Archive for May, 2011


New York Mansion Tax? I don’t live in a mansion!

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According to New York State, if the purchase price of an apartment is $1 million or more, you are buying a mansion!  Therefore your purchase would be subject to a 1% Mansion Tax, calculated on the entire purchase price, not just the part that exceeds $1 million.  Buy at $999,999.99 no tax; buy at $1,000,000.00 or more, and you’ll owe $10,000+ tax.

If you’re thinking you’re safe if the purchase price is less than $1 Million, but are paying fees or taxes that would have otherwise been paid by the seller, think again.  Those fees become part of the consideration for the property and could lead to being responsible for the Mansion Tax.

According to Joel E. Miller, a Queens tax lawyer, although the mansion tax is not deductible, however it does increase the property’s tax basis so it will ultimately reduce the tax paid on a gain on the sale of the property.

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This is the third in a 3 part series.  In Part 1, we discussed the General Principles of a Coop Corproation and the Telltale signs of a GOOD Building.  Part 2 discussed what to look for in Coop Financials.  Finally, we’ll look at:

Assessing a Coop’s Financial Condition

It has been my experience that very few buildings are in such a state of financial disrepair as to warrant a decision on the part of the buyer not to purchase in a particular building.

This was not always the case especially in the 1980’s and early 1990’s, a time that saw a tremendous amount of new conversions and with that, the problems that arise in such situations. Currently, the overwhelming majority of coops have been established for over fifteen years (a very conservative estimate) and has in many ways gotten the kinks out of their financials. They tend to enjoy low or no sponsor ownership, attractive financing and low instances of shareholder default.

In spite of the likelihood that the majority of buildings are solvent, buyers are concerned about the potential for increased maintenance and assessments, these concerns are the main motivation behind their question; “Is this a good building?”

Before forming an opinion, it is essential to understand the following points:

  • Buildings, regardless of their location, age and prominence, need on-going repair and the replacement of parts, systems, and structure.
  • Operational costs are subject to inflationary pressure and therefore are likely to rise.
  • Salaries are subject to union mandates.
  • Taxes are subject to the municipality.
  • The only manner in which a building can raise money is by employing one or more of the following sources:
    • Refinance their underlying mortgage.
    • Exercise their ability to draw upon a line of credit.
    • Raise maintenance. 
    • Institute an assessment.
    • Institute a flip tax on resales.

Based on the aforementioned, it is logical to conclude that ownership costs are going to rise in 99% of the cases.

The job at hand is to assess that a building is being run conscientiously (an imperative) and predict to what extent future costs are likely to rise.

Finally, I recommend a NY Times article which describes some Red Flags in a co op’s statement.

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In Part 1, we discussed the General Principles of a Coop Corproation and the Telltale signs of a GOOD Building.  This post will discuss what to look for in Coop Financials.

Basic Items to Focus on in a Cooperative Financial Statement
  • Liquid Assets.
  • Underlying Mortgage(s).
  • Total Income
    • Maintenance Income
    • Miscellaneous (Other) Income
  • Total Expenses.
  • Income from Operation before Depreciation.
  • Income from Operation after Depreciation.
  • Notes to the Financial Statement.
Liquid Assets
  • Cash and cash equivalents. These constitute money that can be spent irrespective of prepaid items and mandated escrow funds. Cash typically exists in a in an operating account, savings account or is designated as a reserve fund.
  •  A building’s cash accounts should equal at least 2-3 months’ maintenance charges.
Underlying Mortgage(s) 
  • The overwhelming majority of coop corporations have an underlying mortgage as well as a subordinate mortgage. The latter generally appears in the form of a credit line that can be drawn upon as need presents itself.
  • Underlying mortgages are generally 7-15 years in length with the final payment in the form of a balloon payment. These mortgages are considered commercial mortgages and are subject to higher interest rates than found in a conventional mortgage and are subject to pre-payment penalties. Additionally, mortgages of this type are commonly interest-only mortgages and seldom self-amortizing mortgages.
  • When the purchaser of a coop applies for a mortgage, the lender needs to ascertain to what extent the purchase price of the unit relates to its pro rata share of the underlying mortgage. Most often the pro-rata share of the underlying mortgage is usually less than 20% of the purchase price, and in such case, there is no resistance from a lender to lend.

To determine the pro rata share of the underlying mortgage: divide the amount of the underlying mortgage by the total number of shares issued which equals the amount of mortgage per share and multiply that number by the number of shares allocated to the unit in question.

