: HOA transfer fees are still OK. Fannie and Freddie will still buy loans on units with covenanted fees. However, builders, developers and investment firms hoping to make millions off bonds backed by securitized private transfer fees are out of the ballgame.

Here’s the story in a nutshell.

Several years ago a firm called Freehold Capital Partners, initially based in Texas and later in New York, promoted what it called “capital recovery fees” to developers as a way to help finance their master planned communities and condos.

The idea worked like this: For a priod of 99 years, every lot in a participating new development would be sold subject to a covenanted private transfer fee requiring each successive reseller of the property to pay a fee equal to 1 percent of the sale price to a trustee.

The trustee would, in turn, forward portions of the money to the original developer, Freehold Capital, and the investors in bonds Freehold planned to sell based on securitizations of the projected cash flows produced by decades of sales. Developers who wanted cash immediately could sell their rights upfront.

Freehold never revealed the identities of developers who participated in its program, but did claim that it had signed up “thousands” of projects worth “hundreds of millions of dollars” around the country.

One of the firm’s surprise defenders when its program came under attack was Henry Cisneros, former U.S. Housing and Urban Development secretary and chairman of a development firm called City View.

That firm sent a letter signed by Cisneros to FHFA urging regulators to allow use of private transfer fees that “have the potential to help fund infrastructure, reduce negative equity, make homeownership more affordable, and create jobs, while also funding important societal goals such as affordable housing.”

Cisneros later backed off, saying the letter was a “mistake” and was sent to the agency in error by an office aide.

Critics of the transfer-fee concept — ranging from the National Association of Realtors and the American Land Title Association to labor unions and consumer advocacy groups — said imposing such fees in perpetuity would rip off successions of buyers while not benefiting the community, and would siphon off billions of dollars of homeowner equity over decades and send it to Wall Street bond buyers.

Their two-year campaign against private-benefit fees was waged at the state legislative level as well as at the federal level, and ultimately led to state bans or restrictions in 38 states.

Based on the final rule just released by the FHFA, the feds got the point. The regulation prohibits Fannie and Freddie from financing mortgages with private transfer fees except where the fees “provide a direct benefit to the real property” itself.

In other words, the fees are acceptable if they fund community improvements and maintenance as in HOA fees. The rule covers all transfer fees put into covenants on or after Feb. 8, 2011, as well as bonds backed by revenue streams after that date.

Note, however, that private-benefit fees mandated by deeds created before Feb. 8, 2011, are not affected by the rule.

So any owner in a community or condominium project containing covenants that predate the new rule need to be on guard: If you decide to sell your unit, you are likely to be ineligible for conventional financing through Fannie or Freddie. Worse yet, the Federal Housing Administration has a similar ban, so you just may have a severe challenge finding purchasers unless they’re prepared to pay in cash.

Ken Harney writes an award-winning, nationally syndicated column, “The Nation’s Housing,” and is the author of two books on real estate and mortgage finance.

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BofA Tests an Option to Foreclosure

March 23, 2012 By

Lender Lets Owners Stay in Homes, Rent From the Bank

By Nick Timiraos

Bank of America Corp. is launching a pilot program that will allow homeowners at risk of foreclosure to hand over deeds to their houses and sign leases that will let them rent the houses back from the bank at a market rate.

While the initial scope of the “Mortgage to Lease” program is small—the bank began sending letters Thursday offering leases to 1,000 homeowners in Arizona, Nevada and New York—it represents a big change in the way banks deal with borrowers who can’t afford their mortgages.

Until now, banks have focused the bulk of their borrower outreach on modifying mortgages, usually by reducing the monthly payments. When that doesn’t work, most foreclosure alternatives require homeowners to leave their house, typically through a short sale, in which the bank approves the sale for less than the amount owed. Banks often insert clauses forbidding the new owner from renting the property back to the former owner.

The new approach is unlikely to be expanded unless banks conclude that avoiding eviction reduces costs associated with taking back, maintaining and reselling properties. If a significant number of borrowers are willing and able to rent the homes, Bank of America could ultimately sell the properties to investors that agree to keep them as rentals.

Already, in a growing number of housing markets, investors are buying foreclosures and converting them into rentals, often filling them with families that have gone through foreclosure.

