Is The National Association Of Realtors Hurting The Real Estate Market? by Brett Reichel, Brettreichel.com


Yesterday, a fairly sophisticated home buyer called me about a pre-approval.  He and his wife own a home, and a vacation home.  This is a successful business couple who are doing well in the residential construction market despite the current economy.  He indicated that they wanted to buy a new primary residence.  His question to me was “We can get together about 10% down.  Can we even buy a new home with less than 20% down?”

It’s no wonder they are confused.  Every other article where leadership of the National Association of Realtors is quoted, every press release they issue usually has the quote that “tight lender guidelines are hurting the real estate market”  or “buyers need to have 20% down and be perfect to accomplish a purchase” or some words like that. 

Unfortunately, these types of statements are blatantly untrue in most markets, and are very damaging to the real estate market at large and to home buyers and sellers everywhere. 

It’s true that lenders are giving loan applications MUCH greater scrutiny than they have in any time since 1998.  Rampant mortgage fraud on the part of borrowers, Realtors, lenders, and mortgage originators have required lenders to check and recheck everything represented in a loan application.  Unfortunatley, until we get everyone to realize that the “silly bank rules” they are breaking consititutes a federal crime we are stuck with the extra scrutiny.  Fortunately, the new national loan originator licensing and registration systems should make loan officers everywhere realize the seriousness of this issue and root out fraud before it get’s to the point of a loan being funded.  The safety of our banking and financial systems is too important to allow the kinds of games that have been played over the last few years. 

The National Association of Realtors is right about appraisals.  Appraisals remain a very serious issue.  Pressure from Fannie Mae and Freddie Mac on lenders results in pressures by lending institutions on appraisers to bring in appraisals very conservatively.  It’s common for appraisers to use inappropriate appraisal practice due to the Fannie Mae/Freddie Mac form1004mc, which results in innacurate appraisal (see previous posts).

It’s also true that underwriting guidelines are stricter than they were during the golden age of loose underwriting (1998 thru 2008).  What people don’t realize that underwriting guidelines are easier now than they’ve been in any previous time frame.  In fact, it’s a great time to buy for many folks who have been priced out of markets previously.

How can I make that type of claim?  Because I remember the “bad old days”…..Prior to 1997-1998, debt-to-income ratio’s were much stricter than they are now.   A debt-to-income ratio compares your total debt to your total income.  In the old days, if you put 5% down on a conventional loan, you couldn’t have more than 36% of your total income go towards your debt.  Now?  If you’ve been reasonably careful with your credit, have decent job stability, and a little savings left over for emergency it’s pretty easy to get to a ratio of 41%!  With only 5% down!  On FHA loans, it’s really easy to go to 45% DTI with only 3.5% down!   In fact, there are times that we go even higher.

Is that obvious in the mass media?  No.  They paint a dire picture based, in part, on the statements of NAR. 

So, if you are a Realtor, press NAR to paint a more positve picture of financing.  Nothing that is “puffed up”, just reality.  If you are a buyer, don’t be fooled by what you read in the mainstream press.  Talk to a good, local, independent mortgage banker.  They’ll give you a clear path to home ownership and join the ranks of homeowners!

 

 

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Coming Next: The Landlord’s Rental Market, by A.D. Pruitt, Wall Street Journal


Apartment landlords appear to be among the only commercial property owners able to sign new tenants amid the sluggish economy.

But the strength of the multifamily sector is itself related to the troubled economy. There has been an “abnormal slowdown in household formation in recent years,” Lawrence Yun, chief economist for the National Association of Realtors, says in a new report. “Many young people, who normally would have struck out on their own from 2008 to 2010, had been doubling up with roommates or moving back into their parents’ homes.”

NAR, using U.S. Census data, says that household formation was only 357,000 last year, compared with 398,000 in 2009. That’s way below 1.6 million in 2007. But Mr. Yun said young people have been entering the rental market as new households in stronger numbers this year.

