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One of the biggest groups to drive the housing recovery and eat up excess inventory was the investor segment.  As the distressed property began to be replaced by traditional sellers, those quick flip opportunities dissipated and with them the investor segment seemed to evaporate as well.  Distressed homes are now at their lowest levels since 2007 before the crash, so real estate investment, much like real estate purchases for the general public are once again long term investment vehicles.  For an investor, that means grabbing a property at the best price possible, but looking for a 6 to 10 percent return on that investment through rental income with a long term goal of allowing the property to appreciate for a minimum of 5 years and then possibly selling.  For traditional buyers of real estate this means that the home they buy is once again an investment that they live in.

Even though plunging gas prices have created quite a windfall for most households that extra cash has not found its way back into the market place as is reflected in the dismal retail sales figures this year, down to their lowest levels since 2009.  As OPEC nations and now Iran continue to flood the market in an effective strategy to undermine the fracking industry and US oil production, oil prices continue to plunge and drag the stock market down with them.  The stock market woes, combined with questions about China’s sputtering economy should send investors looking for more stable places to park their money and real estate may be just the right fit.

With vacancy rates of single family home rentals, which now makes up 40% of the total rental market, at their lowest levels since the 1980’s and the stock market bouncing around like the Tasmanian Devil on crack, real estate is becoming very attractive to investors once again.  This has also led to a bit of a reversal in the conventional wisdom that conventional interest rates would begin climbing their way South of 5%.  For the second week in a row, Freddie Mac is reporting a drop in 30-year conventional fixed rate mortgage rates, which has put us back in the 3 to 4 percent areas depending on the borrower.  This means that home owners with equity may soon be swapping that equity into a bigger, newer home and selling the house that they rode out the mortgage meltdown in.  What will be interesting to see is if the first time home buyer segment will finally make a comeback from its lowest level in 30 years to duke it out with the investors who are hoping to use those same houses as rental investment property.

Bottom line, with stock market volatility, interest rates staying in the basement, SFR rental vacancies down and SFR rental rates up, real estate is returning as the safe haven it once was before the meltdown.

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pre-approved House hunting without a pre-approval is sort of like challenging  someone to a dual without having sword.  And just like a butter  knife isn’t a broadsword, a pre-qualification is not the same as a  conditional approval.  Being pre-approved is always important, but  in a market with a lack of inventory like ours, having the ability to  present an offer with a solid pre-approval is essential.  There is  nothing worse than finding the home of your dreams and then  having to wait to put in an offer because you don’t have your ducks  in a row.  Additionally, because a pre approval is more comprehensive than a general pre-qualification, you will really know what your limits are.

So what’s the difference between a pre-qual and a pre-approval?  A pre-approval is an accurate determination of the amount of loan you can afford and are qualified for, based upon corroborated income, employment and credit checks.  A pre-qual is an estimate of what you should be able to get if everything you told the lender is accurate.  I think of it like asking a 6 year old if they brushed their teeth.  The answer is going to be, “uh-huh” and you can just go with it, or you can casually walk into to the bathroom and see if the toothbrush is wet and if toothpaste is spread all over the sink, like usual.

Basically getting yourself pre-approved before you start looking, when all is calm, is much easier and far less stressful than waiting until you find the house of your dreams.  Picture this, you’ve found it, it’s “the one”, you are doing the happy dance in the living room chanting, “mine, mine, mine”, but just then someone else walks in the door with the same wild eyed stare you have and begins their happy dance in the kitchen.  You now have to make sure you have a loan before you can write an offer or you have to submit an offer without any proof that you can qualify for a mortgage.  Meanwhile the mutant, house stealing couple dancing in the kitchen is waving their pre approval, contingent only on underwriting and appraisal, in the air like they just don’t care and their agent is busy slapping together an offer on her I-pad.

So, do yourself a favor and check out a few lenders, see who you click with and more importantly who can give you the best rate and terms.  Then dig up the paperwork, jump through the hoops before they’re on fire and provide the blood samples the lender requires…just kidding, they might ask for urine, but never blood.  The point is, don’t set yourself up for failure by not being fully prepared to get your offer accepted.

