Article in November 29, 2006 Wall Street Journal

Fewer New-Home Sales as Prices Rise

By JEFF BATER

November 29, 2006

WASHINGTON -- New-home sales resumed declining in October, but the median price increased.

Meanwhile, the U.S. economy was stronger last summer than first thought because businesses accumulated more inventory and trade was less of a drag. Gauges measuring third-quarter inflation were lowered slightly, according to Wednesday's data revisions.

Sales of single-family homes decreased by 3.2% to a seasonally adjusted annual rate of 1.004 million, the Commerce Department said Wednesday. September sales climbed 3.7% to 1.037 million, revised from a previously estimated 5.3% advance to 1.075 million. Sales increased 2.1% in August but fell 9.2% in July.

The average price of a new home increased to $309,700 in October, up from $297,700 in September and $293,600 in October 2005, according to Commerce. The median price also rose, up to $248,500 last month from $218,200 in September and $243,900 in October 2005.

The sales numbers Wednesday were worse than what Wall Street expected. The median estimate of 23 economists surveyed by Dow Jones Newswires was a 2.3% decrease to an annual rate of 1.050 million in October.

Year-to-year, sales were down 25.4% since October 2005 as the housing market softens. Yet, in a glimmer of hope, the National Association of Realtors reported Tuesday sales of previously owned homes rose in October for the first time in eight months; still, year over year, sales were 11.5% lower.

New-home inventories receded in October. There were an estimated 558,000 homes for sale at the end of the month, the Commerce data Wednesday showed. That represented a 7.0 months' supply at the current sales rate. An estimated 562,000 homes were for sale at the end of September, a 6.7 months' inventory.

Financing costs drifted down in October. The average rate on a 30-year mortgage was 6.36%. It was 6.40% a month earlier -- yet 6.07% in October 2005.

By region, new-home sales last month fell 1.7% in the South, 5.6% in the Midwest and 39.0% in the Northeast. Demand was 3.2% higher in the West. Based on figures unadjusted for seasonal factors, an estimated 77,000 homes were actually sold last month in the U.S., down from 82,000 in September.

GDP Revised Up

Gross domestic product increased at a 2.2% annual rate July through September, the Commerce Department said Wednesday in its first revision to third-quarter 2006 GDP. The government initially estimated growth at 1.6%.

GDP has weakened as the housing slump weights down the economy. Second-quarter growth was 2.6% and GDP raced ahead at a 5.6% pace in the first three months of 2006.

The government's price index for personal consumption increased 2.4%, lower than the previously estimated 2.5% climb but below the second quarter's 4.0% rise. The PCE price gauge excluding food and energy increased 2.2%, lower than the previously estimated 2.3% climb and below the second quarter's 2.7% rise.

Corporate profits after taxes climbed 4.6% to $1.167 trillion in July through September from the second quarter, the report showed. In the second quarter, profits increased 0.3%. Year-to-year, profits surged 31.5% since the third quarter of 2005.

Revisions to inventories and imports were behind the adjustment to GDP, which is a measure of all goods and services produced in the economy. Wall Street expected a smaller upward revision to third-quarter GDP; the median estimate of 22 economists surveyed by Dow Jones Newswires was a 1.8% increase.

The revisions released Wednesday showed businesses increased inventories by $58.0 billion; originally, Commerce estimated a $50.7 billion increase. Companies had lifted stocks $53.7 billion in the second quarter.

The accumulation of goods added 0.16 percentage point to third-quarter GDP. Originally, Commerce said inventories subtracted 0.10 percentage point from GDP. Real final sales of domestic product, which is GDP less the change in private inventories, climbed 2.1%. The original estimate was a 1.7% increase. Second-quarter sales also rose 2.1%.

International trade was less of a restraint on GDP because imports didn't climb as much as first thought, according to the revised data. U.S. exports rose by 6.3%. Imports increased 5.3%. Originally, exports were seen up 6.5% and imports 7.8% higher. So, trade reduced GDP by 0.21 percentage points; initially, Commerce said trade cut third-quarter GDP by 0.58 percentage points. In the second quarter, exports had gone up by 6.2% and imports climbed 1.4%.

Residential fixed investment, which includes spending on housing, plunged by 18.0% in the third quarter, a bigger drop than the originally estimated 17.4%. Second-quarter spending tumbled 11.1%. The 18.0% drop translated to a cut of 1.16 percentage points in third-quarter GDP, and it marked the sharpest fall since 21.7% in the first quarter of 1991.

Businesses increased third-quarter spending more than previously thought. Outlays rose 10.0% July through September, higher than the originally estimated 8.6% advance. Business spending rose 4.4% in the second quarter. Third-quarter investment in structures surged 16.7%. Equipment and software increased 7.2%.

Third-quarter spending by consumers increased 2.9%, down from a previously reported 3.1% but above the second quarter's 2.6% advance.

Consumer spending accounts for the lion's share of economic activity -- about two-thirds. It contributed 1.99 percentage points to GDP in the third quarter; the original estimate was a contribution of 2.13 percentage points.

Purchases of durable goods rose 6.0% in July through September, below the previously reported 8.4% increase. Durables dipped 0.1% in the second quarter. Durable goods are expensive items designed to last at least three years, such as cars. Third-quarter non-durables spending increased by 1.1%. Services spending went 3.1% higher.

Federal government spending increased by 1.5%, revised down from an initially estimated 1.7% increase. Second-quarter spending fell 4.5%. State and local government outlays increased 2.6%.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, rose 2.1%, up from a previously estimated 2.0% climb but below the second quarter's 4.0% rise.

The chain-weighted GDP price index rose 1.8%, unchanged from the first estimate but below the second quarter's 3.3% rise.

