Have You Been Saved?

The guvmint is concerned about the possible implosion of the housing industry due to so-called “exotic” mortgage financing, such as interest-only loans, pay option ARMs, and just plain old ARMs.

So, they’re gonna save us with (what else?) some new regulations!

The Comptroller of the Currency, with the concurrence of The Federal Reserve Board, held hearings in late September and quietly approved new regulations requiring lenders to underwrite such “exotic loans” under worst-case scenarios instead of the previously-used starter/teaser rates where anyone with a heartbeat could get a loan.

On the surface, this makes sense and had they acted sooner, they might have alleviated some of the impending trauma for borrowers with adjustable loans that are (gasp!) starting to, well, er  .  .  .  .  adjust!

There is, however, more than a little absurdity involved in lumping all such financing tools in the category of “exotic”.

What about the homebuyer who gets transferred every 5 years?  Is that homebuyer really going to benefit from getting a 30-year fixed loan that may cost more in both rate and fee?  That buyer would probably be better off getting a 5/1 ARM because he will likely be down the road before the loan can adjust.

Then there’s the (Omigod!) dreaded, exotic, interest-only loan.

Let’s get a grip, guys ~ you aren’t paying much principle in the early years of a 30-year fixed-rate loan anyway!

Example:  a $250,000 interest-only loan @ 6% interest works out to $1,250/month or $15,000 in payments in the first year.

If you amortize that same loan over 30 years, the monthly principle/interest payment is slightly less than $1,500/month, or $18,000 the first year.

Thus, the difference between interest-only and fully-amortized is only $3,000 ($250/month) in the first year of the loan.

If the buyers  take the interest-only loan, they can simply add $250/month to their monthly interest payment to create their own amortization schedule and pay it off in 30 years, just as they would if they opted for the 30-year amortized loan. 

And, if the borrowers encounter unforeseen financial challenges, they are only required to pay the $1,250 interest payment instead of the $1,500 principle/interest payment.

Pay option ARMs are an entirely different story.  I would be the first to proclaim them as “exotic”; maybe even “stupid”. 

I am proud to say that I have never allowed any of my clients to get one of them. 

Call me conservative, but I can’t come up with any valid reasons for speculating on cyclical real estate values while concurrently skipping payments so you can end up buried even deeper when/if things go awry.

The unfortunate result of tightening these guidelines may be that some people will now be unable to refinance their way out of trouble as their ARMs reset from those tantalizing teaser rates that sounded so attractive when they got their loan.

Eagle Real Estate MLS Statistics

According to Intermountain MLS data, 47 Eagle, Idaho homes closed escrow during September 2006 with an average selling price of $415,764.

This compares to 88 homes closed during September 2005 with an average selling price of $418,899,  indicating a stunning 46.6% year-over-year decline in closed units.

The average selling price for a home in Eagle during September 2006 was $415,764 ~ a little less than 1% below the year-earlier number.

Here’s the interesting part:

We now have 167 homes for sale in Eagle, Idaho that are priced above $700,000, with an average asking price of $1,071,601.

88 comparable homes have closed in the past 12 months, which works out to an absorption rate of about 7.3 homes/month in the $700,000+ price range.

Dividing the listing inventory by the absorption rate tells us that we have 23 months’ worth of listings above $700,000 (if no more homes are listed).

(data is for single-family homes on lots or acreage).

Boise Real Estate MLS Statistics

According to Intermountain MLS data, 723 single-family homes closed escrow in the Boise real estate market during September 2006 at an average selling price of $276,274.

This contrasts to 1,258 closed escrows during September 2005 at an average selling price of $236,262.

The numbers indicate a year-over-year 42.6% decline in closed units combined with a 14.5% increase in the average selling price.

I seriously doubt that we will continue to see 14.5% annual appreciation when we are experiencing a 42.6% decline in closed units.

(data pertains to Ada County single-family homes on lots or acreage). 

Greenspan Says Worst Is Over!

“The U.S. housing market appears to be emerging from its recent travails and the worst may be over”, says Alan Greenspan.

Whew~ I’m sure glad to know that everything is okay again!

For awhile there, I thought we might have to deal with this market downturn for several more years.

Greenspan, former Federal Reserve Chairman, made the remarks at a recent meeting in Calgary, Canada.

This incredible statement comes from the guy who re-inflated the U.S. economy with cheap mortgage money following the collapse of the stock market bubble in 2000 and the economic slowdown following 9/11/01.

Our current real estate slowdown is a direct result of the runaway U. S. real estate market of the past five years, fueled by unprecedented low interest rates.

Am I the only one who is noticing more and more pep talks from government officials and real estate “experts” predicting a soft landing and a speedy return to business as usual?

Builders Are Feeling The Pain

One of my builder friends is in trouble.

He is an excellent builder, a very good business person, and pretty conservative about taking risks.

Last year, he sold around 50 homes, at an average of $350-$400k each.

I have learned that he has laid off office staff after being caught in the classic trap of being unable to book new sales while carrying expensive, unneeded lot inventory.

In our market, builders are often lured into joining “builder teams” in subdivisions.

That means that the developers allow only a select few builders to buy lots and build in their subdivision.

Sounds attractive if you’re a builder ~ you have minimal competition from other builders and a dependable supply of building lots.

Here’s the catch:

The developers require the builders to close on the lots they need within 30 days of the developer recording the final map.

That means the builders must either write a check or obtain financing if they want to have lots for future build jobs or spec homes.

The system works reasonably well until the market stalls, as has now happened.

Then, the builders are stuck with lots they don’t need and either their working capital tied up, or they have significant carrying costs.

That is what has happened to my friend, the builder.

He hasn’t sold a build job since February and activity in his once-busy subdivision has all but vanished.

I drive through that subdivision regularly (my daughter lives there) and I rarely see a car in the parking lot at the model home complex.

This is the same subdivision where busloads of frenzied California speculators/flippers tried to buy every available home last summer.

Many of those “investor-owned” homes are now back on the market, competing against builders trying to sell spec homes on lots that were purchased at higher prices.

It’s not a fun time to be a builder in the Boise real estate market.