Monday, August 25, 2008

Dream Homes At Prices You Can Afford

Is buying a new home a good idea in today's economy? As a long-term investment, homeownership is still one of the best investments for individual households.

Housing, like all markets, has its ups and downs. Homeownership has a track record that is virtually unmatched by any other purchase in terms of its real benefits.

If you have good credit, a job, and a steady income, you'll find there's still plenty of mortgage credit to be had at good rates. For well-qualified buyers, rates are running at near historic lows.

Based on the housing stimulus program recently signed into law, you might even qualify for a first-time homebuyer tax credit, if you purchase a new home now.

Homeownership's Real Value

Dollar for dollar, homeownership is a solid stepping-stone to a future of financial security and the single largest creator of wealth for many Americans.

Over time, real estate has consistently appreciated, even through periodic adjustments in response to economic conditions. In the state of North Carolina, home appreciation has stayed at a solid 8% annually, with Raleigh real estate at a 6.4% annual home appreciation rate, compared to the national home appreciation rate or 5% annually.

The returns of such high appreciation rates are much more than an equal investment into the stock market. For instance, at the national appreciation rate of 5%, if you put 10% down on a $200,000 house, for an investment of $20,000. At a 5% annual appreciation rate, that $200,000 home would increase in value by $10,000 during the first year. Earning a $10,000 on an investment of $20,000 is an extraordinary 50% annual return. As you can imagine, an even better investment return occurs with an 8% home appreciation rate.

In contrast, putting that $20,000 down payment into the stock market and getting a 5% gain would only yield a $1,000 profit.

Should I Wait to Buy Until Home Prices Go Even Lower?

If you wait for what you think is the absolute best deal, you could end up waiting for years and missing out on your dream home. All the market fundamentals show that now is a good time to buy – prices are down, interest rate are near historic low levels, and there are lots of homes to choose from.

There are many things to consider when “shopping around” for a new home, and waiting for something that might now happen will only prolong that process. In addition to taking advantage of currently offered incentives, one of the most important things you can do when looking to buy a new home is to hire a home inspector to make sure the home is safe. A home inspector focuses on the condition and structure of the house and points out observed safety concerns. However, a home inspector will not do and destructive testing and will not inspect what they cannot see, leaving your new home in stable condition.

Therefore, if you buy now, you'll not only be in the driver's seat during the buying and home inspection process, you'll also reap the gains of price appreciation. Remember, those who purchased homes in the early 1990s during the last big economic and housing downturn came out as big winners.

The Advantage of New Construction

Today's new homes are better than ever. When you buy a new home, you get quality, new construction, the latest technological advances, and low-maintenance, money-saving, energy-efficient appliances. Many new-construction homes are built to Green Building standards. Homes are designed to fit your lifestyle, featuring larger kitchens for family gatherings, bigger closets, ample storage space, and more bathrooms.

In addition to cutting edge construction, it is easier than ever to get a home warranty. A home warranty will provide a new homeowner with coverage that will help curb the costs for common frequent household breakdowns. A home warranty will help keep the house looking and functioning like new, and is also a good selling point down the road.

So it's a good time to buy – if you're a first time buyer and qualify for the tax credit, it's an even better time to buy – and there are quality, new-construction homes and condos in every price range throughout North Carolina waiting for you. Don't wait and risk missing out on your dream home.

Monday, August 18, 2008

Teardowns Have Foes, But They Can Revitalize The Block

The first part of Mark and Constance Eddy's home-ownership story is classic: In 1998, the newlyweds bought a starter home in a post-World War II subdivision in Prairie Village, Kan.

The 900-square-foot, two-bedroom, one-bath house was dated, with 1950s metal cabinets and gold-flecked Formica counters in the kitchen, but cozy.

"It was all we needed," Mark Eddy said.

What really sold the couple on the home was the street. Prairie Lane is a winding street of tiny houses nestled close together under a canopy of large trees. The neighborhood is next to the Prairie Village Shops, which contains an urban mix of businesses -- gas station, hardware store, drugstore and diner, as well as upscale restaurants and boutiques.

"People live in their front yards. There's a mix of ages -- some neighbors are like grandparents to the children on the street. It really has a sense of community," Eddy said.

Seven years later, the couple had two small children and a third on the way. It was time to trade up. So the Eddys sold the house on Prairie Lane and bought a 1,900-square-foot ranch on a big lot in Leawood, Kan. They were living the American dream.

But in a 21st-Century twist to the tale, the Eddys were unhappy in the "better" neighborhood. The street was usually deserted and quiet, except for the distant hum of traffic on Interstate 435.

