Tuesday, January 19, 2010

Housing Market to Stand on its Own

Kessler’s Take:
April 1st is a big day in the housing world. It is the beginning of the last month a buyer can get a contract in place for the Federal Housing Credit and it is the first day the Federal Reserve will end its debt purchase program of $1.25 trillion buying mortgage backed securities. When this happens the United States secondary mortgage market will have to stand on its own two feet without big brother buying what nobody else has shown an interest in. Mortgage backed securities are commodities like any other bond or stock. When demand is there supply is offered at a low yield keeping mortgage rates low. When the demand is not there the yield being offered on these securities must be raised to entice investors to invest in the commodity. The age old thought is you can not have a perfect world, low interest rates and a booming stock market. What we have experienced in the past 6 months is the closest we might every come. The stock market has rallied back to a bullish mark and mortgage rates have touched all time lows.
The road to housing recovery is not a straightaway; it has many curves that are not seen. The first issue that had to be dealt with was an overabundance of inventory. When the nation’s inventory is over a 6 month supply the market is considered a “buyer’s market” because there is more supply than demand. Over the past 6 months the inventory has burned off and we now sit at a 6.5 – 7 month supply. This was caused by very low interest rates coupled with a federal housing credit and available financing backed by the government.
The second issue is the psychology associated with the housing market. Most buyers and sellers felt that as more time had passed the housing values would continue to drop. After stringing together a couple of months of positive numbers and even some markets seeing slight increases in home values most buyers and sellers feel that the housing market has hit its low and will maintain over the next year.
The government single handedly saved the housing market as most felt it would. I have said before and I will always stand behind: Our friends in Washington, regardless of party lines, all agree that housing is a deep rooted issue that directs our economy. A bad housing market means bad everything.

Kessler’s Forecast:
April 1st should not be looked at as a doomsday in the housing market, rather a day that reality will set in. There is no reason why mortgage rates should be at 5%. They should be around 6% based on the current economy. What will happen is the psychology of most buyers will change. There will be many that will think about what they could have had rather than what they can have. When rates do go to 6% it will affect buying power. It can change a borrower’s ability to borrower in excess of $50,000 for a purchase price. While many are predicating that the increase in rates will stunt the growth of the housing sector, I believe it might help. Buyers will need to get off the fence as the fear of increasing rates will encourage them to buy now.
Traditionally when rates rise home values drop. I do not see this happening in our current market. Home values have dropped to such a drastic degree housing that affordability is at an all time low. When the rates do go up I feel the values will remain the same and people will either dedicate more in monthly allowance or look at lower priced homes. Anybody who has been fence riding looking for the housing market to continue to drop will get scared enough by these rising rates to continue the positive direction of the market by buying before rates do get to high to afford what they are looking for.

Fewer Seller’s Drop Their Price

Kessler’s Take:
A sign of stabilization in the housing market would be to see fewer sellers dropping the sales prices to sell their homes.
Trulia reports a decline in the number of home sellers lowering their asking prices at least once to 21% as of January 1st from 22% in December and 25.6% in November, marking the lowest level since April. The average discount held steady at 11%.
This is one of the signs the housing market needed to see to be in a better place than it was. Sellers are usually the last to acknowledge their home is not worth what they think it is. The report to me means seller’s are listing their property closer to what it is actually worth rather than putting a ridiculous asking price and having to drop it several times to entice a buyer to make an offer.
I have personally watched a study where two like houses were trying to sell. The first set the price well over what it was worth in a buyer’s market, the other house listed the price 10% below the market value. While both houses had the same advertising and both had great Realtors representing the properties, the second house that was listed below market value sold higher than the one that started higher.
What happened was buyers came and saw the lower property first. The public open houses did extremely well because the potential buyers saw that this property was a bargain. After a couple of buyers made offers there was a bidding war getting the seller a final offer 5% above what they listed the property for.
The first example did not fair as well. Getting potential buyers into the property was much harder as the buyers in the market thought the seller was out of their mind and the house just was not worth it. As time passed the seller started to drop the price but at this point the property had been on the market for a long period of time begging the question what is wrong with the house. Six months had passed and the seller finally accepted an offer 25% lower than what they had listed the property for. They had it on the market 4 months longer than the other example and sold it for less.
This shows that sellers need to be realistic when putting their house on the market. It is often better to start low and hope for some action than to hang the price high and pray for a bite. The reports done by Trulia show that sellers have acknowledged the value of their homes has come down and are being more realistic with their expectation of the sales price.

Kessler’s Forecast:
The fact that seller’s have a more realistic mentality to their homes value is a huge step in the right direction for the housing market to recover. The tug of war between buyer and seller has slowly died down and has made room for stabilization in the market. 2010 will be the year of stabilization. There will not be a tremendous amount of bidding wars nor price drops if sellers stay realistic with what the market is willing to pay.

Rates

Kessler’s Take:
The 30 year fixed moved down to 5.06% nationally from 5.09% according to Freddie Mac’s Weekly Survey . Last week I forecasted it would be up to 5.13%. This week upcoming should see an additional decrease to 5.01%, rates should remain in the low 5’s until mid February.
Kessler’s Forecast:
Last week (1/7/2010) – 5.13%
1 week (1/21/2010) – 5.01%
1 month (2/18/2010) – 5.35%;
3 months (4/15/2010) – 5.85%;
6 months (7/22/2010) – 6.25%;
12 months (1/20/2010) – 6.50%

Reports

Previous Week:
None

Upcoming Week:

Wednesday, January 20th
December Housing Starts
U.S. Census Bureau

According to the Newark, N.J. office of the FBI, David Findel, from Colts Neck, N.J., surrendered himself to the FBI and made his initial appearance before Judge Mark Falk, regarding a complaint that alleges Mr. Findel, obtained more than $11 million from secondary market lenders through this scheme.

David Findel, the president and CEO of Morganville, N.J.-based Worldwide Financial Resources, was released on a $1 million secured bond.  

Findel expanded Worldwide Financial Resources, originally a financial planning company, to include home mortgage origination and banking services. This allowed Worldwide Financial Resources to both originate and fund mortgages for its clients by borrowing money from a warehouse lender. To repay the lender, Findel would resell each mortgage the company originated in the secondary mortgage market.

Early in 2008 Worldwide Financial Resources began experiencing a liquidity crisis.  Findel allegedly conducted a scheme to defraud mortgage banks by reselling the same mortgages to multiple financial institutions. Once Worldwide Financial Resources sold a mortgage, Mr. Findel would allegedly create a second set of fraudulent mortgage documents and resell the same mortgage to a different secondary market lender.

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