U r b a n T r e k k e r

Investment Outlook 2008

I posted something yesterday about the state of housing market in Northern Virginia. In that, I linked into Bill Gross (fund manager of the largest bond fund) article about the outlook for 2008, "Better Late than Never."  Via PIMCO.

Approaches to monetary policy must change as well. 1% short rates were so effective 5 years ago that they not only bolstered demand but created a housing bubble of Frankensteinian proportions. Those days, however were influenced by the creation and implementation of adjustable-rate mortgages (ARMs) that were priced at the short end of the yield curve. Millions of ARMs were issued at 2% and 3% teaser rates, many with terms of up to 5 years before their inexorable adjustment upwards. Surfeits of houses were bought at artificial prices because of these generous terms and billions in home equity loans were taken out – both driving demand and the economy forward. But adjustable-rate mortgages are a dying relic. Originators will no longer offer them except on onerous terms. No more teasers or pleasers of that ilk; there are regulators to deal with, and lawyers on the prowl with class action lawsuits in their briefcases.

A loan officer called me yesterday. This guy was still trying to sell the easy money 100% kind of loans, low credit score and even similar products to NiNJa (no-income-no-asset) loans? I don't believe it! Didn't this guy get it that the problems we're having today starts from lenders lowering their standards? In the meantime, FBI has started working on cracking down lenders.

Continue on.

And so the monetary attempt to halt housing’s – and therefore the economy’s – downward slide rests on the shoulders of the 30-year mortgage. If so, then Mr. Bernanke – we have a problem. First of all these 6-7% 30-year mortgages now require a significantly higher down payment than in prior years. 20% down? Say what? Where does a 30-year-old couple get that kind of money? Secondly, however, and just as important, what motivates a future homeowner to pay 6%+ interest for an asset that is going down in price? It was an easy decision to pay subprime yields of that and then some when housing prices were accelerating at double-digit annual percentages; the benefit was obvious. Now however, with prices in negative territory, the risk/reward is tilted towards the renter. [emphasis mine in this par.]

My point is that Chairman Bernanke must recognize the reduced benefits and obvious dangers of a déjà vu trek to 1% short rates. Those yields produced 5% 30-year mortgage rates to the homeowner for a 2-3 month period in 2003 and they could do so again, but bubble creating, inflation inducing damage to the U.S. dollar would be the likely result now. Best to stop far short of 1% and at the same time encourage reforms in FHA government assisted programs that would permit subsidized mortgage rates with minimal down payments.

Right on, Bill. He is so right on the money! Easy money will create more bubbles in the long run. Read the full article, here.

No. Va. Home Sales Record Drop December and 2007

Northern Virginia had the lowest monthly December and yearly 2007 sales. Existing home sales declined by 13.06 percent year-to-date through December. What's interesting is for 2006 total number of homes sold, NVAR posted two different numbers: 1) at 20,753 homes and 2) at 22,377 homes. The second number was based on NVAR historical returns since 2000. It might be a 'typo' on the first, you think?

Using the data from NVAR historical monthly stats, the total number of homes sold in December was 1,199 units, the lowest since 2000. The total number of homes sold for the year was 18,042 declined from 22,377 units in 2006, or a 19.3 percent drop from a year before. On the other hand, prices inched up by 1.35 percent in December. The average home prices for 2007 slightly up for the year at 0.13 percent to $538,463. The average median price (use for when comparing areas) declined by 3.15 percent to $437,500 from $451,750.

Analysis

1. There's a study out there that shows how despite housing slump, prices are still high nationally. The same perspective holds true for Northern Virginia (locally).

In 2007, when you look at the average list price (the price listed on MRIS) and sold price, there is a correlation there. The difference between the average list price vs. sold price swings from 7 percent in January to 9.3 percent in December. Without looking at the specifics, it shows that buyers paid much less for than the listing price. Fannie Mae and Freddie Mac both write-off 5% of LTV on conventional loans.

2. On a 10-year trend, it shows how prices may have the impact on the number of homes sold.

 

The MoM price trends since 2000

The number of homes sold in 1998 was 22,264 with average sales price of $229,151. Prices have changed a bit since 2005. It stays within the same price range in the low-$500's while the total number of homes declined within the last 3 years - from 30,480 homes sold in 2005, 22,377 homes sold in 2006 to 18,042 homes sold in 2007, the lowest sales since 1998.

That means, price needs to go down a little bit more to get rid of high inventories. 

3. The silver lining for soft housing market, especially with rising foreclosures for this area, is a boon for buyers because of high inventory and lower prices.

If you look at last year trend (above), you'll see that we had an upside down market with high inventory and low number of listings that were sold.

