Friday, March 05, 2010
Thursday, March 04, 2010
Is Warren Buffet Right about Residential Real Estate?
He's affectionately known as the Oracle of Omaha. So when billionaire investor Warren Buffett dropped a few choice words about the real estate market into his annual letter to shareholders in his company Berkshire Hathaway Inc., beleaguered homeowners across the nation did a little happy dance.
The reason was simple: Warren Buffett predicted that the protracted real estate slump would end some time in 2011. "Within a year or so, residential housing problems should largely behind us," he wrote on February 27 in his letter. "Prices will remain far below 'bubble' levels, of course, but for every seller or lender hurt by this there will be a buyer who benefits."
While Buffett built his empire by betting on industries and companies he felt were undervalued, he has also made a few bad bets, as well. Indeed, reading between the lines of his investor's letter, hopeful housing watchers might proceed with caution.
Buffett, who was named the richest person in the world in 2008 by Forbes magazine with $62 billion, has a personal interest in seeing the residential real estate market recover. Berkshire Hathaway owns a real estate brokerage, a pre-fabricated home manufacturer, and other makers of products used to build homes. All of these investments were hammered during the housing crisis of the past two years. Clayton Homes, the pre-fab home company, saw its profits before taxes drop 9 percent last year.
In his letter, Buffett was frank about the dim prospects for new construction. "People thought it was good news a few years back when housing starts -- the supply side of the picture -- were running about 2 million annually," he wrote. "But household formations -- the demand side -- only amounted to about 1.2 million." With characteristic humor, Buffett said the only ways to correct that imbalance were for the U.S. to "blow up a lot of houses," "speed up householder formations by, say, encouraging teenagers to cohabitate," or to pull back on home construction.
Buffett's point is that housing values are at historic lows, which will induce more home shoppers to become buyers. But the troubles of the hundreds of thousands of people who owe more on their mortgages than their homes are worth won't be solved by a slight uptick in sales.
Buffett has always prided himself on investing when other investors are running scared. Last year's purchase of Burlington Northern Santa Fe Railroad is a good example. But Buffett's purchases of reinsurance firm General Re and corporate jet company NetJets both resulted huge losses. But this is a strategy available mostly to people with deep pockets, who can afford to make a mistake once in a while.
The key to the housing market, as Buffett would likely agree, is timing. Buy low and sell high works in any market. Just as Buffett did: He still lives in the same 5-bedroom stucco house he bought in Omaha, left, in 1958 for $31,500. Of course, it's now worth an estimated $700,000. That's appreciation we can relate to.
It Wasn't a Mortgage Recession After All: So Why Don't We Feel Better?
The Great Recession wasn't the result of subprime mortgage madness, according to a new report from the National Bureau of Economic Research. It was just a plain old bank panic. Yeah, but weren't bank panics supposed to be a thing of the past, thanks to the creation of the Federal Deposit Insurance Corporation in 1934?
That's the problem.
The report, by Yale economics professor Gary Gorton, says subprime mortgage securitization was a mess -- a house of cards probably doomed to fall -- but subprime by itself simply wasn't big enough to put the entire financial system at risk. That required a failure of the Renew Sale and Repurchase (REPO) market for collateralized securities that over the last 30 years had come to backstop global finance.
The problem here, of course is that hardly anyone has even heard of REPO, which manages to be an unregulated, uninsured $20 trillion business that is absolutely essential to keeping money flowing in the world. Subprime is only $1.2 trillion -- not big enough by itself to wag this dog.
According to Gorton, the entire basis of global banking changed in the 1980s, thanks to money market funds and junk bonds, which took all the profit out of being a traditional bank. So banks began securitizing loans to regain those lost profits.
The REPO market of interbank loans had always existed but it grew dramatically in the 1990s to support securitization. But since there was no deposit insurance for institutional loans measured in hundreds of millions of dollars, counterparties demanded collateral to back these overnight REPO loans that generally replaced demand deposits in the banking system.
While the subprime mortgage crisis began in January, 2007, the ensuing bank panic didn't happen until August of that year when lenders began making collateral calls and demanding haircuts (collateral fire sales at discounted prices) from borrowers that led to all the big banks being seriously under-capitalized.
The government, while well prepared to respond to a demand deposit bank panic like those of 1907 and 1933, was not only unprepared for the 2007 panic, they didn't even know there was a panic until it was well underway.
The panic meant that the value of all types of bonds declined, trillions of bank capital evaporated and the REPO market, itself, collapsed as all counter-parties lost faith in each other and the basis of the entire banking system literally disappeared.
So what does this mean? Well it explains why the banks still aren't lending money, because they don't have the means to back the loans they'd like to make, absent government intervention. It means that until the REPO market regains some steam there isn't going to be much natural progress in getting the economy to start growing again (take out the government stimulus and we're screwed). And it shows that the Fed and Treasury in the United States were no better able to protect us than you could keep your dog from running into the road and being hit by a car.
But it wasn't strictly a subprime mortgage crisis.
That's the problem.
The report, by Yale economics professor Gary Gorton, says subprime mortgage securitization was a mess -- a house of cards probably doomed to fall -- but subprime by itself simply wasn't big enough to put the entire financial system at risk. That required a failure of the Renew Sale and Repurchase (REPO) market for collateralized securities that over the last 30 years had come to backstop global finance.
The problem here, of course is that hardly anyone has even heard of REPO, which manages to be an unregulated, uninsured $20 trillion business that is absolutely essential to keeping money flowing in the world. Subprime is only $1.2 trillion -- not big enough by itself to wag this dog.
According to Gorton, the entire basis of global banking changed in the 1980s, thanks to money market funds and junk bonds, which took all the profit out of being a traditional bank. So banks began securitizing loans to regain those lost profits.
The REPO market of interbank loans had always existed but it grew dramatically in the 1990s to support securitization. But since there was no deposit insurance for institutional loans measured in hundreds of millions of dollars, counterparties demanded collateral to back these overnight REPO loans that generally replaced demand deposits in the banking system.
While the subprime mortgage crisis began in January, 2007, the ensuing bank panic didn't happen until August of that year when lenders began making collateral calls and demanding haircuts (collateral fire sales at discounted prices) from borrowers that led to all the big banks being seriously under-capitalized.
The government, while well prepared to respond to a demand deposit bank panic like those of 1907 and 1933, was not only unprepared for the 2007 panic, they didn't even know there was a panic until it was well underway.
The panic meant that the value of all types of bonds declined, trillions of bank capital evaporated and the REPO market, itself, collapsed as all counter-parties lost faith in each other and the basis of the entire banking system literally disappeared.
