Katrina & Oil Prices: The Perfect Storm

August 29, 2005 | 7:23 pm |

katrina

Late last week, as the hurricane threat to the Gulf of Mexico increased, the oil futures market became concerned that production would be affected. Futures traders bid up the price of oil and gasoline due to the perceived future constraints on supply and now oil seems headed for $70 per barrel. The futures market seems hyper-sensitive to any threat to oil production these days.

refinery2



How can this impact housing prices?

Simple. Higher Mortgage Rates.

As this and other inflationary factors gain momentum (if they do), bond investors would likely become concerned about the inflation risk in the long term, which eventually translates into higher borrowing costs. Higher borrowing costs generally translate into lower home prices.

Then again, thats just one theory of many. Lets ride the storm out.


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Headline: Real Estate Sells Newspapers

August 29, 2005 | 6:36 pm | |

netnesting

The interest in real estate is keeping newspapers seeing black ink. [Note: Paid Sub.] Besides homeowners who have seen the value of their properties rise over the past several years, it is newspapers, specifically classified advertising, that have enjoyed the rise but the recovery has been slow.

newspaperstand

Real estate comprises 1/4 of all classified advertising. Gains in real estate advertising has possibly masked increased competition from web site listings. Correspondingly, newspaper stocks have not done well in 2005.

Could the intensity of bubble talk be more influenced by the thirst for dollars than we give it credit for? Could the media make the bubble a self-fulfilling prophecy?


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PMI: Going Over Your Limit

August 28, 2005 | 1:00 am |

See previous post on Matrix: PMI Gets You In The House: Now Get Rid Of It.

The Homebuyers Protection Act was passed by Congress in 1998 requiring lenders to notify homeowners when the equity in their home reached a level where PMI was no longer required.

Here is the testimony of Richard J. Roll, Founder and President, American Homeowners Association (AHA) in front of the United States Senate Committee on Banking, Housing and Urban Affairs on February 25, 1997 on PMI. He was speaking about the abuse of PMI overcharges.

“Your home falls under this act if you purchased, constructed, or refinanced your single-family home after July 29, 1999, and your loan is not a government-insured FHA or VA loan. If you purchased your home before July 29, 1999, your lender is not required to cancel your PMI when you reach 20 or 22% equity, but many lenders will do so if you ask.

Here is an article on the costs associated with PMI insurance to homeowners.

There is significant incentive for a homeowner to get PMI removed from their loan payment. In order to do this you need the services of a certified real estate appraiser to provide a value estimate. If the home has appreciated enough to where the equity is at least 20% of the overall value, then the odds are relatively good that you can get the lender to remove the PMI.


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PMI Gets You In The House: Now Get Rid Of It

August 28, 2005 | 12:41 am |

percent Homeowners can save thousands by canceling private mortgage insurance [PMI]. PMI is an insurance on the top 20% of the loan so the lender is assured that they will get the full 80% or balance of the funds outstanding if the property goes into foreclosure.

The Homebuyers Protection Act was passed by Congress in 1998 requiring lenders to notify homeowners when the equity in their home reached a level where PMI was no longer required.

“Your home falls under this act if you purchased, constructed, or refinanced your single-family home after July 29, 1999, and your loan is not a government-insured FHA or VA loan. If you purchased your home before July 29, 1999, your lender is not required to cancel your PMI when you reach 20 or 22% equity, but many lenders will do so if you ask.”

How to Cancel PMI Here’s a great article on removing PMI from your loan by Chip Wagner, an accomplished appraiser in the Chicagoland area. Most lenders require and approved and state certified appraiser to perform the evaluation.

Here’s how they do it in Minnesota. I suspect it is not much different than other states.

Note: Check with your lender for specific instructions.


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With Oil In The Mix, Asset Prices Are Expected To Simmer Down

August 28, 2005 | 12:18 am | |

houseupstairs

Greenspan said today that the US housing boom is sure to end eventually and there should be a drop in home prices.

[Webmaster’s Note: I’m am fairly certain most people do not believe the housing boom will go on forever so tell us something we don’t know.]

A weakened housing market would take the punch out of an inflation threat and therefore the pressure off the Fed to keep raising short term rates. Consumer spending is reported to account for 70% of the US economy and this driven largely by the ability to tap home equity.

housinginhand

To date, some US economists believe the “wealth effect” of housing are offsetting the negative influence of rising oil prices. [Note: Paid Subcr.] The ability to pull equity out of the housing sector has helped consumers maintain discretionary spending despite rising oil prices.

Besides rising oil prices, labor costs are expected to rise keeping pressure on the Fed to raise short term rates.

The Fed believes that home prices will continue at their brisk pace through the third quarter, before easing in the final quarter of the year.

Here’s a great article written last May called “Don’t Buy Housing Bubble Propaganda” by the webmaster of one of the best economic blogs out there: Big Picture

The author discusses mortgage rates and changing demographics better than any article I have read on this topic. One item of particular interest: More than 80% of all stock purchases are speculative. According to the NAR, housing is currently at 23% which seems to pale in comparison, doesn’t it?