 

Senator Chris Dodd, one of the so called authors of Dodd Franks famously said those words, which were very reminiscent of Senator Nancy Pelosi’s statement about the Affordable Care Act, after his bill passed out of committee.  The impetus behind the law was due to the claims of both Franks and Dodd that the reason for the mortgage meltdown was the lack of oversight and regulation, when in fact the oversight was in place, but was simply being ignored by the likes of Franks and Dodd.  Dodd Franks was supposed to limit the tax payer’s liability by getting rid of “too big to fail” institutions, but as with any 2300 page law, the unintended consequences generate more problems than solutions.  The regulations have actually increased the size of the heavy hitters in the banking industry and driven out the smaller institutions that supplied other options and increased competition in the market.  House Finance Committee Chairman Jeb Hensarling (R-Texas) put it this way, “In other words, even more banking assets are now concentrated in the so-called ‘too big to fail’ firms. Pray tell, how does this improve financial stability?”  Good question.

 

The biggest problem with a behemoth like Dodd Franks and the unsupervised entities it has created like the Consumer Financial Protection Bureau and the Financial Stability Oversight Council is that with increased bureaucracy comes decreased efficiency.  They increase the time and cost it takes to create lending options as more regulatory red tape is generated, and they decrease the number of people that can actually qualify for a loan.  In real world terms, since the implementation of these regulations, we’ve seen the number of buyers who can obtain financing decrease; the time it takes to get that approval increase and the time it takes to actually take a purchase from acceptance of offer to closing expand.

 

The truly unfortunate thing is that even with these slow downs, which have also hindered the speed of the economic recovery in general, is that they have not achieved the goal they were intended to.  Mark Calabria, Director of Financial Regulation Studies, Cato Institute recently reported to congress that, “Although a few modest improvements have been made to increase financial stability, I believe Dodd-Frank, no net, has reduced financial stability,”  and, “The reason for such is a combination of both errors of commission and omission. Moral hazard has been increased by Dodd-Frank’s expansion of the financial safety net and increased concentration of risk into fewer entities, while the primary 18 causes of the crisis were largely left untouched. I fear if we continue along our current path, we are almost certain to see another financial crisis sometime in the next decade.”

 

One of the key drivers of the mortgage meltdown was the desire to create equality in housing.  This noble concept is definitely one worth striving for, but to create that equality, people like Barney Franks pushed to ignore existing regulations and created an environment in which banks were more concerned about having a portfolio containing the right mix of ethnic, gender, age type buyers instead of a mix of well qualified to risky loans in their systems.  I can remember shaking my head when instead of valid trade lines of credit being required to ensure a buyer’s ability to pay for their mortgage, that lenders were able to use utility bills and unemployment income to qualify a buyer for a loan.  The legislators have already forgotten what led to the meltdown and are pushing for lenders to make things fair in housing once again.  The recent Supreme Court ruling regarding disparate impact cases in housing is just one more step back in the direction of being less color/gender/age/sexual orientation-blind with regards to housing.  This is not meant to say that we should not strive for everyone to have the opportunity to be a home owner in whatever neighborhood they wish to live, but we should be careful in trying to create an environment where everyone should have the same outcome regardless of their ability to afford that home.

 

We live in a desert, sort of explains all the rocks and cactus doesn’t it.  Shockingly, with the exception of areas surrounding the many springs in the Las Vegas (Spanish for The Meadows) area, xeriscape grass isn’t something that typically  did well in the hundred plus  degree heat.  When water was actually flowing  over the spillways  of Hoover Dam back in the 80’s, no one really worried too  much  about how much water it took to keep those Green Valley lawns so   green, but for the last 15 years, Clark County has been in a  drought.  Builders  no longer install grass in front yards of new  homes and hotels recycle water  to run their fountains and water  the foliage, in fact since 1990 Las Vegans  have gotten so efficient  at water conservation, that we’ve reduced our use of  water by one third, while the population has nearly tripled.  Increased  regulations, fines and incentives created by the Southern Nevada Water District have been instrumental in achieving those numbers, but when the economy tanked, SNWA ran out of money to continue offering those great rebates for yanking out your lawn and putting in rocks, shrubs and low volume drip systems.  When that happened, SNWA was forced to turn to bond sales to come up with the cash to encourage homeowners to swap out their grass.  This is where things get a little weird, since 2009, that rebate came with a pretty big string that most people don’t realize is there.  SNWA has required that upon receiving the money for the rebate that a conservation easement be recorded with the property.  Now there are many easements that run with a property, the power company, sewer and water all have easements already in place…just take a look at the title report from when you purchased your house, but this one is a bit different, it is a conservation easement and about 14,000 homes and businesses have them.  Where it gets tricky, is that when you sell your home, like roughly 500 that were sold last year with the conservation easement, the new owners must adhere to the conservation terms, in other words if the new owner wants grass, they have to get a waiver from SNWA, which costs about 200 bucks and oh ya, there is the little matter of paying back the rebate money, plus interest.  Personally I’m good with shrubs, rocks and trees and if I never have to see another lawn mower in my life I will die a happy man, but I like being told what I can and can’t have in my yard about as much as being sent to the store for feminine hygiene products during half time of the Superbowl.  Unfortunately this easement is one that could very easily be missed or not even taken into consideration when someone is buying a home, but could become a very big issue if the person buying just has to have grass or they will simply die!  The bucks from SNWA are definitely nice, but if you accept them when swapping sprinkles for drips, you may want to consider finding a way of disclosing that fact during the sale just to lower any liability after the sale and if you are in buying process, it is very important to look through those easements when reviewing your preliminary title report to see if a conservation easement exists.  Most likely you wont ever want to swap out a nicely xeriscaped yard, but for some reason, people living in the desert do enjoy digging holes, filling them with water and sipping on blue drinks with little umbrellas when the temperatures crank up past the 90’s.  In other words, putting in a pool could get even more expensive and even be a bigger hassle than just appeasing the HOA.  My suggestion is to really take into consideration if the cash for grass is really worth an easement that will run with your property for ever.