So what does this mean? Well it explains why the banks still aren't lending money, because they don't have the means to back the loans they'd like to make, absent government intervention. It means that until the REPO market regains some steam there isn't going to be much natural progress in getting the economy to start growing again (take out the government stimulus and we're screwed). And it shows that the Fed and Treasury in the United States were no better able to protect us than you could keep your dog from running into the road and being hit by a car.
But it wasn't strictly a subprime mortgage crisis.
Wednesday, March 03, 2010
Mortgage Defaults and Deficiency Judgements
Homeowners in jeopardy of losing their home to foreclosure may also face the consequences of a Deficiency Judgment. A Deficiency Judgment originates from the difference between what the homeowner owes on the property (the amount of the note or notes) and what the property sold for either in Sheriff Sale or Short Sale. There are some states that do not allow Deficiency Judgments unfortunately Nevada isn’t one of them.
There is reason for legitimate concern that Banks, Lenders and Lawyers will to try extract more money from people who have already lost their homes because of circumstances like job-loss or illness. Fears of financial backlash are further justified by the severe drop of home values in the Las Vegas area. In some areas of Clark County home values have dropped well over 50% to 60%.
One of the ways a deficiency is created is when property is sold at auction/ sheriff sale, and the first lien holder (usually the bank with the first mortgage) buys the property at the minimum amount required by law to take ownership. What the bank is doing is using their money to repurchase the property and payoff the loan they gave to the homeowner, with the intention of never paying off the entire loan amount creating the difference between what was owed on the house and what the house sold for. In most cases the bank is still well ahead of the game especially if a homeowner put some money down during time of the purchase and then paid on the property for a couple of years before they defaulted. The bank can also write-off the difference for the lost portion of the debt.. The bank is like the house, like the casino, it always wins.
For a homeowner to be responsible for the difference the state foreclosure laws have to allow the bank to sue the foreclosure victims for a deficiency judgment. Not all states allow this, Nevada does.
The banks may not act now on a Deficiency Judgment. They may check their losses some years down the road and then sneak up on the former homeowner with a demand for the difference. We continue to educate ourselves and our clients when it comes to Deficiency Judgments and other Foreclosure problems. In some cases it may be in the lenders best interest to waive deficiency judgments – sometimes not. When Modifying a Loan, or doing a Short Sale your agent has to do everything possible to make sure the bank agrees to waive its right to seek judgment. The Waiver should be recorded written document.
Beware of lawyers who try to instill fear of bank judgments or any other types of liens or judgments. They may have their own agenda. They may be trying to scare you into using more of their services when their services aren’t warranted. Bankruptcy Lawyers may try and push you into a Chapter 7 or a Chapter 13 to protect yourself against bank before any negotiating of a waiver has been tried. Lawyers make their money by litigating and they may try to keep you paying for litigation long after you need it.
Personal legal protection is the key. We live in a society where lawsuits are an every day event. There is always the potential for a lawsuit, no matter how frivolous or trite, between one party and the other. The legal profession is a world filled with people who twist and distort words and phrases to serve their own ends. This is a profession that works diligently at trying to extort and destroy individuals and businesses with legalese.
Below is what is called mortgage walk-away trustee sale states, meaning they are non-judicial foreclosure states.
In those states, generally, when they foreclose on you, they cannot pursue you for their financial losses.
Many, such as California, do in theory allow a lender to choose judicial foreclosure but in those cases the lenders only do so if a borrower has significant other assets. This is the “one action” rule that lets the lender either pursue non-judicial foreclosure, at lower cost and less time, or judicial foreclosure that costs more money and takes more time but lets them go after you for their financial losses.
Alaska
Arizona
Arkansas
California
Colorado
District of Columbia (Washington DC)
Georgia
Hawaii
Idaho
Mississippi
Missouri
Montana (as long as non-judicial foreclosure is used)
Nevada – note that the lender CAN get a deficiency judgment (See below)
New Hampshire
Oregon
Tennessee
Texas (but even in a non-judicial foreclosure, the lender can pursue a deficiency judgment)
Virginia
Washington
West Virginia
These are states that also allow non-judicial foreclosure, and/or where non-judicial foreclosure is more common and deficiency judgments can be obtained more easily:
Michigan
Minnesota
North Carolina
Rhode Island
South Dakota
Utah
Wyoming
Tuesday, March 02, 2010
Monday, March 01, 2010
Friday, February 12, 2010
Affordability Forecast for Housing
Reprinted from newsletter source.
John Burns Real Estate Consulting
U.S. Building Market Intelligence™
February 12, 2010
Affordability is a "C-": Are We Nuts?
Before I get into our Affordability calculations, let me explain the methodology behind all of the grades below.
1. We collect a complete history on 70+ variables and forecast the important ones by forecasting each MSA and rolling it up. Our U.S. Housing Forecast includes a complete history on every variable below, and forecasts on the important ones, and is only $145 for one month and $450 for an annual subscription.
2. In this monthly email, we publish the current stats along with the historical minimums, maximums and averages as a service to the industry.
3. Each indicator is graded based on a bell curve where an "A" is its historical best, a "C" is its historical average, and a "F" is its historical worst. The grades are designed to provide a simple tool for decision makers to scan the data.
4. Each of the 8 categories has a grade that is nothing more than the average of the grades under it.
Our Affordability grade is a "C-", which on the surface looks absolutely ridiculous. With an "A-" for our JBREC Affordability Index (we recently renamed our Housing Cycle Barometer) and an "A+" for mortgage rates, one might think that Affordability analysis should stop there.
However, only 50% of new home buyers traditionally are coming out of an apartment. The other half need a down payment. Here is what is weighing down our overall grade:
• Equity: Average equity in a home is $82,471, which is a "D-" (our grades use current dollars to account for inflation over time)
• LTV: Loan-to-value of 62.5% is a "F" because of the historical norm of 34.5% (this statistic includes the almost 1/3 of all homeowners who do not have a mortgage), and
• Income Growth: Incomes have declined 3.9% in the last year, which is the worst year on record.
What does this mean? Affordability has rarely been better for an entry-level buyer, and affordability has rarely been worse for the many potential move up / move down buyers who bought or refinanced their home in the last decade. With this knowledge, and hopefully some more detailed analysis at the local level, you can make great decisions for your business.
Economic Growth............................................................................D+
Economic growth has begun to improve compared to last month, and we are seeing signs that job losses are nearly over. The preliminary fourth quarter GDP growth rate skyrocketed to 5.7%, compared to a final value of 2.2% in the third quarter. Much of the growth was the result of recent government stimulus and an increase in inventories. The pace of job losses also eased this month, although in the last 12 months the U.S. has lost 3.94 million jobs, which is equal to a decline of 3% of the total payroll workforce. Unemployment fell unexpectedly compared to last month to 9.7%, while the broader measure of unemployment, the U-6, also fell to 16.5%. Mass layoff events - defined as a cut of 50 or more jobs from a single employer - also eased to 1,726 this month, and has fallen 30% compared to one year ago. Job seekers are finding it increasingly difficult to find employment, as the amount of time required to find work is currently double the historical average. The CPI (all items) increased again to 2.7% from one year ago, while the Core CPI (minus food and energy) also rose to 1.8%.