Article in November 29, 2006 Wall Street Journal

Distressed Real-Estate: Priced to Sell
Rising Home Foreclosures
May Create Opportunities
For Investors Buying in '07

By JAMES R. HAGERTY
November 29, 2006

As a weak housing market nudges the foreclosure rate higher, next year is looking promising for investors in distressed real estate.

So far, the U.S. housing slump hasn't produced a bonanza for such investors, but lenders stuck with foreclosed property are becoming more inclined to slash prices or sell properties through auctions, industry experts say.

"We're all going to have to be more creative in the next 12 to 24 months" in selling foreclosed homes, says Chad Neel, president and chief operating officer of Fidelity National Asset Management Solutions, a unit of Fidelity National Information Services Inc., Jacksonville, Fla. Mr. Neel's company helps lenders manage and sell foreclosed homes.

Williams & Williams Inc., a Tulsa-based auctioneer, says its sales of foreclosed homes will nearly double this year to about 5,060. Dean Williams, chief executive of the auction firm, expects another near doubling of sales in 2007.

Dallas-based Hudson & Marshall Inc. expects its auction sales of foreclosed properties to total about 4,800 this year, up 23% from 2005. David Webb, co-owner of the auction company, believes sales will rise at least 20% in 2007.

The auction firms say their busiest auction markets recently have included Michigan, Ohio, Indiana, Pennsylvania, Texas and Colorado. "Word on the street is that California, Florida and Arizona will also be very active in the next 12 months," Mr. Webb says.

Lenders refer to foreclosed homes as REO, short for "real-estate owned." They generally try to sell REO homes as quickly as possible to minimize holding costs, such as those for insurance, taxes and lawn care.

In the first half of 2006, REO properties accounted for 3.1% of all U.S. home sales, up from 2.4% two years earlier, according to a study by First American Real Estate Solutions, a unit of First American Corp., Santa Ana, Calif. The study found that those homes sold at a median discount of 14% to their estimated value in the first half, compared with 12.5% two years before. The discounts reflect the gap between the actual sale price for the homes and the value estimated by a computer model, which takes into account sales of comparable homes nearby and price trends.

It has taken a while for foreclosures to mount. The housing boom of recent years reduced foreclosure rates because most people who fell behind on their loans could refinance or quickly sell their homes for at least enough to pay off the loans. At the end of this year's second quarter, only about 1% of all home mortgage loans outstanding were in the foreclosure process, down from an average of 1.2% over the past decade, according to the Mortgage Bankers Association. Doug Duncan, chief economist for the mortgage bankers, expects a modest rise in foreclosures over the next year or two.

People with weak credit records who have taken out loans over the past year are falling behind on payments at a rapid clip, according to a recent report by mortgage analysts at UBS AG in New York.

Christopher Cagan, director of research and analytics at First American Real Estate Solutions, notes that REO sales are a lagging indicator of the housing market because at least a few months elapse between a borrower's default and the foreclosure. Dr. Cagan expects a modestly higher foreclosure rate and deeper discounts next year.

Discounts are likely to be larger in areas where inventories of unsold homes have soared, such as in parts of Arizona and Florida, Dr. Cagan says. Another big factor in determining demand for REO homes is local job and population growth.

In Los Angeles County, which has strong housing demand and an extreme shortage of space, the median discount on REO homes was just 1.7% in this year's first half. In Ohio's Cuyahoga County, where job losses have left a glut of empty homes, the discount was about 30%.

Most REO homes are listed by real-estate brokers and sold like ordinary houses. But lenders often turn to auctions when they see their REO inventories piling up. Lenders that choose the auction route want to get "current market value, whatever it is, rather than sit on vacant property and speculate as to if or when it might sell," says Mr. Williams of the Tulsa-based auctioneer.

One recent buyer at a Hudson & Marshall auction was Warren Russell, who bought a 1,300-square-foot home in Detroit for just $1,500. Mr. Russell says the home is structurally sound but needs new windows, paint and some other items. He expects to spend about $10,000 renovating the home and then rent it out.

In considering purchases of foreclosed homes, Mr. Russell says, "you can't think, 'Would I live here?' There are people at every level of income that need a roof."

Article in November 26, 2006 Detroit Free Press

FOR SALE: THE STORIES BEHIND THE SIGNS: Sellers tough it out in buyer's market

Even with price cuts, homes sit and deals fall through

BY JOHN GALLAGHER
FREE PRESS BUSINESS WRITER

November 26, 2006

To the shared experiences of life in metro Detroit, from rooting for the Tigers to fretting over automotive layoffs, add a new one: not being able to sell a house this year.

Gilda Bone knows all about it.

Since she put her family's Saline duplex on the market two years ago, she's cut the price from $257,000 to $199,000 -- and still has no buyer.

Then there's John and Beth Fohrman of Ann Arbor, who each brought a home to their recent marriage. They sold John's house after cutting the price, closed on their new house and put Beth's condo up for sale in 2005. The condo remains on the market after five price cuts.

"It's a big inconvenience," John Fohrman said last week, "but we're grateful for our blessings."

Sales of houses and condominiums have plunged during the past year, in the worst housing market since at least the 1980s. As a result, prices have begun to decline sharply. Last week, the National Association of Realtors said Detroit-area home prices posted the worst decline of any urban area in the nation during the period from July to September period, down 10.5% from the same period a year before.

And a lot of owners who think they have finally found a buyer are seeing the deals fall through because of the uncertain employment situation.

Bone has had at least five signed purchase agreements, but none made it to closing. Two of her buyers experienced layoffs and had to back out. Others just got cold feet.

"We've been as flexible as we can be with them," Bone said.

