Foreclosures: More Than We Thought

NPR had a story this morning on their show, Morning Edition, about how foreclosures are counted.

It turns out that they've been undercounted in rural counties by RealtyTrac, the company everyone's been using for these statistics.

HUD is now responsible for counting these, at least temporarily. I'll be digging into how we look locally with these new numbers.

Disaster Prone Areas

For those of you who are wondering what's become of me, I've taken a break to help with some of the recovery efforts for Ike in the gulf coast. I worked initially in Louisiana and am now in Houston. It's been quite an experience!

When Katrina hit New Orleans it started a conversation about that city and whether it should even be rebuilt where it currently sits because of its vulnerability to flooding and hurricanes. But after a couple of weeks down here, I think the question is bigger than that.

Those who live in the most low-lying areas, who are most vulnerable to the ravages of nature, are very often the poorest. And, so many of the same people living between New Orleans and Houston have been hit by Katrina, Rita, Gustav and Ike. Who knows what comes next!

The local, state and federal governments rush in to help in these situations, which is what should happen. But it's a costly exercise. And, I wonder if it wouldn't be more prudent to simply offer many of these people incentives to move away from the areas of greatest danger. Since many of these individuals are in tough financial circumstances, some of them may welcome the chance for a fresh start elsewhere. Certainly I heard many express that they didn't think they could handle any more hurricanes!

And, maybe there are some areas where we should have a new designation. There are lands protected from development for all kinds of reasons. Why not some kind of "disaster prone" designation? I wouldn't say no one could build there because I don't want to tell people what to do. But they'd sign a waiver of any right to assistance, including government flood insurance, if they decided to build there.

Right now this seems like another case of working on eliminating the effects of the problem without ever getting at the root cause. It seems to me we're smart enough to do better!

VA Inspection is Not A Home Inspection

Buyer clients of mine were advised this week by their lender that they did not need to do a pre-offer home inspection on a foreclosure listing because, since they are getting a VA loan, the inspection is automatically part of what they get. Voila! Save money!

Bad lender!! Unfortunately, he doesn't quite have the whole picture.

When you get either a VA or FHA mortgage, as part of the appraisal, there is something of an inspection done. What these entities are doing is making sure there are no significant issues with the home that will cause the buyer to have to come up with money for repairs in the first year or two of home ownership. It's a worthy goal. But the inspection has gotten increasingly cursory over the years. And, things that the VA or FHA consider to be a problem, may in fact be things that are not a problem at all. (I've seen deals fall apart over these things!)

A real home inspection takes around 3 hours, sometimes longer, depending on the home. Each system will be tested. The home will be evaluated for water issues. The inspector will go into the attic to look for leaks. Better yet, the potential buyer gets a better understanding of what they're buying, how the systems work and what they'll need to do to maintain their home in good condition.

The VA or FHA appraisal doesn't come close to performing any of these functions.

But there's an even bigger problem here. The lender assured my clients that if they find anything significant, they'll simply increase the size of the loan so they can immediately have it fixed. So, no worries about having to walk away from the contract and lose their earnest money deposit to the bank.

So, even if the appraisal says the home is worth only the contract price and the place needs a brand new roof, no problem loaning them the extra money? A lending institution, given our current situation is willing to loan over 100% of the value of the property to first time home buyers? (Yes, this is going to be a no money down transaction.) And, they'll say this up front without even limiting the amount? If the required repairs bring that number to 110% of the value of the home, are they still going to approve the loan?

I think the answer is "no" and I think they've badly mislead my clients. Lending institutions should do what they do best, make lending decision. (OK, that may not be what most of them do best any more but we're giving them the benefit of the doubt!)

Lending institutions should not be offering advice that puts my clients at risk for losing their earnest money.

Self-contained?

A long, long time ago in what surely must have been an alternative universe, a government official told us that the mortgage crisis was self-contained. At the time it struck me as odd. It seemed to indicate a belief that the housing market was its own little corner of the economy, without much impact on the rest of our economy or our lives.