 

 

DOJquicken-loans

Something Smells

When the mortgage meltdown happened, aside from wondering, “what the hell happened?” most people also wondered, “How the hell could this happen?”  At that point the fingers started pointing and interestingly enough those with their fingers in the air first, in my opinion, were the politicians, who created, nurtured and turned a blind eye on the environment that led to the melt down.  It sort of reminds me of a student farting in a silent class room then pointing their finger at the least popular kid in class and shouting, “he farted!”  As I’m sure you all remember lenders weren’t exactly the people’s BFF after the economy tanked.  Since that time, politicians have walked away from the stench they helped create by hammering those stinky bankers. 

Headlines around the country have been created by the ridiculous sums of money the Department of Justice, an oxymoron right up there with one of my favorites…Bank Short Sale Negotiator, has successfully sued big name banks for.  US Bank settled for $200 million, JP Morgan Chase dropped $614 million and B of A coughed up a cool Billion…with a B.  In addition, the only high profile folks that got sent to the hoosgow were financial types, Michael McGrath Jr. of US Mortgage and Lee Farkas of Taylor Bean & Whittaker.  I suppose they must have been the foulest of the foul, but one has to wonder why the politicians, like Barney Franks, charged with oversight of institutions like Fannie Mae and Freddie Mac weren’t also held accountable.  As mentioned above, they were quickest on the draw to point at the least popular suspect at the time and scream, “Lenders Stink!” 

Don’t get me wrong, the lenders came up with some real limburger loan products and they definitely contributed to the stench, but don’t forget that the push for everyone to have a home and the lowering of regulations came straight outta DC.  Lenders were only too happy to accommodate, consumers were only too happy to get loans using welfare payments as income or just make false claims about what they could afford, financial intuitions were only too happy to bundle the crap loans into mortgage backed securities and let’s face, Realtors were only too happy to sell those houses and collect those bigger commissions, yet again, the lenders keep paying the tab. 

Quicken Loans, who has been getting investigated by DOJ for the last couple of years, is being told it is their turn to empty their pockets and bend over.  Basically they have two choices, agree to a few hundred million dollar settlement over the discrepancies found in 55 of the 246,000 loans they originated between 07 and 11 or face an even bigger fine…see B of A above…if they choose to fight.  I have to say, I am happy to see them “toe the line”.  I might feel differently if the DOJ dispensed justice based on the rule of law and not politics, or if those accused had flaunted the law in the face of diligent government oversight, but the hypocrisy of a government suing over a situation the government was instrumental in creating and watching a Justice Department pick and choose where, when and who it will enforce laws against in this and so many other examples has left me a bit, shall we say skeptical.

Quicken may indeed be guilty of wrongful doing, just as so many others have been, but I have to say I am really looking forward to the DOJ’s tactics coming under scrutiny at this point as well.  Collecting big money from the stinkers is a great talking point for the politicians, but if lenders have to fear being shaken down at any given time, regardless of their practices, they will become less inclined to lend.  So before assuming that Quicken Loans has been floating stink burgers, keep your eye on all the evidence because it might just turn out that the DOJ is actually what stinks.