NAR expects vacancy rates in multifamily housing will drop from 5.5% to 4.6% in the third quarter of 2012. Vacancies below 5% generally are considered a landlord’s market, the trade group noted.

Minneapolis has the lowest multifamily vacancy rate at 2.5% followed by 2.8% in New York City and 2.9% in Portland, Ore.

But conditions aren’t as rosy in the rest of the commercial property market with the tepid economy poised to slow demand for space, according to the report.

For the office market, the vacancy rate is forecasted to fall from 16.6% in the third quarter of this year to 16.3% in the third quarter of 2012.  The markets with the lowest office vacancy rates include Washington, D.C. at 8.6%, New York City at 10.1% and Long Island, N.Y at 13%.

Retail vacancy rates are projected to decline from 12.9% in the third quarter this year to 12.2% in the third quarter of 2012. San Francisco led with the lowest vacancy rate of 3.8% followed by Northern New Jersey at 6.1%. Los Angeles; Long Island, N.Y.; and San Jose, Calif tied for third place at 6.4% each.

Did you order the appraisal yet? – The Ideal Home Loan Process


Awhile ago I produced a video about some conversations between certain Realtors and my team.

I also wrote a nice long post about the subject, and Realtor professionalism in general, on my site.

I like to go back and watch the video from time to time because it makes me laugh, and that is a rare commodity in today’s Real Estate market. While I was watching it, I thought I would share with the audience here what I consider to be the ideal home loan process, and exactly how the appraisal fits in to that timeline.

1) Pre-application Consultation – Ideally, home loan applicants would sit down with a competent, licensed Mortgage Professional 6 months before they intend to enter the market. Many people have unique circumstances regarding credit, income, employment, etc., and 6 months is usually enough time to work through issues to present the best possible loan file to underwriting.

2) Gathering of Essentials – Before you apply, you should gather your last 30 days paystubs, 2 most recent bank statements, last 2 years Federal tax returns with w2s & 1099s, & most recent retirement statements. And, if applicable, any divorce decrees, award letters, child support orders, and last 2 years business tax returns for self-employed/business owners.

3) Fill out a Loan Application – When it’s time to fill out a loan application, do so with somebody you trust and get along with. You will be speaking with your loan officer a lot over the course of the coming weeks, so you might as well make sure that those conversations are with somebody you like and who is professional. They should clearly explain your loan terms, and all of the disclosures that need your signature so that you feel comfortable with the agreement you are entering into.

4) Behind the Scenes – This is where the real work starts. Your Loan Officer and his/her team will be verifying and documenting your income and assets, dissecting your credit report, pre-approving you through automated underwriting, ordering a preliminary title report and title insurance, and many other things that are just as exciting as they sound, but necessary. This prepares your file to be ideally what we call a “one touch” file in…

5) Underwriting – Despite the possibility of unexpected snafus, underwriting can still be a fairly smooth process if you have chosen the right Loan Officer to work with. Depending on underwriting turntimes, in a couple of days you should have a conditional approval. Think of this as the “to-do” list that you and your Loan Officer must complete before your loan documents can be drawn up.

6) Conditions – You will work with your Loan Officer to get all of the “to-dos” done and submitted to the underwriter. Once you are sure that all conditions can be satisfied, this is when you would order the…

7) APPRAISAL! – Your Loan Officer will order your appraisal through an Appraisal Management Company. Depending on the company used, and the demand for appraisals, this process will take a few days to a week. It has to be completed within 10 days, but it usually doesn’t take that long. Assuming the appraisal comes in at an acceptable value, the next step is to order the…

8 ) DOCS! HOORAY!! – The docs, or loan documents, are the paperwork you sign at closing. These include the final application, disclosures, the note, and sometimes your last 2 years tax returns need to be signed (if you e-filed the previous 2 years). Next step is…

9) FUNDING!!! – There will be some “prior-to-funding” conditions, but most of the time its standard escrow items. The escrow company sends all of the documents you signed at closing to the lender, and the lender reviews those documents for accuracy and completeness. If everything is ship-shape (which it should be if you are working with the right people), then you can…

10) MOVE IN!!!!! – Time to pay for pizza and beer in an attempt to trick your friends into helping you move.