I haven't heard anyone use that phrase in awhile.

Now that we're facing a $700 billion bail out of the financial industry, here's the real problem with those earlier statements. First of all, they show a shocking lack of understanding of the importance of real estate in our economy. (By people who are paid a lot to know better!)

Second, the phrase, and the accompanying blather, was used to justify why there was no need to help out struggling home owners who were losing their homes to foreclosure.

And, so the hole got bigger, more people lost their homes. And, what do you know, it turns out that when enough people lose their homes, banks lose money! If enough homes get lost and enough banks get hurt, then there is reason for the government to step in and help.

I'm going to suggest that if the government had been willing to back stop struggling homeowners two years ago, we'd never been looking at this absurd $700 billion price tag now.

If I sound disgusted today, I am. The people who should have known better sat on their hands and watched this unfold. And, even now, as the bail out is being debated, there's a huge amount of push back about helping homeowners. Mind you this is the case even though I've heard several interviews with financial efforts admitting that foreclosures are really the root of the whole problem. So, we're going to put up $700 billion without addressing the root cause. Does this make sense to anyone?

Someone's going to have to help me make sense of this one! Feel free to share your wisdom!

A New Chapter

I kicked this off in the real estate community last week. And, today I'm announcing it publicly here.

Piedmont Property Management is now open for business! The business initially serves Fauquier, Culpeper and Rappahannock Counties.

I started my own property management firm for the same reason many entrepreneurs start a business. There was clearly a need. I heard so many complaints about the existing options that I became convinced there was an opportunity to do it better.

And, you, my client will be the ones who decide whether I manage to pull that off!

So for those of you who have decided it might be smarter to rent the house out and wait for a better market to sell, let me know! I'll be happy to tell you all about what I do and how I do it!

Don't look for a lot of posts here regarding property management. This will still be devoted to the buying and selling of real estate. And, in case you're wondering, yes, I still do that! In fact, it's time to go write an offer!

Final August Numbers

I know you've been hearing nothing but doom and gloom from the financial markets for the last week. And, it does feel like the sky is falling some days.

But the August numbers actually show lots of reasons for optimism. Almost across the board, by any measure of activity, the numbers look much, much better than they did a year ago.

In Culpeper, the inventory is at 676, down from 814 homes for sale at this time a year ago. Meanwhile, closed sales jumped from 32 to 64. Even new listings coming on the market has fallen from 154 to 121.

In Fauquier the story is much the same. Inventory is at 730 now vs. 823 a year ago. While the sales are still relatively flat, they have increased from 57 to 60.

Prince William has seen dramatic improvements, year over year. Inventory levels right now are at 4835. A year ago there were 5654 homes for sale. Sales have doubled from 419 to 838. The only negative indicator here is that new listings continue to come on the market at a fast clip.  There were 1300 new listings in August. But a year ago there were 1530.

Rappahannock even showed some dramatic results with 5 sales last month compared to 2 a year ago. Inventory, however, remains close to it's highest point (August of last year) at 82 homes for sale.

While activity is very good, prices show no signs of recovery right now. And, I believe you'll continue to see prices flat or falling for at least the next six months. But banks are getting their listings sold. They're not doing it by getting them in great shape. They're doing it by dramatically discounting price.

If you're a seller, that's your dilemna. Do you drop your price to compete with the banks? Can you afford to wait until all the foreclosures work their way through the system, potentially at least another year? Do you rent it out and hope for a better market at the end of the lease?

Whatever you decide, whatever your situation, it's good to hear a little good news this week!

To Inspect or Not

Clients I'm working with who are trying to buy a home settled on the one they want this week. It's a foreclosure and, as with most foreclosure properties, it's sold as is. That means we can't make the offer contingent on a home inspection or a radon inspection.

Normally, what I advise clients to do in this situation is to have a home inspection done before writing an offer. But in this case the bank already had several offers and gave us a deadline if we wanted to submit an offer. We had less than 20 hours to do so.

