Homeownership: Reports of Its Death are Exaggerated

There have been a growing number of reports announcing the death of American homeownership over the last two years. Some have said we are evolving into a rental society and even challenge the long standing belief that homeownership should be a part of the American Dream. They look at the falling rate of homeownership as proof of their point. Others say that the younger generations no longer see the value in owning over renting.

However, this past week, two news items might refute these points. First, DSNews reported the homeownership rate actually increased in the last quarter; the first quarterly increase in two years.

“After falling to a 13-year low during the second quarter, the homeownership rate posted a highly unexpected rise in the third quarter, according to a Census Bureau report.”

Then, Fannie Mae released their 2011 3^rd Quarter National Housing Survey. We will cover this report in more detail on Wednesday. But we do want to mention a few findings the report highlighted. Both Generation Y (birth date mid-1970s to mid 1990s) and Generation X (birth date mid 1960s to mid 1970s) have stronger beliefs in the importance of homeownership than those of the general population.

Here are the numbers for the three major reasons to buy (as per the survey) with the percentage who believe in each reason:

1. It is a good place to raise children and provide them with a good education:

§ Generation Y: 84%

§ Generation X: 81%

§ General Population: 80%

2. You have a physical structure where you and your family feel safe:

§ Generation Y: 77%

§ Generation X: 79%

§ General Population: 76%

It allows you to have more space for your family:

§ Generation Y: 76%

§ Generation X: 77%

§ General Population: 73%

Both generations also believe in homeownership as an investment. 70% of Generation Y and 66% of Generation X see homeownership as a safe investment while 64% of the general population believes so.

Bottom Line

This country’s belief in homeownership is anything but dead. The younger generations have the same if not a higher level of belief than earlier generations. As the economy improves, more people will make the move into a home of their own.

Money to Purchase AND Renovate Your Home

This is a great new product that I am actually using personally. It's a little more difficult than your standard loan, but it allows you to do so much more. Please read the blog and give me a call for more information.

Whether you’re looking at a foreclosed home, bank REO, a Short Sale or really any home, you need to be aware of the FHA 203K Program. The general condition of real estate has taken a dip over the past few years, as homeowners are not sprucing up their home as they have in the past.

(Pssst…there’s a recession going on…people are afraid of losing jobs…and they believe they won’t “get back” the money they spend by renovating upon sale).

The 203K loan can be used for small repairs (with a minimum of $5000 of work) such as a new roof or replacing the boiler. It can go all the way up to practically rebuilding the home and anything in between. Maybe you love a home, the neighborhood, etc., but you hate the kitchen cabinets. The 203K may be for you. As long as the existing foundation stays intact, we can talk about any type of repair, upgrade, modernization or expansion.

With one closing, we will give borrowers money to satisfy their contract with the seller AND establish a Rehab Escrow Account to fund the agreed renovations. The Rehab Escrow Account is managed like a Construction Loan. Money is released after work is completed, the property is inspected by the lender and the title is updated.

Like all FHA loans, the property must be owner occupied and loan approval requires full documentation of income, assets and credit worthiness. At the same time, underwriting guidelines have some flexibility built in. (In theory, we can lend up to 110% of the After-Improved Value of the home for example.)

Loans are processed in the same fashion as any other loan (in terms of income, asset and credit) with the exception of the appraisal. Appraisers work in conjunction with the home improvement contractor and a HUD Approved Pre-Planner to determine: “As-Is”Value, “After-Improved” Value, costs of construction and the draw schedule of the renovation portion of the loan. This work typically adds about a week to the approval process, largely because it should be done BEFORE contracts are signed.

SOME UNIQUE FEATURES OF THE 203K

§ Mixed-Use Properties may be eligible! As long as the commercial space is no more than the allowable square footage based on the number of floors in the building and none of the renovation monies are used for a commercial renovation, the 203K gives tremendous interest rates for Mixed-Use Properties.

§ The loan can be used to change property usage (when appropriate municipality approval)…..converting a 1 Family Home to a 2 Family or a 4 Family to a 3 Family or any variation that stays within the 1-4 Family boundaries works.

