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Real Estate Outlook: Resales Up, Rate Dip
by Kenneth R. Harney
They're not overwhelming yet, but definite signs of improvement continue to pop up in real estate around the country. 

Take the latest home resale report: Sales were up by 2 percent nationally in May, and up 5.5 in the Midwest and 4.6 percent in the Northeast.
Condo sales also jumped 5.5 percent nationwide.
Sales of existing homes were up even in some of the hardest hit local markets -- Sarasota on the Gulf Coast of Florida, for example, and Sacramento California and Battle Creek Michigan.
Big deal! You might say in response. A lot of that activity is attributable to severely depressed home prices, short sales, and banks dumping foreclosures.
No question that's true. But the down cycle has to stop somewhere, and in the toughest local markets that means deeply-discounted and distressed properties coming out of foreclosure now look like excellent deals to bargain hunters.
So yes absolutely: Houses with slashed prices are selling fast and pushing up sales numbers. That's the way cycles work. The cyclical rebound gets rolling on the wreckage left over from the boom.
But there are other signs of light as well: The federal government agency that tracks home price movements -- based on multiple sales of houses financed by Fannie Mae and Freddie Mac -- found home values actually increased in two major regions in the U.S. last month.
Prices continue to rise in Texas, Louisiana, Arkansas, Oklahoma, Kentucky, Tennessee and Mississippi. Dozens of metropolitan markets in the mid section of the country never participated in the boom, and they are showing steady increases in prices.
Still another plus: Mortgage rates took a surprise dip last week -- reversing the previous week's sharp increases. Thirty year fixed rate loans are back down to 6.4 percent and fifteen year rates are under six percent again.
And here's one more positive sign to add to the mix: Personal consumption -- an important indicator of the economy's underlying rate of expansion -- rose by four tenths of a percent in May. That's the largest gain since December of 2006.
Are developments like these enough to push us into a full blown housing recovery or keep us out of recession? Not by themselves. But keep your eyes on home sales and prices in the hardest hit local markets. If enough of them start going positive -- then yes, we could be on the verge of a turnaround in the months ahead.
Published: July 3, 2008 

March 19, 2008 

Economic Scene
Can’t Grasp Credit Crisis? Join the Club 

By DAVID LEONHARDT 

Raise your hand if you don’t quite understand this whole financial crisis. 

It has been going on for seven months now, and many people probably feel as if they should understand it. But they don’t, not really. The part about the housing crash seems simple enough. With banks whispering sweet encouragement, people bought homes they couldn’t afford, and now they are falling behind on their mortgages. 

But the overwhelming majority of homeowners are doing just fine. So how is it that a mess concentrated in one part of the mortgage business — subprime loans — has frozen the credit markets, sent stock markets gyrating, caused the collapse of Bear Stearns, left the economy on the brink of the worst recession in a generation and forced the Federal Reserve to take its boldest action since the Depression? 

I’m here to urge you not to feel sheepish. This may not be entirely comforting, but your confusion is shared by many people who are in the middle of the crisis. 

“We’re exposing parts of the capital markets that most of us had never heard of,” Ethan Harris, a top Lehman Brothers economist, said last week. Robert Rubin, the former Treasury secretary and current Citigroup executive, has said that he hadn’t heard of “liquidity puts,” an obscure kind of financial contract, until they started causing big problems for Citigroup. 

I spent a good part of the last few days calling people on Wall Street and in the government to ask one question, “Can you try to explain this to me?” When they finished, I often had a highly sophisticated follow-up question: “Can you try again?” 

I emerged thinking that all the uncertainty has created a panic that is partly unfounded. That said, the crisis isn’t close to ending, either. Ben Bernanke, the Federal Reserve chairman, won’t be able to wave a magic wand and make everything better, no matter how many more times he cuts rates. As Mr. Bernanke himself has suggested, the only thing that will end the crisis is the end of the housing bust. 

So let’s go back to the beginning of the boom. 

It really started in 1998, when large numbers of people decided that real estate, which still hadn’t recovered from the early 1990s slump, had become a bargain. At the same time, Wall Street was making it easier for buyers to get loans. It was transforming the mortgage business from a local one, centered around banks, to a global one, in which investors from almost anywhere could pool money to lend. 

The new competition brought down mortgage fees and spurred some useful innovation. Why, after all, should someone who knows that she’s going to move after just a few years have no choice but to take out a 30-year fixed-rate mortgage? 