In the meantime, she's put a new roof on her duplex and has painted the interior to make it more attractive.

"We've been taking on projects that we had hoped would be somebody's else's projects," she said this month.

The sales slump has been especially difficult for people such as John and Linda Bruce, who are paying two mortgages -- one for the home in Grosse Pointe Farms they haven't been able to sell in more than a year, and one on their new, smaller ranch home in St. Clair Shores.

"We were not prepared for what's happened here. ... It has not been easy," John Bruce said this month.

Of course, sellers' pain translates into buyers' gain, said Pat Vredevoogd Combs, a Grand Rapids-area broker who became president of the National Association of Realtors this month.

"Buyers out there have choice," she said. "They can take their time a little bit, as opposed to a crazy, frantic marketplace where they've got to buy the first thing and then maybe not be happy with it."

But that's not much consolation to buyers who haven't been able to sell their old home.

"It was easier finding a home than selling this one," Doreen Badgett of Troy said of her previous home in Southfield, which has been on the market for three months.

Michigan hit especially hard

The slump in sales comes despite low interest rates and an economy that, by national standards at least, is pretty good.

The Michigan market, however, has been hit particularly hard by layoffs in the automotive industry. But the problem of slow house sales is not confined to the state.

Across the nation, a slump in sales of houses and condominiums followed years of rapid price appreciation. Many market-watchers blame today's slump on a price bubble that finally burst.

"A lot of things are overpriced," Sherri Richwine, a broker with Real Estate One in Ann Arbor, said this month. "People are not being realistic. Just because they received a large paper appreciation, they think they should be able to sell it for that. In reality, the gain is not as great as they thought."

Still others said the slump may have been worsened by several years of brisk activity by home builders, who have delivered thousands of new homes onto the market.

With prices plunging, home-building activity, too, has slumped dramatically in recent months, with new residential-building permits in southeast Michigan down 66.2% to 526 in October, compared with 1,557 in October 2005, according to data from the Southeast Michigan Council of Governments.

Real estate goes in a cycle

Some realty agents report signs that the slump may be easing. Gary Severn, a veteran agent in the Grosse Pointe market, said this month that more people are attending open houses and calling to ask about places listed for sale.

But even if agents are hopeful, a recovery hasn't shown up yet in sales figures. For September, sales in Michigan were off more than 14% compared with September 2005.

Declines have been especially sharp in Livingston County, where sales were down 26% in September from a year before, and Monroe County, where sales were off nearly 32% during the month. September was the most recent month for which data were available.

The Detroit Board of Realtors reported sales up 6.6% during September. The city is one of the few areas of the state to show a gain.

Even so, Vredevoogd Combs, a 35-year veteran of the business, said this month that better days are coming.

"We're in a cycle where we've got a lot more houses than we do buyers," she said. "Pretty soon, we're going to be in a cycle where we have a lot more buyers than we do houses. That's kind of the cycle of real estate life."

Article in November 22, 2006 Detroit News

The incredible deflating housing market

Region's home prices fall most, but is rebound near?

Dorothy Bourdet The Detroit News / The Detroit News

First came the sting of massive job and income cuts, making Metro Detroiters nervous about their futures. Right behind were fear and caution, which kept homebuyers on the sidelines and created an oversupply of homes that can sit months, even years, on the market.

Now, comes home price deflation, the worst in the nation, according to a survey released this week by the National Association of Realtors. The median home price in Metro Detroit sank to $154,100 in the third quarter, down 10.5 percent from $172,100 at the same time last year. It was the largest percentage drop of U.S. cities.

"The overall feeling in Michigan is everybody's knees are knocking a little bit," said Nancy Warson, a Livonia Realtor.

While prices are down, at least one top Realtor predicts the market may be ready to rebound.

"We're ready to turn around," said Pat Vredevoogd Combs, National Association of Realtors president and a Grand Rapids Realtor. "What we're seeing, we think, is that it's bottoming out."

The steep decline in home prices can be blamed on big losses in jobs and income in Metro Detroit, said Dana Johnson, chief economist at Comerica Bank.

"Overlaid on top of that fundamental is the fear and uncertainty that pervades this region," he said

Would-be homeseller Brian Kurtz knows that uncertainty well. The financial planner from Troy has dropped the price on his Sterling Heights colonial by $36,600 to $259,900 and is now paying $4,000 per month for two mortgages.

"It's like trying to sell ice cubes to Eskimos," said Kurtz, whose home has been on the market since August 2005.

Warson, with Real Estate One, said buyers are just not out there. One of Warson's clients in South Lyon, who is selling their house for about $500,000, has had only one potential buyer look at it in seven months.

Those kinds of waits are reflected in the state's slumping home sales, which are down 17.2 percent in the third quarter. Those kinds of waits also can quickly force down home prices, as sellers often drastically cut their asking prices so they can snag a buyer.

In a state where the jobless rate has soared above the national average, buyers are wary of getting into long-term financial commitments, Warson said. Current homeowners, such as empty nesters, are also reluctant to move or downsize, fearing they'll take a loss on their home.

"Some are scared about their job, some are scared (because) they don't know where the market is and they would prefer to buy at the very, very bottom, so they're holding out -- and nobody knows where the bottom is," Warson said.

Sellers have to be patient

Home prices are slipping nationally, too, though not as drastically as in Michigan. The median single-family home price in the U.S. was $224,900 in the third quarter, down 1.2 percent from last year when the median price was $227,600.

While the national decline is seen as an expected correction in housing prices that had soared out of control with five years of double-digit increases, the big drop in the Metro Detroit median home prices over the past six months has been unparalleled since 1989, the furthest back data is available.