Executives last year began to ask themselves “isn’t there a way to sort of combine that whole process and keep the borrower in the property? It’s just better for the market,” said Ron Sturzenegger, the Bank of America executive who last summer was put in charge of the unit that handles troubled mortgages.

Bank of America became the nation’s largest mortgage originator after its 2008 purchase of Countrywide Financial Corp., but over the past year it has retreated from the mortgage market. The initial pilot is limited to loans that Bank of America holds on its books. Homeowners can’t apply for the program—only those who receive letters from the bank can participate.

Borrowers would agree to a what is known as a “deed-in-lieu” of foreclosure, where they essentially sign over ownership of the property to the lender. This is less costly to the bank and also does less damage to a borrower’s credit than a foreclosure.

Borrowers selected for the program must be at least two months past due on their mortgage and face considerable risk of foreclosure.

In exchange, former owners would be offered one-year leases with options to renew the leases in each of the following two years at rents that the bank determines are at or below the current market price. Borrowers would have to demonstrate an ability to pay the market rent.

For example, based on a sampling of home values and rental rates in Phoenix recently, a consumer with a $250,000 mortgage and monthly payments of $1,600 could swap the house for a lease, renting the home for $900, depending on the condition of the property and the neighborhood.

Consumer advocates and some investors have long called for less disruptive alternatives to foreclosures, given the limits of loan-modification programs. “You still have a lot of people that are facing foreclosures, and this is a way to keep people in their homes that is obviously much better,” says Dean Baker, co-director of the Center for Economic Policy and Research.

Foreclosures, particularly if properties are vacant, can drag down housing values in a neighborhood.

Borrowers selected for the program must be at least two months past due on their mortgage and face considerable risk of foreclosure. Bank of America is reaching out to borrowers who have exhausted other alternatives to foreclosure or who haven’t responded to earlier solicitations. Homeowners with second mortgages or other liens won’t be selected.

Mr. Sturzenegger said the success of the current pilot would determine whether Bank of America expands the effort. “We’re optimistic but realistic. If we get a great takeup rate and the process works, we’ll roll it out,” he said.

The program is the latest example of how banks are experimenting with ways to deal with a large overhang of foreclosed properties. Some lenders have begun offering incentive payments of up to $30,000 to borrowers who agree to short sales.

Fannie Mae rolled out a “deed-for-lease” program in late 2009 but it hasn’t been widely used. Some industry analysts say that banks haven’t aggressively marketed the initiative.

Already, investors have approached Mr. Sturzenegger about purchasing pools of leased properties from Bank of America. One of those investors is Laurie Hawkes, president of American Residential Properties, a Scottsdale, Ariz.-based firm that has bought nearly 800 homes in the Phoenix area as rentals. If homes are realistically priced, Ms. Hawkes says her firm would “definitely” be interested in buying them.

Foreclosures have slowed sharply in some states amid heavy scrutiny of allegedly forged paperwork used by processing firms. Banks completed 860,000 foreclosures last year, down from 1.1 million in 2010, according to CoreLogic Inc.

“One of the outcomes of the ‘robo-signing’ scandal is that it is more difficult to foreclose,” said Mr. Baker. “It’s more worthwhile for banks to pursue alternatives.”

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New American Dream is renting to get rich

February 16, 2012 By

(Reuters) – Rich Arzaga owns a luxury home in San Ramon, California, but he’s not betting on it as an investment.

The founder and CEO of Cornerstone Wealth Management, who bought the 5,000 sq. ft. property in 2005 for $1.8 million and has spent $500,000 improving it, considers the abode a wonderful place for his family. But ask him to rate his home — or any home, for that matter — as a financial investment, and Arzaga balks.

“It’s the American Dream to own a home, but whoever said that didn’t do the analysis on it,” says Arzaga, knowing he’s taking a contrarian stance to conventional wisdom.

Examining 250 properties around the U.S., and going through close to 40 client files to project the financial impact of owning real estate versus liquidating it, Arzaga, an adjunct professor in personal finance at the University of California at Berkeley, found that, “100 percent of the time it was better to rent, rather than own.”

That’s right: 100 percent.

