Best Opportunities for Buyers are Now!

Heads up folks, the great "window of opportunity" may be about to close.

The past few months have presented buyers with a great chance to snap up bargain homes. All at once, we have seen:-

• falling home prices, back at least to 2003 levels
• record low mortgage rates encouraged by Government intervention
• the introduction of an $8,000 First Time Buyer Tax Credit

The result has been a significant increase in activity in the past couple of months, though this has been largely focused on the sub-$200,000 price range, and in particular on foreclosures which have accounted for over 2/3 of the sales so far this year in Warren County. This activity has brought the sub-$200,000 inventory to less than 7 months' supply, which is now a balanced market and no longer a seller's market in this price range.

But here's where things stand as we move firmly into the heat of the summer:-

Home prices appear to have bottomed, though many over priced homes on the market still have to come down to more realistic levels. However, buyers waiting to see a further fundamental drop in sale pricing levels are likely to wait in vain.

Mortgage interest rates may be rising. Over the last week of May, the government's sale of 10 year Treasury Bills (to help finance the stimulus) resulted in yields increasing by 1/2%, and mortgage rates, which are closely linked to 10 Year Treasuries, also increased by almost 1/2%. The market experts believe this is just the start of an inevitable steady rise in rates as a natural response to the huge supply of money into the market and the resultant threat of inflation down the line.

The Tax Credit will end! If you are a first time buyer (defined as someone who has not owned a home during the previous 3 years), you also need to be aware that you have to complete your purchase by November 30, 2009 to qualify for the First Time Buyer Tax Credit. A recent government announcement allows the credit to be "anticipated" and used towards the downpayment, but this still all has to be completed by November 30. That's less than 5 months, and that time soon disappears when you are going through the process of looking for and buying a home.

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So now is the time to act, before you are looking over your shoulder wishing you had done so earlier. I can help you find a home, and talk you through the process if you are not familiar with it. Here's how to start . . .

• browse for listings on the market at my home search
• read more about the First Time Buyer Tax Credit
• read more about foreclosures
• ask me for an up to date foreclosure list for Warren County.
• or just send me an email or call me on (540) 671-1367

There are Alternatives to Foreclosure

Many homeowners are struggling to pay the mortgage, or see a problem looming with a substantial increase in their mortgage payment as it re-sets. They may have borrowed unwisely, or just been unlucky with reduced income through losing a job or other reasons.

These homeowners may be quite prepared to sell their home to solve the problem, but can't do so because the value of their home is less than the amount they owe. They are "upside down" on their mortgage.

But most of them think that foreclosure is inevitable, and the only possible outcome.
Not so . . .

There are several reasons why you should try to avoid foreclosure if at all possible . . . not only does a foreclosure do long term and substantial damage to your credit, but a foreclosure on your credit history can affect present and future employment, and security clearances even at lower levels.

If you are in this position and facing foreclosure, don't assume that there is no alternative. The sooner you act, the greater the chance of working out a way forward. There are two main options to pursue, but note that they both require that you are genuinely suffering hardship and do not have the means to rectify the situation from your own resources.

Mortgage Modification. Approach your mortgage lender to see if they are able to modify your mortgage terms, by refinancing at lower interest rates or providing other temporary or longer-term relief. Don't assume they won't listen - lenders are increasingly aware of the benefits of helping to prevent foreclosure if they see the opportunity. Of course, the proposal must be viable. The government also announced a scheme a few weeks ago which, in certain cases, will compel lenders to modify mortgages, and in doing so provided a framework which others may wish to work with.

Short Sale. A short sale is the sale of a home where the net sale proceeds are insufficient to clear the mortgage(s), and the owner is unable to make up the shortfall from his own resources. The mortgage lender therefore cooperates with the sale and writes off the shortfall. Mortgage lenders are becoming very cooperative towards short sales, because if the only alternative is foreclosure, there are several reasons why they will lose less and benefit more from an agreed short sale. While a short sale will affect your credit, the impact is significantly less and for a shorter period than a foreclosure, and should not affect employment or security clearance issues.

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I have recently undertaken specialized training in the issues surrounding distressed property ownership, and have achieved the CDPE designation (Certified Distressed Property Expert). This leaves me very well placed to advise you and help you through these difficult times, and I encourage you to contact me to let me help you.

If you live in or around Warren County, VA, and would like to talk it through, please give me a call on (540) 671-1367 or send me an email with some contact points.

Market Update

We have been stuck in a range of around 25 to 30 sales per month for some time now in Front Royal/Warren County, but have seen the median sale price steadily fall due to the high level of foreclosures. Of the 27 sales in February, 22 (81%) were foreclosures. To put it another way, only 5 homes in regular private ownership sold in February, out of around 350 privately owned homes on the market. So far this year just 5 homes have sold for over $300k, and none over $400k.

The first chart shows active listings, sales, and months supply over the past 3 years. Click on the chart for a larger image.

The second chart illustrates the falling median sale price (green) and the Days on Market (purple) for homes that sold. Click on the chart for a larger image.

Confidence remains the principal obstacle to an improving market, and much of that depends on the general economy over the coming months. However there is no doubt that an improvement in activity will not bring about an increase in prices for a long time (my guess is 3 or 4 years). Why? Because there is still a significant over-supply of homes on the market (nearly 16 months supply), along with a large reserve of wannabe sellers waiting in the wings for a better opportunity to sell, who have either given up over the past 12 months, or who haven't yet put their home on the market.

Pricing of listings remains absolutely paramount. Most of the foreclosure companies get it right, which is why their homes sell. Most private sellers are still getting it wrong, as they cannot come to terms with the price necessary to achieve a sale.