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Eminent Domain: Nice Home, I’ll Take It

August 27, 2005 | 8:56 pm |

Eminent Domain refers to “the power possessed by the state over all property within the state, specifically its power to appropriate property for a public use.”

The valuation principal behind this is the idea that the highest and best use for the property will benefit the public which supercedes the private property rights of the property owner. This has been unnerving to many because property ownership is perceived as a basic tenent of citizenship in this country.

Last week, the Supreme court announced that it would not re-visit [Note: Paid Subsc.] the controversial ruling made in the eminent domain case, KELO et al. v. CITY OF NEW LONDON et al.

In the original decision, the Supreme Court found that local governments have the right to take private property if it faciliates economic growth. The New London case was controversial because the area to be taken was comprised of residential homes that were not blighted or crime-ridden. Another sore point was the fact that developers are making a profit against the loss of private property.

Before the New London case, the Poletown case in Michigan 20 years ago was seen as a leading symbol of eminent domain abuse.

There is the potential for abuse by government authorities in these takings and the fear of a land grab by developers who have strong political connections with local governments. This ruling has begun to prompt states to examine when a government should take private land, what methodologies should be used for fair compensation as well as others

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Live From Wyoming: Low, Risk Premiums

August 27, 2005 | 2:09 pm | |

hills

Greenspan spoke this week at symposium, held in Jackson Hole, Wyoming, sponsored by the Federal Reserve on the legacy of his 18 year era. He took the position that the housing market now suffers an imbalance.

The Federal Reserve is paying closer attention to the rising values of assets such as stocks, bonds and homes, as low interest rates encourage more risk-taking, Fed Chairman Alan Greenspan said.

Low “Risk Premiums” (A new mantra?) This trend reflects what Mr. Greenspan said was the increased willingness of investors to accept low “risk premiums, a willingness based on a complacent assumption that the low interest rates, low inflation and strong growth of recent years are likely to be permanent.”

tightrope

His concern is when (bond) investors become more cautious, yields will rise, lowering housing values and then selloff of bonds that caused rates to drop in the first place. “This is the reason that history has not dealt kindly with the aftermath of protracted periods of low risk premiums.”

Other notable Greenspan-speak, etched in the public conscience are:

A Conundrum – An inverted yield curve appears to loom on the horizon.

A Frothy Housing Market – “The Fed feels it needs to squeeze more air out of the market – the housing market in particular, although the Fed has stressed that it’s not targeting housing with interest-rate policy.”

Irrational Exuberance – Greenspan first used the phrase in 1996 several years before the stock market corrected in 2000 but it came to define the rapid run up in stocks in the 1990’s. The analysts that missed the dot com bubble now seem to be the ones warning us about the housing market boom’s eventual conversion to bust.


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Turning the Bond Market Upside Down: Inverted Yield Curves

August 27, 2005 | 10:01 am |

yieldcurveinverted According to Investopedia.com an inverted yield curve is a “Usually a chart showing long-term debt instruments that have lower yields than short-term debt instruments. It is sometimes referred to as a negative yield curve.” But they are cause for concern: “History has shown that inversions of the yield curve have preceded the last five U.S. recessions. The yield curve can accurately forecast the turning points of the business cycle.”

invertedyieldsign

Why would investors accept lower long terms rates than short term rates?

According to SmartMoney.com “The answer is that long-term investors will settle for lower yields now if they think rates — and the economy — are going even lower in the future. They’re betting that this is their last chance to lock in rates before the bottom falls out. Inverted yield curves are rare. Never ignore them. They are always followed by economic slowdown or outright recession as well as lower interest rates across the board.”

Perhaps this is an indicator that the economy will stall, and rates will go down even further. Stay tuned.

See previous post Yield Curve Enters Kitchen Table Talk


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Housing Stats Send No Clear Message, Well Sort Of

August 25, 2005 | 9:26 pm | |

rollercoaster

A slew of seemingly conflicting, or at a bare minimum, entangled housing related statistics have been released over the past few days. Each statistic is generally covered as the subject of a story rather than combined into one analysis, the results often contradict each other. Here are some headlines grouped by their indicated trends for the month:

Headline Summary – Improving Conditions (sort of):

Associated Press: Rates on 30 – Year Mortgages Decline
MarketWatch: New-home sales surge to record 1.41 mln [Note: Reg.]

Headline Summary – Weakening Conditions (sort of):

Wall Street Journal: Economic Data Send Mixed Signals [Note: Paid Sub.]
New York Times: The nation’s long housing boom appears to be losing steam.
New York Times: Rents Head Up as Home Prices Put Off Buyers
Wall Street Journal: Rise in Supply of Homes for Sale Suggests Market Could Be Cooling [Note: Paid Sub.]

signs

And The Trend (This Month) Is…

Existing home sales are far greater than new sales so their decline, coupled with rising rents and expanding inventory would appear to indicate a leveling off of the market. But then again, these are July stats, an historically slow period of the year for housing sales, and next month is expected to be more of the same.