The reason is simple. While a home is the main repository of wealth for many Americans, it comes with numerous hefty expenses. The carrying costs – what’s needed to hold and maintain the asset – range from property taxes and home insurance to emergency repairs and renovations. In a rental situation, the landlord covers those costs, leaving the occupant free to invest revenue in other areas.

“I don’t have the emotions a lot of people do surrounding real estate,” Arzaga says. “I have steely eyes for how investing in real estate works, and I’d better be a prudent investor for my clients.”

Owning a dream home, he says, creates a drain on other financial priorities, causing homeowners “not to meet their financial goals. They were going to fail.”

Some real estate experts thought there was some truth to Arzaga’s argument, albeit with several conditions.

“To state that owning a home is or isn’t a good investment is too simplistic,” says Jeffrey Rogers, president and COO of Integra Realty Resources. “It depends. In times of relatively higher rents, low home values, and low interest rates, it makes sense to own a home. But in a reverse market, it wouldn’t be economically feasible. Over time, those who purchase in down or flat markets with low interest rates come out ahead.”

“Our lifetimes are a long time, and when we look over the long term, real estate and other investments tend to have a positive return,” says Jed Kolko, chief economist at Trulia.com, a real estate search and research website. “But when it comes to real estate, changing your mind is expensive. There are a lot of costs involved in buying, selling and moving. If you move every two years, it’s probably a bad investment for you. It also depends on your job market. If you’re in a one-company town and the company goes down, there goes your job and there goes your home value.”

Greg McBride, a senior analyst at Bankrate.com, agrees with one point of Arzaga’s. “Home ownership is not so much a creator of wealth as a store of wealth,” he says. “The promise of home ownership is that over the long haul, it can rebate many or perhaps all of your costs, unlike rent, which doesn’t rebate a dime.”

The trouble, he says, is that many Americans want a home so badly, they neglect other ways to grow wealth and financial security.

“You have the other financial bases covered: emergency savings, retirement savings, paying off debt, saving for the education of your children,” McBride says. “There’s no sense in buying a home if it’s going to deplete your emergency or retirement savings.”

McBride crunched the numbers in a pre-bubble era (2004) for a home purchased at $200,000 by a buyer in the 27 percent marginal tax bracket. Factoring in a 30-year mortgage, $1,200 in annual home insurance, closing costs of $5,500 and maintenance costs of $100 a month, along with property taxes, he calculated that it would take a selling price, 10 years later, of $395,404 just to break even. His conclusion gave Arzaga’s view credence: “Homeownership may not be the moneymaker you think it is.”

Then there’s the emergency fund, a must for when a home requires unexpected repair work.

“As far as emergency savings is concerned, six months of a cushion is adequate,” McBride says. “But only 24 percent of people have that kind of cushion, and about 65 percent own homes.”

So while home ownership may sound glamorous, you need a lot of money to make it work, without much guarantee of positive returns in a post-bubble era. Indeed, Arzaga cites himself as an example of how home ownership doesn’t pay off. His residence is today worth $1.5 million, about 17 percent less than what he paid.

So why not sell? For Arzaga, it’s a lifestyle choice, and one that he doesn’t regret, since his big money-making investments are elsewhere.

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4 real estate lessons from the 1%

December 21, 2011 By

By Tara-Nicholle Nelson

While reading an article about the aggressive — and ostensibly legal — tax reduction strategies of Ronald S. Lauder (son of Estée), I was struck by this quote from University of Colorado law professor Victor Fleischer: “There’s real truth to the idea that the tax code for the 1 percent is different from the tax code for the 99 percent.”

The connotation? The super-rich have not only cash, but also elite access to loopholes and other advantages to which the 99 percent might aspire, but will never attain.

While the Occupy movement is on a mission to illuminate and shatter power imbalances between the 99 percent and the 1 percent, there’s another angle to take on the issue: Let’s call it the “If you can’t beat ‘em, learn from ‘em” school of thought.

Along those lines, here are four real estate lessons all of us can take from the 1 percent:

1. Take advantage of government programs/assistance. When the big banks — whose execs certainly belong to the 1 percent — began to experience the fallout of the subprime mortgage meltdown, they threw up their hands, pleaded their case, enrolled governmental advocates and got the bailouts we now know as the $700 billion Troubled Assets Relief Program, or TARP.