For example:

$8,000,000 (underlying mortgage) / 22,000 (total shares) = $363.63 per share x

147 (unit’s shares) = $53,454 (pro rata share of the underlying mortgage)

$53,454 / $650,000 (purchase price) = 8.22%

Total Income
  • Maintenance income is sometimes referred to as rental income. It represents the sum of money paid to the corporation by the shareholders. Maintenance can be stable, it can increase from year to year, and in some instances, it can go down.
  • A maintenance increase of up to 5% over the previous year would be considered normal whereas an increase in the vicinity of 10% would be considered high; however, every maintenance increase must be looked at within the context of the overall financial condition of the building.
  • Miscellaneous income is income received from non-maintenance sources such as assessments, tax refunds, interest, dividends, flip taxes, proceeds of un-sold shares, commercial income, and laundry income. In most instances, income from non-maintenance sources should not exceed 20% of a building’s total income otherwise it will be a breach of the 80/20 rule and create a tax consequence for the building. In some instances where a building is receiving too much miscellaneous income, it has become necessary for the building to increase their maintenance to comply with this rule.
    • In the past year or two, the 80/20 rule has been made more flexible to allow exceptions to the rule if certain conditions exist. One such condition would be when no more than 20% of the building is allocated to non-residential occupancy, the building may receive more than 20% of its income from miscellaneous sources.
Total Expenses
  • This is the sum of money the coop spent for such items as debt service, utilities, repairs, insurance, service contracts, real estate taxes, management fees, legal fees, and salaries etc.
Income from Operations before Depreciation
  • This is the difference between total income and total expenditures. Ideally,the total income should be equal to or slightly more than the expenditures. Realistically, the income flow might be slightly more or less than the expenditures.
  • The significance of a negative cash flow before depreciation must be assessed in relationship to the existing maintenance level, the level of cash assets and the anticipated need for additional income. A negative cash flow of 5% or more would cause concern if it were the result of normal expenditures and not an extraordinary event. At times a coop may purposely budget a negative cash flow in order to absorb substantial cash reserves, and in doing so, would eliminate the need for a maintenance increase which might have a negative impact on values.
Income from Operations after Depreciation
  • Income after depreciation is a “phantom number” and has no significance as long as it remains a negative. Should it be a positive number, the coop will be liable for federal income taxes.
Notes to the Financial Statement
  • Pay notice to any items that might impact the coop’s need for additional cash flow or asset accumulation such as:
    • Terms of the underlying mortgage(s).
    • Land lease escalations.
    • Rental income variances.
    • Tax liabilities.
    • Late shareholder payments.
    • Assessments.
    • Capital improvements.
    • Impending lawsuits.
Miscellaneous Items
 Sponsor Ownership
  • Ideally, a low percentage of sponsor ownership is preferable to a high percentage of sponsor ownership. The latter places the possibility of a material default in the hands of a single shareholder and restricts or even inhibits a bank’s willingness to lend in the building.
  • In cases where a sponsor or investor entity owns 10% or more of the shares, New York City mandates that such entity provide an annual affidavit that illustrates the differential between the rental income received (if any) and the maintenance due on the units in question.
  • Other issues aside, the essential concern of shareholders is “Does the sponsor pay his maintenance in a timely manner?” The answer to this question is yes in 99% of the situations.
Future Repairs
  • Coops seldom conduct a study to determine the remaining useful lives of the building’s systems and major components. Additionally, coops are seldom required (if ever) by their governing documents to accumulate funds in advance of the need of such repairs.
Ground Rent
  • Ideally, it is better for a coop to own its land rather than to have to lease it. Leasing land is never a positive situation but not necessarily the reason to forgo purchasing in such a building. When evaluating a land lease building; notice the remaining term of the land lease, rent escalations, and renewal options. Pay particular note to when the property is going to be re-appraised for purposes of determining future ground rent.
  • Land lease buildings do not necessarily have high maintenance charges, although they usually do.
  • Land rent does not contribute to the tax deductibility of the maintenance.
  • A “too short” land lease term (15 years or less) with no renewal option would severely impact the values of units in the building. In such an instance, a unit’s value could be defined as the difference between the fair market rental value, less the maintenance charge, multiplied by the number of years remaining on the land lease.
  • It is always advisable for a purchaser to have an attorney review the land lease prior to signing the contract of sale.
Obtaining Updated Information from the Managing Agent
  • Most financial statements reflect the state of affairs on December 31st of the preceding year. Such statements are usually issued between March and May of the following year.
  • It is advisable to obtain updated information with regards to maintenance increases, assessments, and capital improvements when the purchase is to be made between June and December, otherwise, the buyer would be relying on information that is 6-12 months old.
High Maintenance / Low Maintenance
  • Too often, buyers and brokers are apt to state an industry standard for the cost of maintenance in terms of $X.00 per square foot. This way of thinking is erroneous because there are many variable items that comprise maintenance and the amount of people that share in these expenses varies from building to building. For example: a building with 250 shareholders has the same expense for a 24-hour doorman as a building with 25 shareholders.
  • Other variables include:
    •  Terms of the underlying mortgage: amount, interest rate, interest only payments vs. amortized payments, amortization term.
    • Improved building systems versus the status quo.
    • High service versus low service: concierge, elevator operator, lobby attendants, handymen, porters, resident manager.
    • On-site amenities versus no amenities.
Reserve Fund