§ On major renovations we will finance up to six months payments into the loan. In these cases,the house will not be habitable until after the work is completed.

§ There is a Streamline 203K for projects that require less than $35,000 of repairs. Typically, we like to see only one or two items of work that can be done quickly (with one inspection).

It is recommended that you work with an experienced loan officer when exploring the 203K Program, as there are many details that need to be considered (from selecting a qualified contractor to the inner workings of the draw schedule and preparing for different contingencies). While the program is more intricate, with the right education ahead of time, it is extremely manageable.

What if You Could Buy Shoes...

What if there was a shoe store that had:

§ An unparalleled selection of shoes of every size, color, and price range

§ The shoes were discounted 30% or more

§ You had a credit card that would finance the shoes for 30 years at 4.5%

How many shoes would you buy? My bet is there would be a line around the block. Well, today, real estate is like that shoe store (incredible selection, terrific bargains and excellent financing terms). But there’s more….

§ Shoes go in and out of style. Homeownership is still the American Dream.

§ Shoes are worth less once you wear them. Homes will appreciate in value over time.

§ Shoes get disposed of. Homes are lasting.

And while many can recount memories created in certain shoes, everyone can remember their first home, their first family gathering, the countless holidays shared. There is also the ability to decorate to your tastes, the stability (and lower crime rate) in homeownership neighborhoods and the higher level of education achieved by kids who grow up there.

If you’d stand in line to buy shoes, what’s stopping you from exploring a home? Despite some media perceptions, there is mortgage money available with reasonable down payment requirements at extremely low rates…talk to a loan officer. There are some great deals out there with short sales, foreclosures and regular transactions also!

Happy Shopping!

Housing Prices: Explaining the Recent Uptick

Several pricing indices have reported that, on a month-over-

month basis, home values have ticked up slightly over the last quarter. This has caused some

 to call the bottom to the housing market – at least from a price standpoint. We must realize

that prices are determined by supply and demand.

Demand has indeed shown improvement in many parts of the country. However, the supply side of the formula is being impacted by legal issues. The number of foreclosures coming to market has been slowed dramatically by the courts as the banks still struggle with improperly filed paperwork. This inventory will eventually find its way to the market and again put downward pressure on values.

Here is a chart showing the challenge:   

Bottom Line

If you are selling, there currently is a window of opportunity to get your best price before the distressed properties are released.



Reprinted by Permission from KCM Blogsite

Thank God I Didn't Buy Gold at $400 an Ounce

We hope that headline grabbed you. The reason we used it was to bring some perspective to the debate as to whether or not homeownership is a wise investment in today’s troubled market. A family should never look at the purchase of a home simply as a financial investment. It is so much more than that. But, even if we look at it as only an investment, we must look at it in the long term. Let’s use gold as an example.

Gold had dropped from over $400 an ounce to $250 an ounce (a 40% decline) from February 1996 to August 1999. People were so glad they hadn’t bought at $400 an ounce.

Lord William Rees-Mogg, the current Chairman of The Zurich Club, in 1997 said:

“No investment has been so thoroughly exploded as gold; most people think that there will no more be another gold boom than there will be another boom in tulip futures in The Netherlands.”

Everyone knows what happened next. The proclamation of gold’s death was rather premature. Gold rose from $250 an ounce to over $1,500 an ounce in the next twelve years.

If we look at real estate in the long term, we can see that it has been a great vehicle for building family wealth. The Federal Reserve’s Survey of Consumer Finances, conducted once every three years, provides a snapshot of family income and net worth. There survey has shown every time that homeowners’ net worth far exceeds that of renters. Here is the breakdown of the last several surveys:

§ 1998 – Homeowner net worth exceed renters by 31%

§ 2001 – Homeowner net worth exceed renters by 36%

§ 2004 – Homeowner net worth exceed renters by 41%

§ 2007 – Homeowner net worth exceed renters by 46%

The 2010 survey is not out yet but the National Association of Realtors’ has estimated that number to be approximately 41% in 2010. You may be thinking this is no longer the case based on the current fall in home values which have dropped back to 2000 – 2002 prices.