Yet many an individual American, whose personal finances have too much at stake to fail — at least as far as their household and local communities are concerned — struggle silently to make their monthly mortgage payment.

More than 20 million American households are upside down on their mortgages. The Obama administration’s foreclosure avoidance program, Home Affordable Refinance Program (HARP), was designed to help 5 million homeowners refinance into lower interest rates and payments.

At last count, earlier this fall, HARP had actually helped only 62,500 seriously underwater homeowners, and fewer than 900,000 homeowners total — a number so low Congressional Republicans sought to wind the program down. The Obama administration revised the program in hopes of helping more homeowners. (In 2009, the administration projected 4 million HARP refinances by fall 2011.)

The Main Street bailout is here and, whether you think it’s sufficient or not, it seems indisputable that it is vastly underutilized.

In an effort to get more help to the homeowners who need it, the Obama administration loosened up qualifying criteria; the revised guidelines just kicked in on Dec. 1, 2011. The 1 percent looks to the government when they are down on their luck; so should you.

2. Take full advantage of the tax code. Many members of the 99 percent have decried the complexity of the tax code and its loopholes that favor the rich. Lauder’s son, for example, has reportedly deferred or avoided tens of millions in federal taxes by donating art to his own foundations, deducting of property taxes on an extensive real estate portfolio, making massive charitable donations, and derivative stock transfers — deductions accessible only to those rich enough to own such assets in the first place!

Besides the better-known federal mortgage interest and property tax write-offs, there are numerous, less well-known deductions of which “99 percent-ers” should take full advantage.

Some areas allow renters to take a property tax credit. Similarly, homeowners who switch to solar or installing a tankless water heater can get the federal government to help pay via tax credits, some of which expire soon, others of which will be longer lived. It won’t line your pocket with millions, but every little bit helps.

3. Pay for professional advice when it counts. You’d be amazed at the number of buyers, sellers and homeowners I’ve heard reference real estate advice they received from their parents, their mechanic and the other moms at day care — and that doesn’t even begin to count the folks who try to distill insights just from a headline in the national nightly news or from a story they overheard at the hairdresser about the amazing deal they were able to negotiate (and, by the by, everyone exaggerates at the hairdresser!).

I assure you, Mr. Lauder pays a virtual army of attorneys and accountants a pretty penny for his tax advice. And the rest of us should make the appropriate investment in obtaining experienced, local, professional advice when it comes to making potentially life-changing real estate, mortgage and tax decisions.

4. Don’t let emotion cloud your decisions. Members of the 99 percent often stay emotionally committed to a home or a list price despite the fact that it is absolutely a losing battle, the data completely contradicts our commitment, or that the living situation no longer works for the people who live in the household.

The 1 percent, on the other hand, will divest of a home or slash even millions of dollars off the list price of their home in a New York minute, if it makes business sense.

Obviously, it’s a bit easier to be detached from an asset when it’s not the only asset you have. As well, sometimes the 1 percent is a little too hasty to detach from all sorts of relationships that most of us in the 99 percent hold dear — from homeownership to marriage and beyond.

But we 99 percent-ers might do well to take a page from the 1 percent playbook when it comes to holding onto assets that have become toxic. Sometimes, it makes sense to short-sell the house, divest of it via a deed-in-lieu of foreclosure, or simply slash the list price, in the service of the household’s greater, long-term financial good.

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Fear and finance in real estate

December 20, 2011 By

By Tara-Nicholle Nelson

What’s keeping fence-sitters on the fence?

Homes are cheaper than ever (OK, cheaper than they’ve been since 2003, to be precise), and rates are lower than ever, yet sales activity is relatively low and stagnant.

A study published this week by Yahoo! Real Estate took a deep dive inside the minds of renters and owners to get to the bottom of this puzzling truth. Fifty-nine percent of the renters surveyed said they would prefer to own their homes.

So, what on earth is stopping them? The answers were loud and clear: fear and finance, and in these renters’ minds the twain definitely do meet.

At least one-quarter of the renters and owners in the market identified one or more of the following as their primary fears about buying a home:

  • worry about mortgage payments rising (25 percent);
  • concern that their credit is not good enough (25 percent); and
  • the fear that property taxes will rise (28 percent).