The lack of a reserve fund, or cash cushion, is not necessarily a negative condition. Having money in reserve is relative to the need of having money in reserve. If there is high need, then a reserve fund is important. If there is low need, then a reserve fund is not as important.

Additionally, money can only be accrued if the coop takes measures to create such a fund from the following sources:

  • Positive cash flow (income over expenses prior to depreciation).
  • Assessments
  • Cash-out refinance of their underlying mortgage,
  • Secondary financing or credit line.
  • Flip taxes.
  • Sale of un-sold shares (if any).
  • Assessments are a viable means to create needed cash to pay for improvements or supplement cash flow in lieu of increasing maintenance or borrowing money. Assessments tend to be considered single events (sometimes ongoing) in which case they are less likely to inhibit values as does “too high” maintenance frequently does.
  • Unlike a maintenance increase, an assessment accrues towards the building’s cost basis and in doing so adds favorably to the building’s ability to depreciate against income.
  • Many coops choose not to accrue such funds until the actual need for such funds arises. Coop documents typically do not impose mandates on the accrual of such funds.

In Part 3 we’ll discuss Assessing a Coop’s Financial Condition.

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When you buy a house or a condominium, you are getting real property. When you buy a co-op you are not actually purchasing the physical apartment. You’re buying shares in the cooperative corporation which owns the building in which the apartment is located.  Here’s  more information on coop buying and mortgage process.

Like investing in shares of any corporation you should consider the financial viability of that corporation.  As always, I suggest that before buying any real estate you create your team of trusted advisors which should include a broker, attorney/financial advisor and mortgage banker or broker.

General Principles of a Coop Corporation

  • A coop is a “not for profit” corporation.
  • The coop’s board of directors has a fiduciary responsibility to operate the building in a responsible manner.
  • The coop board of directors generally appoints a managing agent to attend to the day to day operation of the building.
  • Coop corporations, regardless of size, are mandated to publish an annual financial statement that details the nature of their financial affairs. Included in these statements are the following: assets, liabilities, income, expenses

Telltale Signs of a GOOD Building

  • A building that is in obvious good repair and in immaculate condition.
  • A condition where maintenance is commensurate with services and sustains a cash reserve commensurate with the impending need of such a fund.
  • Tax deductibility of maintenance that is under 58%.
  • Cash flow variance within 5% above or below expenses.
  • Assessments dedicated to ongoing capital improvements.
  • A reserve fund equal to two to three months’ maintenance charges.
  • Low or no instance of shareholder or sponsor default.
  • A building that owns their land.
  • A defined land lease escalation as opposed to one based upon an appraisal.
  • An actual income / expense statement that reflects the budget projection.
  • Stable or reduced fixed costs.
  • Exhibits a net loss after calculating depreciation.

Next time we’ll discuss what to look at in a Coop’s Financial Statements.

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The Federal Government backed new mortgages as large as $729,750 for the last three years in high cost states such as New York and others.  As of September 30, this will no longer be the case. 

 According to this New York Times article and the National Association of Realtors, there is likely to be downward pressure on prices in a lot of markets.  The National Association of Realtors plans to lobby heavily to get an extension on the loan guarantees.