And there you have it, the ideal home loan process. Each individual loan carries its own set of circumstances, so it isn’t out of the realm of possibility that your process might deviate from these 10 steps. However, if you select the right person to work with, you should have a good idea of what you are up against from the beginning.

Jason Hillard - @homeloan_ninja

Jason Hillard

If you have any questions about Real Estate financing in Oregon or Washington, or the home loan process in general, feel free to shoot me an email at obi-wan_shinobi@homeloanninjas.com or check out the wealth of information at http://www.homeloanninjas.com/! I started the site because I continue to be appalled by the complete lack of reliable information about home loans in the mainstream media. I sincerely hope it is a true resource that helps to educate everyone to become a better home loan consumer.

The Median Price Fallacy, by Brett Reichel, Brettreichel.com


Every month or so, the news media generates articles based on the latest statistics from various multiple listing services. In those articles they relate how “Median Prices” have either fallen or increased. What’s that mean? Well, a median price is one where it’s the middle price of all the sales in an area. So, let’s say we have a small city called Brettville. In Brettville last month, there were 15 sales. One sale was at $200,000, 7 were above $200,000 and 7 were below $200,000. Then the middle price, or median price for Brettville last month was $200,000.

Market analysts watch median prices for changes, and use them as an indicator of market price changes. However, median prices are not a good and clear indicator of an individual houses value, despite what most appraisal reports say today. In fact, when an appraiser uses changes in median prices as a justification for time adjustments to value, it is inaccurate analysis.

What’s a time adjustment? An appraiser uses comparable sales (comps) to determine their opinion of value on the property they are appraising. The appraiser makes dollar value adjustments on these sales when they compare them to the subject property . A “comp” might be 200 square feet bigger than the subject so the appraiser would adjust for that difference. One thing appraisers do commonly in today’s market is adjust for the difference in time between when a “comp” sold and the date of the appraisal. If a market is appreciating or depreciating at 1% a month, the appraiser would make an adjustment to the value of the comp in comparison to the subject to compensate for the difference in time.

It’s inaccurate analysis to use median price to justify this time adjustment. Why? Because median price could be affected by more cheap houses selling in an area or more expensive houses selling in a neighborhood. It could have zero to do with any change in value.

Another factor that makes median prices not appropriate for time adjustments is that different market value ranges could have different changes in value. In some of the markets, larger, move up style homes are depreciating faster than starter homes. Why? Because there are more first time home buyers in the market than move up buyers.

If you are not happy with your appraisal, review it, and read the comments. If the appraiser justifies the time adjustment with median prices, and not a matched pair analysis, you have a faulty appraisal, and valid grounds for a complaint. Don’t expect your lender to do this, your loan officer doesn’t understand, and the underwriter probably doesn’t either. But the appraiser knows what they are doing. They used to laugh at Realtors for doing this in an appreciating market. Now they’ve jumped on that bandwagon, too.

For More of Brett’s writing. Go to http://brettreichel.com

Why Are Appraisals So Bad?, by Brett Reichel, Brettreichel.com


Ok – so….blinding flash of the obvious here….Appraisals are serious problems for real estate transactions right now. Lawrence Yuen, the Chief Economist from the National Association of Realtors said this week “Home sales are being constrained by the twin problems of unnecessarily tight credit and a measurable level of contract cancellations from some appraisals not supporting prices negotiated between buyers and sellers”.

Many of you have experienced first hand the effects of a low real estate appraisal. Maybe you were denied the ability to refinance to a lower interest rate or worse yet, maybe you had a sale blow up on a home you were trying to purchase. Or, if you are a Realtor or lender, you’ve had clients you can’t help due to a low appraisal.

