New Jersey Real Estate Report

From USA Today:

Housing woes have domino effect

If you haven’t yet felt the impact of the nation’s credit crisis, just wait. Chances are, you won’t have to wait long.

So far, the turmoil may feel a bit remote for average people: Failed mortgage lenders. Gargantuan write-downs by banks. Foreclosures for people who couldn’t really afford the mortgages they got.

What about the rest of us? Are we in danger? No one knows for sure, but quite likely, yes.

As the credit crisis seeps into farther-flung corners of the economy, more of us will find it harder — and costlier — to borrow money. The value of the funds in our retirement accounts could shrink. People with subpar credit will likely find it more difficult to qualify for auto and home-equity loans. Even consumers who make the cut may need higher credit scores and more documentation.

With loans harder to get, people will hesitate to buy cars, boats and other big-ticket items. The gravest fear? That weak consumer spending — along with surging energy prices, a long housing slump and sluggish job growth — will plunge the economy into a recession.

Even if a recession doesn’t occur, “We’re going to be in for a rough ride,” says Robert Kuttner, a senior fellow at Demos, a New York policy organization. “With job creation slowing down, credit standards being tightened and housing values not going up anymore, the consumer is under pressure to tighten his or her belt.”
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Tighter credit and falling home prices top the reasons why the economy could slip into a recession, according to 50 economists surveyed in late October and early November by the National Association for Business Economics.

Most economists still don’t foresee a recession. But the risk of a downturn is growing with each bout of bleak news. About 18% of economists who responded to NABE’s survey put the probability of a recession starting within the next 12 months at 50% or greater. That’s up sharply from the 11% of economists who said so in August.

A recession would inflict pain on a majority of Americans as unemployment rose and the stock market sank further. In a recession, “Investors have to be prepared to absorb a 20%-plus decline in the value of their portfolios,” says Ed Yardeni, president of Yardeni Research, an investment research firm in Great Neck, N.Y.
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The initial low rates on adjustable-rate mortgages are resetting to higher rates. And with housing prices in many markets falling, overextended buyers can’t refinance. Delinquencies and foreclosures are rising. Banks and other investors holding downgraded securities tied to risky mortgages are writing down their values billions of dollars at a time.

Each week brings fresh evidence of how the credit crisis is causing damage. Last week, for example, the stock market fell after Goldman Sachs downgraded the nation’s largest bank, Citigroup, to a sell. Goldman said the bank would likely have to write down $15 billion over the next two quarters, mainly because of its exposure to risky mortgage securities.

And darker days probably lie ahead: Mortgage-related losses industrywide are likely to mount through 2009 and further bruise financial institutions, says Mark Zandi, chief economist at Moody’s Economy.com.

Such losses eat away at banks’ capital reserves. That means they can’t lend as much money. Goldman Sachs analysts predict that, overall, banks’ exposure to risky mortgages could reduce the credit available to consumers and businesses by a staggering $2 trillion.
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Consumers who pulled money out of their homes as the market soared in recent years will also be in for a shock as home prices fall during the worst real estate recession since the Great Depression.

Kuttner says he believes that consumers’ recent “reliance on home equity and credit card loans isn’t because middle-income people are going on shopping sprees, but because wages are squeezed.”

Home-equity withdrawals accounted for up to $324 billion a year in consumer spending from 2004 to 2006, according to estimates from Federal Reserve economist James Kennedy, based on a paper he wrote with former Fed chairman Alan Greenspan. These withdrawals and related consumer spending plunged in the first half of this year as the housing market weakened, according to updated estimates from Kennedy.

Pain isn’t restricted to struggling homeowners

This real estate recession is the worst since the Great Depression, affecting almost every part of the housing market, from construction to lending. A turnaround is not expected until the second half of next year and the financial aftershocks from rising foreclosures will be felt for at least another six years.

The confidence level of home builders remains at a 22-year low, and the National Association of Home Builders repeated last week that it doesn’t expect the decline in new home construction to bottom out until the second half of next year.

“Builders do not see any significant change in housing market conditions as compared to last month,” NAHB chief economist David Seiders said in a statement, and special sales incentives are having limited success in attracting home shoppers.

D.R. Horton, the second-largest home builder, said last week that 48% of buyers canceled their contracts in the July to September quarter, and that housing market conditions continued to decline in that period.