As is often the case with innovations, though, there was soon too much of a good thing. Those same global investors, flush with cash from Asia’s boom or rising oil prices, demanded good returns. Wall Street had an answer: subprime mortgages. 

Because these loans go to people stretching to afford a house, they come with higher interest rates — even if they’re disguised by low initial rates — and thus higher returns. The mortgages were then sliced into pieces and bundled into investments, often known as collateralized debt obligations, or C.D.O.’s (a term that appeared in this newspaper only three times before 2005, but almost every week since last summer). Once bundled, different types of mortgages could be sold to different groups of investors. 

Investors then goosed their returns through leverage, the oldest strategy around. They made $100 million bets with only $1 million of their own money and $99 million in debt. If the value of the investment rose to just $101 million, the investors would double their money. Home buyers did the same thing, by putting little money down on new houses, notes Mark Zandi of Moody’s Economy.com. The Fed under Alan Greenspan helped make it all possible, sharply reducing interest rates, to prevent a double-dip recession after the technology bust of 2000, and then keeping them low for several years. 

All these investments, of course, were highly risky. Higher returns almost always come with greater risk. But people — by “people,” I’m referring here to Mr. Greenspan, Mr. Bernanke, the top executives of almost every Wall Street firm and a majority of American homeowners — decided that the usual rules didn’t apply because home prices nationwide had never fallen before. Based on that idea, prices rose ever higher — so high, says Robert Barbera of ITG, an investment firm, that they were destined to fall. It was a self-defeating prophecy. 

And it largely explains why the mortgage mess has had such ripple effects. The American home seemed like such a sure bet that a huge portion of the global financial system ended up owning a piece of it. Last summer, many policy makers were hoping that the crisis wouldn’t spread to traditional banks, like Citibank, because they had sold off the underlying mortgages to investors. But it turned out that many banks had also sold complex insurance policies on the mortgage debt. That left them on the hook when homeowners who had taken out a wishful-thinking mortgage could no longer get out of it by flipping their house for a profit. 

Many of these bets were not huge, but were so highly leveraged that any losses became magnified. If that $100 million investment I described above were to lose just $1 million of its value, the investor who put up only $1 million would lose everything. That’s why a hedge fund associated with the prestigious Carlyle Group collapsed last week. 

“If anything goes awry, these dominos fall very fast,” said Charles R. Morris, a former banker who tells the story of the crisis in a new book, “The Trillion Dollar Meltdown.” 

This toxic combination — the ubiquity of bad investments and their potential to mushroom — has shocked Wall Street into a state of deep conservatism. The soundness of any investment firm depends largely on other firms having confidence that it has real assets standing behind its bets. So firms are now hoarding cash instead of lending it, until they understand how bad the housing crash will become and how exposed to it they are. Any institution that seems to have a high-risk portfolio, regardless of whether it has enough assets to support the portfolio, faces the double whammy of investors demanding their money back and lenders shutting the door in their face. Goodbye, Bear Stearns. 

The conservatism has gone so far that it’s affecting many solid would-be borrowers, which, in turn, is hurting the broader economy and aggravating Wall Streets fears. A recession could cause credit card loans and other forms of debt, some of which were also based on overexuberance, to start going bad as well. 

Many economists, on the right and the left, now argue that the only solution is for the federal government to step in and buy some of the unwanted debt, as the Fed began doing last weekend. This is called a bailout, and there is no doubt that giving a handout to Wall Street lenders or foolish home buyers — as opposed to, say, laid-off factory workers — is deeply distasteful. At this point, though, the alternative may be worse. 

Bubbles lead to busts. Busts lead to panics. And panics can lead to long, deep economic downturns, which is why the Fed has been taking unprecedented actions to restore confidence. 

“You say, my goodness, how could subprime mortgage loans take out the whole global financial system?” Mr. Zandi said. “That’s how.”  