 

 

mortgage-denied

Banks are all showing healthy first quarter gains, but access to credit remains a struggle for many first time home buyers and those that have not established long term histories of successful borrowing and repayment of loans.  The knee jerk reaction of politicians who created legislation to protect consumers has definitely been successful in ensuring that borrowers are not taken advantage of, just as not allowing someone to leave their home ensures they never get hit by a bus.  Don’t get me wrong, there are some good things that have been created by Consumer Financial Protection Bureau, but the funny part is that many of the reforms Barney Frank and Chris Dodd came up with were to correct problems created by them and other politicians who continually pushed lending institutions to lower credit requirements and then blocked all attempts at reining in the unsafe lending practices until the market went kerflooey.  Just as the unintended consequences of the Community Reinvestment Act among other legislation led to the environment in which borrowers were able to use things like welfare payments and unemployment payments as valid income sources, the legislation coming out of Dodd Frank has created an environment where the very people they were trying to help are finding themselves unable to obtain credit at all.  This does not mean we should return to the days where lenders were funding stated income loans for anyone who walked in off the street, but a little common sense would be nice.

J David Motley, President of Colonial Savings recently testified before congress about how access to credit for people who are actually good risks is being hindered by the regulatory burdens enacted by the CFPB.  Motley stated that Mortgage Bankers Association data shows that credit availability remains well below levels seen during normal times due to regulatory demands.

Congress recently passed legislation to help with transparency in CFPB meetings and more bills are in the pipeline to reform the stifling over reach created by Dodd Frank, but it is doubtful any will be in time to stop the implementation of new TILA RESPA rules in August that will almost certainly muddy the mortgage waters further and will absolutely extend the time it takes for homes to move through the escrow process.  Hopefully the bipartisan legislation that is once again making its way through congress, which will take oversight of the CFPB away from the Fed and create an Inspector General position by the President and approved by the Senate, will finally be passed and common sense reforms will be enacted.

For a full recovery of the housing market to take place, access to credit needs to be filled with far fewer fiery hoops that first time home buyers are being forced to jump through.  This segment of the housing market is still below historic averages and the reason for the lack of first time home buyers is a direct consequence of the over correction made by the CFPB.

Don’t forget to take your Private Mortgage Insurance deduction when doing your taxes. Most people remember to get the mortgage interest deduction in there, but if you are above an 80 debt to value ratio on your mortgage, you are most likely paying PMI. Here is a very informative article about how to get your deduction. http://www.houselogic.com/home-advice/tax-deductions/deducting-private-mortgage-insurance/#comments

rent-vs-own

Ownership becoming more attractive than rent

With interest rates still at incredibly low levels and rental rates continuing to climb, up over 11% over the last 3 years according to Freddie Mac economists, comparisons of rent vs. own will be getting a much closer look as we move into the spring.  While Las Vegas has seen a slight increase in the unemployment rate this month, up to 7.1% from 7% in December, overall the jobs market is strengthening and Nevada has reached a record high level of employers.  In other words more employers are seeing the benefits of setting up shop in the tax friendly environment of Nevada and they are feeling confident enough in the over all economic recovery to hire more people.  For quite a while now renting vs owning, has been a tough call for many people, and for quite a few others, who were pushed into having to decide between short selling or letting their home be foreclosed on, the option to buy was not open to them.  Currently most lenders want to have a period of 3 years after a short sale and anywhere from 2 years (new FHA program) and up to 7 years for others before a loan can be obtained with anything beyond usurious interest rates.  The worst periods of underwater home ownership seem to be fading in the rear view mirror, allowing home owners to once again think about utilizing the equity in their home, that’s right I said EQUITY, to move up into new or larger properties.  All of these scenarios bode well for the health of the housing market, with only a few dark clouds looming on the horizon.  Underwriting and qualifying for loans is still fraught with many pitfalls, but it does seem that restrictions are loosening from the schizophrenic paranoid to simply ridiculously uptight.  The biggest concern will surround the closing procedures required when the Consumer Finance Protection Bureau, which is still way too under regulated in my opinion, enacts new Real Estate Protection Act and Truth In Lending standards in August.  As with most things, the road to hell is paved with good intentions and while the new guidelines mean well, they could slow the process of buying and selling a home considerably.  Hopefully the housing market will have built up a good head of steam heading into August and there will only be a slight hiccup. For now, expect to see seller’s wondering if they should trade their equity up into new digs and expect the increasing rents to send many lessees looking for greener pastures that they own.

The link below shows an excellent comparison of a Rent Vs Own scenario taking place over a period of 7 years.

rent vs own

 

For a very long time, the real estate market, especially in Las Vegas and Henderson was dominated by institutional sellers.  days-on-market-3-2015Be they banks, lien holders or investors, the balance of power has been strongly on the seller’s side of the fence for quite some time.  With the implementation of Assembly Bill 284 in 2011, foreclosures in Nevada pretty much dried up overnight causing short sales to become far more palatable to lending institutions, but with the expiration of the Debt Forgiveness Act, those too have become far less common.  Our market today is roughly 80% traditional sellers and due in part to slower sales; our median home values have been on the rise.  As they say, a rising tide lifts all boats, and in this case it has given homeowners who had been underwater new opportunities.  As I mentioned, our market has been very favorable to sellers for a while now, but that may be changing in the months ahead.  This is not to say that an out of control buyer’s market is right around the corner, where home prices plummet and homes dip back beneath the waves, but we may very well be seeing the start of a market where sellers once again have to compete in little ways to make their home more attractive.

