Another Bailout?

Another week and another groveling industry seeking their turn at the trough filled with taxpayer dollars.

But this week it's the homebuilders, which hits a little closer to home.

First of all, let me say, that this is one bailout that actually could put some money in my own pocket. (Never let it be said I didn't property disclose!)

And, having said that, let's look at the merits (and downsides) of this plan.

First of all, an outline of the plan as found in today's Wall Street Journal:

The plan calls for a $250 billion stimulus package titled "Fix Housing FIrst".

The first part would be a tax credit for home buyers of 10% of the home's value, up to $22,000. Unlike the earlier $7500 credit, this one would not have to be paid back.

The second part of the plan would have the government subsidizing interest rates. A 30-year fixed rate mortgage would be 3% if you bought in the first 6 months of 2009. The rate would go up to 4.5% if you bought in the second half of 2009.

The good news here is that at least someone is addressing the root of the current problem, housing. We've heard of lame plan after lame plan to help homeowners in trouble. This one won't help homeowners much either, but plenty of others will feast at the gravy train.

Here are the problems I see. First of all, why should the taxpayers be helping out the homebuilders and related industries, such as real estate? While I'm not opposed to attempts to increase my income, I see no reason my neighbors' tax money should support my real estate habit. If it was a bad use of taxpayer money to bail out AIG, it's equally bad to use it here.

The homebuilders are in trouble. There's a good reason for that. There are too many homebuilders for what the market will support in the next 20 years. Yes, it will be painful for many individuals and families to see some companies go under. But the end result will be a healthier industry.

This has the potential to produce another unsustainable bubble.  What happens to home prices in 2010? At some point there has to be a balancing of supply and demand. You can artificially influence that, but only for the short term.

And, again, it does nothing for homeowners losing their homes to foreclosure.

The Wall Street Journal article does mention other suggestions that would allow current homeowners to refinance to lower interest rates with the government subsidizing the difference. That actually does have the potential to help, depending on the details.

Meanwhile, I'd say let's stop spending taxpayer money like a drunken sailor, with no oversight or accountability. How can that be in anyone's long term best interests?

Testing Bottom

The evidence suggests that we're testing a bottom in the Culpeper market, or at least in one segment of it.

If you look at homes with these characteristics:

• Single family home
• Less than five years old
• In one of new subdivisions in town of Culpeper
• Colonial
• 3-4 bedrooms, 2 1/2 baths
• Basement

What you're seeing are multiple offers on anything around $200K. So we're back to bidding wars with most of these then selling for more than list price. I'd say generally these are under contract within 14 days. Although it's hard to tell since the contracting process on a foreclosure can drag on for awhile.

And, yes, all of these are foreclosures. There are short sales out there in this price range as well and they're moving more slowly. Most short sales are long, painful processes and most buyers don't want the hassle. But if foreclosures really do begin to dry up, short sales will be the next ones people look to for a deal.

And, then, finally, we can move on to Joe Homeowner's house. The question is, will buyers then move up to his price? Will Joe Homeowner come down to where the banks are selling houses like hotcakes? Or will we be back to the stalemate?

Citi and What Lies Ahead

I like my friend, Lenn Harley's analysis of what's really going on with the Citi bailout.

I'd add this, however. It is in the bank's, the taxpayer's and the government's best interest to help the homeowner.

It's where it all started and you can not staunch the bleeding until you deal with the wound.

Bank's balance sheets will continue to deteriorate as long as home prices continue to fall.

How much taxpayer money will we continue to spend on controlling the symptoms?

Virginia Homeowners Alliance

The Virginia Association of REALTORS has founded an organization dedicated to protecting the interests of Virginia homeowners. It's called the Virginia Homeowner's Alliance. Their web site provides a place to get information on how to improve the value of your home, lets you monitor what's going on in various government entities that may impact you as a homeowner, and will also provide you with an easy way to contact government about your concerns.

With the flood of paid lobbyists at all levels of government this seems like a terrific idea. Citizens come together to make their voices heard. It's one of the things the internet does best.