What The Real Estate Economy Really Needs:

Washington Post: More Cowbell!

cowbell …sorry, it was late when this was posted.


Crackling and Buzzing: Power Lines/EMF Valuation

August 25, 2005 | 1:25 pm |

The National Association of Realtors has created a resource area called Field Guide to Power Lines. Part of the problem with this issue is that there has been a battle of competing health studies that of course, are on the opposite side of the sprectrum.

Position: Power lines don’t affect property values
This party claims that since there is no definitive proof of a health risk, no loss in value should occur to property owners. The key driver of this movement has been the powerline industry.
[Links]
American Transmission Co.
American Trails From an operational perspective, EMF is not much of an issue for trail activities…
Colgate Univ Term Paper Just a term paper and not a scientific study but it concludes that there is more evidence that says there are limited health risks and on that basis, possibly not detrimental to value.

Position: Power lines affect property values
This party claims that since there is evidence that there is a health risk, a loss in value to property owners should be recognized. The key driver of this movement has been the environmental groups.
[Links]
University of Missouri-Kansas School of Law A review of a case where “…that a tax assessor’s opinion that the proposed power line would not change the assessed value of the property for tax purposes was incompetent and prejudicial…”
Wave-Group An exerpt of the correspondence: “Late last year, New York’s highest court, the Court of Appeals, ruled that the owner of property adjacent to a utility’s high-power electrical transmission lines could seek damages for a decrease in the market value of the property caused by the fear that the power lines might cause cancer, even if such a fear was not medically or scientifically reasonable. That decision has already begun to change the outlook on electromagnetic field (EMF) litigation for utilities.”

Valuation Links
Power Lines and Property Values: The Good, the Bad, and the Ugly An incredibly detailed discussion on valuation approaches for powerline properties.
Realty Times Columns Concludes that homeowners would probably pay less for a property near a powerline just because of the uncertainty.

Common Sense Application for Appraisers
In a valuation matter, where an appraiser is asked to value the effect of power lines on property values, wouldn’t it come down to how the typical homebuyer in a market felt about the uncertainty of risk? In other words, if two properties are identical, but one is located under or near a powerline and one is not and the former sells for less, isn’t that indicative of the effect on value? Whether or not EMF causes cancer or not, if a buyer pays less, it would seem to me that the difference before and after is a quantifiable measure of effect.

What do you think?

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Urban Beats Suburban

August 25, 2005 | 10:46 am |

suburbs In certain pockets of the country, homebuyers are choosing the city over the suburbs as home buyers re-evaluate urban areas. This demographic shift is occuring as baby boomers get older and many urban areas have largely seen a cultural renaissance over the past 10 years.



urban

Growing suburbs are now experiencing the problems of their neighboring urban areas and homebuyers are now considering moving farther out where land is cheaper but the commute is longer.



carinstruments
With oil prices rising, this makes for an interesting situation since commuting costs will rise making the feasability of a long distance commute less likely to be sustained.


In Bad Form

August 25, 2005 | 9:15 am |

For some reason, Fannie Mae was inspired to change ALL the appraisal forms they use, effective November 1, 2005.

This will be a painful conversion process for most appraisers and will generally be met with skepticism for a few reasons:

  • Cost – The new FNMA forms seem to be written to prevent other traditional uses such as appraisals for estate, trust, litigation, divorce and other purposes. The Appraisal Institute, in good faith and possible anticipating a revenue stream, has created AI Reportsâ„¢ Residential Summary Appraisal Report Form. The press release sounds interesting, but Letter Sized formatting for a professional versus legal look? Commercial appraisers generally write letter sized narratives and residential appraisers do not. Think of the thousands of appraisers out there all set up to use legal documents. Once again, the orientation of the AI remains for commercial appraisers. This new form is being developed by all the major software vendors.

Here’s a radical idea. Keep using the old FNMA 1004, 1073, 1075 and other appraisal forms for non-lending use. They are USPAP compliant and appraisers already have the software. I want to see how this shakes out before I consider using the AI form.

  • Liability – The new forms hard code pages and pages of liability pitched back to the appraisers. I call these the silent killers. The text is not that well written creating more confusion to the reader.

  • More data to present – The forms harp on days on market type stats for all of the comps and lots of other detail. In a perfect world, this is great stuff, but the reality is that many markets do not have this level of detail. The added time spent to collect this data warrants a fee increase, yet that likely won’t happen. As a result, we will all get used to inserting Not Available in many of the fields. Again, good intentions by FNMA to catch “flipping” but unrealistic implementation. Bad appraisers will remain bad.

  • More headaches for lenders using OCR software – Some national lenders fought the introduction of these forms, an unprecendented quantity at one time, because all their OCR scanning software and back office systems have to be re-designed to input this information.


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