Housing Suffering Relapse Confronts Bernanke Credit Conundrum
The Obama Administration is studying whether to let a first-time home buyers’ tax credit expire as scheduled at the end of November. Fed Chairman Ben Bernanke and his colleagues may continue talking this week about how to wind down purchases of mortgage-backed securities, according to Peter Hooper, chief economist at Deutsche Bank Securities Inc. in New York. The two programs have helped stabilize real-estate demand, with new-house sales rising 9.6% in July from the prior month, the most since 2005. Ending these efforts may stifle the housing rebound by depressing sales and pushing up both mortgage-backed bond yields and interest rates on home loans, even in the face of the record-low zero to 0.25% short-term rates the Fed has engineered, said economist Thomas Lawler. A weaker housing market would likely dampen the economic recovery and undercut shares of builders. “Things could get ugly,” said Lawler, an independent consultant in Leesburg, Va., who spent 22 years at Fannie Mae. “We could be facing a triple whammy at the end of the year: the expiration of the tax credit, the end of the Fed mortgage-buying program and rising foreclosures.” Residential construction and home sales led the way out of the previous seven recessions going back to 1960, according to David Berson, chief economist of PMI Group, a mortgage insurer in Walnut Creek, Calif. Real-estate sales fuel consumer spending, which historically accounts for about 70% of gross domestic product, he said. “Housing has been the sector of the economy with the largest multiplier effect,” said Berson, former chief economist at Fannie Mae. “Whether buying new homes or existing homes, people tend to fill them up with things: new furniture, new appliances, new window coverings.” (www.bloomberg.com)
Bloomberg.com (9/21/09); Kathleen M. Howley and Rich Miller
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Forty Percent of California’s First-Time Home Buyers Significantly Influenced by Tax Credit
Nearly 40% of first-time home buyers said they would not have purchased a home if the federal tax credit for first-time home buyers was not offered, according to the California Association of Realtors® “2009 First-time Home Buyers Tax Credit Survey." Nearly 70% of those surveyed said that the federal tax credit was either “very important” or “most important” in their decision to purchase a home. When ranking the importance of the tax credit, those who planned to use the credit gave it a 4.5 on a scale of one to five, with five being “most important.” That rank was tied with low home prices. In California, home prices have declined 59% from the peak to the current low in this cycle — contrasting with the national picture where the prices have declined by 28%. “While affordability has improved in California over the past two years, it is still lower than affordability nationally,” said James Liptak, president of the California Realtors®. “As a result, the tax credit is an even bigger factor in California compared with elsewhere in the country. Going forward, the credit will be even more important to the housing recovery.” (www.realestatechannel.com)
Real Estate Channel (9/21/09)
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Despite National Upswing, Florida Home Builders Worried
The road to recovery for South Florida’s housing market will be longer — and bumpier — than that of the rest of the nation. “It is clear that our situation in South Florida is very different from the national situation,” said builder Venny Torre, principal of TorreMackle Group of Coral Gables. With new home construction virtually dead in the region, TorreMackle is focusing on completing distressed residential projects. “Getting out of the problems we have will take longer here,” Torre said. “South Florida was so overbuilt. Until we sell more existing homes and sort out the troubled assets, we will be behind the national average.” If local building permit figures are any indication, future construction in South Florida will be centered on single-family homes. All but seven permits issued in the tri-county area in July were for single-family projects. Single-family homes in the region are likely being built by individual property owners with the resources to take advantage of lower-than-normal construction costs, Torre said. Major home building companies are not currently getting involved. The oversupply problem in South Florida might dampen new-home construction until late 2010, said Ashley Bosch, president of the Builders Association of South Florida and managing director of Miami-based Blok Development Group. Many more homes are expected to end up in the hands of lenders as the cost of adjustable-rate mortgages soars in the next few months, Bosch said. Home buyers who obtained adjustable-rate mortgages between 2004 and 2006 are starting to see the higher rates kick in. “What we’re expecting now is quite a few people defaulting and a greater influx of foreclosures,” he said. “When you have that much product on the plate, it is difficult to get starts and permits going. It is not a good business decision to be starting new homes right now.” (www.dailybusinessreview.com)
