A Few Pundits Quick At The Trigger But ...

Over the past month, government officials and other industry pundits (C.A.R. and National Association of Realtors) have been trying to spin a positive story from the steady stream of statistics on the housing market. As arm-chair economists it becomes difficult sometimes to sort out the truth from the chafe. I understand that a significant part of our market economy is built upon "public perception" which oftentimes has little factual basis or support. Furthermore, these agencies and groups emphasize a positive strand amongst a steady stream of "bad" news in an attempt to buoy the market. But consumers "in the market" need to avoid the temptation of stopping at the raw data (statistics), and connect the "dots" which consist of the factual plot points when evaluating your buying or selling decisions.

Reported today in the Los Angeles Times Business section is that "home sales fell again in May." The story reported that sales were down 3.6% from the same month last year. However, last week C.A.R. and other pundits reported that May sales figures were up for the month 9.2% as compared to April's sales figures. So what is the real story behind the numbers - increase or decrease? Well not so fast ...

The real story is not in the sales statistics cited above, but the relationship and affect a series of other numbers provided at the end of the article have on the housing market. Inventory levels (number of homes on the market) fell 3.5% in May, and that given the current sales volume it will take 9.6 months to sell this inventory. The historic average inventory level for supply is approximately six months. Higher inventory levels result in lower median home prices; while lower inventory levels usually cause an increase in median home prices.

Other information that affects inventory levels which in turn drives both median prices and sales figures are the developments in the foreclosure markets. Last month Data Quick reported that there were over 100,000 homes in foreclosure in Southern California. In the Times article the Federal Housing Finance Agency reported mortgage delinquencies on the rise - the number of borrowers at least 60 days behind on payments rose to 1.1 million from 926,000 in the 4th quarter of last year. This represents a 3.62% increase on late pays nationwide. This will result in another wave of foreclosures and short sales going to market over the short term - four to twelve months. This pent up supply of homes will be in addition to the homes in foreclosure subject to the "moratorium" in place. The current moratorium prevents banks and REO service companies from marketing existing foreclosure properties. How will the Feds manipulate the market and slow down the tidal wave of foreclosures which may dramatically affect the inventory levels and price points at the lower end of the market? This is a significant plot point as it relates to the lower end of the market - which recently has made up 60% of the total home sales in Southern California.

The best long term medicine may be tough to swallow in the short term ... the Feds need to let the market place resolve the mess. This means that the moratorium should be lifted allowing REO servicing companies to get the existing foreclosures sold. Turning over the existing foreclosure backlog will create pricing pressure in the short term; however, it will ultimately benefit the real estate service industry, construction, retailers supporting home improvement, manufacturers, lenders, and the financial markets (and for that matter all supporting service industries and markets). In addition, new buyers will benefit from a lower affordability index and entry into homeownership. The other tangible benefit will be that by the Feds loosing the reins on the moratorium they will prevent a future whiplash that potentially will create more damage than any short term pain.

Specifically, as the economy continues to soften in 2009 (look at the unemployment figures), more and more homeowners will get behind in payments which may continue to increase the number of short sales and foreclosures on the market (thus affecting inventory levels, etc.). A steady stream over the short term may be easier for the market to handle verses creating, through a series of moratoriums, "pent up" inventory that may get unleashed on the market all at once. Another ripple effect to the moratorium is that REO service companies have allegedly been told that the moratorium will be lifted in Sept - the problem with this plan is that by the time tenants are evicted from the property, the holiday season will be upon us and that is typically when the market activity drops significantly (less buyers in the market); thus causing vacant foreclosure homes sitting idly on the market further creating price erosion. As with many manipulated market plans or government regulations, the solutions oftentimes create situations worse than the problems intended to solve. This may be the case with the proposed plans and actions currently being hatched in the real estate industry these days.

Let me know your take on these developments. Otherwise, if you are looking to buy or sell real estate in Southern California look us up at: www.coastalcommunityhomes.com.

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Real Estate: 30 year fixed-rate mortgages averaged 5.38% this week, down from 5.59% last week and 6.42% last year. Fueling 1st time buyers.

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Mortgage Fraud Crack Down On High Gear

Although the topic of mortgage fraud may not be everyone's dinner table conversation or the hot topic of the day, but the Feds are pouring resources into mortgage fraud crackdowns and oversight. Various federal agencies such as the FBI, Justice Department, Secret Service and the US Post Office have received a combined $500 million in new funding to investigate and convict individuals and companies engaging in mortgage fraud. Could this amount to one of many knee jerk reactions to a meltdown in various financing and real estate markets? What do you think?

With every catastrophic event politicians are motivated to pass either a series of funding initiatives or bills in reaction or over reaction to the event. Taken by itself there always seems to be good arguments supporting such initiatives; however, over time the cycle swings either towards to much government intervention or towards more market control. Striking a healthy balance between government oversight and to much government intervention remains an enigma for our country to manage. In the current recession, we are trending towards significant government intervention that offers significant bailout funds for large corporations and government agencies; however, the homeowner remains left with few options. So when a person is faced with refinancing a problem loan or acquiring a home due to significant underwriting changes adopted over the past 18 months, application fraud becomes a tangible issue. I'm not trying to justify the fraud or any semblance of fraud; however, maybe we should look to the core of the problem and attempt to solve it. So what is the problem?

Well one needs to look at supply and demand forces in the market. Buyers looking for homes or owners looking for new loans look to financial institutions for solutions. The channel of brokers, bankers and financial institutions profit by funding loans. So look at the type of loan programs offered and set achievable underwriting criteria that provides a competitive flow of funds into the market. Then motivate the channel of mortgage brokers, bankers and financing companies to fund loans with borrowers that achieve realistic underwriting goals at rates and terms that will keep the market from imploding in the next real estate cycle. For example providing 100% or 105% loans for purchase or refinances is only inviting fraud and future market busts. At the same time forcing a borrower to have a perfect credit file and still delay funding (so that 30 and 60 day loan locks are expiring) by creating a bureaucratic paper nightmare is not the solution either. Some where in this mess is a solution that must be found balancing the needs of the homeowner by providing real solutions (that actually find their way to the borrower) with the needs of the market, financial institutions and Wall Street. Unfortunately until the core of the problem is addressed this pendulum will continue to sway in the winds of political favor offering nothing but false promises of solutions for troubled homeowners and financial institutions alike.

I would be interested in your feedback. Let me know what you think. For additional information on the status of the market visit us at www.coastalcommunityhomes.com.

Economist cites median home prices to keep falling. Lower end of market will continue to show life assuming first time homebuyers get $$$.

Fraud enjoys confusion. Regulators advocating a simplification of the mortgage transaction process.