"We immediately missed the neighbors, and we missed walking to the shops," Mark Eddy said. Two years later, when the house next door to their first home came up for sale, the Eddys decided to buy it, tear it down and build a new house on Prairie Lane big enough for their family to grow into.

At 3,400 square feet, the Eddys' new home towers over its neighbors on Prairie Lane. The home is in compliance with city requirements for setback from the street, setbacks from the sides of the property, height and footprint on the lot. But shortly after groundbreaking, the Prairie Village Homes Association took the Eddys to court, claiming the proposed house design was in violation of deed restrictions that limited to homes to "1 1/2 " stories. The judge eventually ruled in favor of the Eddys.

Mark Eddy, co-owner of Gahagan-Eddy Building Co., says he talked with many neighbors on the street and showed them his house plans to try to gain their approval before moving ahead with the home teardown. A majority of homeowners on his street signed a petition in favor of allowing the house.

Bill Chinnery on the homes association board of directors says he thinks the chocolate-brown exterior paint and two tall trees on the lot help the house blend into the neighborhood in summer. But in winter he thinks the house sticks out too much.

"I like the house, but it's too big for the neighborhood," Chinnery said.

Jessamine Guislain, who has lived on the street since 1965, disagrees.

"It's a beautiful house, and I enjoy looking at it," Guislain said. "I'm happy to see a family who loved Prairie Lane able to move back to it."

Guislain said allowing home teardowns and home renovations on the street helps keep the community intact. "In my own experience with a house next door to me, every family who lived there, once they had their second child, moved."

Eddy says most of his neighbors have been supportive, but he acknowledges others think the house is too big. "I respectfully disagree. If a house is beautiful, I don't care if it's twice the size of the one next to it. It should only be a problem if it's ugly."

Prairie Village recently adopted an ordinance to notify homes associations of permit requests within their neighborhoods, says assistant city administrator Dennis Enslinger.

"Everybody has their own expectation of what the neighborhood is and what it should become, and the city is trying to balance those interests for everybody involved. But it is an ever-changing balance," Enslinger said.

Cydney Millstein, owner of Architectural & Historical Research LLC in Kansas City, says preserving historic neighborhoods is important, but it doesn't mean everything has to stay the same.

"If new designs are done tastefully with a tip of the hat to what was going on historically, that's OK. If it's bringing life back to a neighborhood that became kind of stale after a while, this is a good way to inject vitality back into the neighborhood."

By: Cindy Hoedel; McClatchy Newspapers
Detroit Free Press; August 17, 2008

Home-Equity Debt Lurks

A recent improvement in beleaguered home-equity loans has been a rare sign of encouragement for banks. But bullish investors need to remove their rose-colored glasses.

Banks have about $700 billion of home-equity loans -- in which a bank lends money to a homeowner against the equity in his house. That includes both fixed-rate loans and floating-rate debt drawn from credit lines. Lenders usually can't collect on a defaulted home-equity loan by seizing a house unless the borrower has no mortgage, since mortgage lenders have first claim.

The so-called piggyback loans are the riskiest of this home-equity debt. Most were taken out during the raging real-estate market. These loans came on top of a first mortgage, aren't backed by insurance and enabled some borrowers to buy homes without making a down payment. These loans represent more than 8% of the value of outstanding home-equity loans, according to SMR Research.

Banks have been reducing unused credit lines, especially in areas with housing problems. James Dimon, chief of J.P. Morgan Chase, which has been hurt by losses in its home-equity portfolio, recently said delinquencies could be stabilizing. "It's a little ray of sunshine that is OK to grab onto for now," he said.

Many who were caught flat-footed when these loans turned sour now assume that home-equity loan risk already is factored into bank stock prices, which have tumbled. But investors may be too upbeat once again. For one thing, the recent news isn't exactly uplifting: 2.22% of all home-equity loans were charged off by banks in the second quarter, an all-time high. That is up from 1.69% in the first quarter and 0.9% in the fourth quarter of last year. Tax refunds and government-issued stimulus checks likely are at least partly responsible for why things aren't worse.

The losses likely will remain elevated for the foreseeable future. It isn't easy to see why home-equity losses would improve until there is a true bottom for housing. Analysts at Goldman Sachs predict home-equity losses won't peak until the first quarter of next year.

For investors, it would be best to avoid lenders with heavy exposure to home-equity loans written by outside mortgage brokers and other third parties that often employ lax underwriting standards. Instead, stick with banks that made their own loans during the real-estate surge.