The mechanism for determining who holds sway in the housing market is through absorption rate, or the average sales rate and the current inventory.  If there is more than 6 months inventory in a market based on the absorption rate then it is considered a buyer’s market and of course less is a seller’s market.  Right now we are around 4% and moving closer to 5%, which should continue to increase as warmer weather comes along.  Part of the reason homes aren’t moving as quickly as sellers would like is due to over pricing the homes, but it is far more difficult to increase the price of a home once a buyer has accepted a lower price, than it is to simply reduce the price once a property is not getting any offers.  The trick is knowing how long to test the waters before bringing down the price and having a plan in place to do so when the time comes.  There is a perception that when a house has been on the market for longer than 30, 60 or 90 days that there is something wrong with it.  That perception is one that was actually true during the REO/Foreclosure market we stumbled through for so long, but today is a new day and sellers should test the market to see how much they might get.  They do have to be aware though, that as the market become more evenhanded that incentives like a home warranty offered, or closing costs may once again have a place in our sales.

I have heard many “sky is falling” forecasts that overpricing will hurt our recovery, but in my opinion overpricing is part of a healthy market.  The problem comes when overpaying becomes the norm and common sense leaves the building with Elvis.  Sellers in non distressed situations have traditionally started high, reduced priced and then sold their homes at a price that consumers are willing to pay.  I doubt very seriously that the overpricing of our homes in Las Vegas will lead to a return of buyers paying over appraised value for those homes.

There is one area of concern I should mention, which is the reset of Home Equity Lines Of Credit which will start in 2015 and run through 2018.  The reason this is worth keeping an eye on, is that if our market tilts slightly toward the buyer and then there is a sudden onslaught of foreclosures because sellers can’t afford the higher payments on the HELOC resets, we could see a return to declining values.  It is unlikely, but still worth keeping a wary eye upon.

 

paw-phil

 

Punxsutawny Phil may have seen his shadow, but there are fewer and fewer signs that the  winter engulfing the housing market will continue.  While many elements of housing have been  improving over the last 24 months, the fear that “shadow inventory” or a struggling jobs market  could derail housing’s rebound have kept many potential buyers and sellers on the sidelines.  It  does seem as though the sun is finally shining on housing and based on foreclosure start rates  and the fact that while sales are not as high as they have been in years past, over the last three years the total number of homes sold has remained relatively close.

National Association of Realtors Statistics existing home sales.

2012 total US sales 4,660,000

2013 total US sales 4,090,000

2014 total US sales 4,940,000

Additionally new home sales are up nearly 5% year over year based upon HUD statistics

January 2014 US new home sales 457,000

January 2015 US new home sales 481,000

The number of homes available for purchase is also stabilizing, with absorption rates (rate at which available homes are sold in a specific real estate market during a given time period.) getting back to a point where inventory levels are nearly at the middle of the spectrum. (less than a six months supply favors sellers, more than a six months supply favors buyers)

Existing US homes inventory 5 months supply

New US homes inventory 5 months supply

Nevada homes inventory 4 months supply (our market still slightly favors sellers)

Other positive signs are reports that the mortgage market is still taking such a low level of risk that lenders could loosen the reigns by as much as 5% and still be under 2001 and 2003 risk levels.  Those years marked a time of balanced credit access and default risk.  Unfortunately at the end of 2003, Option ARM loans began to be presented in greater numbers to the public, which created substantially higher credit risk and of course along with other factors led to the melt down.  Now lending institutions are being encouraged to take on more risk, which will allow first time home buyers much greater opportunity and should further strengthen the housing market.

Loans with high default risk 2001–2003 12%

Loans with high default risk 2014 5%

The national forecast for 2015 has been for an increase in value of 8%.  Nevada and specifically Las Vegas/Henderson should easily fit into that scenario.  The median gain in value between 2013 and 2014 for single family homes was roughly 11%.  In the years before the bubble and the bust Las Vegas and Henderson experienced between 3% to 12% depending on area and other factors and based on what we are currently seeing a stable return to that trend is not only possible, but very likely.

Good night sweet Phil.