"We're kind of an oddity out there," said Combs, the Grand Rapids Realtor.

Economists say home sellers will have to be patient as they wait for the local real estate market get upright again.

"It's going to be a while before that fear and uncertainty goes away. We're at least six months away from the time when jobs and income bottom out here in Michigan," Johnson said.

Falling home prices mean people have fewer options when they hit financial rough spots.

Wayne County had the nation's second-highest metro foreclosure rate in October, with one in every 196 households filing for foreclosure, according to RealtyTrac, an online firm that tracks foreclosures.

"When it (the median house price) drops sharply, it leaves people with no equity and when they get into trouble they have no choice but to walk away," Johnson said.

"It's an example of how the distress in the economy ripples from one sector to another."

Agents are getting creative

To jump start the housing market, real estate agents have pulled out all the stops. They've developed individual Web sites for each house, increased commissions for the buyer's agent and added other incentives for buyers.

"We've seen plasma TVs, we've seen $5,000 bonuses, we've seen cars, we've seen airline tickets. We're about as creative as we can get at this point," Warson said. "It's still not driving the market up."

In an average year, real estate broker Rob Scalici closes on about 75 to 100 home sales. Right now, he's got 30 listings and no buyers.

"It's kind of amazing. I'm back to doing things that I haven't done in a long time," said Scalici, a broker with RE/MAX Metropolitan in Utica, who is spending more and more Sundays in open houses hoping to snag a buyer.

Scalici hopes 2007 will be a better year for home sellers.

"You've gotta hope that with the New Year comes renewed spirits," he said.

Combs of the National Association of Realtors is optimistic.

Her open houses have been busier -- just this week she sold two homes in the Grand Rapids area.

"Buyers have been sitting on the sidelines watching," she said. "We're seeing them coming back into the market."

Article in November 18, 2006 Detroit Free Press

Jobs outlook dim for 2 more years
U-M economists predict more losses before recovery

BY JOHN GALLAGHER
FREE PRESS BUSINESS WRITER

November 18, 2006

Michigan will endure at least another year or two of job losses, on top of six straight years of decline, before seeing a recovery in labor markets, University of Michigan economists predicted Friday in their annual Michigan economic forecast.

The ominous prediction confirms what many had long suspected -- that Michigan is going through the longest stretch of job losses since the Great Depression of the 1930s.

Since mid-2000 to the end of this year, the state will have lost 336,000 jobs out of its roughly 5-million person workforce, and it will lose another 33,000 jobs in the next two years, the U-M outlook said. Most of these losses have been in the hard-hit manufacturing sector, particularly the automotive industry.

The losses to come will translate into Michigan's unemployment rate rising from an average of 6.8% this year to 7.5% next year and 7.7% in 2008 -- the highest rates since 1992.

"The Michigan economy is fighting its way through a long stretch of stormy weather, trying to ride out the turbulence generated by the ongoing restructuring among the domestic automakers," said U-M economist George Fulton in remarks prepared for delivery Friday morning in Ann Arbor. The remarks were released to the media Thursday.

"The Michigan labor market will continue to flounder. Dreary as this outlook may be, we do see some improvement developing over its horizon. By the close of 2008, job growth barely nudges into positive territory," he said.

Delivered each year since 1973, the U-M forecast is among the most-respected predictions of Michigan's economic future, widely relied on by government, business and academia for planning investments and mapping strategies.

By predicting no upswing in the state's job market until the end of 2008, the U-M forecasters injected another year of losses into its outlook. A year ago, the U-M economists were predicting Michigan's job slide would end in 2007.

This time, though, Fulton and colleagues Joan Crary and Saul Hymans predicted the state would lose 24,000 jobs during 2007 and another 9,000 during 2008, mainly due to heavy losses in manufacturing.

The state will lose more than 40,000 manufacturing jobs over the course of this year, nearly 30,000 next year and another 24,000 during 2008, they said. The auto industry will account for about 70% of these manufacturing job losses.

"The state economy reflects not simply the fortunes of the auto industry as a whole, but ... the well-being of the traditional domestic producers, or Big Three -- General Motors, Ford and the Chrysler Group," Crary said.

"From 2001 to 2005, the Big Three's market share plummeted 7 percentage points. The situation went from bad to worse this year as soaring gasoline prices had consumers tightening their belts and focusing on fuel economy. It now appears that Big Three market share will plunge by nearly 3 percentage points this year."

There was some good news amid the gloom. Michigan's service sector should add more than 20,000 jobs this year, nearly 13,000 jobs in 2007, and just shy of 17,000 in 2008.

Almost half of these gains will occur in private education and health services, the only major industry to have grown throughout the extended downturn in the Michigan economy.

Article in November 16, 2006 Detroit Free Press

Auction to unload new condos, homes
Bids in 1-day sale start at $30,000

BY ALEJANDRO BODIPO-MEMBA
FREE PRESS BUSINESS WRITER

November 16, 2006

In a dramatic sign of southeast Michigan's lagging housing market, properties with opening bids as low as $30,000 will be offered Sunday in what is believed to be the largest-ever auction of its kind in Michigan.

Neumann Homes, a Chicago-based builder with extensive operations in Michigan, is trying to recoup its investment in the area by conducting a one-day auction of 87 homes, lots and condos in nine communities.

The auction will be at 2 p.m. Sunday in Troy.

Homebuilders including Neumann say Michigan's sagging economy -- with the nation's highest unemployment rate and job cuts at Detroit's automakers -- has saddled them with excess inventories and limited options to make a profit or merely break even.

"Every builder in the U.S. is facing a downturn, and everybody is left with excess inventory," said Laurie Tarver, division president for Neumann Homes in Michigan.