Using this stance, investors should use caution when it comes to First Horizon National. According to a Goldman analysis, 15% of First Horizon's home-equity loans, or 5% of all its loans, were made by outside parties. Outsider-written loans represented 22% of Fifth Third Bancorp's portfolio, or 3% of its total loans. And 14% of Wells Fargo's home loans, or 3% of total loans, were written by third parties.

These three banks also have a relatively high number of home-equity loans that are at least 90% of the value of the underlying houses, which is worrisome. Some investors also are concerned about E*Trade, which also was a big buyer of home-equity loans.

On the flip side, Comerica, Regions Financial and BB&T Corp. hold almost no loans made by outsiders, which is a good sign.

By: Gregory Zuckerman
Wall Street Journal; August 1, 2008

Private Lenders Provide Option for Borrowers

As lending standards have become tougher, a rising number of people and businesses are turning to an unlikely source for money: private lenders.

In recent years, the practice of borrowing money from private parties was rare, except among those who were unable to qualify for traditional loans. Banks were flush with cash and eager to lend, meaning even people with a tarnished credit history often could find quick sources of cash.

Now, even those with good credit are bypassing banks to borrow money -- despite interest rates that can reach 20% or more, and down payments of 35% or more.

These private funds -- which aren't from banks or credit unions -- are being used for everything from second homes to apartment construction. Many borrowers have excellent credit, but they are trying to avoid the added time, scrutiny and uncertainty of a conventional bank loan. Such transactions are "not as publicly available as one might expect," says Ron Phipps, a real-estate broker in Warwick, R.I., "but there is definitely money available."

Arrangements for such loans are equally low-key. While hedge funds and high-net-worth investors are providing cash, it isn't unusual for a private lawyer to get five friends to each throw in $100,000 for a home loan. Wealthy investors, hedge funds and private-equity firms are lending money in pursuit of consistently higher returns. The bear market for stocks may make alternative investments such as this type of lending more attractive.

Typically, borrowers hear about private loans from lawyers, mortgage brokers and real-estate agents. Borrowing and lending opportunities are even sometimes posted on Web sites or in newspapers.

For investors, well-structured deals could reap significant returns, because private lenders typically charge much higher closing costs and interest rates than traditional lenders. They also require a much higher loan-to-equity ratio. So if the borrower falls behind, the lender potentially could resell the property at a profit.

"For the investors, there's an opportunity," says Scott Haislet, owner of LEC Mortgage in Lafayette, Calif. "But you better know who is in charge and who's making the decisions about the property."

Borrowers "need to make sure they understand the way the loan works," says Allen Fishbein, director of housing for the Consumer Federation of America. Mr. Fishbein recommends that borrowers "seek out independent professional advice before committing themselves."

The tight credit market makes the loans especially appealing to borrowers, who a few years ago might not have considered the option. "In times like these, when money is tight, private money flourishes," Mr. Haislet says. Stricter lending standards make it more difficult for borrowers with good credit scores to get large loans or so-called bridge loans, which someone might use during a construction project. If you are considering a home-equity loan for a construction project, also consider a home warranty. A home warranty service contract will cover the repair or replacement of many common home repairs and replacements.

Even borrowers with excellent credit scores can wait weeks for a loan to be approved. Occasionally, those deals evaporate, leaving builders and home buyers scrambling for cash. That is where private lenders step in. It isn't unusual for these lenders to charge several points and interest rates of 12% or significantly higher. They also typically require borrowers to provide 35% or more of the down payment, so there is ample collateral if anything goes wrong.

Mr. Haislet, who arranges some private loans, warns that "they're not for everyone. If borrowers can find a better alternative, they should take it, but sometimes there are no other alternatives."

Mr. Haislet says most of the private loans are for less than five years -- and sometimes only six months, for those doing home-renovation projects who could otherwise not borrow the money.

He says his borrowers typically pay 9% to 11%, compared with many current bank rates of less than 7%. The loan-to-value ratios also are much larger.

By: Jilian Mincer
Wall Street Journal; July 31, 2008

Wednesday, August 13, 2008

How to Shake Off the Mortgage Mess

Where are the hosannas for Congress's handiwork on housing? Nobody expected it to solve anything, but it's worth understanding why.

By CNBC's count, the federal government has already made roughly $1.4 trillion available to refinance mortgage debt since the housing meltdown began. That makes this week's bill, which adds another $300 billion to the pot, seem a mite anticlimactic. The key word is refinance. Even if this money helps prevent foreclosures, it's aimed at houses that people want and that would likely resell even if foreclosed. Hardly touched is the real problem of tens of thousands of houses financed during the subprime boom that are unoccupied, unwanted, falling apart, built on spec, mortgaged on spec and abandoned on spec.