Down the road, non-distressed owners would compete in prices with distressed property owners (the must sell) like banks, short-sales sellers, which likely going to affect pricing. Add to it the new homes. Builders need to sell their inventories. At least existing homes sales in general is better than the new home sales that plunged to a record 26% in 2007.

Okay, you get the idea.

S&P Shiller-Case forecasts for further decline in housing. This is the thing. Even if the Fed lowers the interest rate a little bit more and economic stimulus plan gets some traction, that won't help housing market much. On the interest rates' side, what the Fed is doing is lowering the Fed funds rate, that is "..the rate that banks charge against each other overnight." Banks may borrow from the Fed's money at low rate, but, consumer loans operate differently. Refinancing is up, but the cut so far hasn't translated into more purchase. Via Reuters.

The MBA seasonally adjusted index of refinancing applications soared 22.1 percent to 5,103.6, the highest since July 2003. But the index measuring applications for home purchases declined 17.7 percent to 362.0, the MBA said. [emphasis mine]

On the mortgage side, the fixed-rate mortgage, the rate is tied in to long-term Treasury bonds yield that move based on the economy and outlook. And not tied to the Fed funds rate.

The Fed can't slashed rates too deep because "..of inflation risks and dangering of dollars," according to Gross, largest bond fund (PIMCO) manager. And there is risk of bubbles, too?

Technorati Tags: new homes,NAHB,mortgage bankers association,fixed rate mortgage,distressed properties,fed funds rate,washington dc region,northern virginia,washington dc,fannie mae,freddie mac,economic stimulus plan,mris,nvar

Ahead of the Feds Meeting

We'll see what's the Feds going to decide at their meeting (today and tomorrow). Analysts' consensus is calling for half a point, according to Bloomberg.

Headlines from around the web in anticipation of the meeting. The announcement is scheduled for announcement tomorrow at 2:15pm.

* Economy: Mixed Signals Ahead of Fed Meeting [CNBC]
* Home Prices in 10 Cities Drop a Record in November [Reuters]
* IMF Cuts 2008 Global Growth Forecast to Weakest in Five Years [Bloomberg]
* Countrywide: 1 in 3 Subprime Mortgages Delinquent [CNBC]
* Sharp Drop in Consumer Confidence in January [NYT]
* Gold Hits Fresh All-Time High [Financial Times]

Note: My bad on the timing of the announcement. Thanks for a reader comment. The info has been corrected. - dewita

"The FOMC announcement is tomorrow at 2:15pm, not today."

Foreclosures Creeping Up Inside and Outside the Beltway

CBS 60 minutes had an episode about the mortgage mess last night. Stockton, CA, might be the capital of foreclosures in America.

Here in our backyard, Washington DC, we are also not immune to the same mess. In fact, foreclosure homes starting to flood the market. The number of foreclosed homes or any variation of it (short-sale, pre-foreclosure or bank-owned) in Washington DC region - is not as bad as in other states, like California, Florida and Nevada - but it's creeping up.

The outer edges (read:exurbs) of Washington DC, i.e. Prince William county, got hit the hardest with foreclosures. Though, the market is getting better over there. Inventories still high at 7+ months supply. Over at Springfield, City of Alexandria, Falls Church, and Arlington, when you look at the big picture, market inventory is low. However, getting it more details you'll noticed that the number of foreclosures on the rise.

Take for example the sub-market of Fairfax county, Springfield/Franconia area. Springfield is outside the beltway. This is an area if transition to BRAC goes well according to Pentagon plan, will be the next up-and-coming neighborhood. For single family homes, the prices still affordable. Unlike Prince William county, Springfield has close proximity to DC via the Beltway, I-395, and easy access to Metro and VRE.

The total number of active listings on the market is 650 homes for all types (condo, townhouse, single home). If we pull listings of 3BR/2Ba single family homes under $400,000 - 82 out of a total 105 homes within the price range - is under some sort of 'third-party-approval' category. Third-party approval (TPA) is a 'code' for foreclosure, pre-foreclosure, or bank (lender) owned. That means, eighty percent all of 3BR/2ba homes under $400,000 is foreclosed homes. Put it this way - 4 out of every 5 homes is in foreclosure! Yes, you read it right. And those are single homes, not condos.

That's why the county has projected a budget shortfall for FY 2008-2009 due to soft housing market.

Whatever the case, the trend is an 'alarming rate' for a sub-market of metro DC. Considering the low unemployment rate around Fairfax at 2.2%, which is way below the national average of 5% in December 2007.

Sample of few foreclosures in Springfield.