Leading Indicators...........................................................................C
Leading indicators rose this month for the most part, yet the pace of improvement has begun to ease. The December Leading Economic Index 6-month growth rate increased to 10.8% after declining for the past two months, and remains very high compared to history. The ECRI Leading Index - an indicator of future U.S. growth - fell in January, yet remains near its highest level in 77 weeks. The index at the end of January increased 21.5% year-over-year, its fifth largest growth rate on record since ECRI began tracking that statistic in 1968. Stocks ended their upward streak in January, yet all four major indices we track have posted positive year-over-year results ranging from +15% to +36%. The S&P Homebuilding Index also improved in December. The spread between corporate bonds and the 10-year treasury fell in December, declining to 150 bps after peaking at nearly 270 bps in March. Since the 10-year treasury is seen as a risk-free investment, the spread between corporate bonds and the 10-year treasury displays the perceived risk of investing in corporate bonds, which has declined recently as Wall Street has become less worried about businesses failing. According to the 4th quarter CEO Confidence Index, CEOs are now much more confident about the economy. Confidence as of the fourth quarter is now approaching early-2007 levels. The survey of CEOs revealed that 84% expect their profits to either remain flat or increase in the next 12 months and 87% of CEOs plan to keep the same number of employees or increase the number of employees over the next year.
Affordability......................................................................................C-
This month, affordability worsened as a result of a slight increase in home prices and a slight rise in mortgage rates. However, our housing-cost-to-income ratio remains at just 27.2%, and housing affordability remains excellent compared to history. Affordability is so good that owning the median-price home is now nearly just as affordable as renting the average apartment - a difference of just $54 per month. Household income has fallen 3.6% year-over-year to $52,817 as a result of large job losses and government furloughs. Despite the recent steady drop in incomes, the median-home-price-to-income ratio remains just slightly above the historical average at 3.4. The 30-year fixed mortgage rate increased slightly to 4.98% by January month-end, while adjustable mortgage rates fell to 4.29%. The Fed's overnight lending target rate remains at a range of 0.00% to 0.25%, which is the lowest level on record. The share of ARM applications increased to 4.5% by the end of January which is a significantly smaller share than the peak level of 35% of total applications in early 2005.
Consumer Behavior..........................................................................D
Consumer behavior improved once again this month. Consumer confidence increased in January to 55.9 yet remains well below the historical average of 97. Consumer sentiment improved this month as well to 74.4 - also low compared to the historical average. The Consumer Comfort Index rose to a monthly average of -44.5 in December. The personal savings rate of 4.8% increased compared to last month, yet down from the recent peak of 6.9% in May. The U.S. net worth has increased quickly over the past two quarters due to improvement in the stock market, but has fallen $3.4 trillion within the past year. The Misery Index also increased this month due to an increase in inflation.
Existing Home Market.......................................................................D+
The existing home market weakened this month. The seasonally adjusted annual resale activity plummeted to less than 5.5 million homes in December, according to the National Association of Realtors (NAR). This is a decline of 15% year-over-year, and a drop of 16.7% since last month. Despite the seasonally adjusted decline, on a rolling 12-month basis sales have improved for six consecutive months, increasing 1.0% this month and 4.9% year-over-year. The federal tax credit was set to expire on November 30th until it was ultimately extended to Spring 2010. This led to a surge of buyers closing by November, and in December the rush to close was lost. The national median price of an existing single-family home spiked to $177,500 in December, up from $169,300 in November. The recent increase led to a 1.4% year-over-year gain, and marks the first positive growth rate since July 2006. The Case-Shiller national index, which tracks paired sales, improved in the third quarter, and the monthly 10 and 20 market composite indices both declined compared to last month for the first time since April 2009. Although the indices remain down year-over-year, the rate of decline continued to ease. The number of unsold homes rose to 7.2 months of supply in December, rising above the historical average. Pending home sales volume inched upward in December, and have increased 11% year-over-year. As of the third quarter, 23% of all homes with a mortgage throughout the U.S. were worth less than the balance of the mortgage.
New Home Market..............................................................................D+
Overall, the new home market worsened compared to last month. Builder confidence fell again one point in January to 15. Seasonally adjusted new home sales volume also fell in December to 342,000 transactions, declining 9% year-over-year. The rolling 12-month total through December also fell this month to 373,000 transactions, tying the all time record low, previously set in July 1982. The median single-family new home price rose to $221,300 in December, but has fallen 3.6% year-over-year. The inventory of unsold homes increased for the second consecutive month to 8.1 months of supply and the volume of new homes for sale remains flat at 234,000 homes, which is the lowest volume since April 1971.
Repairs and Remodeling....................................................................D-
Conditions for residential repairs and remodeling were weaker than last month. Homeowner improvement activity fell in the third quarter, representing a drop of 9.4% year-over-year. The Remodeling Market Index increased in the third quarter to 39.8 and has rebounded after bottoming out in the fourth quarter of 2008. Despite recent increases, the index remains well below the historical average of 50. Residential construction has fallen 19% year-over-year as of November, yet the pace of decline has eased.
Housing Supply...................................................................................F
In general, housing supply has declined compared to last month. Total completions fell to 768,000 this month, representing a 25% year-over-year decline. Seasonally adjusted new home starts also fell in December, due to a 7% drop in single-family starts. Multifamily starts increased 12% since last month, yet remain down 38% from one year ago. Seasonally adjusted total permits increased to 653,000 this month, representing an increase of 11% compared to November, but a decline of 16% year-over-year and have fallen nearly 74% since its most recent peak in September 2005. Although vacancy rates in the U.S. have improved in recent quarters, the majority of the U.S. remains oversupplied compared to history. Just five states in the U.S. are currently undersupplied - New Mexico, Oklahoma, Wyoming, South Dakota and North Dakota.
U.S. HOUSING MARKET STATISTICS
Data Current Through February 11, 2010
Grade*
Overall Grade D+
Statistic Grade
Economic Growth D+
These are the best indicators of how the economy is currently performing.