A full 30 percent of the owners and renters who self-identified as interested in buying a home expressed concerns that they might not be able to scrape up enough cash for a down payment.

And the No. 1 concern was arguably the one that is the most contradicted by the facts of the current market climate: 36 percent of buyers were fearful about the cost of owning a home.

Among the nearly one-third of survey respondents who were renters, top reasons for renting included:

  • don’t have money for a down payment (53 percent);
  • insufficient capital/income (51 percent);
  • insufficient credit/won’t qualify for a loan (38 percent); and
  • don’t want long-term debt (25 percent).

The paradox is inescapable — prices and rates are at bargain-basement lows, and renters and prospective buyers are fearful that homeownership just costs too much.

At first glance, fear seems like one of those nebulous concepts not worth even trying to explore in the context of the hard numbers and market dynamics of real estate economics, but economists have long known otherwise.

In fact, I conceive of homebuyer fear as holding down one end of the consumer confidence continuum, a measurement of consumer mindsets that has long been unanimously understood to exert a powerful influence on the hard numbers that drive market recovery, health and stability.

Against that backdrop, the power of studies like this one becomes much more clear. Identifying what buyers’ fears are, specifically, empowers agents and sellers to address them in the way they market and describe their listings.

Beyond how it helps individual players in the market, it also holds the potential to course-correct public policy when it comes to buyer education, mortgage lending guidelines and buyer assistance programs.

(The latter assumes that we as a nation do actually see smart homeownership as a valuable social norm worthy of furthering — an admittedly debatable assumption these days.)

For example, buyers might be confused or misinformed on subjects like how much lenders actually require in the way of a down payment, about the level of control they have over whether and by how much their mortgage payments will adjust (30-year-fixed, anyone?), and about how relatively straightforward it is to determine whether their credit qualifies them for a mortgage (and if not, their ability to take steps over time to remediate it).

Knowing this makes it sensible for sellers to incorporate mortgage scenarios into their property marketing materials.

In the same vein, a frequent concern of buyers I encounter when it comes to the total costs of homeownership is that owners live under the constant threat of massive repair bills. The uninitiated might not understand quite how much power homeowners have to mitigate and manage that exposure through things like homeowners insurance, flood insurance, earthquake insurance, and even basic homebuying musts like property inspections and home warranty policies.

To the extent that any of these misunderstandings or misinformation are paralyzing otherwise qualified buyers who can actually afford the homes they want, it seems like education to correct these misconceptions and empower wannabe buyers should be a top priority of any entity — public or private — that has an interest in eliminating that bottleneck and helping buyers take advantage of today’s low prices and rates.

But maybe there’s another way to look at this whole thing. Maybe this whole conversation about homebuying fears is actually a very good sign that would-be buyers have learned from the mistakes of the preceding generation of homeowners and are determined not to repeat them. This fear could be read as caution — and caution seems like a very wise sentiment with which to approach the endeavor of buying and owning a home.

Maybe these buyers-to-be have witnessed the devastation of the foreclosure crisis, firsthand or otherwise — 36 percent of the total survey respondents personally know someone who has lost a home — and have decided to get educated and make sure they don’t hop off the homebuying fence until they are comfortable that they are making sustainable decisions when it comes to all the costs associated with homeownership.

This seems especially likely when you map their specific concerns to some of the most notorious causes cited for the housing market meltdown, including adjustable mortgages, zero-down loans and interest-only mortgages and some of the most widely reported impacts the housing crisis has had on the mortgage market (namely, the universal tightening of mortgage guidelines).

During my tenure actively selling homes as a real estate broker, I saw lots of consumers make less-than-optimal decisions as a result of their fears and freakouts. But there is a basic level of fear or anxiety about the gravity of the financial and life commitments involved in buying a home and taking on a mortgage that is not necessarily dysfunctional.

In fact, it can be an indicator that the fearful individual is actually taking the matter precisely as seriously as a prudent person would.

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November foreclosure activity hints at rising tide

December 15, 2011 By

By Inman News

After rising in October, foreclosure activity fell slightly on a monthly basis in November, but some signs point to a coming increase in early 2012, according to a report from foreclosure data site RealtyTrac.