"Then add to that the sluggish economy and lack of job growth in Michigan. The bottom line is, no builder wants to do an auction, because it means you need to get the return quicker than you wanted."

A look at what's for sale

Neumann Homes, one of the nation's largest homebuilders, with operations in Illinois, Colorado and Wisconsin, has built 11,000 homes since 1985.

It is putting 23 single-family homes, 24 condos and 40 building sites up for auction, including luxury homes and condos in Rochester Hills, Clarkston, Highland Township, Lake Orion, South Lyon, Milford, Southfield, Pontiac and Novi.

Minimum opening bids will range from $30,000 to $200,000.

"The advantage of having an auction as a builder is you have the opportunity to sell a lot of property in one day," Tarver said. "For consumers, it's the deal of a lifetime. It's definitely a buyers market."

These developments are among those in the auction:

• Middlesboro at Oakhurst Golf & Country Club, 6855 Oakhurst Ridge Road in Clarkston.

• Oakland Knolls, 44 Londonderry Lane in Rochester Hills.

• Pine Bluff Estates, 2742 Overbrook in Highland Township.

• Fountain View, 1106 Fountain View Circle in South Lyon.

Bids for 21 of the homes, condos and lots will be sold on an absolute basis -- meaning that they will be sold at the highest bid, regardless of the seller's desired minimum bid.

The remaining properties will be sold on reserve, which means the seller has the right to refuse a bid if it doesn't reach a predetermined price.

Successful bidders will be charged a 3% service fee. Bidders must provide a cashier's check, certified check or cash for the minimum amount of the property's listing.

"As far as new product, this is the largest auction of new property in Michigan, to the best of my knowledge," said Bob Roggeveen, president of Auction Services Group, a Chicago-based company that is conducting the Neumann Homes auction.

Some of the proceeds from the auction will go toward paying off third-party lenders, recouping Neumann's initial investment or providing money to reinvest in Michigan.

Other Michigan builders are considering similar auctions.

Jim Babcock, president of the Building Industry Association of Southeastern Michigan and chief executive of the Babcock Building Co. in St. Clair Shores, recently put up for auction homes he built in Monroe.

"It's no secret that new home sales are slowing down and our members are doing all types of things to be creative and move product," he said. "Auctions are becoming more common."

Slump seen as temporary

Taking the unusual step of auctioning off properties is evidence that Michigan's housing economy is among the worst in America. Michigan single-family housing permits -- a proxy for the number of homes builders plan to construct -- declined 35% in September, compared with September 2005.

In metro Detroit, permits were down 45%, according to the Michigan Association of Home Builders. Overall, permits in southeastern Michigan have fallen from 24,359 in 2004 to 7,429 for the first eight months of this year.

But even as developers find it more difficult to sell properties, they say the downturn in the housing market is temporary and Michigan will be on the mend by 2008.

"I think we're right around the bottom of this cycle," said Robert Filka, chief executive officer of the Michigan Association of Home Builders. "It will probably take another 12 to 18 months before things start to pick back up."

Article in November 14, 2006 Detroit News

Homeowners now pay for years of low rates

Dorothy Bourdet / The Detroit News

For Amy and Randy Greenwood, an adjustable-rate mortgage was a way to consolidate bills even with less-than-perfect credit.

A so-called ARM helped Detroiter Amanda Pena realize a dream: a home for her family.

For the Hamiltons, it was a savvy finance management move, given they didn't plan to stay in their Livonia house too long.

The deal worked like this: get lower interest rates on your loan for several years, but risk higher payments after that time is up and your interest rate readjusts.

Time is up for the Greenwoods, Pena and millions of others like them, who planned to refinance before they faced higher rates but couldn't and got hit with sticker shock when the mortgage bill arrived.

"It's going to make it harder. It will take away some extra money that we would like to save," said Amy Greenwood, whose mortgage bill jumped from $1,100 to $1,359 after the interest rate on the loan jumped 3 1/2 percentage points.

Monthly payment hikes could scarcely come at a worse time for many Michigan families who face falling home values, job loss and a stale real estate market.

"We have the combination of (adjustable-rate mortgages) and the combination of a depressed real estate market. I'm seeing people all the time now that I just can't help," said Mark Chessman, a Roseville bankruptcy attorney. "It's just the kiss of death."

Several years ago, when mortgage rates scraped bottom, thousands of Metro Detroiters opted for adjustable-rate loans to buy a home at the initial low rates they offer, as well as to refinance out of other higher-interest mortgages, consolidate and pay off credit card debt, or to take out home equity credit lines for improvement projects.

Now, interest rates on an estimated $500 billion to $800 billion of those loans will readjust in 2007, according to the Mortgage Bankers Association. Freddie Mac estimates that $494 billion will reset this year.

The sometimes staggering increases in housing payments that come with adjustable-rate mortgages are at least partly to blame for a 17 percent, third-quarter jump in foreclosures reported this month by RealtyTrac Inc., an online firm that tracks foreclosures. Year over year, foreclosures are up 43 percent nationally.

"With the volume of these loans -- more than $1 trillion of them due to adjust over the next 15 months -- this is a trend that definitely bears watching," said James J. Saccacio, chief executive officer of RealtyTrac.

Values below what they owe

Median home prices in Metro Detroit dropped 8 percent -- the biggest decline since 1989 -- in the second quarter of this year, compared to the same period last year, according to the National Association of Realtors.

Those falling home prices, coupled with mortgages with no down payments or maxed-out home equity lines of credit, has left stranded many homeowners whose home values now fall below what they owe.

"Home prices are not rising the same as they are across the nation. We haven't had that home explosion like they have in Nevada or Arizona," said Carlo Dall'Olmo, a broker with 1st Metropolitan Mortgage in Farmington Hills.