Once you go to the site and sign up you will not be flooded with a ton of spam! But you will have access to information that I think will be useful to you. In addition to giving you a voice in governement, it also provides useful information on neighborhoods and schools and practical information on things like lawn care. By the way, the site is relatively new. It will continue to grow and expand and your suggestions on how to do that are welcomed!

Now I have a favor to ask. If you do go to the site and register, it asks for the name of the REALTOR who referred you. I'd like to ask that you please enter my name. In the interests of full disclosure this enters me in a drawing for things like an iPOD or a Wii.

But I hope you do this for yourself! And I'll be interested to hear what you think of the site!

Foreclosures Frozen

Freddie Mac & Fannie Mae today announced a suspension of foreclosures beginning November 26th through January 9, 2009. 

What does this mean? It's one more sign that there will be a reduced number of foreclosures available in the short term. 

I believe it's too soon to say what the long term impact will be. If they use this time to work out loan modifications, perhaps many of these will never come back onto the market.

If you're a seller, there's reason for optimism. Every foreclosure that isn't competing against you and bringing down prices is good news. (Unless they all get dumped back on the market in the spring!)

If you're a buyer it's time to start wondering how much longer should you wait to buy? Might prices go lower? Yes! Might we be near the bottom? Yes!

If you're buying a house to live in and enjoy for the long term, it's time to think about at least getting out there and looking. Knowledge is always power in a negotiation. The more you know about what prices and inventory looks like now, the better positioned you'll be to decide if it's time to buy.

Too Big....Period!

We've heard a lot of talk lately about financial institutions that are "too big to fail". I don't know how the rest of the country looks, but here, in Virginia, that's not how things seem to have worked.

The clients who had the best mortgage experiences and who are less likely to be in trouble are those who did business with small local banks. A lot of these banks lost a fair amount of mortgage business during the crazy years to fly by night outfits who promised the moon. These were the guys quoting ridiculous rates and finding a way to get a mortgage for anyone who could fog a mirror. The small guys who did this aren't around any longer.

But there were plenty of big financial institutions who couldn't resist the lure of all that money and jumped right into the mud. Countrywide is one that comes to mind. While the company name still exists, it's only because they were rescued by a savvier financial institution that took fewer risks.

From a real estate agent's point of view there were always a lot of advantages to a local institution. They were accountable for the loans they made. If something went wrong during the mortgage process it was a lot harder for them to duck me! I could walk into their office and ask what the heck was going on!

Small, local banks also take risks, but they're a different sort of risk. It's the "George Bailey" school of risk-taking. Yes, they look at credit scores. But some of these smaller, local institutions will also look at the individual and know that risk is also about integrity.

When this current financial crisis is over and someone writes the book on what happened with banks, there's going to be a recognition that our small, local banks made better decision and suffered less.

Maybe "too big to fail" should instead be, "too big to save"?

JK Moving & Storage

As you know by now, I like highlighting local Virginia businesses who are making a difference by their commitment to a greener, more sustainable way of operating.

JK Moving & Storage recently sent me their Commitment To Sustainability.

They're doing things like offering free used packing materials to their customers to reduce waste. They help with recycling your electronics. These visible efforts impacting their customers are great, but maybe more important are the things going on that you might never see.

They train staff on the importance of sustainability and how individuals can contribute at work and at home. Their vehicles use ultra low sulfur diesel to reduce emissions. They recycle batteries and anti-freeze. And, my favorite, they launched ReUse DC. It's a site where individuals and corporations can trade, sell and give away their unwanted furniture, household items and office equipment.

JK Moving & Storage had already turned me into a fan because of how they treat my customers. I'm an even bigger fan now!

If you'd like more information, check out their website or e-mail Clarke Mahek at cmahek@jkmoving.com or call him at 703-930-7275.

The Culpeper View

Allison Brophy has another great article  in the Culpeper Star Exponent taking a closer look at the real estate market and the state of foreclosures in Culpeper county. Culpeper's been one of the hardest hit counties in this part of Virginia.

And a timely article in Slate on why the argument that the sub prime mess is because lenders were forced to do sub prime mortgages by the government is hogwash.