Palm Beach Daily Business Review (9/18/09); Eric Kalis
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Good Credit Scores, Deadbeat Choices
Experian, one of the three national credit bureaus, teamed with the consulting company Oliver Wyman to identify the characteristics and debt-management behavior of the growing number of home owners who bail out of their mortgages with none of the expected early warning signs, such as nonpayments or late payments on other personal debt. With foreclosures, delinquencies and loan losses at record levels, strategic defaults and walkaways are among the hottest subjects in residential real estate finance. Unlike in earlier, academic studies, Experian and Wyman had the ability to tap into credit files over extended periods of time to identify patterns associated with strategic defaults. Among their findings, there were 588,000 strategic defaults during 2008, more than double the total in 2007 and far beyond most industry estimates. They represented 18% of all serious delinquencies that extended for more than 60 days during the fourth quarter of last year. In contrast with most mortgage delinquencies in which borrowers are trying to save their houses, not dump them, strategic defaulters often go from perfect payment histories to no mortgage payments at all. They just suddenly stop paying. Strategic defaults are heavily concentrated in negative-equity markets, where home values zoomed during the boom and have cratered since 2006. In California last year, the total number of strategic defaults was 68 times as high as it was in 2005. In Florida, it was 46 times as high. In most parts of the country, these defaults were about nine times as high in 2008 than in 2005. Home owners with large mortgage balances generally are more likely to pull the plug than those with lower balances, and defaulters generally understand that their credit scores will be severely depressed by their decision. (www.washingtonpost.com)
Washington Post (9/19/09); Kenneth R. Harney
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Groundbreaking Way to Heat, Cool Homes, Geothermal Energy Systems Are Aided by Midwest Climate
St. Louis’ temperate climate makes the region ideal for geothermal heating and cooling systems that drastically slash home energy costs, experts say. Among the growing number of users in the area is Gary Pedersen, a retired Bayer Corp. policy analyst, who says the utility costs at his two-year-old home in Kirkwood, Mo., are half those at his nearly identical former home in Eureka, which had a conventional forced-air system. Experts say the St. Louis region is especially geothermal friendly because its infrequent triple-digit temperature swings over a given year mean the ground temperature just a few feet below the surface is a constant 60 degrees or so. As a result, heating and cooling demands on a geothermal system are low. Yunsheng “Shawn” Xu, an associate professor of engineering at the University of Missouri, is designing a geothermal system to drop energy costs to zero in the 2,600-square-foot home he plans to start building next month on a 15-acre semirural site where he can make the best use of the sun’s effects. He said the geothermal system’s cost — roughly double that of a conventional heating and cooling system — helps push his three-bedroom home’s construction budget to about $400,000. At about $154 per square feet, the cost remains solidly in the range of custom-built homes in the St. Louis area. He plans to recoup 30% of the system’s cost through the federal tax credit that applies to geothermal systems as well as solar panels, solar water heaters, small wind energy systems and fuel cells. (www.stltoday.com)
St. Louis Post-Dispatch (9/18/09); Tim Bryant
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Upgrading Bathrooms Without Taking a Bath
Bathrooms used to be an afterthought. Before 1900, most houses didn’t even have one inside. Now, 80% of new single-family homes have two. They occupy 12% of total floor area, almost 300 square feet, according to NAHB. An NAHB study says, “when the number of bathrooms is approximately equal to the number of bedrooms, an additional half-bath adds about 10% to the home’s value, and one additional bath adds 19%.” But the study notes that bath additions are expensive, almost $50,000 for an upscale master-bath project. Its conclusion: A mid-range bathroom remodeling job is a better investment. For a national average cost of $10,500, the home owner can expect to get back at least 100% of the outlay at sale time. It’s nice to dream about space for saunas and sunken tubs, but when grand plans are tempered by a budget, the owner can often gain enough room to make a dramatic difference without gutting the space and moving all the walls. For instance, if the bath is next to a closet, expansion is simple. Or the exterior wall can always be pushed out, leaving the others alone. If a few feet are needed, a contractor can probably cantilever extra floor joists beyond the existing foundation — a bump-out addition. This saves the work and expense of building a foundation. (www.chicagotribune.com)
Chicago Tribune (9/18/09); Mike McClintock
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