8111 Birmingham Lane

Bought in Sept 2005 for $505,000
Price history: $549,900, $499,900, $479,900, $449,900, $399,900 and $379,900
Now price $349,900,
- 30%

8288 Raindrop Way

Lender owned (Countrywide)
Bought in October 2004 for $435,000
Price history: $429,900, $416,900, $404,900, $398,900, and $392,900
Now price: $386,900
- 11%

Over at inside-the-beltway in places like Falls Church, City of Alexandria and Arlington, foreclosure is more concentrated in certain zip codes. In Arlington, the number of foreclosure is high in zip code 22204. In Falls Church, in zipcode 22042. Foreclosure for the City of Alexandria is in some pockets, but the number is lower than Falls Church or Arlington.

The silver lining of this foreclosure thing is a boon for buyers. How else would you explain this? Two years ago, those homes were priced at $400's and higher. Now, the same property back on the market - for how much?

A couple of house keeping things based on market observation.

• Let's talk about price first. They (agent & seller) usually price the property really low to get your attention (buyers). By the time it gets the bank's attention, that is not usually the price point you're going to end up. The bank wants your offer to go higher. This is when you and your agent need to back up the offer with a thorough market study. There will be times when the bank want to see it [read: to see if you're not pulling the numbers out of thin air].
• You want to be flexible on time. It takes a long time for the bank (the third-party) to get to your offer. I put an offer for a client end of December, we haven't heard back from the listing agent (for the bank) until today. That's a month of waiting.
• To save the time of going back and forth with the bank, you want to get an 'approval' (not pre-approval) before making an offer. It makes your offer stands out. 
• If the property already lender or bank owned (you can see this from tax record) and it is vacant. You are good to go. Time dealing with the bank is shorter.
• In some cases, banks don't want to pay a dime - if agent is buying or agent is related to buyer. In that case, look for other agent. Unless, your family don't mind working for you - for free.
• Be ready for 'trashy' houses that need some fix-it-up. One time my client and I were at a condo full of roaches. I am not exaggerating. I called the agent about it, and he had no clue about the condition of his listing. By his own admission, he admits that ".. he hasn't been to the property.. for 3 months!" What?
  
• Somehow, if the owner just getting started negotiating with the bank and still living in the place.. look else where. There are so many out there. Don't waste your time. The bank will 'sit' on it until...whenever they see the light.
• Many of the big banks is in trouble. They have a growing portfolio of non-performing assets. Banks don't make money sitting on idle investments. They need to unload their holdings quick. That's why, they're only after 'the numbers.' The bottom line. Their attitude is 'let's-get-down-to-business.'

So when buying foreclosure: 1) look for a bank-owned and 2) make sure it's vacant. The listing agent usually throws in the remarks some sort of a code, like 'seller is really motivated' or 'seller is ready to make a deal.' If that's the case, you get yourself a ready to deal seller.

Because inventory of foreclosure is on the rise (note: we haven't even gone condos!), if you want to check out pre-selected single-family houses (from hundreds of active listings) under the category, it's here: Springfield, Falls Church, Alexandria.

My disclaimer: Information is provided from MRIS. Data is current as of January 27, 2008. Status may change in the process. We'll check in some other area in Northern Virginia and the District of Columbia, next week.

image: MSNBC

 

Technorati Tags: brac,springfield,springfield metro,franconia,bank owned,REOs,short sale,pre-foreclosure,MRIS,inside the beltway,washington beltway,subprime,northern virginia,single home price trend

Weekly Real Estate News Roundup

* The Darker Side of Interest Rate Cuts [Fortune]
"Interest rates are headed lower. But how low can they go?"

* Fed Cuts: What it Means for Your Mortgage [Realty Check]
"On days like this, I think it’s important to go back to the ol’ mortgage primer and figure out exactly what all this news means to you, to your mortgage, to your home equity line and to your home’s financial future.

* Golf Without Borders [NYT]
"MANUEL MEHOS was surfing one of Mexico’s best-known breaks when he looked up from his paddling in the Pacific. “I said to myself,” he recalled, “‘Wouldn’t it be great if there were a development here someday?’”

* Where Will Fannie/Freddie Changes be Felt [Developments]
"There are 19 metropolitan areas where the economic-stimulus package’s changes to the conforming loan limits would likely have an impact, according to this analysis from the Stanford Group Company, a Washington, D.C.-based financial services company."

* Economists React: 'A Long Way to Go' Before Bottom [Real Time Economics]
"We look for the moderate declining trend to hold through the winter, but we continue to believe that a bottom will be found in the spring."