The Top Ten Reasons It's a Great Time To Buy Real Estate! 

by Paul Pastore

1. Selection, selection, selection. There are about 57,000 resale homes on the market in Maricopa county(Phoenix). Regardless of the price range a buyer desires, there are plenty of houses from which to choose. Just a few years ago the resale inventory dropped below 5,000 units. A buyer was forced to make compromises if they were going to locate the home of their dreams. There is a great selection of attached homes, condos, and townhouses. You can find large lots, small lots, and a lot that will accommodate your boat or RV. There are lots of options in this market.
2. No Bidding Wars. In 2005 we had one client that made an offer on ten homes. They lost the first nine to the 'feeding frenzy' that existed. Other buyers bid the properties up substantially from the original listing price. There were escalation clauses where buyers authorized their agents to outbid other offers by thousands of dollars. There is no competitive bidding in this buyer's market.
3. You can make an offer. A few years ago when you made an offer, the only question was how high above the list price could the buyer reach in hopes of being the best offer on the table. Today the sell price list vs. price ration is about 96%. A seller will not be insulted if you 'make them an offer they can't refuse'.
4. Patience is tolerated. In the hot seller's market that existed everything was rushed. Find a house before other buyers did. Hurry up and make the offer. Today a buyer can take their time. Look at several homes and think about your decision for a few hours.
5. Due diligence is welcomed. In this market a buyer is encouraged to obtain a home inspection, termite inspection, and appraisal. In 2005 many buyers waived these contingencies in order gain an advantage with multiple offers.
6. There are plenty of specs. In the not too distant past buyer had to 'play games' if they wanted a new home. There were lotteries and waiting lists in order to obtain new construction. Some buyers slept in their cars in order to get to the head of the lines. R.L. Brown estimates that builders have thousands of specs ready for immediate occupancy.
7. Repair requests are welcomed. After a buyer completes a home inspection, they are allowed to submit a repair request to the seller. In the past a seller might insist the home was sold 'as is'. Many times, there were back-up buyers waiting for a primary buyer to upset the seller whose home was increasing in value almost daily.
8. Few, if any investors. It is estimated that one third of all sales in 2005 were to investors. These non-owner occupied buyer caused the market to inflate and affordability to decline. Mortgage fraud became commonplace. It's a great time to buy without having to compete with hundreds of prospective landlords.
9. Location, location, location. Today's buyers can find homes closer to work. In the past buyers flocked to Maricopa and Queen Creek in order to find affordable homes. In this market, reasonably priced homes are within biking or walking distance to schools, rapid transit lines, and relatives.
10. Real Financing is available. The 'wink, wink' zero down, no doc, adjustable, sub-prime loans are gone. Fixed rates are back. FHA financing, first time homeowner bond programs, special loans for teachers, and police officers are back in business. It's a great time to buy real estate! 

A question of value

PLUM ISLAND — Next to his cottage at 17 82nd St., Tom Lawrence also owns a 10,500-square-foot lot that the city valued at $10,000 last year.

The lot, which can't be built on, is a rare find, he said: one of the few private beaches on the North Shore.

But this year, the third year in a three-year assessing cycle in which the city must get its numbers approved by the state, the assessed value of Lawrence's lot jumped by 500 percent — from $10,000 to $61,000.

His cottage, a 1,273-square-foot home near the Plum Island Basin, increased in value from $375,300 to $561,300, an increase of 49 percent.

And he doesn't know why.

"I was pretty surprised to see such a huge jump," Lawrence said. "It just kind of seemed a little funky, you know."

Lawrence, who owns several properties on the island, is filing three abatement requests with the city after seeing the values of those properties soar many thousands of dollars.

Lawrence had another vacant property on L Street, which he bought on speculation that he could potentially build there but has yet to do so, increased from $32,400 to $312,800. That means this year, Lawrence will pay $3,160 in taxes compared to $324 last year.

He said after getting his tax bills he did research in his neighborhood and found that many homes in the area also saw increases of 20, 30, 40 and as high as 60 percent, which he believes is a trend that proves the city's system for assessing property is flawed.

But the assessors in Newburyport and Newbury say the value of land there is consistent to the growing desirability of property on the inland (aka Basin) side of the island.

"Why these huge increases?" he said. "My concern is that obviously there is something not right with the process in just the way they go about their assessments. You would guess that there would be some sort of cap from year to year rather than be clobbered with a 60 or 70 percent increase.

"It seems like someone maybe wasn't doing their jobs in the years preceding" the third year in the three-year cycle, he said.

City Assessor Dan Raycroft said he wouldn't discuss specific Newburyport properties to try to resolve problems through the press. Instead, he said, it is more professional to save such discussions for abatement discussion.