The appraisers say, that they are just reading the market. To a degree, that’s true. Nearly no one’s house is worth what it used to be, and with the market making that move downward, clearly there are going to be lower appraisals (another blinding flash of the obvious).

Mortgage guys(used in a gender neutral way here) and Realtors will blame the Home Valuation Code of Conduct (the HVCC, which has been recently replaced by a new law with similar restrictions). It’s true the HVCC has created some issues.

Personally, I can live with an accurate appraisal, even if it doesn’t give me my desired outcome. That’s life, appraisals should be as accurate as possible, and lenders need a good report to base their analysis of the collateral on. But, we aren’t getting accurate appraisals. Why?

Here are a few reasons:

First – the HVCC created a monster by leading most lenders to decide to order their appraisals through appraisal management companies. Many appraisal management companies require cheap and quick appraisals. The biggest national appraisal management companies that the “big 4″ lenders require the market to use, order appraisals from wherever they can get the cheapest fee’s and the quickest turn-around times. Little consideration is given to the qualifications of the appraiser, other than appropriate licensing, certification, insurance, and bonding. Sometimes, this means an apprasier is coming from two or three hours away from the subject property!

Why is this an issue? Because all real estate is local. Identical houses just blocks apart, sometimes across the street, can have significant differences in value because of market perceptions. Differences in schools, addresses, and many other factors create value differences in markets. If you are from two hours away, you probably don’t know all these nuances. It’s easy to miss that a buyer will pay $25,000 more for a house within certain elementary school boundaries, and that the boundary can be in the middle of the street. If the appraiser isn’t extremely familiar with the market they shouldn’t do the appraisal there, or they should learn and quantify these differences really quickly and complete an accurate report.

Second – appraisers have a tendency to forget markets are driven by psychology. In the stock market, the “efficient market theory” has been proven to be inaccurate. Psychology affects an illiquid investment like real estate even more. Too many appraisers approach appraisal from a technical viewpoint that ignores market psychology. The reason we need good appraisers is to quantify these nuances that make differences in value that a computer can’t pick up on. That’s why lenders rely less and less on “Automated Value Models” run through computers, and instead rely on an expert in the local market.

Third – seasonality is an issue. Most markets have seasons where houses don’t sell as readily. Maybe it’s too much snow, maybe too much heat, maybe it’s the holidays, but really these seasons affect sales prices, and this too should be quantified and reflected in reports.

Fourth – lender meddling is another issue. FannieMae and FreddieMac (the agencies)force repurchases of loans on to the big lenders, who force them on smaller lenders. Repurchasing loans creates huge losses for lenders. The agencies use flimsy excuses, like claiming valid appraisals are invalid, to force these repurchases, and scare the other lenders to death. Thus lenders get more conservative and pressure appraisers to bring appraisals in lower through their underwriting practices. The agencies create additional pressure on the appraiser through the use of the Form 1004 MC, which was created to analyze market conditions, but is really an ill-conceived form that can lead to poor analysis of the market by both underwriters and appraisers.

Fifth, incompetence is all too common in the appraisal profession. A recent appraisal report done in a suburb of Seattle indicated that the appraiser depreciated the value of the house at 1/2% a month because median prices dropped in that Multiple Listing Service area by 6% over the last twelve months. On the surface this would appear to be an appropriate decision. But, median prices are not the best indicator of values. Appraisers and underwriters will not accept median prices to determine appreciation, why would they be appropriate in a declining market? In fact, many appraisal text books identify this practice as wrong. We see this poor reasoning time and time again in appraisal reports and it is invalid analysis.

What do we do about this? Apply pressure to get accurate appraisal reports! Your loan officer might not be able to do much, but maybe someone higher up can. Make sure your complaints are based on sound data, and not just your emotional involvement in the transaction. If you are in the real estate or lending industry, learn more about appraisals so that you can know what to look for and give your clients better advice. In any event, we need to continue calling attention to this ongoing problem.