Harvard University just completed a study that showed:

“Even if homeowner wealth fell back to 1995 levels, it would still be 27.5 times the median for renters.”

Bottom Line

We are not predicting that real estate will see the same levels of appreciation that gold did. However, we do believe that the real estate market will rebound strongly.

Distressed Property Sales: Down…But Not Out

There has been much written about the falling inventories of distressed properties in many market places. Some have looked at the decreasing percentage of distressed property sales reported by the National Association of Realtors over the last four months as a sign that we are finally cleaning out the last remnants of the foreclosures. If you look at the numbers, it could seem that way:

§ March: 40% of all sales were distressed properties

§ April: 37% of all sales were distressed properties

§ May: 31% of all sales were distressed properties

§ June: 30% of all sales were distressed properties

However, in reality the falling percentage of distressed property sales is not an accurate indicator. The reason the percentages are falling is because many homes are currently tied up in the process of foreclosure.

An article in HousingWire quoted James Zeldin, EVP Default Resource on the issue:

“I would absolutely expect an increase in inventory over the next 12 to 18 months. I’m personally expecting that a lot faster. I believe we’re going to see macro forces pushing these institutions to do more REO liquidation.”

Once these properties are cleared through the foreclosure process, the inventories of distressed homes will again increase and the percentage of sales will again begin to climb.

Bottom Line

We are working our way through large numbers of distressed properties every month. However, there are many more which will come to market in the next year to eighteen months.

Assets and Your Mortgage Application

When lenders evaluate mortgage borrowers, they look at four things: income (the ability to repay), credit (the willingness to repay), collateral (appraised value and property condition) and assets (cash in the deal and cash reserves after closing, mostly). Of the “four legs of the table”, assets are the least discussed, and yet may be the most important.

What do we mean when we talk about assets?

§ Monies needed for the down payment (the difference between the purchase price and the loan amount which may or may not be the same as the money deposit at contract signing)

§ Monies needed for closing costs (fees to the lender and third parties for things like appraisals, title insurance, settlement services, and so on)

§ Monies needed for Pre-Paids (homeowners insurance, flood insurance, real estate taxes, etc.) and establishing escrow accounts for future payments

§ Monies for Reserves- the money you still have left after closing. Monies that would be available, if a problem were to arise

Why do we care about assets?

§ Assets may be the truest reflection of a borrower’s fiscal strength. Their ability to save and properly budget could be a significant indicator to their future paying habits

§ The source of the assets is important. Savings? Gift or inheritance? Lottery victory? Insurance settlement? Sale of a baseball card collection? Each reflects differently on the borrower.

§ Many people don’t show all their income on their tax returns (it’s just a fact). Undocumented income can’t be used to qualify; however, often assets become a truer representation of a borrower ability to pay than their 1040s.

§ Reserves are an issue. A client with $50 in the bank after closing is riskier than one with $50,000. Also, clients who have money in the bank but have some sporadic lates on their credit are looked at differently than those who didn’t have the money to make the payments.

Common Asset Issues in Mortgage Packages:

§ Large deposits (defined as those which are excessive for the income level) raise an underwriter’s eyebrows. Where did the money come from? Maybe the borrower took a loan that doesn’t yet show up on their credit report.

§ Cash deposits are another red flag. In this day and age, people keep their money in the bank, not under their mattress. Where did the cash come from?

§ Gift monies and seller’s concessions, while considered as borrowers assets when doing calculations, will give an underwriter pause when assessing the borrower’s real ability to replay.

Guidelines have tightened. When borrowers are paying off credit cards to get their ratios in line, lenders are asking where that money came from now. That act has nothing to do with the home purchase, but may be a sign of something fragile in the borrower’s financial make up.

The best advice is to consult a loan professional to discuss the proper way to position your assets and the timing of it that will put you in the most favorable light.