Real GDP (annual rate) 5.7% C+
Employment Growth (1-year Change)
- Non-ag Payroll, NSA -3,943,000 D
Employment Growth Rate
- Non-ag Payroll, NSA -3.0% D
Unemployment Rate 9.7% F
Average Length of Unemployment (Weeks) 30.2
Median Length of Unemployment (Weeks) 19.9
% of Labor Force Unemployed 27 weeks and over 4.1%
U.S. Initial Jobless Claims 480,000
Mass Layoff Events, SA (YOY % Change) -29.9% B+
Productivity 6.2% B-
Retail Sales 5.4% C
Capacity Utilization 72.0% F
Inflation
Core CPI 1.8% B+
Full CPI 2.7% C
Personal Income Growth, nominal -0.3% F
Federal Deficit (last 12 mos., $mil curr.) -$1,472,921 F
U.S. Immigration as a % of Total Population 0.4%
Total Population Growth 1.0%
Total Households 111,711,000
- Growth Rate 0.9% D
Owned Households 75,038,000
- Growth Rate 0.4% D
Rented Households 36,673,000
- Growth Rate 2.0% C+
Statistic Grade
Leading Indicators C
These have all proven to be predictable early indicators of the direction of economic growth.
Leading Econ. Index (Ann. Growth Rate Last 6 Mos.) 10.8% B
ECRI Leading Index 21.5% A-
Manpower Net Employment Outlook 6% D
U.S. Vistage CEO Confidence Index 88%
CEO Economic Outlook Survey 72%
U.S. Average Hours Worked per Week 33.3
Temporary Employed Workers -23.9% F
Corporate Profit Growth (pre-tax) -6.7% D
Corporate Bond Spread (Corp Bond vs. 10-Yr Tres.) 150.0%
Capital Goods New Orders -10.2% D
Money Supply - M2 0.7% C-
Interest Rate Spread
10-year Treasury 3.66%
2-year Treasury 0.86%
Interest Rate Spread 2.80% A-
3-month LIBOR 0.25%
3-month Treasury 0.06%
TED Spread 0.19% B
Stock Market (Return over last 12 months)
Dow Jones 15% C
S&P 500 19% C+
NASDAQ 36% B-
Wilshire 5000 22% B-
S&P Super Homebuilding 18% C
Tougher Standards on Business Loans - Large Firms -6% B
Tougher Standards on Business Loans - Small Firms 4% C+
Crude Oil Price (Current $) $78.22 D
ISM Manufacturing Index 58.4 C+
ISM Non-Manufacturing Business Activity Index 52.2 C-
Statistic Grade
Affordability C-
These statistics are probably the most important indicators of short-term housing market performance.
Conforming Mortgage Rates (contract rate; an additional 0.6 - 1.0 points are also paid up front by the borrower)
JBREC Affordability Index 1.4 A-
US Median Home Payment / Income Ratio 27.2%
US Median Home Price / Income Ratio 3.4 C
Mortgage Rates, Fixed 4.98% A+
Mortgage Rates, Adjustable 4.29% B+
Fixed/Adjustable Spread 0.69% D-
Fixed/10-year Spread 1.32% D+
Fed Funds Rate 0.15%
Percentage of Adjust. Loans 4.5% A-
Equity/Owned Home (Current $) $82,471 D-
Debt % in Home (LTV) 62.4% F
Median Household Income $53,293
- Growth Rate, nominal -3.9% F
Statistic Grade
Consumer Behavior D
Consumer attitudes correlate well with short-term housing sales performance. Consumer income growth, debt levels and job prospects affect the long-term outlook for housing sales.
Consumer Confidence Index 55.9 D
Consumer Sentiment Index 74.4 D+
Consumer Comfort Index -44.5 F
Revolving Cons. Credit per Household $7,828
- Growth Rate -9.2% A+
Personal Savings Rate 4.8% C-
U.S. Net Worth Growth Rate -6.0% D
Financial Obligation Ratio 17.8% D+
Misery Index (Unemployment + Inflation) 12.70 D+
Statistic Grade
Existing Home Market D+
Sales volumes correlate well with the Housing Cycle calculations, and boost the trade up New Home sales market.
S&P/Case-Shiller® U.S. Price Index (YOY % Change) -8.9% D
NAR Single-Family Median Home Price $177,500
NAR Single-Family Annual Price Appreciation 1.4% C-
Freddie Mac Annual Price Appreciation -4.0% F
Annual Sales Volume, SA 5,450,000 B
Existing Home Inventory for Sale, SA 3,289,000 D+
Months Supply of Unsold Homes, SA 7.2 C
Purchase Mort. App. Index, SA 226.9 C-
Pending Home Sales Index, SA 96.6 D+
Homeownership Rate 67.2% B
Statistic Grade
New Home Market D+
High appreciation and low inventory would mean an excellent short-term outlook for the new home industry.
Housing Market Index 15 F
Multifamily Condo Market Index 24 D
Median Price, NSA $221,300
Annual Appreciation Rate -3.6% D
Constant Quality Price Index (YOY % Change) 0.2% D+
Sales Volume, SA 342,000 F
New Home Inventory for Sale, NSA 234,000 B+
Months Supply of Unsold Homes, SA 8.1 B-
Months of Homes Completed, SA 3.4 B-
Months of Homes Under Const., SA 3.5 C
Months of Homes Not Started, SA 1.2 C+
Statistic Grade
Repairs and Remodeling D-
High remodeling levels are good for the economy and are closely tied to consumer confidence.
Homeowner Improvement Activity (YOY % Change) -9.4% D-
Remodeling Market Index - Current 39.8 D+
Remodeling Market Index - Future Expectations 38.7 D+
Private Residential Construction (YOY % Change) -19.2% D
Residential Investment as % of GDP (nominal) 2.5% F
Statistic Grade
Housing Supply F
High construction levels are good for the economy. However, if new supply exceeds demand, prices could fall.
New Housing Units Completed, SA 768,000 F
Single-Family Starts, SA 456,000 F
Multifamily Starts, SA 101,000 F
Total Starts, SA 557,000 F
Single-Family Permits, SA 508,000 F
Multifamily Permits, SA 145,000 F
Total Permits, SA 653,000 F
Manuf. Housing Placements, SA 53,000 F
Total Supply, SA 706,000 F
Total Housing Stock 130,587,000
Homeowner Vacancy Rate 2.7% F
SA stands for Seasonally Adjusted Annual Rate. NSA stands for Not Seasonally Adjusted.
John Burns Real Estate Consulting, Inc.
John Burns Real Estate Consulting
U.S. Building Market Intelligence™
February 12, 2010
Affordability is a "C-": Are We Nuts?
Before I get into our Affordability calculations, let me explain the methodology behind all of the grades below.
1. We collect a complete history on 70+ variables and forecast the important ones by forecasting each MSA and rolling it up. Our U.S. Housing Forecast includes a complete history on every variable below, and forecasts on the important ones, and is only $145 for one month and $450 for an annual subscription.
2. In this monthly email, we publish the current stats along with the historical minimums, maximums and averages as a service to the industry.
3. Each indicator is graded based on a bell curve where an "A" is its historical best, a "C" is its historical average, and a "F" is its historical worst. The grades are designed to provide a simple tool for decision makers to scan the data.