It is my belief, however, in the Manhattan market, where over 70% of apartments for sale are Coops, this may be a tempest in a teapot.  Most coops require anywhere from 20% to 50% down payments, and most coop boards insists on high income to debt ratios, as much as 25% to 30% maximum debt to income.  Likewise, to get financing on a Condo, lenders have been asking for 20% or more as a down payment.

 While other areas in the country may feel the pinch, Manhattan is likely to be unaffected by this change in Government guaranteed mortgages.

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Mortgage Vocabulary for First-Time Coop and Condo Buyers

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Confused by mortgage lingo?  HUD has an entire glossary for you:   

Here’s some samples:

Points:  1% of the loan amount to lower the interest rate, or cover some fees involved with the transaction

 Float-Down:  After locking in your rate, the lender may give you the opportunity to lower your rate if the market rate falls.

Margin:  On Adjustable rate loans, the margin is how much above the index you are going to pay.

Cap: On Adjustable rate loans, the cap is the most the rate can increase in one year.

 Walls in Insurance:  additional insurance that banks may require insuring what’s inside the apartment.

 See the full article and video on

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Not Your Parents’ Mortgage

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It seems like every time we turn around, the rules are changing on home mortgages.  Gone are the days when we could find an apartment we wanted, then find a mortgage to fit.  Now, you should talk to a mortgage banker before you even start looking to be sure you are looking in the right price range.  Where there were many different types of mortgages, now there are two basic types:  Fixed or Adjustable rate.  While there is still some choice among different types of each, there aren’t as many as before.

Plan on putting up at least 20% for a down payment for a conventional loan (more if you’re looking at coops).  You might be able to qualify for a government-backed loan or private mortgage insurance if you’re strapped for a down payment, but it will cost you more in the long run.

It’s entirely possible the applicant could qualify, but the building won’t.

Scrutiny is the name of the game when it comes to a mortgage these days; consistent, stable income, high credit score and enough assets to cover not only the down payment, but also closing costs and reserves.  Even the coop or condo building financials will be examined very closely.  It’s entirely possible the applicant could qualify, but the building won’t.

See the full story and the video interview on

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Little touches can go a long way in getting the price you want for your apartment.  Give the buyer a chance and they will deduct from your sales price for every flaw they see.  Take that temptation out of the equation. 

  • Clear out your personality – de-clutter.  Give your buyer a chance to see their family or self living there.
  • Buy new towels and throw pillows.  Give your place a fresh look for very little.
  • Clean your rugs, floors… well everything!  Clean and tidy is the order of the day.  Fix cracked or chipped plaster.  Add a coat of fresh paint.
  • Replace tired, cracked grout.  Usually cheaper than ripping up the tile and replacing it.
  • Replace outdated appliances and fixtures.
  • Swap out the lighting fixtures for a brighter deal
  • If your kitchen looks old, replace or reface the cabinets for a boost
  • Make sure the space is defined. If it’s listed as a bedroom, make sure there’s a bed in it.

Look at your property from the buyer’s perspective and see what changes can be made for a relatively low cost.

Based on NY Times Article by Christine Haughney.

Categories : Selling
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Mortgage Market Trends for week ending May 20, 2011

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We suspect that there are a few businesses tougher than the home-building business these days, but we are hard pressed to think of any.  The homebuilders likely agree, given the homebuilder index remains at a depressed 16 reading for May.

Homebuilders continue to report lousy conditions.  They blame competition from distressed sales, which made up 39 percent of the homes sold in the first quarter, as well as unavailability of construction credit for their woes.  What’s more, sales of distressed homes also pressure prices of existing homes, which means new home sales have been crimped further by buyers unsure that they will be able to sell their existing home at a favorable price in order to trade up.

Homebuilders are surely frustrated by the sputtering and the false starts that they’ve had to endure over the past 18 months.  Just when it appears a positive trend in starts will take hold it reverses and falls again.  Starts rebounded 7.2 percent in March but reversed 10.2 percent in April, dropping to an annualized rate of 523,000 units. The drop was led by a 24.1 percent fall in the volatile multifamily-starts component, but the larger and more significant single-family component was off 5.1 percent. Unfortunately, we doubt that homebuilder fortunes will improve much in the coming months.

Pricing – for everyone – remains the front-burner concern.  The NAR reports that the median sales price in the first three months of the year was 4.6 percent lower compared to the first quarter of 2010. Prices have declined in 118 of the 152 metropolitan areas included in the NAR’s report. We are quick to note, though, that year-over-year comparisons are irrelevant when one quarter is advantaged by tax credits and another quarter isn’t. We will be much more interested in data from the second half of this year compared to the second half of 2010.

