Daily Archives: May 15, 2012

No Recession in the U.S. | Bedford Hills NY Real Estate

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The economy is, statistically speaking, out of a recession. GDP and job gains have occurred in the past two years. But for ordinary folks, a sizable number believe we are still in a recession. That is an understandable sentiment given the unemployment rate is not back to normal, foreclosures are still happening, and inflation ate up all salary increases. Consumer confidence still shows well below normal levels of 90 to 100.

Let’s review more in-depth what has happened and what we can expect regarding the economy. Economists define recession as prolonged period of output decline. Two consecutive declines in GDP normally qualifies as a recession. The fact of the matter is that the U.S. GDP has expanded by 11 straight quarters. The latest growth rate of 2.2% in the first quarter is nothing to get excited about since it is below the 3% historical average growth rate, but the economy is nonetheless producing more. As for jobs, the low point was in early 2010 when there were 8 million fewer people working compared to just two years prior. But since the low point, the U.S. economy has added almost 4 million net new jobs. We are still down from the peak, but well off the bottom and continuing to add jobs with each passing month.

As to the forecast, it is very hard to see how the economy could sink back into a recession. Each of the major components suggests further economic expansion. The equation for Gross Domestic Product (all the stuff we produced) is defined by this simple equation:

GDP = Consumer spending + Investment spending by businesses + Government spending + Net international trade.

Consumer spending will be positive for the simple reason that aggregate income has been rising because of job creations and because of wealth gains in the stock market. Housing wealth is still not yet definitively positive, but it will no longer be negative. By year end, home prices will have shown some modest gains, and therefore, a higher housing wealth effect will help consumers to open their wallets. The home price increase projection is based on a diminishing rate of distress property sales as the year progresses and from the declining levels of distressed homes in the pipeline, the so-called shadow inventory. Also home sales have been rising and visible inventory levels have been falling.

Business investment spending will be positive due to the simple reason that corporations have an abundance of cash on their balance sheets. Banks also have plenty of cash reserves. Housing or residential investments, which had been negative for most of the past 5 years, have been growing solidly because of rising home sales. The only holdback is small businesses, who are still struggling to accumulate profit and tap borrowing. But this condition has been persistent so that small business spending cannot possibly turn lower from already low levels. The only direction for small business spending to go is up.

Government spending, meanwhile, has turn negative. State and local governments in particular have been shedding spending for the past 3 years. The federal government has also begun to cut, primarily in defense. In the short-run, declines in government spending mean lower economic activity. Fired government workers and defense contractors cannot spend money as they used to. But the improvements to budget deficit may raise the confidence of bond investors and thereby help assure attractive low interest rates for those private consumers and businesses in need of borrowing.

As to the final component, the international picture has been fairly neutral. Both import and export growth rates have been about the same and this is not expected to change all that much. A slight fall-off in exports to Europe may occur be compensated by rise in exports to Asia.

Of the main components above, the two big players are consumers and businesses. And as said above, it is hard to foresee how consumers and businesses can retrench. Therefore, U.S. GDP will continue to expand, albeit at the somewhat subpar rate of 2% to 2.5%, this year.  Job gains will likely be around 2 million. We are in a recovery phase and clearly out of the recession, but the slow recovery is sure making people believe that the economy is not normal and still lingering in the recession.

The only caveat to the forecast is that a new federal budget needs to be agreed upon by Congress and the White House before the end of the year. If no new budget passes, then there will be sizable automatic government spending cuts to domestic and defense programs. Taxes will go up sharply. The dollar amount taken out of the economy will be equivalent to 3% of GDP. All this happens suddenly on January 1, 2013, if no new budget is passed. A potential 3% GDP subtraction on an economy that is now growing at 2% will then put the economy into a recession.

via economistsoutlook.blogs.realtor.org

Home Buyer Qualifying Income | Bedford NY Real Estate

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In addition to metropolitan area prices, NAR Research estimated qualifying income for each metropolitan area in the first quarter of 2012. This article will review what qualifying income is and how we estimated it. How does calculated qualifying income for the median priced home compare to the income of potential buyers in your area?

Qualifying Income
When a home buyer seeks a mortgage for a home purchase, the lender will review the amount of income the potential buyer earns. Total gross income will be compared to the total housing payment to ensure that the home buyer is not spending more than a prudent percent of their income on housing. This should help ensure that lending is responsible and home ownership is sustainable (1).