But the pain is not being felt evenly across the country. Home prices fell in 17 states during the last year, but most states “continue to have stable home values,” and a half dozen others even showed moderate price growth, according to an analysis of repeat sales last week by First American LoanPerformance.

Worst hit were California, Nevada, Arizona, Louisiana and Florida, where prices declined 5% to 10%.

Almost 16% of homeowners who bought in the past two years owe more on their mortgages than their properties are worth, Zillow.com says.

From the Wall Street Journal:

Citigroup Feels Heat To Modify Mortgages
Nonprofit Groups Press For Subprime Relief; Deciding Who Gets Help
By LAURIE P. COHEN
November 26, 2007; Page A1

Paulo Perez, a graphic artist, hasn’t made payments in months on the $330,000 mortgage on his ranch house in La Puente, Calif. It fell to Citigroup Inc.’s mortgage-servicing unit to decide what to do about that.

After Citigroup moved to foreclose on him, Mr. Perez, who is 28 years old, asked the financial giant to cut his monthly payments to a level he can afford. Citigroup representatives eventually said no, offering him a less appealing suggestion: Sell your house, turn over the proceeds, and we won’t go after you for any unpaid balance.

On the front lines of the great American mortgage workout, tens of thousands of borrowers are in trouble and looking for relief. Washington has offered advice about what lenders should do, and influential groups that counsel low-income borrowers are ratcheting up pressure on Citigroup and others to offer struggling homeowners more favorable terms on their existing loans — even borrowers whose finances seem hopeless.
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In many ways, the pressures Citigroup faces mirror those on other mortgage servicers, whose job it is to collect monthly payments and pass them on to mortgage investors. Servicers are responsible for protecting the financial interests of those investors. But they also have become targets for criticism that the mortgage industry isn’t doing enough to clean up problems arising from years of careless lending to subprime borrowers with shaky credit.

Citigroup, however, may have a bigger mess on its hands than many. In September, as the U.S. housing crisis deepened, it bought servicing rights to a problematic $45 billion mortgage portfolio. It announced a commitment to “help distressed borrowers remain in their homes,” working with Acorn Housing Corp., a nonprofit group that counsels low- and moderate-income home buyers. But with 46,000 borrowers already in default, Citigroup is struggling with the magnitude of the portfolio’s problems, and its relations with Acorn are fraying.
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Acorn and other nonprofit community groups contend that mortgage servicers have no right to play hardball with borrowers. Subprime lenders, these groups say, talked customers into loans they couldn’t afford by encouraging them to overstate their incomes and by basing the loans on inflated appraisals. Anyone with steady enough income to make regular monthly payments should get a restructured mortgage, the groups argue.

On the other hand, Douglas Duncan, chief economist for the Mortgage Bankers Association, argues that lenders aren’t the only ones to blame for the subprime-lending debacle. Among the many culpable parties, he says, are the borrowers who didn’t follow through on their obligations.
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Of the 280,000 loans in the portfolio, 16.4%, or 46,000, were in default as of Sept. 30, meaning borrowers were at least two months late making payments. About 14,000 of those delinquent borrowers faced foreclosure. Nationwide, 14.8% of subprime borrowers were in default as of June 30, according to the latest figures from the Mortgage Bankers Association, a trade group.
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In Granada Hills, Calif., Natalie Brandon is fighting to keep the three-bedroom ranch house she bought in 1985 for $105,000. Mrs. Brandon, 51, does medical billing for doctors; her husband is a dispatcher for a local gas utility. Last year, she got a $625,500 mortgage from Argent, now owned by Citigroup. Her 7.99% interest rate isn’t set to rise until next June, but she already is behind on payments.

Over the past five years, she has refinanced her home five times, each time taking out cash and paying prepayment penalties. Last year, all she had to do to refinance was state that she and her husband earned a combined $100,000. She says she used the proceeds to pay off $30,000 owed on her white Lexus.

This year, she says, their income fell after she suffered a short-term disability. Mrs. Brandon figures if she sold her home today, she wouldn’t get more than $450,000 — what a nearby home sold for in foreclosure.

From Newsday:

Experts predict more pain before housing rebounds

Problems in the real estate market are going to get worse — much worse — before they better, experts say.

Home prices will keep falling and foreclosure rates nationally will keep rising at least until the end of next year, they said. And some predictions contend that the market won’t right itself until 2010.