The good news is that lower prices have helped rejuvenate sales volume. Total home sales increased 8.3 percent to a seasonally adjusted annual rate of 5.14 million units in the first three months of 2011 compared to the last three months of 2010. Our economic textbooks haven’t failed us on this market process: lower prices produce higher demand, and, therefore, help to clear inventory.

Admittedly, our textbooks have been less prescient on mortgage rates. Despite obvious price inflation in consumer, producer, and financial markets; strong job growth; and worries over the United States ‘ fiscal conundrum; mortgage rates (as well as most U.S. Treasury rates) continue to fall. Indeed, we are now looking at 30-year fixed-rate mortgages near a five-month low, well below 5 percent.

Obviously, other factors are at work here, and it could simply be a supply and demand imbalance and surprisingly strong demand for U.S. Treasury securities that are keeping mortgage rates low. Whatever the cause, we still don’t think they will hold. There are simply too many variables favoring higher rates, and none more influential than the Federal Reserve’s eventual need to shift to a tighter monetary policy from an expansionary one.

This isn’t to say we couldn’t be wrong, but if we are, then some of our economics textbooks might need a rewrite.

Could Home-Price Insurance be a Contrarian Indicator?

SmartMoney ran an interesting article this past week on insuring against a drop in home prices. In short, the article focused on how underdeveloped the market for hedging and insuring against falling home prices is and how it is starting to develop.

Up until recently, the only way to insure a home against falling prices was to buy futures contracts on home prices in 10 metropolitan areas, including Boston, Miami, and Las Vegas. Of course, if you didn’t live in one of the 10 metropolitan areas, you won’t be perfectly insured. If you lived in Reno and bought futures contracts based on home sales falling in Las Vegas, you could still lose if Las Vegas home prices rose while Reno home prices fell.

Today, firms are beginning to sprout around the country offering direct insurance for local markets. One, Home Headquarters, a nonprofit, sells insurance at a cost of 1.5 percent of the home’s value for homes located in Syracuse , New York . More firms are set to enter the market this year.

This tells us something: new products (and articles about them) tend to proliferate toward the end of a strong trend – either down or up. Perhaps this latest data point on insuring against falling home prices, combined with all the other negative data points on housing, is a sign the end is near in a good way.

Graph Courtesy from NY Times in an article by Maryann Haggerty May 19, 2011.  Data and Commentary provided by Fred Ashe, from DE Capital Mortgage.

Categories : Market Reports
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All Real Estate is Local. Very, Very Local!

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Truth, lies and statistics!

Earlier this month,  Zillow released its Q1 Real Estate Report.  Many in the press joined in and cried gloom and doom.

The hysteria was best summarized by a Curbed article that listed the 10 Most Depressing Things Mentioned in The Zillow Report.  Perhaps real estate prices continue to decrease in Phoenix, Los Vegas, Tampa, etc., but in New York City, especially Manhatan,  it’s just not the case.

You would be misled if you simply looked at the Zillow Home Value Index for New York Metro data and assumed it had anything to do with Manhattan Residential real estate sales.

  MoM QoQ YoY
New York Metro -.5% -1.6% -5.3%

But if you focus on coops and condo sales which account for over 99% of residential properties sold in Manhattan vs single family homes , you’ll see that in New York City there have been significant price increases

  MoM QoQ YoY
New York Coop+Condo +2.3% +7.5% +19.2%

As previously discussed with regard to the Case Shiller report discussed here, the Case Shiller report excludes new developments, condos and coops.  At least the Zillow report has that data available (perhaps not new development) but you have to dig for it.

All real estate is local.  So local, in fact that certain neighborhoods, blocks, buildings and even specific apartments have their own hyper-local real estate data.

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To Rent or To Buy…That Is The Question

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You’ve got to live somewhere and you’ve decided to live on Manhattan’s Upper East Side.  You want 2 bedrooms and 2 baths in a full service doorman building. Now you need to decide if you want to buy or rent. 

On the one hand, mortgage rates are near record lows, but you know that won’t last forever.  Apartment prices are, on average, lower than last year, but sales are up.  Rent, on the other hand, seems set to be rising thanks to low vacancy rates. 