* New Test for Developers in Maine: Climate Change [Christian Science Monitor] h/t Planetizen
"A plan to build thousands of new homes next to a lake in Maine's north woods faces an environmental test that may one day          challenge developers nationwide: What's the carbon footprint of a new subdivision or land development?"

* Stimulus Could Benefit Home Builders, Banks [MSNBC]
"U.S. homebuilders, lenders and other struggling companies could receive hefty one-time tax refunds this year and next under a provision of the economic stimulus plan percolating in Washington."

* U.S. Real Estate A 'Bargain' for Foreign Buyers [Inman News]
"Two years ago, while attending a home-builder convention in Orlando, Fla., a top-producing local real estate agent was bubbling over the interior design features of a vacation home."

* America's Richest Counties [Forbes]
"It's easy to assume that the nation's richest counties dot the tri-state area around New York City, or San Francisco's Bay Area."

* Shopping for a Loan Online? Beware of Lowball Offers [Washington Post]
"I wrote an article five years ago on Internet mortgage-referral sites, six of which I examined with some care. In the intervening years, more have popped up."

Regional [DC-MD-VA] News Roundup

* Housing Prices at the Edges Falling Faster [The Ground Floor]
"It's always a (somewhat unexpected) pleasure when facts begin to support one's theories."

* The Next Page in Downtown Plan [Baltimore Sun]
" It's just three storefronts now, just half a block with a jewelry/pawn shop, a carryout and a barber shop."

* In Arlington, A Slightly Down Year for Real Estate [Sun Gazette]
"A solid first half of the year, followed by a sluggish second half, meant the Arlington real estate market outperformed the region as a whole in 2007 but still ended up with fewer sales than were recorded in 2006."

* State Emphasizing Car Pooling in HOT Lanes [DC Examiner]
"Virginia transportation officials are hoping 3,750 additional commuter parking spaces along the Interstate 95 corridor will reduce concerns about the planned high-occupancy toll lanes wiping away Northern Virginia’s carpool culture."

* Developer Ready to Face Public Opinion with Historic Property [Washington BizJournal]
" A D.C. developer has just posted its face -- well, its logo, anyway -- on the otherwise youthful Facebook.com."

* Can Big be Green? [Washington Post]
" The house Joe Monfredo built in Anne Arundel County has seven bedrooms, 6 1/2 baths and four fireplaces. There are a recreation room, a study, a media room, a gym, a second laundry room and a second kitchen."

* Rural, Family-Friendly Life Draw Buyers [WHG]
"Rural charm and miles of shoreline have persuaded more than 85,000 people to call Calvert County home, a number that is growing steadily."

FTA Says No to Dulles Metrorail?

A few days ago I wrote something about Dulles rail utility relocation work. Now this? Washington Post  is reporting that FTA [Federal Transit Administration] might not give the much needed $900 million of federal matching dollars for Dulles metrorail. Without the fed funding, there won’t be any metrorail! Via Washington Post.

The federal government will not fund the Metro extension to Dulles International Airport without drastic changes, officials said yesterday, effectively scuttling a $5 billion project planned for more than 40 years and widely considered crucial to the region’s economic future.

…….

Kaine said Virginia officials and the Metropolitan Washington Airports Authority, which is managing the project, would address the concerns of Simpson and Peters by Monday. But several project supporters, including state and congressional officials, said privately that it would not be possible to meet all of the federal government’s demands. The federal and state governments have spent more than $140 million in planning the rail line. [emphasis mine]

Simply stunning! The Feds has put us on the wrong track. A big ‘disappointment’ for Washington DC region, specifically for Virginia. Most importantly, is that we need to solve the transportation problems around here. It doesn’t really matter anymore whether elevated track or tunnel. Though, I strongly support the tunnel version. Just give us the funding, please.

Speaking about climate change. What about smart growth? Plus, the benefits of taking thousands of cars from the road that is not only reducing gas consumption but also reducing CO2 emission.

What are they thinking?

Crossposted with Urban Tysons

Bye-bye Incandescent aka Traditional Bulb

The funny looking compact-fluorescent-light or, CFLs, is about to replace the traditional bulbs as we know today as incandescent bulb. CFLs will become the 'standard' bulb, not today, but in 2012. Even before then, EPA estimates that sales of CFLs in 2007 have nearly doubled since 2006. In 2007, 290 million CFL bulbs were sold. The market share of now CFLs reach 20% of the total bulb market.

When the bulb first came out, my mother made a conscience decision to replace every bulb in the house with CFLs. She was no science nerd, her sole motivation to replace all bulbs in the house was "to cut her household utility bill." That's it.

chart: EERE consumer guide

Congress figured it out, if they didn't pass a law (like they did for HDTV), the majority won't see the need (or benefit) to change the way they consume electricity. The scaled-back version of the Energy Bill that was passed in December in 2007 has some important energy-efficiency provisions in it. Via Washington Post.