What’s prudent? In its guidelines, the Department of Housing and Urban Development (HUD) suggests that total house payment not exceed 31 percent of gross income . HUD’s total house payment includes principle and interest but also includes payments for things such as mortgage insurance and homeowner’s insurance.

Because NAR’s analysis will exclude some factors that HUD includes in the total house payment, we use a more conservative ratio of 25 percent to create the metro area qualifying income. In other words, qualifying income is set to equal four times the calculated annual mortgage principal and interest payments (2).

Other Criteria Needed to Qualify
Having enough income relative to total house payment is just one factor that will be considered in a home buyer’s application for a mortgage. A lender will also consider a borrower’s other debts and the total paid to service those debts relative to income, as well as credit history, demonstrated ability to pay, financial reserves, and other factors.

All of these factors will be considered in the analysis done by a lender before approving a home buyer’s request for a mortgage.

However, the qualifying income analysis provides a rough snapshot of how affordable some markets are. Here are some highlights:

The full list of metro areas and qualifying incomes is available here.

(1) HUD Mortgage Credit Analysis: In its total house payment calculation, HUD includes many payments that are not included by NAR in the analysis such as real estate tax escrow payments, hazard or mortgage insurance, among others. Also HUD allows the payment to income ratio to exceed 31 percent if compensating factors are present. See the document for details, particularly section 4155.1 4.F.2.b Mortgage Payment Expense to Effective Income Ratio.

(2) At this time, prevailing mortgage rates are near and often under 4 percent, thus a 4 percent mortgage interest rate figure was used in calculations as a conservative estimate. Mortgage payments are estimated assuming a fully amortizing 30-year fixed rate mortgage. Down payment assumptions vary and are explicit in the analysis.

via economistsoutlook.blogs.realtor.org

Short Sales to Increase in 2012 | Pound Ridge NY Real Estate

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The number of short sales grew steadily through the end of 2011 and is expected to continue to grow in 2012.  NAR Research estimates that the number of short sales in the United States will increase by 9.2% in 2012.  This trend will continue a shift towards alternative methods of transitioning underwater owners who can no longer afford their mortgages out of homeownership without excess cost to banks and negative ramifications on homeowners of foreclosure.

While the share of short sales fell to 11% in March from 13% a month earlier, according to the  REALTOR® Confidence Index, the share of short sales is following the typical seasonal pattern where non-distressed sales rise through the summer reducing the share of distressed sales.  However, the share of short sales for all of 2012 is expected to remain roughly the same at 12.1%.  The total number of short sales, though, will rise with the national trend, reaching 546,500 in 2012.

Demand for short sales increased over the last year as the timelines for foreclosures in process continued to rise in both judicial and non-judicial states.  Banks accrue additional costs on maintenance and forgone interest or investments as properties sit in foreclosure.  Consequently, it is to their advantage to prevent properties from reaching foreclosure.  While the number of new delinquent loans has fallen in recent months, there remain a large number of underwater borrowers, more than 11 million by some estimates, who are at risk of falling behind on their payments.  As these properties come to market, they will need to be liquidated below their mortgage amount.

The states with the highest number of short sales in 2012 will remain those that experienced the largest price increases during the boom: California, Florida, Arizona, and Nevada.  However, Texas, Illinois, and Georgia will each have large volumes at 22,000, 19,000, and 15,900, respectively.

There is potential for a surprise on the upside to our estimates for 2012.  Both Bank of America and the Federal Housing Finance Agency have announced new programs in the past few weeks that are aimed to streamline the short sale process, reducing the time for buyers to hear back about offers and improving the communications between sellers/buyers and the bank or Fannie Mae/Freddie Mac.  Improvements in the short sale process could have important impacts on the market.  Buyers often wait months to hear back about offers on short sales.  If response times decline or if the uncertainty to the consumer is reduced by having a finite timeline, demand for short sales could rise, reducing their price discount to the market.  Stronger prices would make short sales even more attractive to the banks.  A virtuous cycle like this would help to stem the flow of properties into foreclosure.

Short sales have increased steadily in 2012 and are expected to continue to rise in 2012.  While still distressed sales, a shift toward short sales is a sign of improvement in how the market handles distressed properties and is a trend that is in the best interest of homebuyers, homeowners, and the communities that they live in.

via economistsoutlook.blogs.realtor.org

House Poor: Morality and Mortgages? | Armonk NY Real Estate

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So I was reading in the newspaper that now there’s a government program where I can refinance and get a cheaper rate even if I’m deeper underwater than the Titanic.  Which I am.