  • Neither mortgage rates nor rents are likely to rise rapidly
  • Apartment prices, relative to rents, remain higher than their long-term average (?)
  • If you plan on moving again in the next few years, renting is usually better than buying.
  • If you’re planning to settle in one place for at least 5 years, buying makes sense

So let’s use the example above where the goal is to buy or rent an apartment on the Upper East Side consisting of 2 bedrooms and 2 baths in a full service doorman building. Let’s say you’ve just seen the First Quarter Rental Report from Prudential Douglas Elliman   , or The April rental report from MNS Real Estate Group  or the Citi Habitats’ First Quarter Report  .

You can use a Rent vs. Buy calculator or you can get to know your Rent Ratio:  Take the sale price of apartment divided by annual cost of renting an equivalent apartment.  Below 15 is where most people lean towards buying.  The New York Times recently reported  that according to Moody’s Analytics, at the end of last year, the rent ratio for Manhattan was hovering around 29. Still down from the peak about 5 years ago, but still higher than the decades before the housing bubble.

I generally suggest using a rent ratio of 15 to 20 as a beginning point of discussion for the rent vs. buy calculations.

So let’s say you want to pay up to $4500/month for a rental ($54,000 per year). Using the rent ratios of 15 to 20, it may be advantageous to buy an apartment costing between $810,000 (15 x $54,000) and $1,080,000 (20 x $54,000).

Rencenty, I did a property search on the Upper East Side (60th Street to 96th Street from FDR to 5th Avenue) for 2Br + 2Bth coops and condos with full time doormen. I limited the maximum price to $1,080,000.

Of the 87 listings,  19 are condos or condops and 68 are coops. The search results show the average price is $937,000 and the monthly charges average $2076. 87.  

Although the benefits could outweigh the costs (tax deductibility of mortgage interest, tax deductibility of coop maintenence, etc.), additional costs of ownership must be considered:  closing costs, borrowing costs and maintenance or common charges. Not to mention the need to have $200,000+ as a minimum down payment required either by the mortgage people or the Board.   

Consulting your buying team (broker, attorney/financial advisor and mortgage banker or broker) will help you make the right decision.

Categories : Build Your Team, Buyers
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Mortgage Market Trends for week ending May 13, 2011

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MARKET RECAP had many in the media – from the Wall Street Journal, to Bloomberg, to the New York Times – talking this past week, and they were talking mostly about home prices.

Home prices, according to Zillow, posted the largest decline in nearly three years in the first quarter of 2011, with prices falling 3 percent compared to the fourth quarter of 2010. Zillow’s data also show that prices have fallen nationally for 57-consecutive months.

The economists tell us that prices are deteriorating because of the glut of foreclosed properties selling at a discount. Mortgage companies Fannie Mae and Freddie Mac have sold more than 94,000 foreclosed homes during the first quarter, a new high that represents a 23-percent increase from the previous quarter. More properties could be on the way: Fannie and Freddie together were holding 218,000 properties at the end of March, a 33-percent increase from a year ago.

This latest dour data on prices prompted many economists to recalibrate their forecasting models, pushing back their estimates on when the housing market will actually bottom. One economist, quoted at, said, “We aren’t even halfway through a 10-year transition in the housing market.” Zillow’s in-house economist believes prices won’t hit bottom before next year and expects that “they will fall by another 7 percent to 9 percent.”

Distressed properties are an issue, to be sure. The NAR reports that d istressed property sales accounted for 39 percent of all transactions in the first quarter, up from 36 percent a year earlier. While good for sales volume, distressed properties are dragging down prices. In the first quarter, the median existing single-family home price was $158,700, down almost 5 percent from $166,400 one year ago, according to the NAR.

The rise in the number of distressed properties means more lower-priced homes, more home owners with negative equity, and, thus, even more distressed properties. It sounds like a vicious circle, except it isn’t. Most sellers have reserve prices. They won’t sell their home at just any price, regardless if they’re underwater or not. That also goes for REO properties. People are rational; they want to maximize their returns, and maximizing returns often means remaining on the sidelines instead of selling.

We still don’t back down from our contention that prices are at or near their lows. Could the price drop a little further after a purchase? Yes, but that can happen with any investment. What’s important is where the investment will be seven-to-10 years from now. We believe that residential real estate will be higher, and possibly a lot higher.

We also believe that the housing market would be in much better shape today if more people capable and willing to buy could. We are speaking of overly tight lending standards. The average credit score on loans backed by Fannie Mae stood at 762 in the first quarter, up from an average of 718 for the 2001-2004 period.