4. Each of the 8 categories has a grade that is nothing more than the average of the grades under it.
Our Affordability grade is a "C-", which on the surface looks absolutely ridiculous. With an "A-" for our JBREC Affordability Index (we recently renamed our Housing Cycle Barometer) and an "A+" for mortgage rates, one might think that Affordability analysis should stop there.
However, only 50% of new home buyers traditionally are coming out of an apartment. The other half need a down payment. Here is what is weighing down our overall grade:
• Equity: Average equity in a home is $82,471, which is a "D-" (our grades use current dollars to account for inflation over time)
• LTV: Loan-to-value of 62.5% is a "F" because of the historical norm of 34.5% (this statistic includes the almost 1/3 of all homeowners who do not have a mortgage), and
• Income Growth: Incomes have declined 3.9% in the last year, which is the worst year on record.
What does this mean? Affordability has rarely been better for an entry-level buyer, and affordability has rarely been worse for the many potential move up / move down buyers who bought or refinanced their home in the last decade. With this knowledge, and hopefully some more detailed analysis at the local level, you can make great decisions for your business.
Economic Growth............................................................................D+
Economic growth has begun to improve compared to last month, and we are seeing signs that job losses are nearly over. The preliminary fourth quarter GDP growth rate skyrocketed to 5.7%, compared to a final value of 2.2% in the third quarter. Much of the growth was the result of recent government stimulus and an increase in inventories. The pace of job losses also eased this month, although in the last 12 months the U.S. has lost 3.94 million jobs, which is equal to a decline of 3% of the total payroll workforce. Unemployment fell unexpectedly compared to last month to 9.7%, while the broader measure of unemployment, the U-6, also fell to 16.5%. Mass layoff events - defined as a cut of 50 or more jobs from a single employer - also eased to 1,726 this month, and has fallen 30% compared to one year ago. Job seekers are finding it increasingly difficult to find employment, as the amount of time required to find work is currently double the historical average. The CPI (all items) increased again to 2.7% from one year ago, while the Core CPI (minus food and energy) also rose to 1.8%.
Leading Indicators...........................................................................C
Leading indicators rose this month for the most part, yet the pace of improvement has begun to ease. The December Leading Economic Index 6-month growth rate increased to 10.8% after declining for the past two months, and remains very high compared to history. The ECRI Leading Index - an indicator of future U.S. growth - fell in January, yet remains near its highest level in 77 weeks. The index at the end of January increased 21.5% year-over-year, its fifth largest growth rate on record since ECRI began tracking that statistic in 1968. Stocks ended their upward streak in January, yet all four major indices we track have posted positive year-over-year results ranging from +15% to +36%. The S&P Homebuilding Index also improved in December. The spread between corporate bonds and the 10-year treasury fell in December, declining to 150 bps after peaking at nearly 270 bps in March. Since the 10-year treasury is seen as a risk-free investment, the spread between corporate bonds and the 10-year treasury displays the perceived risk of investing in corporate bonds, which has declined recently as Wall Street has become less worried about businesses failing. According to the 4th quarter CEO Confidence Index, CEOs are now much more confident about the economy. Confidence as of the fourth quarter is now approaching early-2007 levels. The survey of CEOs revealed that 84% expect their profits to either remain flat or increase in the next 12 months and 87% of CEOs plan to keep the same number of employees or increase the number of employees over the next year.
Affordability......................................................................................C-
This month, affordability worsened as a result of a slight increase in home prices and a slight rise in mortgage rates. However, our housing-cost-to-income ratio remains at just 27.2%, and housing affordability remains excellent compared to history. Affordability is so good that owning the median-price home is now nearly just as affordable as renting the average apartment - a difference of just $54 per month. Household income has fallen 3.6% year-over-year to $52,817 as a result of large job losses and government furloughs. Despite the recent steady drop in incomes, the median-home-price-to-income ratio remains just slightly above the historical average at 3.4. The 30-year fixed mortgage rate increased slightly to 4.98% by January month-end, while adjustable mortgage rates fell to 4.29%. The Fed's overnight lending target rate remains at a range of 0.00% to 0.25%, which is the lowest level on record. The share of ARM applications increased to 4.5% by the end of January which is a significantly smaller share than the peak level of 35% of total applications in early 2005.
Consumer Behavior..........................................................................D
Consumer behavior improved once again this month. Consumer confidence increased in January to 55.9 yet remains well below the historical average of 97. Consumer sentiment improved this month as well to 74.4 - also low compared to the historical average. The Consumer Comfort Index rose to a monthly average of -44.5 in December. The personal savings rate of 4.8% increased compared to last month, yet down from the recent peak of 6.9% in May. The U.S. net worth has increased quickly over the past two quarters due to improvement in the stock market, but has fallen $3.4 trillion within the past year. The Misery Index also increased this month due to an increase in inflation.
Existing Home Market.......................................................................D+
The existing home market weakened this month. The seasonally adjusted annual resale activity plummeted to less than 5.5 million homes in December, according to the National Association of Realtors (NAR). This is a decline of 15% year-over-year, and a drop of 16.7% since last month. Despite the seasonally adjusted decline, on a rolling 12-month basis sales have improved for six consecutive months, increasing 1.0% this month and 4.9% year-over-year. The federal tax credit was set to expire on November 30th until it was ultimately extended to Spring 2010. This led to a surge of buyers closing by November, and in December the rush to close was lost. The national median price of an existing single-family home spiked to $177,500 in December, up from $169,300 in November. The recent increase led to a 1.4% year-over-year gain, and marks the first positive growth rate since July 2006. The Case-Shiller national index, which tracks paired sales, improved in the third quarter, and the monthly 10 and 20 market composite indices both declined compared to last month for the first time since April 2009. Although the indices remain down year-over-year, the rate of decline continued to ease. The number of unsold homes rose to 7.2 months of supply in December, rising above the historical average. Pending home sales volume inched upward in December, and have increased 11% year-over-year. As of the third quarter, 23% of all homes with a mortgage throughout the U.S. were worth less than the balance of the mortgage.
New Home Market..............................................................................D+
Overall, the new home market worsened compared to last month. Builder confidence fell again one point in January to 15. Seasonally adjusted new home sales volume also fell in December to 342,000 transactions, declining 9% year-over-year. The rolling 12-month total through December also fell this month to 373,000 transactions, tying the all time record low, previously set in July 1982. The median single-family new home price rose to $221,300 in December, but has fallen 3.6% year-over-year. The inventory of unsold homes increased for the second consecutive month to 8.1 months of supply and the volume of new homes for sale remains flat at 234,000 homes, which is the lowest volume since April 1971.