One in every 579 housing units, or 224,394 properties, received a foreclosure filing — a default notice, scheduled auction, or bank repossession — in November. That’s a 3 percent drop from October and a 14 percent drop from November 2010 — the smallest year-over-year decline in the past year.

“Despite a seasonal slowdown similar to what we’ve seen in each of the past four years, November’s numbers suggest a new set of incoming foreclosure waves, many of which may roll into the market as REOs (bank-owned homes) or short sales sometime early next year,” said James Saccacio, co-founder of RealtyTrac, in a statement.

“Overall foreclosure activity is down 14 percent from a year ago, the smallest annual decrease over the past 12 months, and some bellwether states such as California, Arizona and Massachusetts actually posted year-over-year increases in foreclosure activity in November.

The number of homes receiving default notices decreased 8 percent month to month and 9 percent year over year in November, to 71,730 properties. That figure is also a 9 percent decline from August, when default notices rose 33 percent from the month before.

That surge in default notices that began in August meant scheduled foreclosure auctions were at a nine-month high in November, Saccacio said.

Scheduled auctions rose 13 percent month to month but fell 17 percent year over year in November to 96,540. On a monthly basis, auctions rose more than 35 percent in several states, RealtyTrac said: California (63 percent), Washington (56 percent), Ohio (53 percent), New Jersey (44 percent), and New York (38 percent).

REO activity hit a 44-month low in November with lenders repossessing 56,124 properties. That’s a 17 percent drop from both October of this year and November 2010.

Nevada had the highest foreclosure rate in the nation for the 59th straight month in November despite “artificially low foreclosure activity,” RealtyTrac said, due to a new Nevada state law designed to crack down on documentation irregularities by foreclosing lenders — that law took effect in October. Foreclosure activity in the state rose 3 percent from October, but was down 43 percent compared to a year ago.

10 states with the highest foreclosure activity rates in November:

Area Foreclosure rate (November 2011)
U.S. 1 in 579 housing units
Nevada 1 in 175
California 1 in 211
Arizona 1 in 256
Utah 1 in 290
Georgia 1 in 330
Michigan 1 in 330
Florida 1 in 358
Illinois 1 in 427
Ohio 1 in 500
South Carolina 1 in 517

Source: RealtyTrac

Foreclosure activity in California rose 11 percent year over year and 15 percent month to month in November. The increase was driven largely by a jump in scheduled foreclosure auctions, which posted a 10-month high last month. Foreclosure filings in the Golden State accounted for 28 percent of the nation’s total — more than any other state.

Arizona also saw an annual increase in foreclosure activity — the state’s first since October 2010. Filings rose nearly 4 percent year over year and 1.3 percent month to month.

Other states that saw annual increases in foreclosure activity included Vermont (100 percent), New Hampshire (45 percent), Maine (29 percent), Rhode Island (20 percent), Delaware (16 percent), Louisiana (nearly 12 percent), Massachusetts (11 percent), South Carolina (4 percent), and Wisconsin (4 percent).

California accounted for nine of the 10 metropolitan areas with a population of 200,000 or more with the highest foreclosure activity rates. Stockton, Calif., had the highest foreclosure rate in November with 1 in 120 units receiving a foreclosure filing. The only non-California metro among the top 10 was Las Vegas, which had held the No. 1 spot for 22 months before October.

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Road Map to a Housing Rebound

December 6, 2011 By

By Meg Handley | US News

If you’re a homeowner these days–and almost two thirds of Americans are–the housing market generally doesn’t fall into the realm of pleasant dinner conversation.

The once-booming industry has been bruised and bloodied from nearly every angle: Home prices have plunged 30 percent nationally over the past five years, millions of Americans have lost their homes to foreclosure, and millions more are on the brink with underwater mortgages. Still others are seriously delinquent on their home loans.

Things are bad, maybe the worst they’ve ever been, but there’s likely to be more pain before there are any real gains for the housing market, experts say, primarily because of the giant inventory of homes on the market and the certainty more will be coming through the pipeline over the next few years.

Still, the U.S. economy is resilient. The recovery has absorbed a debt-ceiling fiasco at home, a near financial meltdown in Europe, and political chaos in the Middle East. The job market is also improving, consumers are spending more, and corporate balance sheets remain healthy, all of which are critical for the housing market to rebound.