Of course, we are interested in speaking with anyone who wants a mortgage who understands the unique opportunity to get a loan at a low rate and to buy a home at a low price. There is a lot we can still do, but there would be more we could do if the tethers were only reasonably lengthened.

The Great Protector from Inflation

Inflation is on many people’s minds these days, including ours. Investors are expressing the most obvious concern, revealed in their seemingly insatiable demand for gold and silver – two historical antidotes to the ill-effects of inflation. Both metals have nearly doubled in price over the past few years.

Real estate is another great protector. Returns on residential real estate have typically averaged a return that was 1-to-2 percent above the rate of inflation over the past century. That’s easy to forget, given the off-putting news on recent price declines. But the message is worth remembering, especially at a time when investors have been piling into richly priced gold and silver. We think real estate is the better value and the better protector from inflation at current prices.

Graph Courtesy from NY Times in an article by Maryann Haggerty May 12, 2011.  Data and Commentary provided by Fred Ashe, from DE Capital Mortgage.

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Mortgage Market Trends for week ending May 6, 2011

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There wasn’t much news on housing sales this past week, so markets focused on prices instead. The chatter centered mostly on fear of the dreaded “double dip.” The fear that home prices will continue to fall and will make new lows.

There is some validity to the fear, if we consider only national numbers. Clear Capital reports that national prices fell 5 percent in April compared to the year-ago period. Over the past nine months, national prices are purported to have declined 11.5 percent.

Distressed properties were to blame. Clear Capital says that REO sales accounted for 34.5 percent of overall sales nationwide after declining to nearly 20 percent in the middle of 2010. This same pattern surfaced in 2008, when REO saturation grew from 20 percent to 32 percent by the end of the year.

It’s an apples-to-oranges comparison (2008 to 2011) in our opinion. Back in 2008 and early 2009, the entire nation was a mess: markets converged and they all dropped in tandem. Today is different; housing markets and economies are more localized. We think Michael Fratantoni, vice president of research and economics for the Mortgage Bankers Association, put it best when he described today’s market as a “tale of two cities.” Home prices are stabilizing and rising in economically viable parts of the country, while other areas remain paralyzed by high unemployment and shadow inventories.

Every region of the country has shadow inventory, but it is proportionally high in parts of California , Michigan , Nevada , Florida , and Arizona . These states still have a lot of work to do to rid themselves of distressed properties. The difference between 2008 and today is that what happens in Vegas really does stay in Vegas. In other words, don’t let national price trends keep you awake, particularly if the comparisons are year-over-year.

It remains a buyer’s market, though, and we’d like to see buyers take advantage of a stable lending environment. In fact, rates actually eased lower this past week. Some credit-market commentators pointed to the death of Osama bin Laden for the lower rates, the rationale being that investors were fearful of a market-churning retaliation, so they flocked to U.S. Treasury securities.

It’s difficult to say for sure why rates dropped; there are simply too many factors that move markets over the short term to say which one is most influential. We prefer to keep our eye on the long term, which is being driven by soaring consumer prices, rising gold prices, and falling value of the dollar. To us, they add up to rising mortgage rates. And we’re not alone in that assessment: the MBA forecasts a 30-year, fixed-rate mortgage rate of 6.2 percent next year.

Hot versus Cold Markets

It’s an age-old dichotomy: some people prefer to buy into the latest trend; some people prefer to go against the crowd and buy what few people appear to want.

In the past couple issues, we’ve noted that the residential rental real estate market is turning, which means more people are buying rental properties. Does that mean that the rental market is now a hot market? We don’t think so. We think it is more of a developing market. That is, it is garnering more interest among more people, but it is still not hot. A hot market to us is the commodities market, gold in particular, and the stock market. Both have nearly doubled over the past two years.

Residential real estate, if not a cold market is a cool market, and we think these types of markets offer more reward for less risk. We have to look no further then the past two hot markets – the stock market of 1999 and the real estate market of 2006 – to realize how dangerous it can be to buy into the hot market.

Of course, it is impossible to accurately predict how hot or cold markets can get, but if we were to bet on which would be the hot market two or three years from now, our money would be on the real estate market.

Graph Courtesy from NY Times in an article by Maryann Haggerty May 6, 2011.  Data and Commentary provided by Fred Ashe, from DE Capital Mortgage.

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