Brett Reichel’s Blog http://brettreichel.com

Pending Sales of U.S. Existing Homes Rose 3.5% in November, by Bob Willis, Bloomberg.com


The number of contracts to buy previously owned homes rose more than forecast in November, a sign sales are recovering following a post-tax credit plunge.

The index of pending resales increased 3.5 percent after jumping a record 10 percent in October, the National Association of Realtors said today in Washington. The median forecast in a Bloomberg News survey called for a 0.8 percent rise in November, and the gain was the fourth in five months. The group’s data go back to 2001.

Home demand is stabilizing after sales collapsed to a record low in July, as the effects of a tax incentive worth as much as $8,000 waned. A jobless rate hovering near 10 percent means foreclosures will remain elevated and any recovery in housing, the industry that precipitated the worst recession since the 1930s, will take time to develop.

The figures are “in line with an ongoing gradual pickup in existing-home sales in December,” Yelena Shulyatyeva, an economist at BNP Paribas in New York, said in an e-mail to clients. “Housing demand should continue its uneven recovery entering 2011 as housing oversupply should keep pushing housing prices down.”

A report today from the Labor Department showed claims for jobless benefits fell last week to the lowest level since July 2008, showing the labor market is improving heading into 2011. Filings decreased by 34,000 to 388,000 in the week ended Dec. 25, fewer than the lowest estimate of economists surveyed.

Business Barometer

Other figures showed the economy accelerated at the end of the year. The Institute for Supply Management-Chicago Inc.’sbusiness barometer jumped to 68.6 in December from 62.5 in the prior month. Readings greater than 50 signal expansion and the level was the highest since July 1988.

Stocks fluctuated between gains and losses after the reports. The Standard & Poor’s 500 Indexfell 0.1 percent to 1,258.23 at 11:17 a.m. in New York. The benchmark 10-year Treasury note declined, pushing up the yield to 3.39 percent from 3.35 percent late yesterday.

The projected increase in pending home sales was based on the median of 24 forecasts in the Bloomberg survey. Estimates ranged from a drop of 5 percent to a gain of 5 percent.

Two of four regions saw an increase, today’s report showed, led by an 18 percent jump in the West. Pending sales rose 1.8 percent in the Northeast. They fell 4.2 percent in the Midwest and 1.8 percent in the South.

November 2009

Compared with November 2009, pending sales in the U.S. were down 2.4 percent.

Even as the labor market is improving and manufacturing is growing, housing remains a weak link. NAR chief economist Lawrence Yun last week estimated there were about 4.5 million distressed properties that could potentially reach the market in coming months.

Average home prices as measured by the S&P/Case-Shiller indexes have begun dropping again after rising when the tax incentive was in effect. The group’s 20-city index fell 0.8 percent in October from a year earlier, the biggest year-on-year decline since December. It fell 1 percent from the prior month, and is down 30 percent from its July 2006 peak.

Reports earlier this month showed the housing market is stuck near recession levels. Housing permits fell in November to the third-lowest level on record, while starts rose for the first time in three months, the Commerce Department reported Dec. 16.

Home Sales

Sales of new and existing homes last month rose less than projected by the median forecast of economists surveyed by Bloomberg, reports from the Commerce Department and the National Association of Realtors showed last week. Existing home sales represent closings on the contracts captured by the pending sales gauge.

Hovnanian Enterprises Inc., the largest homebuilder in New Jersey, on Dec. 22 reported a fourth-quarter loss bigger than analysts expected as revenue fell 19 percent.

“The year can generally be described as one where we and the industry were bouncing along the bottom,” Chief Executive Officer Ara Hovnanian said on a conference call.

Even so, economists in the past two weeks have boosted projections for fourth-quarter growth, reflecting a pickup in consumer spending and passage of an $858 billion bill extending all Bush-era tax cuts for two years.

To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net

    Sales of U.S. New Homes Increased Again in September, by Bob Willis, Bloomberg.com


    Sales of new homes rose in September for a second month to a pace that signals the industry is struggling to overcome the effects of a jobless rate hovering near 10 percent.