There are some signs that lenders are anticipating President-Elect Obama's 90 day moratorium on foreclosures and voluntarily beginning to comply in advance. If your a seller this will be good news, at least in the short term! Prices may stabilize sooner than anyone anticipated. And, if these properties stay off the market, that stabilization may last.

While it would seem that at the end of that time you'd get a bunch of foreclosures hitting the market and driving prices down once again, I'm not sure that will be true. I suspect that during the 90 days plans will be made to permanently reduce the foreclosures to a trickle.

If you're a buyer, it means the number of great deals may be shrinking quickly. If you've been waiting for the bottom of this market, waiting any longer could get expensive.

Good Sign

CNBC had an analyst today reveal that there's been a sudden jump this week in insider purchases in homebuilders stock. Apparently, in a typical week there are 17 purchases by top executives at these firms of their own stock. This past week there were 47. That's a pretty big jump.

I don't know what they know that we don't. But it seems possible they're finally seeing something in the traffic in their new home communities over the last week or two that convinces them things are improving.

There's no way to know if their hunch is right, but they were confident enough to put money on it.

Interesting!

Complex Systems

Henry Paulson was back in front of the TV cameras today. The financial markets didn't seem all that impressed.

But perhaps we shoudn't be blaming the Treasury Secretary. The tools he has available for dealing with our current financial crisis seem ill suited to the task.

I've been thinking a lot lately about how complex a world we live in. The financial systems are the most recent example. Surely these systems are more complex and more interrelated than anyone in government would have dreamed even a few short years ago. In fact, both Ben Bernanke and Hank Paulson were telling us less than 18 months ago that the real estate downturn would be confined to the real estate market and would not affect the larger economy.  I'd argue that this is proof that the top officials in the financial sector of our government didn't truly realize the extent of the complexities and interconnectedness of these systems.

So on the one hand you've got increasingly complex and interconnected financial systems. To add to the complexity, the interconnectedness of all financial systems and markets is increasingly global.

On the other hand, you have government supposedly minding the store, regulating these systems and stepping in to "fix" things when there's a crisis. Government is poorly equipped to do this, I'd argue. If complex systems require detailed analysis to determine the unintended consequences of any solution, government is definitely not my first choice for this job. Government is largely incapable of finesse and subtlety. When a scalpel is required, government is more likely to wield a club. While 200 years ago our government may have been perfectly able to manage the financial affairs of the nation, I'd argue that events have overtaken them. Complexities have outstripped their ability to keep up. The government's repeated, inept attempts to stem the tide of foreclosures is one example. (By the way, this week's attempt will fare no better.)

But if not government, who's going to mind the store? Clearly the players in these systems can not be trusted to regulate or police themselves. Else we wouldn't find ourselves in our current mess. "Fox in the hen house" comes to mind when contemplating that solution.

I don't know that I have the answers for this, but I'm dismayed that I'm not seeing more discussion of these questions. There was some initial discussion of a new Bretton Woods when the $700 billion bailout package was passed. But that seems to have subsided.

What we would seem to need is some kind of an early warning system. Think of the sensors that are in place to monitor the ocean floor and give us early warning of potential tsunamis. Surely the technology exists to create similar warnings that could alert governments and the financial sector to major problems ahead.

With the cold war a lot less frigid maybe instead of that hotline to the Kremlin we need a new hotline that rings when the financial early warning system detects a problem.

This may not seem to be directly related to real estate. But, then again, some people thought that the real estate market stood apart from the rest of our economy not that long ago. Think again.

October Market Numbers

The October numbers continue the good news trend. There are no huge surprises here and no evidence, yet, that the September financial melt down significantly affected our local real estate market.

Culpeper County now has 623 homes in inventory. That's the smallest number we've seen since April of 2006. And the number dropped again from September. The number of homes coming on the market also fell slightly to 109. That being said, remember that this is fairly typical behavior in the fall as some homeowners will pull their homes off the market now and wait and hope for a strong spring market. 58 homes sold in Culpeper in October and an additional 69 homes went under contract.

Fauquier County also has much in the way of good news. There are 690 homes for sale. 110 new listings were put on the market in October, a reduction from the previous month. 49 homes sold, which is slightly less than the previous month. And the number of new contracts written dropped almost in half, from 83 to 43. So November numbers may show a significant drop in closed sales.