The remaining puzzle piece is time and how much of it the housing market will need to recover. Here are some other hurdles the housing market needs to overcome before a rebound takes root:

Job growth/broader economic gains. After a bumpy several months, the employment outlook has started to improve, with the private sector adding more than 200,000 jobs in November, according to payroll firm ADP. That’s certainly good news, but we’re not out of the woods yet. The national unemployment rate is still sky high at 9 percent and the pace of job growth needs to double before it translates into the broader economic growth needed to bolster a housing recovery.

“The situation in the housing market is tightly bound with what’s happening in the broader economy,” says Stan Humphries, chief economist at Zillow. “A broader economic recovery is going to have to precede a recovery in housing. Really, job growth is so essential for housing demand.”

Particularly important is the unemployment rate among young Americans between 25 and 34 years old.

“These are the people that are forming households and buying their first homes,” says Jed Kolko, chief economist at Trulia. Due to the bad economy, more young Americans have been “doubling up,” moving in with friends or living at home to ride out lean times. That’s put the kibosh on demand, according to some, which is part of the reason why there’s still so much housing inventory to work through.

Clarity on foreclosure processes. A group of states has banded together to sue lenders and mortgage servicers over what they claim to be improper foreclosure practices. Awaiting rulings in those suits, lenders have held back on foreclosures, slowing the pace and increasing the backlog. The longer it takes to get clarity on how to proceed with foreclosures, the longer it will take to clear that inventory and the longer it will take for housing prices and the broader housing market to recover.

Faster foreclosure processes. Getting homes that are likely to be foreclosed upon or homes that already are in foreclosure to the market is key to exposing the nation’s shadow inventory, which has been keeping prices depressed around the country.

“The longer this goes on, the longer the foreclosure inventory will perpetuate and the longer we’ll be stuck in a rut,” says Anthony Sanders, professor of real estate finance at George Mason University.

The attorneys general investigation has slowed down the foreclosure process, lengthening the time it takes to get delinquent loans through the pipeline and on the market to be sold. But speeding up the foreclosure process is a double-edged sword. More foreclosures will further bloat the housing inventory, driving down prices even more.

But that’s to be expected, says Chris Flanagan, strategist at Bank of America. “The implications of what we’re seeing is that you have to have prices go down before they go up,” he says. “At a minimum, things need to make it through the pipeline. Having it sit there is a dead weight on the economy and it ultimately creates more downside potential because of the backlog.”

Reduced inventory. Next on the to-do list is to clear out the massive housing inventory the United States has. Especially with the influx of homes likely to come on to the market when foreclosure processes finally get ironed out, we’re going to have a lot of stock to deal with. But reducing the supply of homes should help boost prices in the long run, and price appreciation is good for the housing market.

“There really has to be a way to clear the excess inventory out there,” Sanders says. “[Banks and servicers] know how to do it. It’s called lower the price. The problem is they don’t want to lower the price too much because they’re very nervous about taking huge losses.” Huge losses sometimes leave the taxpayer on the hook, making the entire issue intensely political, Sanders adds.

Other experts say the government has a different role, a role facilitating financing for government- and bank-owned properties. The Federal Housing Finance Agency has thrown around a couple of proposals for dealing with these assets, but nothing has been finalized.

“It would help a lot to have some government-sponsored financing of these [properties],” Flanagan says. “It would help them in the end if they allowed more investors to come in.”

Converting foreclosures into sales would help stabilize neighborhoods and home values, Flanagan adds, and, in some cases, improve the availability of rental homes, a sector of the market that has seen an uptick in demand as the foreclosure crisis hit.

Increasing rents. The completion of the cycle comes when rent increases to a point where it’s more attractive to buy a home than to continue renting. With affordability at record levels, when the jobs market recovers and the economy finds its footing, more renters should turn into homeowners, which will reduce the supply of homes and help stabilize prices.

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Home prices dip in September, ending five straight months of gains

November 30, 2011 By

By Alejandro Lazo, Los Angeles Times

Home prices in the nation’s largest cities fell in September, a widely followed index showed, underscoring the unrelenting weakness in the housing market that could last well into next year.