    Purchases increased 6.6 percent to a 307,000 annual rate that exceeded the median forecast of economists surveyed by Bloomberg News, figures from the Commerce Department showed today in Washington. Demand is hovering near the record-low 282,000 reached in May.

    A lack of jobs is preventing Americans from gaining the confidence needed to buy, overshadowing declines in borrowing costs and prices that are making houses more affordable. At the same time, foreclosure moratoria at some banks, including JPMorgan Chase & Co., signal the industry will redouble efforts to tighten lending rules, which may depress housing even more.

    “These are still very low levels,” said Jim O’Sullivan, global chief economist at MF Global Ltd. in New York. “Ultimately, a significant recovery in housing will depend on a clear pickup in employment.”

    Another Commerce Department report today showed orders for non-military capital equipment excluding airplanes dropped in September, indicating gains in business investment will cool.

    Capital Goods Demand

    Bookings for such goods, including computers and machinery meant to last at least three years, fell 0.6 percent after a 4.8 percent gain in August that was smaller than previously estimated. Total orders climbed 3.3 percent last month, led by a doubling in aircraft demand.

    Stocks fell, snapping a five-day gain for the Standard & Poor’s 500 Index, on the durable goods report and investor speculation that steps taken by the Federal Reserve to shore up the economy will be gradual. The S&P 500 fell 0.5 percent to 1,179.8 at 10:14 a.m. in New York.

    Economists forecast new home sales would increase to a 300,000 annual pace from a 288,000 rate in August, according to the median of 73 survey projections. Estimates ranged from 270,000 to 330,000.

    The median price increased 3.3 percent from September 2009 to $223,800.

    Purchases rose in three of four regions, led by a 61 percent jump in the Midwest. Purchases dropped 9.9 percent in the West.

    Less Supply

    The supply of homes at the current sales rate fell to 8 months’ worth, down from 8.6 months in August. There were 204,000 new houses on the market at the end of September, the fewest since July 1968.

    Reports earlier this month showed the housing market is hovering at recession levels. Housing starts increased in September to an annual rate of 610,000, the highest since April, while building permits fell to the lowest level in more than a year, signaling construction will probably cool.

    Sales of existing homes, which now make up more than 90 percent of the market, increased by 10 percent to a 4.53 million rate in September, the National Association of Realtors said yesterday. The pace was still the third-lowest on record going back a decade.

    Home resales are tabulated when a contract is closed, while new-home sales are counted at the time an agreement is signed, making them a leading indicator of demand.

    Moratoria’s Influence

    Economists are debating the likely effect on new-home sales from the foreclosure moratoria and regulators’ probes into faulty paperwork. Most agree the moratoria pose a risk to housing sales as a whole.

    Michelle Meyer, a senior economist at Bank of America Merrill Lynch Global Research in New York, is among those who say the moratoria, by limiting the supply of existing homes, may lift demand for newly built houses in coming months.

    “There is a possibility there will be a shift in demand for new construction, at least in the short term,” she said.

    The U.S. central bank and other regulators are “intensively” examining financial firms’ home-foreclosure practices and expect preliminary findings next month, Fed Chairman Ben S. Bernanke said this week at a housing conference in Arlington, Virginia.

    Fed officials have signaled they may start another round of unconventional monetary easing at their next meeting Nov. 2-3 to try to spur the economic recovery.

    Homebuilders say labor-market conditions will be the biggest factor in spurring or delaying a recovery.

    “The U.S. economy needs to improve, and we’ve got to see some improvement in job creation,” Larry Sorsby , chief financial officer at Hovnanian Enterprises Inc., the largest homebuilder in New Jersey, said during an Oct. 7 conference call.

    To contact the reporter on this story: Bob Willis in Washington at bwillis@bloomberg.net

    To contact the editor responsible for this story: Christopher Wellisz at cwellisz@bloomberg.net