Many people with adjustable-rate mortgages are now scrambling to get into a fixed rate or sell their home, which can also be difficult, said Akua Ofori-Mensa, who works in the GreenPath Debt Solutions Westland office.

"Because the market has depreciated so much, there's not equity in people's home and you need equity to refinance," Mensa said. "I've seen a lot lately too that people want to sell their house, (but) they can't sell it for what the mortgage value is."

'I worry about it every day'

It's that frightening seesaw of rising costs and lower home equity that has Ken Hamilton worried.

At first, an ARM on his home was a smart move, Hamilton said, enabling his family to save money on a mortgage they didn't plan on keeping long term.

By the time his seven-year ARM begins readjusting in two years on his $225,000 Livonia home, he fears it could be tough to sell since homes are not appreciating enough.

"I worry about it every day," said Hamilton, who plans to put up a "For Sale" sign in the next few weeks.

"If we were smart and watched (interest rates) when they got down to the fours, we should have locked in. But we didn't pay that close of attention," he said. "Hopefully, by the time we do sell in eight to 10 months, it will have turned some for Michigan."

Last month, the Greenwoods saw the monthly payment on their Warren ranch jump from $1,100 to $1,359 as their ARM reset.

Poor credit is preventing the couple from refinancing, but Amy Greenwood said they are managing the bills because they were prepared for a reset when they took the loan.

"We planned on it going up. It wasn't like a big surprise," she said. "I do think that people go out there and get mortgages on their home and then they can't afford it."

Low rates fueled boom

Adjustable-rate mortgages offer a low fixed-interest rate for as little as a month to up to 10 years. After the fixed terms ends, interest rates usually reset to higher rates at yearly intervals, though some reset every six months.

While ARMs have been around for several decades, they enjoyed a boom in popularity in recent years as mortgage rates plummeted, even as home sales stayed strong and home prices steadily rose. Those low rates, shy of 4 percent on some hybrid ARMs, lured many buyers who stretched to buy a pricey home that they otherwise probably couldn't afford.

ARMs now make up 25.03 percent of mortgages, up from 17.8 percent just three years ago, according to the Mortgage Bankers Association.

"Interest rates remain relatively low, but people were turning to these products in many markets because home prices were accelerating faster than their incomes were, so there was this evolution," said Allen Fishbein, director of housing and credit policy at Consumer Federation of America.

ARMs often attracted consumers who went payment shopping and picked their loan based on the lowest monthly payout, said Greg McBride, senior financial analyst at Bankrate.com.

"If you cannot afford the monthly payment on a 30-year fixed-rate mortgage, that's a red flag that you cannot afford that home," he said. "Now that short-term interest rates have really increased ... those same homeowners are now looking at some steep payment increases."

Variations have higher risk

While homeowners with traditional, hybrid ARMs are beginning to feel the pinch of higher mortgage payments, those with relatively new variations, called interest-only and option ARMs, are hurting even more.

Considered two of the riskiest loans, they allow borrowers to pay off only the monthly interest on their mortgage or pick from a series of payments each month.

Products like these -- once used by sophisticated borrowers with plenty of discretionary income -- are now heavily marketed to middle- or low-income borrowers who need low monthly payments.

The lowest possible payment on the option ARM, with a 1 percent interest rate, doesn't even cover interest, and the remaining balance is tacked on to the back of the loan. Over time, borrowers can end up with a larger loan than they originally took out.

"What's being advertised on the TV and radio are these ridiculously low (interest) loans," said mortgage broker Dall'Olmo. "People go in thinking this is what the rates are. Not everybody does explain it properly."

Subprime borrowers at risk

Also particularly vulnerable are home buyers who are considered higher credit risks, who typically can't qualify for the lower interest ARMs. They often are sold so-called subprime mortgages with higher rates and more frequent adjustments.

Amanda Pena, a Detroit single mother of three, is one of those. She filed for bankruptcy after the monthly payment on the two-year ARM for her $112,000 house readjusted from 7.5 percent to 10 percent in October, pushing her payment up $180 from $640 to $820.

"When I tried to (refinance), I had no equity in the house. They told me I couldn't refinance, so I was stuck," she said. "That's what pushed me to file for bankruptcy. I already knew it was going to be hard to keep up with the payments."

There's legitimate concern for subprime borrowers in households that have low to middle income who have gravitated toward these loans because they aren't in a position to handle a $300 per month payment increase, McBride said.

Watching the Fed

In 2004 and 2005, 7.7 million or $1.88 trillion in adjustable-rate loans were taken out. Of those, about $300 billion are at risk of defaulting as they reset over the next five years, according to Chris Cagan, economist with First American Real Estate Solutions.

An estimated $600 billion to $700 billion of adjustable-rate mortgages will be refinanced before they're due to reset in 2007, according to the Mortgage Bankers Association.

Some are optimistic that borrowers have seen the last of interest rate hikes by the Federal Reserve, at least for a while.

"We think they're going to hold rates steady at least for the next year and if they do change rates, they're likely to lower them instead of raise them," said Mike Fratantoni, senior economist with the Mortgage Bankers Association.

That's good news for borrowers like Ken Hamilton, whose mortgages won't reset for another year or two. If rates go down, it could even mean lower monthly payments when his loan rate adjusts.

But for now, McBride said, borrowers should do their homework and use caution when considering an ARM.

"They're like steak knives," he said. "You use it the right way, it's a great tool; you use it the wrong way and you can get hurt pretty bad."