Washington has practically monopolized the business of financing and refinancing home sales for willing buyers and sellers, but it does nothing about the homes going rancid on the shelf, souring the value of the nation's entire housing stock and mortgage debt.

Maybe that explains why we're finally getting some takers for a demolition strategy as the least-cost route out of the subprime mortgage aftermath. The Economist, in its July 10 edition, endorsed a "wrecking-ball response." Bill Gross, the Pimco bond king, says in an ideal world Washington would "buy one million new/unoccupied homes, blow them up, and then start all over again." Even Larry Lindsey, the former Reagan economist, concludes that a larger bailout is nearly inevitable -- though his fanciful solution is to recruit 100,000 immigrants who would agree to buy $10 million worth of housing each.

A surplus of homes is the key liability dragging down much of the collateral underlying the financial system. Any Lindsey whimsies aside, have no doubt where many of these losses ultimately will land.

Take Fannie Mae and Freddie Mac, which owned 62,000 homes in the first quarter and were acquiring houses twice as fast as they could sell them. Fannie and Freddie now are statutorily backed by taxpayers, so taxpayers now are the real owners of nearly as many foreclosed houses as the rest of the country's 8,500 banks and thrifts combined.

And that's just the beginning. In seizing IndyMac, a California lender in subprime heartburn country, the FDIC put its fingers in its ears and simply declared a moratorium on new foreclosures. Taxpayers will end up owning a lot of derelict homes through FDIC too.

None of this is reason to disregard glimmers of a bottom in housing. Housing markets are local. Even with an unprecedented 19 million empty single-family homes, apartments and condos hanging overhead, some 500,000 new houses a year continue to be built and sold -- because people want houses where they want them. *If you are building a new home, be sure to get a home warranty. Home warranty coverage is often of great value to a house, whether or not it is being sold.

The problem is the other places.

In California's Central Valley around Stockton, one household in 25 received a foreclosure filing last quarter. In the Inland Empire, one in 32 did. In greater Las Vegas, one in 35 households received a notice. We use household advisedly since nobody lives in many of these homes or collects the mail. Close to the ground, a growing suspicion is that the numbers even understate the troubles because banks see no point in foreclosing on empty, unsellable homes. Local governments complain of not being able to find anyone to dun for upkeep because the owner has absconded and yet no bank has filed foreclosure papers.

To be sure, the disaster is not entirely confined to vast tracts of exurban no-man's lands in the Southwest. The Star Ledger of Newark, where home prices once were rising 50% a year, describes 66 Norwood Street, financed by Countrywide for a speculative buyer who rented it out while never making a payment on her $325,000 mortgage. Fannie now owns the house, which burned twice between a final order evicting the tenant and Fannie's crew arriving to board the place up.

Multiply that by entire neighborhoods of brand new, large homes, built on cheap land far from town or amenities in the subprime ground zero of California, Arizona and Nevada. Failing an improvement on God's damp squib of an earthquake in subprime country yesterday, some sort of strategy is going be priority one for the next president.

So far, Washington has put its political capital into trying to refinance salvageable homes for unsalvageable homeowners, when a relevant policy would consist of judiciously buying unsalvageable houses and demolishing them. Fannie and Freddie's strength is housing market software: They could be put to work devising a least-cost, maximum-bang strategy for demolishing unoccupied homes to preserve as much value as possible for the homeowners and mortgage creditors who remain.

Of course, right now their overriding imperative is to avoid recognizing losses rather than rushing toward them -- which is why Fannie and Freddie should be nationalized (and later privatized). One way or the other, taxpayers will end up owning thousands of unwanted houses. It's not too soon to begin limiting our costs.

By: Holman Jenkins, Jr.
Wall Street Journal; July 30, 2008

Monday, August 11, 2008

Fed Extends Lending Programs as Threats Persist

Move Reflects Worry Over 'Fragile' State Of Financial Market

A year after credit markets seized up, the Federal Reserve is still struggling with the crisis and expanding key lending programs that were designed as temporary measures to nurse the financial system back to health.

The central bank announced Wednesday that it is extending programs through January that allow investment banks to borrow from the Fed. The move is an effort to prevent a worsening in what the Fed described as "continued fragile circumstances in financial markets."

Troubles in the financial world continue to take the Fed deeper into new territory in its effort to prevent a larger credit crunch. The financial sector's weakness is a key reason why policy makers are likely to hold interest rates steady at 2% when they meet next week. A handful of officials are pushing for rate boosts in the near future to get ahead of inflation risks, but most policy makers appear to support staying on hold at least until financial markets can return to a more normal state of functioning. Continued weakness in housing and labor markets also is weighing on many officials.