The goal is to reduce U.S. electricity use, a major source of greenhouse gases that scientists say contribute to global climate change. Half of the nation's electricity generation comes from coal-fired plants, which emit carbon dioxide.

......

Five to 10 percent of residential electricity goes into lighting, making it a prime target for policymakers searching for energy savings. If every American household replaced just one incandescent bulb with a compact fluorescent bulb, the country would conserve enough energy to light 3 million homes and save more than $600 million annually.

Duh? Why did it take so long to realize that energy savings is the simplest thing that anyone can do to reduce energy consumption? According to EERE, as added bonuses,

1. Energy-Star CFLs use approximately 75% less energy 
2. Last 10 times than the traditional bulb 
3. Can save about $30 or more in energy cost over the lifetime.

For skeptics out there, who couldn't see the relationship between electricity, coal and climate change -- here is a few sobering statistics courtesy of our government @ work, the Energy Information Administration.

Coal Consumption by Sector via Energy Perspective

 

Images: Energy Information Administration

Crossposted with Shades of Green

Mortgage Applications Up, But...

 

Image: USA Today

Rates fall, mortgage applications jump but, it didn't help housing market much. Since two-third of all applications is refinancing. The seasonally adjusted refinancing index up 16.9% in the week ending January 18 to 4,178.2, according to Mortgage Bankers Association.

Because of tighter lending standard, it's hard to see how many of the applications actually make it through. Via Mortgage Bankers Association.

With tighter credit conditions we do not know how many of these applications will become loans, but it is clear that borrowers are responding to the 40-80 basis point drop in rates we have seen since November 2 across products," said Jay Brinkmann, Vice President of Research and Economics at the Mortgage Bankers Association.

A couple of observations.

1. Consumers are 'tapped out.' You see a connection with refinancing there? Because refinancing is up 92% since November, according to MBA.
2. What we don't know is whether consumers looking to refinance are actually spending the money or, paying piles of their credit card bills. If they plan to use the equity for paying credit card bills -- that could spell more trouble for the economy -- down the road.
3. Meanwhile, purchase applications (for buying a house) are up 'only' 7% within the same period, from November. That means, buyers are still hesitant to make a move to purchase.

0.75% Rate Cuts

Surprise, surprise. After watching a free fall confidence all over the world, the Fed finally takes action.

"The Fed hits emergency button," that's the headline on Business Week this morning.

Okay, the market's "January from Hell" just got even wilder and weirder. In a stunning development, the Federal Reserve announced an emergency rate cut of 75 basis points Monday morning at around 8:20 am ET, taking the Fed funds target rate down to 3.5%. The central bank cited "a weakening of the economic outlook and increasing downside risks to growth." The Fed also approved a 75-basis-point decrease in the discount rate to 4%.

Policymakers also noted that while "strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households." Moreover, said the Fed, "incoming information indicates a deepening of the housing contraction as well as some softening in labor markets".

More about the rate cut, here, here, here, and here.

So, what does it mean for you? That depends on the type of loan you have. Because "..the 30-year fixed is not tied to long term Treasuries," according to Reality Check.

Dulles Corridor Metrorail Utility Work Has Started

Get ready for the traffic nightmare around Tysons Corner! Though, the funding from the Fed is not here yet. But, constructions for utility relocation has already begun.

First thing first. Before starting with the constructions work of Dulles Corridor Metrorail project, they would have to relocate utility along the service roads on Route 7 and Route 123 and the Dulles Toll road. During the construction work -- which will take (est.) from a short 4 months for Washington Gas to 24 months for other utility companies to complete the work -- traffic will be diverted.

Via email.

• Washington Gas has started working in the service road south of Leesburg Pike in front of 'Business Bank' and moving east towards Route 123.
• Short sections of one lane of the service road will be closed as work requires and traffic will be eastbound only in that section. The work lane will be reopen after construction is completed. Access to all business will be open.

Image: Dulles Metrorail Utility Relocation

One of two lanes will be closed during part of overnight hours. However, it will back to service after 5 am.

Here is the list of improvement projects coming on the pipeline.

• Removing utilities underground,
• Sidewalk added on both sides,
• Widening Route 7 to four lanes in each direction,
• Dual left turns at Tyco, Spring Hill and Gosnell West Park intersections
• Pedestrian bridges across Rt. 7 and 123.

For more info, you can log in to their website www.dullesmetro.com or call 703-572-0500.