Article in November 5, 2006 Detroit Free Press

KENNETH HARNEY: Web site's property valuations questioned

November 5, 2006

WASHINGTON -- Have you ever checked out the satellite photos and market value estimates of homes in your neighborhood on Zillow.com -- the Internet real estate site that offers "free, instant valuations and data for 67 million-plus homes"?

Zillow was launched with major media fanfare last February, backed with a reported $57 million in venture capital. It is one of the most popular real estate sites on the Web -- visited millions of times a month by sellers, buyers, agents, lenders and homeowners.

But Zillow is coming under harsh scrutiny. In a complaint filed Oct. 25 with the Federal Trade Commission, the National Community Reinvestment Coalition (NCRC) charged that Zillow knowingly deceives the public by presenting its property estimates as accurate, whereas they are frequently far off the mark.

The nonprofit coalition, which is composed of housing and economic justice organizations around the country, says its own audit of Zillow's accuracy documented that its valuations are within 10% of actual market value "less than one-third of the time."

The allegedly erroneous estimates are especially harmful in low- and moderate-income and minority neighborhoods, according to the complaint.

"While overvaluations were prevalent in predominantly white areas, undervaluations were more frequent in communities that were predominantly African American or Latino by census tract," the complaint charged.

That alleged disparity, in turn, has opened the door to a variety of deceptive and predatory real estate practices in those neighborhoods.

In a prepared statement, Zillow called the coalition's complaint "groundless."

"As we say consistently and prominently on our Web site, Zillow is a free research tool for consumers, and Zestimates are designed to be a starting point for consumers who want to learn about the value of houses. We make every effort to explain on our site the role of Zestimates as a research tool, as well as to clearly display our rates of accuracy for every area we cover."

San Diego appraiser Vicky Cassens Zillioux says that "valuing a property for a financial decision is not a game -- and should not be treated lightly by the consumer, lender or the vendor supplying that value." She notes that appraisers are held to high standards of accuracy and legal liability by lenders and regulators, and "a similar level of accuracy should be expected by the consumer at Zillow.com."

Article in November 3, 2006 Wall Street Journal

The New Word in Home Sales: 'Canceled'

Buyers Back Out of Deals
In Record Numbers;
A $30,000 Deposit, Lost

By JUNE FLETCHER and RUTH SIMON
November 3, 2006

A little over a year ago, buyers couldn't wait to sign contracts to purchase homes. Now, many can't wait to get out of them.

With real-estate prices falling around the country and even pro-industry trade groups predicting further declines over the next year, buyers are backing away from deals in droves. At a semiannual housing forecast conference last week in Washington, D.C., economists reported that contract-cancellation rates for big builders were running around 40% -- about twice as high as last year's levels. Anecdotally, real-estate professionals say they are seeing a similar dynamic in existing-home sales.

Some of the cancellations are by people who signed new-home contracts at one price months ago, haven't yet closed, and are now stunned to see the builder drastically cutting prices on identical properties. Some are by speculators caught short by other investments they can't unload. And some are by people trapped in a chain reaction: They can't sell their old home -- or the buyer has canceled the contract -- so they are being forced to cancel the deal on a new house they are buying somewhere else.

"There are a whole lot of people running from contracts," says Alexandria, Va., real-estate attorney Beau Brincefield. He is currently representing more than 50 buyers who are seeking to get out of contracts on single-family homes, townhouses and condos, compared with none a year ago.

Even though it may mean losing a deposit that could run tens of thousands of dollars -- deposits typically range from 1% to 5% of the purchase price -- many buyers are deciding that is less onerous than the alternative. With median new-home prices already 9.7% below last year's levels, according to the U.S. Commerce Department, bailing out now may be less painful than committing to an expensive, and possibly depreciating, investment.

It's a far cry from the home-flipping exuberance of the past few years, when rising home values fueled a buy-and-sell mentality among millions of homeowners, and trading up became a staple of reality TV and home-improvement shows.

New-home builders are taking a big hit from record numbers of contract cancellations, or "kickouts." Fort Worth, Texas-based D.R. Horton Inc., the nation's biggest developer, says its cancellation rate is currently 40%, compared with 29% a year ago. Meritage Homes Corp., in Scottsdale, Ariz., is reporting a 37% kickout rate, compared with 21% a year ago. And Standard Pacific Corp. says that 50% of its contracts fell through in the third quarter of this year, compared with 18% for the same period last year. The Irvine, Calif.-based developer built 11,400 homes across the country last year. Among its current projects: Glenmeadow, a gated community in Simi Valley, Calif., where three- and four-bedroom homes range from $1.1 million to $1.3 million.

Caught Between Two Mortgages

Cancellations by buyers of existing homes are up as well. Although no formal measures exist, historically they have been in the 2% range, according to the National Association of Realtors. In September, however, nearly half of the 454 agents responding to an online NAR survey said they had recently experienced cancellation rates higher than that.

Sean Shallis, senior real-estate strategist for the Shallis Team of Re/Max Villa Realtors in Jersey City, N.J., says that roughly 22% of his sales have fallen apart before closing this year because the buyers backed out, up from 10% last year. With the market cooling, buyers have decided they can buy a similar property for less. For others, adjustable-rate mortgages have gotten more expensive, making a home purchase too costly, Mr. Shallis says. To reduce the chances of cancellation, he is advising his clients to close their deals as quickly as possible after the offer is accepted, and to put fewer contingencies in the contract. "The longer your property is under contract, the longer the buyer has to talk and think about it and watch the market change."