It's impossible to get a radon inspection in that time. And, it's practically impossible to get a home inspection done that quickly. In the end, my clients decided to pass on writing an offer on this home.

Here's my dilemna. I advised them that it's certainly not prudent to buy a home without an inspection. And, that's true. But the deeper truth is that I'd have put an offer on this home without a home inspection. It's a pretty new home, built in 2005. I see nothing that worries me, nothing to suggest water or pest issues, my two biggest worries. I am, by nature, less risk averse than your average individual.  And, so, I'd have jumped in and made that offer.

But, it seems like the wrong advice to give to clients. First of all, let's all admit that we live in a litigious society. God forbid something seriously wrong shows up after they've moved in. These are very, very nice people. But that doesn't mean they wouldn't sue me for giving them bad advice and costing them a lot of money. And, that does impact what I say.

I also try very, very hard to never push my own personal likes, dislikes and personal biases on my clients. So, just because I'm willing to take that risk doesn't mean I assume that my clients have that same willingness to take risks with what may be their largest investment.

I'll admit that I remain a little torn about this. It's possible this would have been a good home for them. And I'll never know whether my advice was right or wrong. Don't you hate that?!

The Bailout

I've waited a few days to talk about the Fannie Mae and Freddie Mac bailout. There are two reasons for that. First of all, I don't think we yet know what the effects are really going to be. Secondly, I'd posted when the legislation was passed in July that I was uncomfortable with the idea but didn't have a better one.

Clearly the markets told us yesterday that they think this is a swell idea. And, from their perspective you can certainly see why. Risks for investors have been reduced. Instead, risks for taxpayers have increased. (Hmmm, aren't investors also taxpayers?)

As a taxpayer, I remain skeptical about this use of my money.

As someone who makes a living in the real estate industry, it gladdened my heart to see mortgage interest rates drop a full half percent yesterday.

Long term, the model of Fannie Mae and Freddie Mac doesn't seem to have served us well. Whether some tinkering with the mechanisms can fix it or whether it needs to be scrapped completely will be debated over the next year.

The other debate will be over whether we, as a society, want to make home ownership a high priority. I suspect most are still in favor of this, even given our current difficulties. But I think a lively debate over how we allocate resources and what we believe in, is always a good thing!

The Right House

A client asked a question this week that I've heard before. And, I thought it made for a good blog post. She asked:

How many homes do most people look at before they find the right one?

The answer, as in so many things, is that everyone is different. I've shown someone 1 house and that's the one they bought. I've also show someone over 30 houses before they decided not to move after all! And, I've even had someone buy a home without seeing it until the walk through on the day of settlement.

Nationally, people are physically looking at fewer houses these days before they buy one. The last statistics I saw said the average is 6 homes. The technology available today allows buyers to weed out a lot of homes online without ever stepping foot in them.

Usually it comes down to a couple of houses. And, often there's some dissension in a family over which house to choose. Here's a little guidance that may help.

First of all, if I've done my job, you're not going to go wrong buying either of your top choices.

And, I've never seen anyone unhappy because of that choice.

They may be unhappy over the commute, they may not like the neighbors, they may have over estimated their willingness to work on home improvements on weekends. If they were crazy enough to skip a home inspection, they may be unhappy about what they found! And, if your marriage is already in trouble, the fight over the right house definitely isn't going to improve the situation!

Most people, if they are happy, well-adjusted people, will continue to be happy, well-adjusted people, whichever home they move into.

I'll admit to a bias here. We lived in Miami, Florida when Hurricane Andrew hit in 1992. Being less than half a mile from the water we got pretty much wiped out. Most of us give lip service about knowing that our "stuff" isn't really all that important. I got the chance to test that theory!

So, do your homework. Research the home and the neighborhood. Make absolutely sure you're comfortable with how much you're spending on the house. Then, listen to your gut, work with your family to get buy in and move confidently forward.