The Standard & Poor’s/Case-Shiller index of 20 American cities, a key measure that is closely watched by economists, declined 0.6% from August to September and 3.6% from September 2010. The drop ended five months of month-over-month gains.

Analysts had expected a decline in prices given the end of the busy home-shopping season. Nevertheless, the reversal of home-price gains casts a cloud over recent data that had shown some improvement in housing, such as increased builder confidence and an uptick in building starts. With the fresh home-price data released Tuesday, several analysts noted that a recovery remains out of sight this year.

“Any chance for a sustained recovery will probably need a stronger economy,” said David M. Blitzer, chairman of the S&P index committee.

Home prices, as measured by the 20-city index, are 2% above their bottom hit in April 2009 during the depths of the financial crisis. Prices briefly dipped below that threshold in March but began gaining ground again as the spring and summer selling seasons pushed prices up.

New foreclosure actions and weak demand probably will drive prices down an additional 5% to 10%, and perhaps more, if the economy slips into a double-dip recession, economists Patrick Newport and Michelle Valverde wrote in a research note Tuesday. The two, who track the U.S. economy for consulting firm IHS Global Insight, said the large number of people who remain behind on their mortgages and the high percentage of American homeowners who owe more on their properties than they are worth will also be a major drag on housing for the foreseeable future.

“Add to this the current high unemployment and underemployment rates, one gets a recipe for further price declines,” the economists wrote. “Should the economy slip into a recession … the unemployment rate will climb, driving foreclosures up and leading to an even larger drop in home prices.”

Even if prices begin to show some strength next year, they will probably continue to muddle along as foreclosures continue to cycle through the market, said Paul Diggle, property economist for Capital Economics.

“Even when prices do reach their trough, which could be next year, a continued influx of foreclosed and vacant properties onto the market will prevent the sharp bounce back that valuations might suggest is due,” he wrote in a note.

In a speech Tuesday at the Federal Reserve Bank of San Francisco, Federal Reserve Vice Chair Janet L. Yellen called for more housing stimulus.

“A sharp downturn in housing was at the core of the previous recession, and this sector continues to weigh on the recovery,” she said. “I see a strong case for additional policies to foster more rapid recovery in the housing sector.”

All of the California cities in the index posted price declines from August. Los Angeles and San Diego were down 0.8%, and San Francisco fell 1.5%.

Despite the declines, home prices in California cities measured by the index are comparatively healthy despite the state’s high unemployment rate. The markets tracked by the index are close to key job centers such as Hollywood and Silicon Valley and are also near the ocean, where overbuilding was relatively restrained.

The index does not track prices in California’s Central Valley or the Inland Empire, where housing is still weak and the foreclosure rates of many cities are among the nation’s highest.

Three U.S. cities posted new crisis lows in September, according to the Case-Shiller index. Both Atlanta and Phoenix joined Las Vegas in plumbing fresh depths. While Phoenix home prices are almost back to their January 2000 levels, those in Atlanta and Las Vegas have fallen below that benchmark.

A separate index by S&P/Case-Shiller measuring national home prices ticked up 0.1% from the second quarter, putting home prices at the same level they were at in the third quarter of 2003. The national index posted a year-over-year decline of 3.9%, which was better than the 5.8% drop in the second quarter.

The news that home prices had renewed their decline came as CoreLogic, a Santa Ana research firm that tracks the mortgage market, reported that more than 1 in 5 American home mortgages were underwater.

An estimated 10.7-million households, or 22.1% of all homes with mortgages, had more debt on the properties than they were worth in the third quarter, according to CoreLogic. This is a slight decline from the 10.9 million properties that were underwater in the second quarter.

“Although slightly down, negative equity remains very high and renders many borrowers vulnerable when negative economic shocks occur, such as job loss or illness,” CoreLogic Chief Economist Mark Fleming said. “The nearly $700-billion mortgage debt overhang has touched many corners of the market, and this overhang is holding back the recovery of the housing market and broader economy.”

Nevada led all states with 58% of mortgaged homes underwater, followed by Arizona, 47%; Florida, 44%; Michigan, 35%; and Georgia, 30%. This was the first quarter that Georgia made the top five, ousting California, which had been among the top spots since CoreLogic began tracking the data in 2009.

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