I called the first mortgage guy who found in my spam file on my email and he was happy to hear from me.  He told me that it was called HARP 2.0 and that I qualified since Freddie Mac owned my mortgage.  Isn’t that something? You learn something new every day.

Except there’s a problem, he said.  “You’ve been paying your mortgage on time.”

He was the first mortgage person I had ever talked to who agreed with me.  For ten YEARS I’ve been paying the mortgage on time.  When Countrywide and Washington Mutual bailed out after ripping off thousands of borrowers, I paid my mortgage on time.  Goldman Sachs and Lehman Brothers can go bankrupt , but not me.  First of the month and my check is in the mail.

I didn’t think it was fair but Felicity, my wife, said that just because those companies were bums didn’t mean we should be.  We had to set a good example.  (For who, I wondered, since the kids are grown.)  And then there’s our credit in case we want to buy something, she said.   (And you-know-who frequently does.)

So she found some government bureaucrat somewhere on the Internet who said we have a moral imperative to pay our mortgage no matter what.    He was probably the same guy who invented HARP 2.0.  Just like the government to put out a press release about a great new program and then tell honest working people who pay their mortgages on time that it’s not for them.

“Moral imperative?  You’ve got to be kidding,” I said. “There wasn’t much moral imperative going around when all those people got sold subprime loans they couldn’t afford.”

But I wasn’t worried.  I had a real live mortgage EXPERT who agrees with me.  You need to quit paying your mortgage for three months before you can get into the HARP program, he told me.  The mortgage expert said the program was for people who were having a hard time paying their mortgages.  I figured I qualified.  Writing that check every first of the month is awfully hard on me, that’s for sure.  I wasn’t alone.  He said he had lots of other customers like me who weren’t behind on their payments until they talked to him.  Then they wised up and got cheaper mortgages.  Sounded good to me, but Felicity hit the roof.

“That’s crazy,” she said.  “What happens if we don’t get approved?”

“That’s an easy one.  We save three months of mortgage payments.”

“No we don’t, you dunce. We will still have to make those payments plus interest and we will probably lose one hundred points off our credit score.  Besides, it’s the right thing to do.”

So I did a little more research about this moral imperative thing, which wasn’t very hard.  What about the government itself?  Does the local tax assessor’s office feel a moral imperative to lower your property taxes pronto when home values take a pasting?  I don’t think so.  Who cares if suffering homeowners have to keep paying property taxes for years as if they lived in mansions when Zillow values their home as if they were rotting foreclosures?  When they finally get around to lowering assessments, they raise taxes somewhere else to make up the difference-like it’s our fault that home values tanked.

“So you’re going to stop paying our taxes too?” asked Felicity.  “Good luck with that.”

Well, then I found out that there are thousands of people just like us could care less about their moral imperative.  They are walking away from their mortgages because continuing to pay them is just throwing good money after bad.  They even have a name for it.  It’s called “strategic default” and there’s even a college professor in Arizona who says it’s the right way to go.

Felicity laughed at that one.  “When we lose our home can we move in with the professor?  He probably lives in a trailer park in the crappiest part of Tucson.”

It was clear she didn’t have an open mind so I decided I would find a way to prove to her that forgetting about moral imperative now and then just isn’t such a big deal.  Credit cards came to mind.  I never could figure out what I got in return for the money I sent in every month to credit card companies so I stopped paying one of them.  As soon as the due date passed, they started calling and emailing like I was a long-lost relative.  At first they said patronizing things like “we’ve always treasured our relationship with you because we know you are a coward and pay on time.” As time passed, they got meaner.  They sent me big ugly envelopes plastered with black type that said “OVERDUE” and “ACCOUNT SUSPENDED” just to embarrass me in front of my mailman.  When they called, at first they were nice people in India with lilting accents like in Bollywood movies.  After I was 60 days past due, the robo-call machines called incessantly.  At 90 days, Felicity found out about my little experiment when her card was rejected at Kmart.

Felicity was so mad at me that she nixed the whole HARP thing and ordered me never to talk to my mortgage friend again.  So it was no surprise to me at all when I read in the paper the other day that the HARP program wasn’t getting many takers.  The article said the experts couldn’t figure out what the problem was.  How could so many homeowners pass on such a great deal, they wondered?

Well, duh.  I’m an expert homeowner and take it from me, all they need to do to make the program work is get rid of this moral imperative thing.  In fact, if Congress would just pass a law saying morality and mortgages make about as much sense as morality and politics, we probably wouldn’t have a housing problem at all.

via realestateeconomywatch.com