Repairs and Remodeling....................................................................D-
Conditions for residential repairs and remodeling were weaker than last month. Homeowner improvement activity fell in the third quarter, representing a drop of 9.4% year-over-year. The Remodeling Market Index increased in the third quarter to 39.8 and has rebounded after bottoming out in the fourth quarter of 2008. Despite recent increases, the index remains well below the historical average of 50. Residential construction has fallen 19% year-over-year as of November, yet the pace of decline has eased.
Housing Supply...................................................................................F
In general, housing supply has declined compared to last month. Total completions fell to 768,000 this month, representing a 25% year-over-year decline. Seasonally adjusted new home starts also fell in December, due to a 7% drop in single-family starts. Multifamily starts increased 12% since last month, yet remain down 38% from one year ago. Seasonally adjusted total permits increased to 653,000 this month, representing an increase of 11% compared to November, but a decline of 16% year-over-year and have fallen nearly 74% since its most recent peak in September 2005. Although vacancy rates in the U.S. have improved in recent quarters, the majority of the U.S. remains oversupplied compared to history. Just five states in the U.S. are currently undersupplied - New Mexico, Oklahoma, Wyoming, South Dakota and North Dakota.
U.S. HOUSING MARKET STATISTICS
Data Current Through February 11, 2010
Grade*
Overall Grade D+
Statistic Grade
Economic Growth D+
These are the best indicators of how the economy is currently performing.
Real GDP (annual rate) 5.7% C+
Employment Growth (1-year Change)
- Non-ag Payroll, NSA -3,943,000 D
Employment Growth Rate
- Non-ag Payroll, NSA -3.0% D
Unemployment Rate 9.7% F
Average Length of Unemployment (Weeks) 30.2
Median Length of Unemployment (Weeks) 19.9
% of Labor Force Unemployed 27 weeks and over 4.1%
U.S. Initial Jobless Claims 480,000
Mass Layoff Events, SA (YOY % Change) -29.9% B+
Productivity 6.2% B-
Retail Sales 5.4% C
Capacity Utilization 72.0% F
Inflation
Core CPI 1.8% B+
Full CPI 2.7% C
Personal Income Growth, nominal -0.3% F
Federal Deficit (last 12 mos., $mil curr.) -$1,472,921 F
U.S. Immigration as a % of Total Population 0.4%
Total Population Growth 1.0%
Total Households 111,711,000
- Growth Rate 0.9% D
Owned Households 75,038,000
- Growth Rate 0.4% D
Rented Households 36,673,000
- Growth Rate 2.0% C+
Statistic Grade
Leading Indicators C
These have all proven to be predictable early indicators of the direction of economic growth.
Leading Econ. Index (Ann. Growth Rate Last 6 Mos.) 10.8% B
ECRI Leading Index 21.5% A-
Manpower Net Employment Outlook 6% D
U.S. Vistage CEO Confidence Index 88%
CEO Economic Outlook Survey 72%
U.S. Average Hours Worked per Week 33.3
Temporary Employed Workers -23.9% F
Corporate Profit Growth (pre-tax) -6.7% D
Corporate Bond Spread (Corp Bond vs. 10-Yr Tres.) 150.0%
Capital Goods New Orders -10.2% D
Money Supply - M2 0.7% C-
Interest Rate Spread
10-year Treasury 3.66%
2-year Treasury 0.86%
Interest Rate Spread 2.80% A-
3-month LIBOR 0.25%
3-month Treasury 0.06%
TED Spread 0.19% B
Stock Market (Return over last 12 months)
Dow Jones 15% C
S&P 500 19% C+
NASDAQ 36% B-
Wilshire 5000 22% B-
S&P Super Homebuilding 18% C
Tougher Standards on Business Loans - Large Firms -6% B
Tougher Standards on Business Loans - Small Firms 4% C+
Crude Oil Price (Current $) $78.22 D
ISM Manufacturing Index 58.4 C+
ISM Non-Manufacturing Business Activity Index 52.2 C-
Statistic Grade
Affordability C-
These statistics are probably the most important indicators of short-term housing market performance.
Conforming Mortgage Rates (contract rate; an additional 0.6 - 1.0 points are also paid up front by the borrower)
JBREC Affordability Index 1.4 A-
US Median Home Payment / Income Ratio 27.2%
US Median Home Price / Income Ratio 3.4 C
Mortgage Rates, Fixed 4.98% A+
Mortgage Rates, Adjustable 4.29% B+
Fixed/Adjustable Spread 0.69% D-
Fixed/10-year Spread 1.32% D+
Fed Funds Rate 0.15%
Percentage of Adjust. Loans 4.5% A-
Equity/Owned Home (Current $) $82,471 D-
Debt % in Home (LTV) 62.4% F
Median Household Income $53,293
- Growth Rate, nominal -3.9% F
Statistic Grade
Consumer Behavior D
Consumer attitudes correlate well with short-term housing sales performance. Consumer income growth, debt levels and job prospects affect the long-term outlook for housing sales.
Consumer Confidence Index 55.9 D
Consumer Sentiment Index 74.4 D+
Consumer Comfort Index -44.5 F
Revolving Cons. Credit per Household $7,828
- Growth Rate -9.2% A+
Personal Savings Rate 4.8% C-
U.S. Net Worth Growth Rate -6.0% D
Financial Obligation Ratio 17.8% D+
Misery Index (Unemployment + Inflation) 12.70 D+
Statistic Grade
Existing Home Market D+
Sales volumes correlate well with the Housing Cycle calculations, and boost the trade up New Home sales market.
S&P/Case-Shiller® U.S. Price Index (YOY % Change) -8.9% D
NAR Single-Family Median Home Price $177,500
NAR Single-Family Annual Price Appreciation 1.4% C-
Freddie Mac Annual Price Appreciation -4.0% F
Annual Sales Volume, SA 5,450,000 B
Existing Home Inventory for Sale, SA 3,289,000 D+
Months Supply of Unsold Homes, SA 7.2 C
Purchase Mort. App. Index, SA 226.9 C-
Pending Home Sales Index, SA 96.6 D+
Homeownership Rate 67.2% B
Statistic Grade
New Home Market D+
High appreciation and low inventory would mean an excellent short-term outlook for the new home industry.
Housing Market Index 15 F
Multifamily Condo Market Index 24 D
Median Price, NSA $221,300
Annual Appreciation Rate -3.6% D
Constant Quality Price Index (YOY % Change) 0.2% D+
Sales Volume, SA 342,000 F
New Home Inventory for Sale, NSA 234,000 B+
Months Supply of Unsold Homes, SA 8.1 B-
Months of Homes Completed, SA 3.4 B-
Months of Homes Under Const., SA 3.5 C
Months of Homes Not Started, SA 1.2 C+
Statistic Grade
Repairs and Remodeling D-
High remodeling levels are good for the economy and are closely tied to consumer confidence.