Prince William County shows a current inventory of 4222, again the best number we've seen since early 2006. New listings did increase in Prince William County, perhaps as a result of seeing how quickly some listings were selling. New listings in September were 1178 and in October jumped to 1284. Closed sales dropped a little in October from 934 to 841 but are still a huge improvement year over year. And contracts written also rose from 1059 to 1143.

Rappahannock County continues to march to its own drummer. Inventory there is at an all time high of 103. And another 17 new listings were added to inventory during October. There were 4 closed sales in October and three new contracts written. As of right now I wouldn't expect a big improvement in November.

Overall the news continues to be good in terms of the volumes of sales and the reduction in inventory. What won't make most sellers happy is the continued reduction in sales prices. I don't expect any stabilization in prices before spring. And, actual price increases are likely a long way off at this point.

Distorted Inventory Numbers?

I read a piece in Seeking Alpha this weekend about the inventory situation in the real estate market.  The author's theory is that the improvement we've seen in inventory levels in the last few months is an illusion. And, he gives formulas for computing what the current inventory really is.

His thinking is that the people who pulled their homes off the market, really still do want to sell. In addition, there are many people who have not put their homes up for sale, but would like to sell. His conclusion is that prices will continue to fall for much longer than most people are anticipating because of the huge amount of unseen inventory.

He makes some good points. Certainly there is some unseen inventory out there. There are a substantial number of people just waiting for the market to "turn around" and then they'll list their homes for sale.

But I think he overestimates the size of that universe. Some of the people who have decided not to see in this market will give up the idea all together. Some of them didn't have a pressing reason to sell in the first place. They'll make improvements to the home they are in and stay another five years.

Some people wanted to sell their homes because they had attractive job offers elsewhere. But, in light of the current market, they passed up those job offers.

There's a growing number of owners who have rented out their homes rather than sell them and take a big loss.  Some of those owners will decide they like being landlords and will hold onto that asset. Others will at least hold onto the house as long as they've got good tenants and they can continue to pay their mortgage.

As with so many things, none of us know what the real inventory number is. But the blog post did get it right that the number is higher than what you'll see in October's report due out this week.

New FHA Requirements

Lead

There are new requirements in place for FHA and Rural Development loans. Since FHA loans in particular are very popular in this market, and since these requirements effect rural properties that have been vacant at least 30 days, this will have a significant impact locally.

Doing Your Homework

When you buy a condo or a property that is part of a homeowner's association, you are given a copy of the documents that govern that community. These are the rules and regulations by which you are agreeing to live. You are given several days to review these documents and, if during that time, you decide you can't live by the restrictions contained there, you can walk away from the contract without penalty.

Unfortunately, too many buyers never even glance at the documents. In fairness, they are often several hundred pages thick, written in language not even an attorney could love and many of the provisions will never affect the potential home buyer.

However, there are too many stories of homeowners who found a provision they couldn't live with after they purchased the home.

Recently I've been dealing with an investor who wants to rent out the condo unit he bought. This condo association, and many others, have rules limiting the number of units that can be rentals. That provision is there so that potential buyers can take advantage of FHA financing.

Unfortunately, there are too many rentals in this development already. And, it turns out that the association give priority to owner occupied units where the owner needs to rent out the unit because of some hardship or change of circumstances. Investors have almost no chance of being able to rent out their units.

A close reading of the association documents and some follow up questions would probably have told the investor that this was not a good investment prospect. Finding that information out after you've settled on the property simply means you're saddled with a property you can't rent out, don't want to live in and can't sell at a profit.

Whether you're an investor or buying a home to occupy, it's important to read those documents. Tossing them in a corner to read in a couple of months can be a costly mistake.

A Post Halloween Scare

FIRST THINGS FIRST!

IF YOU HAVEN'T ALREADY...GO VOTE!

I know I've missed Halloween, but if you're still in the mood for something scary, this article definitely fits the bill.

If you don't have time for the full article basically it says we're approaching a record 20% of all homeowners underwater on their mortgages nationally.

Headed into a recession, that's pretty scary. If you lose your job and need to sell your home, what do you do? If you get transferred by your employer and need to sell your home, what do you do?