For the past year, Fed officials have sought to separate their policy actions directed toward financial stability -- emergency lending to financial firms, for instance -- with their monetary-policy role of guiding the economy by setting interest rates. That distinction would allow the Fed to continue its aggressive lending role without being constrained on interest-rate policy if, for instance, it needed to respond to inflation risks.

For now, however, top Fed officials remain especially worried that today's market conditions could deepen the credit crunch by preventing banks from making loans to consumers and businesses. Banks' losses on mortgage loans in particular are wearing down their balance sheets, forcing them to raise large amounts of capital that would allow them to extend credit to consumers. A rate boost now could further aggravate markets while firms are trying to recapitalize. Even though credit markets have improved from their worst points over the past year, they remain far more strained than they were before the credit crisis started last August.

"Healthy economic growth depends on well-functioning financial markets," Fed Chairman Ben Bernanke told lawmakers this month. "Consequently, helping the financial markets to return to more normal functioning will continue to be a top priority of the Federal Reserve."

The Fed's extension of its loan program for securities firms, started in March after the collapse of Bear Stearns Cos., allows the investment banks to take overnight loans directly from the Fed's discount window. That program, known as the primary-dealer credit facility, was set to expire in September.

The Fed extended the program through Jan. 30, though it said "the facilities would be withdrawn should the board determine that conditions in financial markets are no longer unusual and exigent." The move extends the length of the Fed's support to investment banks into the next presidential administration and Congress, which is likely to restart the debate then over whether such firms should get direct lending support.

The Fed's timeline indicates officials believe markets could remain weak, needing a backstop into the beginning of the year. How and when to conclude the program remains in doubt.

"When does it end? It ends a little bit when the liquidity needs start to abate," said Ray Stone of Stone & McCarthy Research Associates. "It's certainly not going to happen soon."

The central bank altered or expanded several programs to address apparent needs of financial institutions and prevent further stress on financial markets.

The Fed extended through January a $200 billion program that allows investment banks to receive 28-day loans of Treasury securities through an auction. In addition, the Fed launched a new program to auction options of up to $50 billion under that program -- the term securities lending facility -- "for exercise in advance of periods that are typically characterized by elevated stress in financial markets, such as quarter ends." That may prevent further market stresses at turning points when firms are closely managing their books, and allows firms to effectively buy insurance instead of carrying the securities over the term. The Fed offered a related program at the turn of the millennium to maintain stability through the Y2K transition.

The Fed carried out a long-sought extension of its auctioned loans for commercial banks. Those will now be available for 84 days in addition to the 28-day loans under the term auction facility. That program was created as an alternative to the Fed's discount window, which is generally used by banks for last-minute funding needs but can carry a stigma because an institution fears being seen as troubled. The $25 billion auctions for 84-day loans will start Aug. 11 and alternate biweekly with $75 billion in 28-day loans. The total credit available under that program will be $150 billion.

The central bank also said it would increase the size of a swap line with the European Central Bank to $55 billion from $50 billion to accommodate a temporary increase in the amount of U.S. dollars the ECB can auction. The ECB and Swiss National Bank are extending 84-day loans in addition to 28-day funds. The Swiss central bank's swap line remains at $12 billion.

Demand for the dollar funding has been rising at each auction since May. In the most recent auction Tuesday, 63 banks bid more than $101 billion for the $25 billion auction. That was the highest number of institutions to bid, and the highest ratio of demand to the amount of funds available, since the ECB opened its swap line with the Fed in December.

Most Fed officials support the efforts to improve market functioning. But their views on the financial situation vary. On one end, officials view the latest market stresses as a source of concern but one that shouldn't stand in the way of raising rates to reverse the aggressive easing -- from 5.25% last September. Officials on the other end believe conditions have worsened dramatically in the past month -- as seen through higher mortgage costs, shrunken bank balance sheets and wider credit spreads -- and add risks to the economy.

While the second quarter delivered strong growth, activity may slow once the effect of economic-stimulus payments fades. High energy prices, a weakening labor market and continued troubles in the housing sector could join tightening credit conditions as restraints to growth into the end of the year.

At the same time, officials are bracing for high inflation readings. Oil this month has pulled off its record high by roughly $20, and gasoline has dropped back under $4 a gallon. Both developments could support a moderating inflation rate in the coming months. But prices remain volatile, and officials are putting little faith in the pullback.