Homeowner Improvement Activity (YOY % Change) -9.4% D-
Remodeling Market Index - Current 39.8 D+
Remodeling Market Index - Future Expectations 38.7 D+
Private Residential Construction (YOY % Change) -19.2% D
Residential Investment as % of GDP (nominal) 2.5% F
Statistic Grade
Housing Supply F
High construction levels are good for the economy. However, if new supply exceeds demand, prices could fall.
New Housing Units Completed, SA 768,000 F
Single-Family Starts, SA 456,000 F
Multifamily Starts, SA 101,000 F
Total Starts, SA 557,000 F
Single-Family Permits, SA 508,000 F
Multifamily Permits, SA 145,000 F
Total Permits, SA 653,000 F
Manuf. Housing Placements, SA 53,000 F
Total Supply, SA 706,000 F
Total Housing Stock 130,587,000
Homeowner Vacancy Rate 2.7% F
SA stands for Seasonally Adjusted Annual Rate. NSA stands for Not Seasonally Adjusted.
John Burns Real Estate Consulting, Inc.
Monday, February 08, 2010
SENIOR HOUSING RECOVERY IN 2010?
Senior Housing
Preparing for Recovery in 2010 and Beyond
It appears, based upon activity in 4Q09, recovery in the senior housing sector has started. Approaching the end of last year, around $1 billion of tax-exempt senior housing transactions financings were completed. Practically all of those transactions had been waiting on the capital markets to re-open for twelve to eighteen months. The mix of pro¬jects heavily favored re-positioning of existing campuses along with a few new developments. Arguably, all are “legacy” projects and reflective of the market two to four years ago when those projects began their planning proc¬ess.
While some savvy sponsors have started planning for ex-pansions, repositioning, acquisitions, or new campus devel-opment during the past two years, many are still waiting on further indications of stability and recovery in their markets as well as the capital markets. Some have seen their occu¬pancy erode after years of stable operations with waiting lists due to the effects of the economy. We believe now is the time to mobilize and act to take advantage of new trends in senior housing, lower construction costs, better labor markets, and access to the capital markets.
Those now starting their planning for new capital projects, or picking up where you may have left off, should take fresh a look at their market and adjust their project positioning to reflect:
• Affordability – Today’s seniors have been particularly affected by the economy. The values of their homes may be down 20% to 50% from three years ago and while they may still have significant equity, they are feel¬ing the perception of loss and the fear of more to come.
In addition, many have seen retirement incomes im¬pacted by the economy as well. Creating a resident service program and pricing that addresses these fac¬tors is essential for success:
• Unbundling of Services - Consider unbundling of services to provide a more value driven resident pricing program. Offering a “pay as you use” service package can provide a significant com-petitive advantage over your competition.
• Lifestyle is Important, but Affordability Rules – Our advertising and sales/leasing approaches over the years have reinforced lifestyle, security, and amenities, but in challenging economic times, consumers seek “best value.” As an in¬dustry, we have done a great job selling the life¬style, the consumer “gets it”, now they want it at the best price. Be the value leader in your mar¬ket.
• Keen Attention to Competitors – Your competition is dealing with the same market trends and reacting as well. Pricing, services, programs, advertising are all being constantly evaluated and tweaked. Make sure you are constantly aware of not only what you competi¬tion is doing, but how your residents and prospects per¬ceive it. Innovators are going to be the winners in the recovery.
• Operational Trends and Opportunities – Most operators are now reporting decreased turnover, better quality applicants, and generally a greater appreciation and dedication by employees to their current positions.
However, there are other operational trends to incorpo¬rate into new project planning:
• Sustainability- The energy industry has made huge strides in the past five years in more effi¬cient technologies. Further, many states are making stimulus funds available for solar and other technologies.
• Meal Preparation and Delivery Systems – there are now several pre-prepared meal delivery sys¬tems that provide high quality food products at very competitive prices. Use of these systems can greatly reduce personnel costs and reduce storage requirements. While they may not be the solution for all communities, they are provid¬ing an alternative that is worthy of more investi¬gation
• Lower Capital Costs – We have all read about lower construction costs now available in the market, but most of the other “soft costs” associated with development of a new project have also seen significant savings. De¬sign costs, engineering services, appraisals, feasibility studies, furnishings, fixtures and equipment are all af¬fected by the market and present value opportunities for those acting now on their projects.
As we know, the planning process for senior housing and the requisite pre-sales period is time intensive. Waiting un¬til all the signals are positive means you will likely miss op¬portunities. Starting the planning now is a prudent action step. If the market slows again during the process, you have the opportunity to adjust “on the fly” and slow along with it. However, missing this window will mean higher costs if you have to play “catch up” and risk missing the de¬mand currently building as seniors have been delaying their decisions to move.
For more information please contact:
Roger Harper
615-218-4102
rharper@rharperconsulting.com
www.rharperconsulting.com
RHarper Consulting Group provides development consult¬ing, program management, and owner representation ser¬vices focused on the senior living and mixed use sectors.
In addition, Mr. Harper is a listed mediator and arbitrator and provides dispute resolution services for the construc¬tion and real estate industries.
Preparing for Recovery in 2010 and Beyond
It appears, based upon activity in 4Q09, recovery in the senior housing sector has started. Approaching the end of last year, around $1 billion of tax-exempt senior housing transactions financings were completed. Practically all of those transactions had been waiting on the capital markets to re-open for twelve to eighteen months. The mix of pro¬jects heavily favored re-positioning of existing campuses along with a few new developments. Arguably, all are “legacy” projects and reflective of the market two to four years ago when those projects began their planning proc¬ess.
While some savvy sponsors have started planning for ex-pansions, repositioning, acquisitions, or new campus devel-opment during the past two years, many are still waiting on further indications of stability and recovery in their markets as well as the capital markets. Some have seen their occu¬pancy erode after years of stable operations with waiting lists due to the effects of the economy. We believe now is the time to mobilize and act to take advantage of new trends in senior housing, lower construction costs, better labor markets, and access to the capital markets.
Those now starting their planning for new capital projects, or picking up where you may have left off, should take fresh a look at their market and adjust their project positioning to reflect:
• Affordability – Today’s seniors have been particularly affected by the economy. The values of their homes may be down 20% to 50% from three years ago and while they may still have significant equity, they are feel¬ing the perception of loss and the fear of more to come.
In addition, many have seen retirement incomes im¬pacted by the economy as well. Creating a resident service program and pricing that addresses these fac¬tors is essential for success:
• Unbundling of Services - Consider unbundling of services to provide a more value driven resident pricing program. Offering a “pay as you use” service package can provide a significant com-petitive advantage over your competition.