Government Assistance for Homeowners

The government yesterday announced their long-anticipated initiative called the Homeowner Affordability and Stability Plan. If you are interested, click the link to read the White House Fact Sheet. The plan aims to:
a) stem the flow of foreclosures with a loan modification plan
b) help those who owe more than their home is worth, to refinance
c) ensure low mortgage rates for the foreseeable future

The two main problems with the initiative are that it only addresses “conforming” mortgages, and while it will no doubt help many deserving families, it will also reward many others who have in the past borrowed unwisely or beyond their means. It is already causing a lot of resentment from among the majority of homeowners who bought wisely and within their means, and pay their mortgage every month.

As always, the devil will be in the detail, and we will learn much more when formal Guidelines to Lenders are issued March 4. Meantime, here are the main features of the initiative:

Mortgage Modification Plan (expected to cover 3 to 4 million borrowers)
- owner-occupiers only
- conforming loans only, where repayments are more than 31% of gross income
- mortgage may be up to date, or in arrears
- overall, repayments will be reduced to 31% of gross income by reducing interest rate (partially subsidized by the government)
- interest rate reduction for 5 years, after which it will be phased back to “regular rate”
- incentive to the borrower of $1,000 reduction in principal for each year that repayments are made on time, for up to 5 years
- also incentives to loan servicers
- debt counseling a condition, if current total debt servicing is 55% or more of monthly income
- participation by lenders is voluntary, but compulsory for those who receive TARP money
- lenders may also achieve the repayment reductions by reducing the amount owed, but this seems less likely to be done

Refinance Assistance (expected to cover 4 to 5 million borrowers)
- owner-occupiers only, with conforming loans
- first mortgage cannot exceed 105% of current value of the home
- there can be an existing second mortgage, but that lender will need to agree to remain “second in line”
- must have satisfactory payment record, and payments must be current for the 3 months prior to entering the scheme
- new mortgage must be a fixed rate over 15 or 30 years, with no prepayment penalties or balloon repayment
- the portion of the new mortgage in excess of the home’s current value must remain unsecured

Additional Support for Freddie Mac and Fannie Mae
- government doubling its stake from $200bn to $400bn
- designed to increase confidence and promote stability and liquidity
- should ensure sustained low mortgage rates for the foreseeable future

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There are a lot of questions unanswered, and I am sure the pundits will be picking everything apart over the coming days. But here are my initial thoughts:

- the concept that this "rewards bad behavior" has to be balanced with the overall benefits to be gained by reducing foreclosures - if that is achieved. Foreclosures devalue all homes in a neighborhood, so this will hopefully provide some benefits to everyone.

- a "conforming loan" was by definiton no more than 80% of the value of the home when it was bought (or when refinanced). The limitation that the loan must now be no more than 105% of the current value would work if house prices had only dropped by some 25%. But in Warren County, Virginia, we have seen sharper declines than that. There will be a lot of people who bought at the peak, who will not meet these criteria.

- we have seen a lot of inconsistency between lenders in how they handle short sales or potential foreclosures. Some won't talk until the mortgage is 3 months in arrears (encouraging owners to not pay!), others won't talk until the home has been on the market for at least 3 months. My hope is that the "Guidelines to Lenders" will provide a standard set of procedures which may encourage all lenders to behave more consistently even with loans that fall outside those guidelines. We'll see . . .

Catching up over the past 18 months

Well, I'm ashamed to admit that it's almost 18 months since I last posted to my blog, but I am committed to making up for that with regular posts from here on to inform readers about the local market in and around Warren County, Virginia, and other local and real estate issues.

So to start to catch up, I looked back to where we were in August 2007 when I last posted. Wow! what a dramatic sea-change we have seen. Where were we then? In contrast to what many of my colleagues and the media in general were saying at the time, I was stressing how the market was drying up. I was quoting 40 to 55 sales per month (down 50% from peak) in Warren County, and a 12 month supply of homes. We had just begun to see the initial "credit crisis" with problems with some mortgage lenders, but little did any of us anticipate what was yet to come.

Since then, the housing market has steadily dwindled, and more rapidly so over the past 9 months or so. Front Royal/Warren County has for some time been seeing only 25 to 35 home sales per month, with an overall supply of about 18 months. Half of those sales are typically foreclosures, with a lot more being "short sales" where the bank is losing money and cooperating with a voluntary sale by the owner without foreclosing.

The backdrop to all this has been the implosion of the "sub-prime" mortgage market, leading to problems with securitization of mortgages in the secondary market. The tightening of credit, and subsequently the illiquidity and failure of several financial institutions, has led to a global economic crisis which governments around the world are fighting to underpin, with far reaching support and stimulus packages (such as the "TARP" in the US) including huge national investments in banks. At the same time, a few weeks ago it was confirmed what anyone already knew unless they were in denial - that the USA was in a recession which had officially started in December 2007.

The fallout from all this has been a rapid decline in consumer confidence, with increasing job losses as employers pare their costs to meet falling demand, and a fear of the widespread talk of a another depression like the 1930's.

House prices in this area (those that sell, not the "hopes and aspirations" of some of the asking prices) are now back close to 2003 levels, and with interest rates at record lows, there are some great opportunities for qualified buyers. Of course the opposite can be said for sellers - the chances are that anyone who bought a home from late 2003 onwards with 100% or near-100% finance, or who refinanced a substantial part of their equity since then, is unable to sell that home and clear their mortgage from the net proceeds.

The past 18 months has seen a dramatic and traumatic turnaround in fortunes. In my coming posts, I will try to make a little more sense of how it impacts the housing market locally.