An abatement is a legal avenue for property owners to challenge the assessment of property in hopes of getting a tax bill lowered. The tax rate for this year is $10.13 for every $1,000 of assessed home value, an increase of 4 cents from the year prior.

Raycroft did say that this year they spent a lot of time reviewing sales of the property of on the Basin, including those with waterfront property and those one or two lots back from the water. He said based on those studies, the assessments were too low.

"It proved to us that our assessments for that specific location were low," Raycroft said.

Island in high demand

Assessments for this year are based on the value of property as of Jan. 1, 2007. That means Raycroft and his assessing team used sales from that year to come up with assessed values, which in turn means the assessments do not reflect the current state of the home market.

To that end, Raycroft said it is important not to compare assessments from year to year.

"The important part is for them to look at the assessment and ask themselves does this reflect the market value of Jan. 1, 2007, or not," he said.

Raycroft added that if something doesn't seem right, then property owners should file for an abatement. The deadline is today at noon.

He said looking from one year to the next and seeing how much a property increased or decreased in value "is not an argument that is going to win anyone an abatement."

Carrie Keville, administrative assessor for Newbury, also lives on Plum Island and owns a home on the Basin. She said last fiscal year was the town's revaluation year — the third year in the three-year cycle — and they saw a jump in prices that year, though not as severe as those in Newburyport.

While she said increases of 30 percent to 70 percent "kind of seem like big jumps to me," she said the land on the Basin is becoming more sought-after every year.

She said many of her neighbors continue to move closer to the Basin when homes become available.

Most times, she said, the homes don't even hit the market since all a homeowner must do is spread the word and people come knocking.

"The properties on the Basin are desirable; they are highly desirable," she said. "It really is a beautiful place to live."

Keville said even an "old, yucky" house recently sold for $525,000, though it had to be completely redone.

Another problem Newbury faced for years was a lack of sales on the Basin on which to base values, she said.

"For a long time there were no houses on the Basin selling, so it was hard to value them," she said.

What's a water view worth?

In Newburyport, some of the larger increases included the home at 47 Harbor St. Evamaria Pietrzyk's 1,071-square-foot Cape Cod jumped in value from $461,000 to $606,900, an increase of 31 percent. At 41 Harbor St., 741-square-foot home increased in value from $328,800 to $515,000, an increase of 56 percent.

There were also many increases in the 30 percent and 40 percent range with several creeping into the 60 percent ranges.

But the huge increases that Lawrence mentions seem more the exception than the rule.

Many of the homes on the island seemed to remain steady, numerous searches through the city assessors' Web site showed. In fact, many of the homes that were not directly on the water decreased in value.

But Lawrence pointed to the homes in the South End of Newburyport along Water Street, homes with much the same view as those on Plum Island, that often had a decrease in value during the most recent assessment.

At 282 Water St., for example, a 1,692-square-foot Cape Cod with views of the water decreased in value from $731,800 to $575,700. Just down the street, at 278 Water St., a 2,491-square-foot home decreased in value from $840,800 to $650,300.

Lawrence argues that it is clear something in the city's assessing system is not working properly when there are decreases like this on Water Street and increases on Harbor Street.

"There are a gazillion examples that something isn't working," Lawrence said. "There is no real logic.

"I think they take a closer look during certification years. In the first and second years, they still should be making market adjustments. When you see jumps like this, it probably means the process wasn't working before. But there is no excuse for having these huge jumps.

"Who is in charge down there for crying out loud?"

Neighborhoods differ

This year, assessment values were difficult to categorize since certain neighborhoods went up and certain neighborhoods went down. Raycroft said there are numerous reasons for the varying assessment trends.

The increases and decreases in the market can be seen using the examples of Mayor John Moak's house compared to Sheriff Frank Cousins' property just blocks away.

The value of the mayor's property on Marlboro Street — a 1,857-square-foot Colonial — went to $569,100 from $547,600, an increase of $21,500 or 4 percent. Cousins' home on Bromfield Street — a 2,143-square-foot antique — dropped to $572,500 from $605,700, a decrease of 5 percent.

Lawrence said those he feels most bad for are the people in his neighborhood who own small summer cottages and shacks. Often, he said, these people are retired or elderly and live on fixed incomes and cannot pay for and plan for huge increases in their property tax bills.

"They get whacked with these huge increases," he said. "How do you plan for almost doubling your tax bill?"