• Lifestyle is Important, but Affordability Rules – Our advertising and sales/leasing approaches over the years have reinforced lifestyle, security, and amenities, but in challenging economic times, consumers seek “best value.” As an in¬dustry, we have done a great job selling the life¬style, the consumer “gets it”, now they want it at the best price. Be the value leader in your mar¬ket.
• Keen Attention to Competitors – Your competition is dealing with the same market trends and reacting as well. Pricing, services, programs, advertising are all being constantly evaluated and tweaked. Make sure you are constantly aware of not only what you competi¬tion is doing, but how your residents and prospects per¬ceive it. Innovators are going to be the winners in the recovery.
• Operational Trends and Opportunities – Most operators are now reporting decreased turnover, better quality applicants, and generally a greater appreciation and dedication by employees to their current positions.
However, there are other operational trends to incorpo¬rate into new project planning:
• Sustainability- The energy industry has made huge strides in the past five years in more effi¬cient technologies. Further, many states are making stimulus funds available for solar and other technologies.
• Meal Preparation and Delivery Systems – there are now several pre-prepared meal delivery sys¬tems that provide high quality food products at very competitive prices. Use of these systems can greatly reduce personnel costs and reduce storage requirements. While they may not be the solution for all communities, they are provid¬ing an alternative that is worthy of more investi¬gation
• Lower Capital Costs – We have all read about lower construction costs now available in the market, but most of the other “soft costs” associated with development of a new project have also seen significant savings. De¬sign costs, engineering services, appraisals, feasibility studies, furnishings, fixtures and equipment are all af¬fected by the market and present value opportunities for those acting now on their projects.
As we know, the planning process for senior housing and the requisite pre-sales period is time intensive. Waiting un¬til all the signals are positive means you will likely miss op¬portunities. Starting the planning now is a prudent action step. If the market slows again during the process, you have the opportunity to adjust “on the fly” and slow along with it. However, missing this window will mean higher costs if you have to play “catch up” and risk missing the de¬mand currently building as seniors have been delaying their decisions to move.
For more information please contact:
Roger Harper
615-218-4102
rharper@rharperconsulting.com
www.rharperconsulting.com
RHarper Consulting Group provides development consult¬ing, program management, and owner representation ser¬vices focused on the senior living and mixed use sectors.
In addition, Mr. Harper is a listed mediator and arbitrator and provides dispute resolution services for the construc¬tion and real estate industries.
OBAMA TINKERING IN REAL ESTATE INDUSTRY FYI
Lead Tackle
show details 9:17 AM (46 minutes ago)
Real estate took some whacks in the new 3.8 trillion dollar Obama budget presented to Congress last week, but there were some helpful proposals for housing as well.
On the negative side, the White House renewed its efforts, which were unsuccessful last year, to rein in mortgage interest writeoffs by high income homeowners, and to raise capital gains rates.
The budget proposes to limit the value of deductions for mortgage interest and charitable contributions for single taxpayers earning more than $200,000 and married couples earning more than $250,000. It also would allow the top federal brackets to move to 36 percent -up from 33 percent - and 39.6 percent, up from the current 35 percent.
Instead of writing off mortgage interest at the top current bracket of 35 percent - or 39.6 percent as proposed in the budget - the White House would have deductions on mortgage interest and charitable contributions limited to 28 percent.
To illustrate: say you paid $10,000 in interest on your home mortgage. Under current rules, you'd be able to get a writeoff worth $3,500 in the 35 percent bracket and $3,960 if the bracket moved to 39.6 percent.
Under the Obama plan, no matter which bracket you're in, the limit would be $2,800.
The White House proposed a similar change last year as a way to pay for health care reform, but housing, real estate, banking and charitable groups opposed it vigorously.
The same coalition would likely fight the idea this year as well. But lobbyists say the mere presence of the proposal in the president's budget makes it a serious threat - especially when the deficit is ballooning to all-time records.
Robert Story, chairman of the Mortgage Bankers Association, said limiting the mortgage interest deduction - even limited to the wealthiest Americans - sets a bad precedent and could hit high-cost housing markets disproportionately hard, especially California and New York.
Housing and mortgage groups praised other non-tax portions of the Obama budget, however, such as its effort to strengthen the FHA program.
The White House asked Congress to authorize FHA to raise its annual premiums charged to borrowers in order to strengthen the agency's reserve funds. FHA's annual premiums - which are typically rolled into the monthly payment - are capped at 55 basis points but the budget would nearly double them, to 90 basis points.
If Congress agrees with the move to increase annual premiums, said Stevens, the agency will be able to reduce its upfront premium charges to borrowers - thereby allowing more home buyers to qualify for an FHA loan.
show details 9:17 AM (46 minutes ago)
Real estate took some whacks in the new 3.8 trillion dollar Obama budget presented to Congress last week, but there were some helpful proposals for housing as well.
On the negative side, the White House renewed its efforts, which were unsuccessful last year, to rein in mortgage interest writeoffs by high income homeowners, and to raise capital gains rates.
The budget proposes to limit the value of deductions for mortgage interest and charitable contributions for single taxpayers earning more than $200,000 and married couples earning more than $250,000. It also would allow the top federal brackets to move to 36 percent -up from 33 percent - and 39.6 percent, up from the current 35 percent.
Instead of writing off mortgage interest at the top current bracket of 35 percent - or 39.6 percent as proposed in the budget - the White House would have deductions on mortgage interest and charitable contributions limited to 28 percent.
To illustrate: say you paid $10,000 in interest on your home mortgage. Under current rules, you'd be able to get a writeoff worth $3,500 in the 35 percent bracket and $3,960 if the bracket moved to 39.6 percent.
Under the Obama plan, no matter which bracket you're in, the limit would be $2,800.
The White House proposed a similar change last year as a way to pay for health care reform, but housing, real estate, banking and charitable groups opposed it vigorously.
The same coalition would likely fight the idea this year as well. But lobbyists say the mere presence of the proposal in the president's budget makes it a serious threat - especially when the deficit is ballooning to all-time records.
Robert Story, chairman of the Mortgage Bankers Association, said limiting the mortgage interest deduction - even limited to the wealthiest Americans - sets a bad precedent and could hit high-cost housing markets disproportionately hard, especially California and New York.
Housing and mortgage groups praised other non-tax portions of the Obama budget, however, such as its effort to strengthen the FHA program.
The White House asked Congress to authorize FHA to raise its annual premiums charged to borrowers in order to strengthen the agency's reserve funds. FHA's annual premiums - which are typically rolled into the monthly payment - are capped at 55 basis points but the budget would nearly double them, to 90 basis points.
If Congress agrees with the move to increase annual premiums, said Stevens, the agency will be able to reduce its upfront premium charges to borrowers - thereby allowing more home buyers to qualify for an FHA loan.
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