Mr. Shallis himself is among the would-be buyers with cold feet. Late last year, he agreed to pay $595,000 for a new two-bedroom condominium in Jersey City for his in-laws. He pulled the plug on the deal this summer after his father-in-law's illness scotched the planned move. "My exit strategy was if they didn't move into it, we could sell it or rent it," Mr. Shallis says. But that plan made less sense after the price of similar properties dropped to as low as $529,000. At the same time, higher short-term interest rates made it unlikely that he would be able to cover his mortgage payments and other costs if he found a renter. Instead, Mr. Shallis walked away from the contract and lost his $30,000 deposit.

A sinking home appraisal quashed the deal for retirees Denis and Michael Budge. The couple put their two-bedroom house in Carson City, Nev., on the market a little more than a year ago at $495,000, so they could move to another home they had already bought in Waldport, Ore. After some nail-biting months with few showings and no offers, they finally landed a buyer, who signed a contract in June for $425,000.

Rising Interest Rates

But during the escrow period, as prices in their area continued to slide, the appraisal came in -- at $395,000. The Budges were still willing to sell, even at that greatly reduced price, but the buyer backed out the day before the closing. (Through his agent, he declined to comment.) The Budges pocketed the $1,000 deposit, of course, but now they are stuck with two mortgages -- a hardship on their fixed incomes. "We thought we were going to relax and enjoy our retirement," says Ms. Budge. "Not any more."

Kickouts were high nationwide in the late '80s, and in California and New England in the early '90s, spurred by massive job losses. But until now there's never been a period where cancellations have spiked in the absence of a recession, according to Amy Crews Cutts, deputy chief economist at Freddie Mac. Ms. Cutts says the current jitters are largely a result of investors fleeing the housing market in the last few months, which "slammed [it] into reverse," and consumers' fears that the bubble had burst. Rising interest rates earlier this year also gave buyers who hadn't yet closed on their homes cold feet. The result: a huge backlog of unsold homes, which could further depress prices.

But mortgage rates have fallen recently, and if they stay below 6.5%, Ms. Cutts expects that buyers will regain their confidence by late spring, causing cancellations to ease up. Vienna, Va., housing economist Thomas Lawler agrees, but says builders must continue to cut their production and sell off their inventory so supply and demand can get back in balance. "Builders need to take a bullet," he says.

Buyer's remorse does have legal consequences, but the laws vary from state to state and depend on how the purchase contract was written. Usually, a buyer who defaults will have to give up the "good faith" or "earnest money" deposit that was made when the contract was accepted. But typically there is also some wiggle room written into contracts that allows buyers to cancel without penalty -- for instance, if they can't get financing, if the home inspection uncovers defects that the seller won't correct, or if the seller doesn't make certain disclosures. Just changing your mind, however, isn't a valid excuse to cancel. A court could find that a buyer who got cold feet is in breach of contract and liable for the seller's expenses, plus damages -- or could even force the sale.

Of course, it is better not to wind up in court. To keep deals from falling apart, builders are offering everything from free vacations and cars to help with closing costs and mortgage-rate buy-downs -- and they are cutting prices, too. "They're hungry," says Gopal Ahluwalia, director of research at the National Association of Home Builders, the organization that sponsored last week's forecast conference.

Upgrades Required

Most of these incentives are dangled to attract new customers. But as the market has cooled and kickout rates have risen, nervous builders have also been quietly sweetening the pot for buyers they have already snagged but whose contracts haven't yet closed -- just to keep them from bailing out of the deal. Some are even offering to drop the selling price after contracts have been signed.

Two years ago, Rosemary and Paul Owen, both federal employees, signed a $350,000 contract on a three-bedroom condo in Cape Canaveral, Fla., that was yet to be built. Since they knew it would take a long time for the building to be completed -- and the housing market was rapidly rising -- they took their time getting their old house in West Melbourne, Fla., ready for sale. By the time they were ready to sell their three-bedroom home this January, buyers weren't biting. Though they lowered their asking price to $359,000 from $439,000, only 18 people looked at their home over a 10-month period, and no one made an offer.

So they went to the builder in Cape Canaveral to get out of the deal and to get back the $22,000 they had paid for a deposit and upgrades. He wouldn't allow that, but he did offer to lower the price of the condo by $21,000 to $329,000 -- the amount he was asking new buyers to pay for a unit that was identical to the one the Owens had purchased two years ago. He also extended the deadline for closing until the end of November. The Owens haven't decided whether they will walk away from their deposit if they can't sell their old home by then. "We don't need two places," says Ms. Owen.

Meanwhile, builders' willingness to lard up their incentives is putting added pressure on sellers of existing homes to do the same. Many are finding it necessary to add thousands of dollars in upgrades to compete with what builders are giving away. Jim Parker, an exclusive buyer's agent in Atlanta, says that in the last quarter, three out of the five buyers he's been working with have bailed out of a contract, while no one canceled during the same period a year ago. "Before, if something was not perfect, they'd buy it anyway. Now they won't," Mr. Parker says. Buyers are also demanding more upgrades. "They're asking for everything, right down to the flat-screen television," he says. "They're comparing houses to a brand-new house, and they expect the house to be updated with new paint and carpeting."

Since most people who are buying are also selling -- seven out of 10 households already own homes -- some are finding themselves of two minds when it comes to kickouts. Glenn Nudell, a shipping executive, recently got $115,000 in concessions, including help with closing costs and fix-up money, when he bought a 12-year-old five-bedroom home in Skillman, N.J., for almost $1.1 million. If the seller hadn't agreed, he says, "I'd have backed away." But then he had to sell his eight-year-old, four-bedroom home in Princeton, N.J. He made sure it was as polished as a builder's model, with new wood floors and carpeting, new cabinets and even a newly finished basement -- but he couldn't sell it until he had knocked $70,000 off of his original $630,000 asking price. Is he concerned that the buyer of his house might back away from the deal before it closes next month? "Of course," he says.