A year from now, whichever house you chose, your chances of living happily ever after are pretty good!

Summer Price Spikes

Slate has a great new piece explaining why housing prices are higher in the summer.

Just the thing to make those buyers just getting ready to buy now feel good about waiting!

Poplar Springs Inn & Spa

I'm always interested in highlighting local businesses that are doing good things on the green front. And recently I had the opportunity to sit down with two staff members from Poplar Springs Inn & Spa.

Anita Carshult, Director of Special Events and Sarah Stanton, Inn & Spa Manager, were kind enough to take some time to tell me about some of the exciting initiatives under way at Poplar Springs.

First of all, I'm very excited by their efforts to incorporate more local food into their menus. Local farms are providing seasonal produce, beef, poultry, cheese and eggs. Lavendar froma local farm is being used in both the restaurant and spa. Local game is served in the restaurant during the fall and winter. Work is under way on an herb garden on the property. The herbs would be used in both the restaurant and spa. And plans are in the works for a vineyard on the property!

The restaurant currently features many local Virginia wines. And they have recently added biodynamic wines as well as some organic vodkas.

The spa is also incorporating local grape skins in some of their products. And their signature treatments are all handmade on site.

On the energy front, they've installed a geothermal system for heating and cooling. LED candles are beiong used in the spa and restaurant.

They are working on reducing water usage by reducing the amount of linens used in the spa.

And I'm also happy to report that they're working to encourage local people to spend more time with them. They've added a new light fare menu available in the lounge Thursday through Sunday from 3:30 to closing. No jackets are required, no 5 course meals, just a menu of light, delicious foods a great selection of adult beverages and the chance to unwind in beautiful surroundings.

They're also added dinner on Sundays from 5:30 to 8:30. Many of you may already have tried their wonderful Sunday brunch from 11 a.m. to 2:30 p.m.

And, they've been doing Date Nights this summer. For a discounted price you get a three course dinner, bottle of wine and an outdoor movie projected on the barn. The cost is $55 on Friday nights and $65 on Saturdays.

I'm looking forward to hearing more about their plans for green initiatives and hope to see many of you in the lounge one evening, relaxing after work!

Market Impressions

I promised a sneak peak at the August numbers. And, overall, they're looking good. The number of closed sales looks like it stayed pretty close to July numbers. But those were good numbers overall. Inventory seems to have dropped significantly in most markets. Final numbers will be out next week and I'll have a more detailed analysis then.

And, while I'm giving you impressions, here are a few things that hit me after showing dozens of homes over the weekend.

• The showing instructions provided for many of the real estate agents were often wrong. There were a lot of people in homes where the listing agent had said they were vacant or out of town. Surprises are never a good thing!
• Overall, foreclosures are priced significantly below the rest of the market. There are a few banks who still aren't getting it. But most have priced these homes to move! However, most foreclosures will require, at a minimum new paint and carpet throughout the house.
• Short sale pricing is all over the map. And, many of the properties where the bank has already approved the short sale price are going to actually sell for much less. Or, the banks will not accept the offers and it will end up in foreclosure (at a much lower price).
• There were a substantial number of short sales where it was clear an offer had disappeared after buyers gave in to frustration when the bank took too long to make a decision. I suspect the real surprise is that there weren't more of those!
• For the first time in a very long time, we ran into other agents with clients showing the same homes at about the same time. That's got to be a good sign!

Buyer Avoidance

I'm fully booked this weekend showing properties to potential buyers.

Great news, right?

Here's the thing, out of all those buyers, not one of them wants to see anything in Fauquier, Culpeper, Rappahannock or Warren Counties.

Next week I'm going to do a very, very specific analysis between a few houses in comparable subdivisions in Fauquier, Prince William and Loudon counties. I think the price comparisons will be surprising to a lot of people.

Other Coming Attractions Next Week:

• Early Peek at August Numbers
• Poplar Springs Efforts to Go Green
• Re-inventing Warrenton

Have a wonderful Labor Day weekend!

