Its Still the Wild West; Kansas on the Cheap

August 15, 2005 | 3:36 pm |

NAR: Housing Affordability Index Down in Second Quarter, Still Favorable

Affordability was largely favorable in the second quarter but higher home prices and mortgage rates more than offset the increase in family income. The West Region shows both higher prices and more highly leveraged transactions. Kansas had the highest affordability for home ownership.

NOTE: This table shows the approximate home price a family earning the specified income could afford making a 20 percent downpayment, with no more that 25 percent of gross income for principal and interest payments. Variables include the type of loan and interest rate.

While the national median sales price of a US home was reported to be $218,900 in June 2005, there was great disparity in the 4 regions covered: Northeast, Midwest, South and West.

  • Northeast $247,500 (21.8%)
  • Midwest $174,500 (16.2%
  • South $190,900 (20.6%)
  • West $322,200 (30.9%)

The West saw an 85% higher median sales price in June than the Midwest did. Not only does the West region have the highest housing prices, but has the highest payment level as a percentage of income, roughly 50% more than the other regions.

A urban development think tank ranked housing affordability by state using median sales price and median household income for 1970 and 2000. They contend that denser urban areas that control growth generally have higher prices.

Kansas was the most affordable place to own a home in the US. Hawaii was the least affordable, nearly 2.7 times that of Kansas.


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Piggyback Loans Pose Higher Risks to Certain Markets

August 14, 2005 | 4:41 pm |

A study by PMI Mortgage Insurance Co. found that piggyback loans may pose risk to the mortgage system; especially vunerable are high priced housing markets. The borrower can use a second mortgage to “finance” a portion of the down payment. This creative financing technique has allowed more purchasers to be more highly leveraged. The study suggests that higher priced housing markets, where the gap between affordability and price is wider, are seeing more of this type of financing and are therefore subject to greater risk in a housing downturn.

USA Today put together the results of the PMI study in the following table.

housingrisktable8-2005

The PMI Risk Index predicts the risk of home-price declines over the next two years using local economic forecasts.

Piggyback loans — so called because a second mortgage is piggybacked on to a first to compensate for a smaller down payment — have become common in recent years as housing prices have appreciated. Approximately 42 percent of home purchase mortgage loan dollars involved piggyback loans during the first half of 2004, up from 20 percent in 2001.

Here is the PMI Report [Note: PDF]

Local media coverage based on risk:


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Supersized Housing With More Amenties

August 14, 2005 | 4:39 pm | |

According to the US Census, the average size of a house in the US is 2,349 square feet, up almost 300 square feet from 1990. We are seeing larger homes coming into neighborhoods called Faux Chateaus [Note: Subscription] or McMansions [Note: Paid Subscription].

Its not just the size thats increasing in new construction, more amenities are being added.

This trend tends to overshadow pricing in the housing market. Larger housing skews the overall market statistics, both median sales price and average sales price, so the rise in prices would be overstated.


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A Bear in a China Shop?

August 13, 2005 | 12:38 am |

Apparently, the Chinese government (The National Development and Reform Commission)was concerned about housing prices back in 2004 which rose 7.7% nationwide last year. In addition, values increased 25% over the period 1998 to 2003 with a 16% market share of investment properties.

The article also said that “The commission Tuesday also said the government’s housing supply is not as balanced because common commercial apartments are not available in large enough numbers, while there is an oversupply of luxury apartments and high-end villas.”

Is it just me, or does this sound familiar? But wait a minute…this is China…”oversupply of luxury apartments and high-end villas?”

Fast forward to the current real estate market in China…

Housing prices in 20 cities fall in July but the average nationwide increase in 70 cities increased 6.4% annually. China, like us has localized markets with different housing trends. 20 out of 70 cities saw falling prices, yet the overall average saw an increase.

Shanghai has observed soaring housing prices in recent years. Its commercial housing prices topped 5,118 yuan (US$617) per square metre last year, about 24.2 per cent or 1,000 yuan, up from the previous year.

Does that sound familiar?

Note: By my conversion calculations, Shanghai averages $6,641 per square foot! Please help me out on this…did I do the conversion correctly? Thats 30% higher than the highest sales in Manhattan on a per square foot (Rupert Murdoch’s $44M penthouse purchase was just north of $5,000 per square foot).


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Yield Curve Enters Kitchen Table Talk

August 12, 2005 | 11:57 pm |

According to Investopedia.com a yield curve is a “graphic line chart that shows interest rates at a specific point for all securities having equal risk, but different maturity dates. For bonds, it typically compares the two- or five-year Treasury with the 30-year Treasury.”



Yield curves have loudly entered the economic discussions. If you grab the red line [Note: Java] in the yield chart, you can see how short term and long term rates have changed in relationship to one another over time.