There is a downward spiral here that someone has to find a way to stop. More foreclosures lead to lower prices which lead to more homeowners under water on their mortgages which leads to more foreclosures when "stuff" happens.

Today's election, whatever the result will not fix everything. But it'll be interesting to see what, if anything, government tries to do on this front in the next few months.

Presidential Choice and Real Estate

With two days to go before the election, it's time to take a final look at both candidates plans for the real estate portion of our economy. Here, straight from their web sites without editing, is what each candidate has to say:

Barack Obama:

Protect Homeownership and Crack Down on Mortgage Fraud

Culpeper's Future

I couldn't have said this better myself! Here, in the Culpeper Star Exponent is a framework for Culpeper's future.

I'd add that we should look at the transportation issues and work on better rail connections with these technology centers.

And, I'd add to his rationale for attracting high tech jobs that they tend to pay well enough for people to afford to buy homes, as opposed to service industry jobs.

The local real estate market could use that shot in the arm!

September's Good News

September's numbers are the kind to make you "ooooh" and "aaaah". They're that good!

In Culpeper, Fauquier and Prince William counties, inventory continues to fall and sales continue to rise.

In Culpeper inventory is down from 823 at this time last year to a measley 632 this year. Sales doubled year over year, 27 last year and 54 this September. And the trend looks to continue with 72 new contracts written in September!

There's good news for those of you in Fauquier as well. Inventory has declined from 832 last year to 696 at the end of September. While sales didn't quite double here they did a very respectable increase from 38 a year ago to 53 now. And new contracts soared to 83.

In Prince William things have changed so much that you've got to feel sorry for the buyers. Total inventory has declined from 5674 to 4489. Meanwhile sales have almost tripled from 327 to 934. 1059 new contracts have been written in Prince William. Multiple offers on foreclosures are now routine there. And bidding wars are back, if the house is in good enough condition and priced cheaply enough.

Rappahannock County is the rain cloud amidst all this sunshine. Inventory continues to rise there with 93 homes on the market now compared to 83 a year ago. There was one sale last month compared to 4 a year ago. And there are three new contracts. In general, sellers in Rappahannock County have been slower to lower prices, believing that the counties unique circumstances protect them from the economic forces at work. And, to some extent that's true. But clearly not to the extent many sellers believe! The other factor at work here are a large number of very expensive properties, owned by very wealthy people, who are perfectly willing and able to wait a year or two for market conditions to change.

Overall, sellers should be singing hallelujahs. But, here's why I suspect many of you aren't. What we continue to see are lots of sales of foreclosures and short sales at very low prices. Many sellers are not willing or able to compete at those prices.

While inventory levels have fallen to around a 12 month supply, it's still not low enough to stop the price declines. If you're a seller in this market, desparate to sell, you're probably thinking that there's not much comfort in this if the only thing selling is foreclosures. But sooner or later, surely, we're going to run out of foreclosures. Here's the question, if that's a year from now, or longer, can you wait?

Ten Cents

I was supposed to have a settlement yesterday. My clients are buying a foreclosure. (The one that we've been working on for months and months and months!)

I know it will come as no surprise to many of you that the settlement didn't happen.

Why, you ask......?

The original estimated settlement statement (HUD1) differed from the final numbers by.....TEN CENTS.

Ordinarily, the change would be made and we'd have approval from all parties for the change in a matter of minutes and would proceed with settlement.

But, this ten cent change had to go back up the chain of command on the bank's side. And, so, we're still waiting. Since this was Friday and no bank is going to give us final approval over the weekend settlement won't happen before Monday.

Except that this week, Monday is a holiday. So, now we're looking at Tuesday at the earliest.

So, how much do you think it cost the bank, to approve this ten cent change? How much in lost time (wages) for the employees who worked on this? How much did it cost them to have this money in my clients' pockets and not theirs for these extra few days?

This is the culmination of months of negotiations as the bank continued to get lower offers from my clients after they rejected higher ones. And, in one case, lowered the price while we had a higher offer on the table!

There are very well managed financial institutions in this country. This isn't one of them.

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.