Just Doin' My Job!

It's been a strange week.

I keep getting extreme gratitude from people for doing my job!

A woman thanked me for showing her a rental. The other agents she'd talked to hadn't wanted to show her what she wanted to see! And, she was unsure about renting vs. buying and they didn't want to have that conversation either, except to tell her it's a great time to buy.

I've gotten thanked repeatedly for returning phone calls and e-mails promptly.

I got thanked by a seller for letting him know I thought we should lower the price on his listing.

I got thanked by someone in our office for turning in paperwork properly filled out, in a timely fashion and in the right format.

In short, I'm being thanked repeatedly for just doing my job!

To which, I can only reply... thank you to all of my competition. Apparently you're all making me look good!

Bank Logic

As I continue to hit my head against the wall, the wall now known as banks, it's good to see it's not just me! Another blogger tells a story of the frustration out there.

And, in a related development, apparently an asset manager for a major bank was on a news program this week saying that the banks are deliberately slowing things down. This gentleman said that the purpose of doing this was to spread out the losses over time so that their numbers don't look as bad.

Well, it's the first rational explanation I've heard for the banks behavior. But I'd argue that it's only rational on its surfact. As soon as you begin to think about this a little more deeply you have to question that strategy.

Pricing will not, can not, recover until the foreclosure and short sale inventory gets cleared out. The longer that takes, the more prices fall. So, the properties that the bank moves to the back of their list will simply be worth a whole lot less, thus increasing their losses. Yes, they may be more spread out, but if the bottom line impact is worse, what have they gained?

Clearly I don't think like a banker!

Getting A Mortgage After Foreclosure

With more and more families locally going through foreclosures or short sales, the question is going to become, when can they get another mortgage?

Well, we finally have some guidelines from Fannie Mae, Freddie Mac, FHA and VA. Courtesy of Beth Goodwin at First County Mortgage, here's what they look like:

You can also reach Beth on her e-mail at beth.goodwin@firstcountymortgage.com

Buyers: Get Your Money!

I've got a lot more information for those of you who are either contemplating buying your first house, or who recently bought one. This tax credit is retroactive back to April 9th of this year!

If you've got additional questions on any of this, please get in touch!

• The amount of the federal tax credit is for 10% of the cost of the home, up to a maximum credit of $7,500. In essence, this is an interest-free loan that enables consumers to receive a tax credit on a dollar-for-dollar basis on their personal income tax return in the calendar year following the year of closing on their home. They begin paying the tax credit back the year after that and make equal installments during the next 15 years. If the homeowner sells the home at any point during the 15-year payback period, then the remaining amount is recaptured, unless they sell the home at a loss, at which point the balance is forgiven.
  • e.g., If a home costs $65,000, the allowable credit would be $6,500. If a home costs $120,000, then the allowable credit would be $7,500.
• Eligibility is for first-time homebuyers only. In this case, a first-time homebuyer is defined as an individual who has not owned a primary home at any time during the past three years, but who may have done so previously. Although certain income limits do apply, the amount of the credit is the same for all taxpayers, married or single.
• Individuals whose Form 1040 filing status is single (or head of household) are eligible for the tax credit if their income is no more than $75,000. Individuals who file a joint return may have no more than $150,000 in income.
• Individuals with incomes between $75,001 and $94,999 (single) or $150,001 and $169,999 (joint returns) are eligible for a partial tax credit.
• Individuals with incomes greater than $95,000 (single) or $170,000 (joint return) are not eligible for this tax credit.
• The federal income credit can be claimed on one’s individual or joint tax return for the purchase of any single-family home between April 9, 2008 through July 1, 2009. Individuals should consult a professional tax advisor for exact tax calculations.
  • e.g., If an individual’s actual tax liability was $5,000, then after the tax credit is applied the purchaser would receive a total refund of $2,500. The refundable amount is the difference between the $7,500 tax credit and the amount of one’s tax liability.
  • e.g., If an individual’s actual tax refund was $2,000, then after the tax credit is applied the purchaser would receive a total refund of $9,500.
• This tax credit is required to be repaid without interest in equal installments of 6.67% of the total credit each year for 15 years beginning the year after the tax credit is claimed.
  • e.g., If a homebuyer claims the $7,500 credit in 2009 on their federal income tax return for a closing that occurred in 2008, then the credit is received in 2009, so repayment begins in 2010 with an annual repayment amount of approximately $500 a year.