“We are going to have a huge correction,” said David Olson, president of Wholesale Access, a mortgage research and consulting firm based in Columbia, Md. “There’s going to be a lot of pain.”
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No one knows yet the extent of the problem. Just last week, Goldman Sachs published a report predicting home prices will fall an additional 13 to 14 percent over the next three years. And, the report notes, the peak of subprime mortgage rate resets won’t come until March. In that month, the interest rate on $42 billion of mortgages will increase, straining the budgets of many homeowners.
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Nearly 150,000 subprime mortgages are scheduled to reset each month through the end of next year, according to the Federal Reserve, causing the typical monthly payment to rise about $350, or 25 percent. Goldman Sachs, meanwhile, predicts that losses on outstanding loans could balloon to $400 billion, though some experts feel that number is too high.
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“The hardest thing is to make the borrowers most at risk fully aware of the risks they face and aware of the opportunities to help ameliorate that risk,” Gumbinger said.

For the most part, however, experts say the country will just have to ride out the troubles in the market. Housing prices should stabilize once they come more in line with incomes. Foreclosure rates should stop soaring once the surge of resets on adjustable-rate mortgages passes.

“We’re just going to have to wait this through,” Olson said.

From the NY Times:

A Time for Bold Thinking on Housing

WE have to consider the possibility that the housing price downturn will eventually be as big as that of the last truly big decline, from 1925 to 1933, when prices fell by a total of 30 percent.

As of this August, domestic home prices were already down 5 percent from their peak 14 months earlier, according to the S.& P./Case-Shiller Composite Home Price Index, and prices were falling at a faster rate in the months leading up to August. (Updated data will appear on Tuesday.)

This crisis should be an occasion for some inspired thinking about fundamental changes in our real estate institutions. The actions that have already been taken are not impressive. The housing market is worsening, and more and more home owners are getting into trouble with their mortgages.

The public response to the housing downturn of 1925-33 provides an important lesson in what government and private institutions can accomplish. Back then, people weren’t content with temporary palliatives. They were thinking big, and revolutionary changes were made in real estate institutions. Without those fundamental changes, the Great Depression would have been much worse than it was, and we would be in a more vulnerable situation today.
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The radical financial innovations of the 1930s were possible because the real estate crisis and other economic problems of the Depression created a sense of urgency. Innovation, after all, tends to come in troubled times.

We should take full advantage of the innovation opportunities stimulated by our current troubles. We would emerge much stronger and better for it.

From Bloomberg:

Home sales, prices decline nationwide

Home prices fell in more than one-third of US cities last quarter as stricter lending standards caused a 14 percent decline in sales nationwide.

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Prices dropped in 54 of 150 metropolitan areas in the third quarter, and the median sales price tumbled 2 percent nationwide, the National Association of Realtors said yesterday. Home sales, including single-family properties and condominiums, slid to 5.42 million at an annualized pace from 6.29 million a year ago.

Declines in sales and prices signal the housing slump that began in 2006 may extend to a third year, matching the slowdown 18 years ago that ended in the 1991 recession. The housing decline will reduce gross domestic product growth to 2.1 percent in 2007 from 2.9 percent a year ago, according to Lawrence Yun, an economist for the realtors group.

“Prices have to continue to fall to deplete a bloated inventory,” said Richard Yamarone, chief economist at Argus Research Corp. in New York. “The only surprise in housing would be if we didn’t see the slump extend into 2008.”

Ninety-three US cities had price gains and three were unchanged from a year ago, according to the report.

The US median home price, the point at which half the homes sold for more and half for less, was $220,800 in the third quarter, down from $225,300 a year ago, the association said. In the second quarter, prices fell in 50 of 149 cities and the national median fell 1.5 percent.
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The collapse of the market for bonds backed by mortgages has spurred US banks to take more than $45 billion in write-downs and tighten their lending standards. Fewer mortgages and falling prices have made it harder to refinance or sell.

About 40 percent of US lenders have raised their standards on mortgages for prime borrowers, their most creditworthy customers, according to a Federal Reserve survey this month. In a July survey, 15 percent reported raising standards for prime borrowers.

About 60 percent of lenders who give nontraditional loans, which include interest-only mortgages, reported stricter lending standards, up from 40 percent in July, the Federal Reserve said.