September 2007 Archives

Why appraisals are coming in above sale prices

Kenneth Harney:

What's going on with appraisals in some parts of the country? Mortgage lenders - and appraisers themselves - say they're increasingly coming in with valuations higher than the contract prices agreed to by sellers and buyers. The differences can range into the thousands.

Are some sellers giving in to lowball offers, fearful that they can do no better in the wake of the subprime mortgage implosion and home sale bust? Or are appraisers simply lagging behind downward market adjustments?

"We're seeing it a lot now," says Patrice Yamato, president of Plaza Mortgage Group in Jacksonville, Fla. "Appraisals are coming in higher than the contract" - a reversal of the pattern during the housing boom years, when appraisals often came in at, or occasionally below, the contract price.

"I think buyers are pushing very, very hard," says Yamato - and they're walking away with steals.

I Love the Smell of Repos in the Morning

Barry Ritholtz:

Last night, I asked the assembled multitudes what was the Fed's motivation behind their big 50 bp whack.

Let me add some spin to the question: OFHEO will now allow Fannie Mae and Freddie Mac to increase their portfolios by 2%/year above cap.

"In another sign of an administration shift, the regulator for Fannie Mae and Freddie Mac, the Office of Federal Housing Enterprise Oversight, agreed to relax restrictions on the mortgage-finance companies' investment holdings. Ofheo's new policy allows Fannie Mae to increase its portfolio by 2% a year, a level comparable with an existing limit on rival Freddie Mac.

Fannie Mae called on the regulator to allow bigger increases. "We still believe the more effective response, given the extent of the market disruption, would be to raise our portfolio cap by at least 10%," Fannie Mae spokesman Brian Faith said."

The details will come out over the next few weeks -- but there are expectations this will eventually include Jumbo Mortgages, Sub-Primes, etc.

Thus, a GSE, originally established to make purchasing homes more affordable for the middle and lower classes, has now become a subsidy for speculators and the purchases of McMansions.

These are your tax dollars at work . . .

Selling a home without an agent comes with risks, rewards

Annette Haddad:

On a lark last spring, Ronald Grant decided to "list" his South Pasadena house for sale on the popular real estate valuation website

Zillow estimated his home's worth at $1.4 million. But Grant, who was planning to sell his home when he retired in two years, decided to have some fun. So he posted a notice on the site saying he would gladly hand over the keys to anyone willing to pay him $1.6 million for his 4,500-square-foot abode.

Greenspan Concedes Mortgage Dilemma

Jeannine Aversa:

Former Federal Reserve Chairman Alan Greenspan acknowledges he failed to see early on that an explosion of mortgages to people with questionable credit histories could pose a danger to the economy.

In an upcoming interview, Greenspan said he was aware of "subprime" lending practices where homebuyers got very low initial rates only to see them later jacked up, causing severe payment shock. But he said he didn't initially realize the harm they could do.

"While I was aware a lot of these practices were going on, I had no notion of how significant they had become until very late," he said in a CBS "60 Minutes" interview to be broadcast Sunday. "I really didn't get it until very late in 2005 and 2006," Greenspan said.

An excerpt of the interview was released Thursday.

A meltdown in the subprime mortgage market has rocked Wall Street. Foreclosures and late payments have soared and lenders have gone out of business. Nervous financial institutions tightened credit standards, making it harder for even more creditworthy borrowers to get financing. This has increased chances the economy might slide into a recession.

What’s Really Happening in Housing Markets?

Morris A. Davis, François Ortalo-Magné, and Peter Rupert:

Recent trends in house prices have induced a certain amount of hand-wringing among leading economists, policymakers, and bloggers of some repute. In the eight-year boom ending sometime last summer, they warned that house prices were rising much faster than ever before, and that such appreciation was unwarranted. As a consequence, these commentators are predicting that prices will fall, perhaps disastrously so.

According to the most widely cited historical data on house prices (compiled by Robert J. Shiller for the 2005 edition of his book, Irrational Exuberance), house prices were roughly flat from 1890 to 1997 (after adjusting for inflation), but since 1998, they have climbed 6 percent per year in the aggregate. Adding to analysts’ sense of trouble is that the rate of house-price appreciation over the boom has varied widely across the United States. The more populated coastal states, such as California and Florida, have experienced nominal gains on the order of 10 percent per year, whereas prices in Midwestern and interior states, like Michigan and Nebraska, appreciated approximately 4 percent per year. The acceleration of prices in the aggregate reflects the fast growth of house prices in the coastal states, so the argument goes, but because growth in house prices has outpaced the growth of residents’ income in these states, analysts argue that the rise in house prices is not supported by economic “fundamentals.” Their observations imply that house prices on the coasts, and therefore in the aggregate, should fall to be more in line with income and fundamentals.

But there is a problem with the data on which these projections rest. They are inaccurate in a particularly important period—the 1970s, a decade which, as it turns out, does offer a precedent for the current situation. A different source of data on housing prices suggests that a housing boom similar to the 1998-2006 boom occurred sometime between 1970 and 1980.

American Heartland Escapes the Housing Bust

Jason Beaubien:

In most U.S. cities, $115,000 won't buy much, but in places like Sioux Falls, S.D., Des Moines, Iowa, and Fargo, N.D., real estate remains relatively affordable. Median prices in heartland cities are about $140,000, and unlike in many big cities, houses here are holding their value.

Jesse Logterman, a 25-year-old Sioux Falls, S.D., homeowner, recently bought a three-story, 2,000-square-foot house for $115,000. Logterman's 91-year-old white clapboard home needs a little bit of work, but the problems are mainly cosmetic. The hardwood floors could use sanding, and when he moved in, there was a dilapidated wet bar in the basement that Logterman, a sound designer and musician, ripped out to make room for a recording studio.

"The electric was redone in 2005, as was the roof. So I thought, heck, for the price and the square footage, I thought it was a pretty good deal," Logterman said.

California's Housing Market

Herb Greenberg:

Since then, fueled by what Levy terms "bizarre mortgages," home prices have ballooned to 80% more than the national average in some of these markets. The median home price in the state recent price declines, notwithstanding hovered at $586,000 as of late July, according to the latest figures from California Association of Realtors. That is more than double the national average of $228,900.

This is where Levy's thoughts about affordability come into play. For many Americans, creative mortgages or not, a purchase price of a few hundred thousand dollars with a small down payment using conventional financing is a lot of money. So is the $1 million-plus to be paid for the privilege of living a few feet from neighboring homes in a tract development in many parts of the state, where housing already is considered by some observers to be in a recession, as defined by sharp drops in the level of new construction and sales activity.

A bigger economic upheaval, Levy says, "isn't about foreclosures," which are making the headlines now, "it's about the spending behavior of those who aren't going to lose homes but have seen their wealth evaporate." Either they don't have as much home equity to borrow against, he says, or they are afraid to spend as they watch the value of their home decline.

Fed governor urges action on house prices

Krishna Guha:

Central bankers should ease monetary policy quickly and aggressively in response to a big fall in house prices, Federal Reserve governor Frederic Mishkin said on Saturday.

Presenting a paper on the final day of the Fed’s Jackson Hole symposium, Mr Mishkin said policymakers should not wait until output falls, but should “react immediately to the house price decline when they see it.”

He said the optimal policy response was both quicker and more aggressive than that suggested by a standard policy rule, in which policymakers respond only to deviations in output and inflation.

He said simulations show that this approach “can be very successful at counteracting the real effects” of even a large house price slump, because of the long lags from changes in housing wealth to changes in consumer spending.

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