Local Farmers Markets

As you're making plans for your weekend, don't forget to stop by one of the local farmers markets. Here's a list of some that I've been frequenting:

Nokesville Farmer's Market - I just discovered this one but already love it. Hours are 8 to noon on Saturdays. They take "local" seriously at this one. All vendors are from Prince William or Fauquier Counties.

Warrenton Farmer's Market - Great excuse to get into old town Warrenton. This is their 33rd year. See them downtown Saturday's from 7 a.m. to noon or on Wednesdays out on Lee Hwy from 7 a.m. until 1.

Culpeper Farmer's Market - At the corner of Main and Commerce every Saturday from 7:30 to noon. I've been very impressed by the great selection of heirloom vegetables here!

Clevenger's Corner Farmers Market - This is the newest addition having just opened last Friday. This is at the intersection of 211 and 229 in Amissville. They're open Fridays and Sundays from 4-7 p.m. for all you non-morning people!

And...I hear there will be a new one in Sperryville any day now! More to come on that.

If you've got others you'd like to see mentioned here, jump into the comments and let everyone know!

No Foot Traffic for Toll, or Anyone Else

I always enjoy hearing Robert Toll, CEO of Toll Brothers, on his quarterly conference calls. He's always refreshingly honest and will undoubtedly make me laugh out loud at some point during the call. And the one this week was no exception.

"With respect to traffic, it’s still dismal. Traffic is -- it’s consistent, however. It has not gotten any worse for the last three quarters, so we feel as though we’ve stabilized but I don’t want to give you the indication that that makes us feel good. It’s as though we walked into the tar pits, sunk up to our nose, our feet are touching a ledge and we are not going down any further but that sure doesn’t make us feel that comfortable...But we are heartened that at least we are able to spook up the traffic. That indicates that there are buyers out there waiting to be nudged. It will take a general turn in confidence for the big nudge to occur but sooner or later, it will occur."

 He's hit the nail on the head as far as traffic goes. Here's a chart that illustrates this at a local level for Prince William County:

There is still a huge gap between where inventory is and the number of sales. And this is after a huge jump in sales in Prince William recently. If you look at nearby counties the discrepancy is often even more jarring.

Unfortunately, there aren't any charts that give us foot traffic statistics. But this clearly illustrates the dilemna for the market. Excess supply in a free market economy inevitably pushes down prices. As long as this gap is as large as it is currently, there's no sign of a bottom from a price perspective.

It's a good thing Robert Toll has a good sense of humor!

Buyer's Window

Buyers for years now have been taking advantage of downpayment assistance programs such as Nehemiah. These programs help provide up to 6% in funds that go towards the downpayment on a home purchase. These are classified as a gift and these programs can be used with FHA mortgages.

But the default rates on mortgages going through these programs has been much higher than that for other loans. So, beginning October 1st these programs will essentially cease to exist.

But for the next few weeks there is a window of opportunity here. If you're a buyer looking for help with a downpayment and don't have family or other assets to tap, look into this program. But do it now! There must be a case number assigned by the end of September in order for you to take advantage of these programs.

The other current buyer benefit that's out there now is a current quirk with VA loans. While the guidelines providing the loan limits on jumbo loans have come out, the interest rates have not. So currently those jumbo mortgages are being financed at the same interest rate as, say a mortgage on a $350K house. This is only with VA loans and this will disappear quickly. So, if you're eligible for a VA loan and know that the home you want to buy will put you in the Jumbo market I'd move quickly on this one.