The traditional economic model for banks is being turned on its head. Banks typically borrow at lower short term rates and lend at higher long term rates, capturing the spread. Since the yield curve is flattening, there is little difference between both rates creating bottom line pressures for lenders.

However, in a recent article in American Banker [Note: Paid Subscription] suggests that the yield curve, when inverted, could actually spell lower mortgage rates next year.

John Herrmann, chief economist at Cantor Viewpoint, a unit of Cantor Fitzgerald …Mr. Herrmann’s outlook is somewhat contrarian. Most economists expect rates to rise as the economy strengthens. But Mr. Herrmann told MSN that mortgage rates could be headed lower – perhaps to 5.25% by the end of the year and eventually “grinding down to 5%” next year.

A deceleration of economic growth, competitive pressure in the mortgage industry, and a trend toward tying 30-year mortgage rates and hybrid loan rates closer to the five-year Treasury rate than the 10-year are all contributing factors, he said.

His reasoning? Without housing, economic growth is way below potential.

More on yield curves to come…


Phew! No Housing Bubble In Canada.

August 12, 2005 | 11:56 pm |

Canadian housing prices are on the rise, but the underlying conditions do not suggest the threat of a bubble similar to that of the late 1980s, according to the Bank of Montreal.

I would hope Bank of Montreal (BOM) learned their lesson from the late 1980’s when they were active construction lenders in the New York market with what appeared to be loose underwriting standards.

BOM says the same things that economists are generally saying in the US: a modest rise in mortgage rates will temper demand but there are concerns about affordability.

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Predatory Lending Results From Overzealous Efforts To Increase Homeownership

August 11, 2005 | 9:40 am | |


Predatory lending has run largely unchecked. Here’s one of the best articles I have seen written on the topic….Wolves in Small Print

excerpt…

Buyers aren’t the only ones screaming. Nationally and in Fort Worth, some of those working in the real estate and mortgage business are also coming forward to charge that the real estate lending business is fraught with fraud. Those professionals say that appraisals are being inflated to buoy up higher housing prices, bigger loans, and higher fees for the industry. First-time home buyers without down payments and with poor credit histories are being pushed through the mill, critics say, and come out the other side with loans they have little chance of repaying. That in turn is pushing foreclosure rates to alarmingly high levels.

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Making Sense of High Housing Prices

August 10, 2005 | 11:11 pm |

Here is an article written by an independent thinktank on public policy initiatives called oddly enough, The Independent Institute

“Making Sense of High Housing Prices” discusses the fact that once governments started adopting land use and urban growth controls, prices began to climb.

Economists Edward Glaser of Harvard and Joseph Gyourko of the University of Pennsylvania studied the effect government restrictions have on housing prices in a number of markets around the country. They found that 90 percent of the difference between physical construction cost and the price of new homes could be attributed to government restrictions on building. Only 10 percent of the difference was due to intrinsically scarce land.

In fact, Glaser & Co. did a study on Manhattan housing that asked the question “Why is Manhattan so expensive? (it also refers to a Miller Samuel / NYU research paper).


Besides Newspapers, Housing Bubbles Sell T-Shirts

August 10, 2005 | 10:54 pm |

Not everyone is taking a bath…

mrhousingbubble



Selling a house they didn’t own

August 10, 2005 | 9:17 am | |

2 sentenced for real estate scheme

In this case, its sounds like the appraiser was duped, but it is a scary thought. It makes for a good argument to get the sales contract on your transactions (besides other obvious reasons, like understanding the terms of the sale). We match up the seller with public record.

I am amazed how many real estate brokers have said to us that we are the first firm to actually ask for a copy of the contract.

Its a USPAP standard as part of the appraisal licensing requirement [i-2e(iv)]

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Housing appraisals – bloated appraisals cause borrowers to over leverage

August 9, 2005 | 10:54 pm | |

The article in Consumer Reports describes appraisal inflation as a potential…

Watch out for the bloat!

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Indicted for $400 appraisals

August 9, 2005 | 5:10 pm | |

Appraiser gets $350 to $450 per report, his clients get $3M: yet all 3 indicted

Here’s another typical story, this time on Long Island…Appraiser does report, client steals $3.1M

Yet another…Appraiser does report, client steals $800K

Over and over we see appraisers being indicted and their appraisal fees are nominal, yet they are indicated alongside those who stole millions from lending institutions.

Q: What does it say about appraisers who get into trouble selling their soul for a few hundred dollars and their clients reaped millions [albeit all parties are indicted]?

A1: They do it with such frequency, they can’t keep track of ethical and unethical appraisals.

A2: They don’t see anything wrong with what they are doing since they aren’t charging a premium for these reports.

A3: They don’t see the value of the service they are providing to the criminals [sorry, thats a stretch] 😉

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