Innovative Colorado Real Estate

You’ve probably heard about the two waves of foreclosures that we have already experienced. The first wave was tied to a high number of subprime loans that reset or adjusted, thus causing a large number of defaults starting in 2006 and continuing through 2008. Subprime loans, or C-Paper loans, are generally riskier for the lenders and include loan programs like “Interest Only” and “Option Arms”. Basically, lenders went a little crazy and issued too many of these loans (many to unqualified borrowers), which is the primary reason the housing market is currently in so much trouble.

The second wave started shortly thereafter and also included a large percentage of subprime activity. What was different about the second wave was that it also included a large percentage of Prime loans, which we should continue to see defaulting through 2011. Prime loans are A-Paper loans that are given to the most qualified borrowers with good income and the best credit scores. This was the first sign that qualified borrowers, even ones with good jobs, were starting to feel the effects of the real estate crisis.

Here Comes the Third Wave…
So that brings us to the third wave, which we expect to see hit sometime this year. This will be caused by several factors, one of which is the effect of the infamous Option Arm. The Option Arm or “Pick-a-Payment” loan has been around for a long time and it was first introduced into the market as a flexible loan for sophisticated borrowers with increasing incomes. The problem is that the many people who were put into Option Arms in recent years were either not sophisticated or shouldn’t have been buying a home in the first place. This loan started with a low teaser rate for the first year (as low as 1%) and allowed people to choose how big a payment they wanted to make every month, so most people chose the lowest payment (surprise) which is actually less than the accruing interest, causing negative amortization. Basically, most people had increasing loan balances while the value of their property was going down. Do the math when these people lose their jobs and it’s not difficult to figure out what happens next.

Another interesting trend that should contribute to our third wave is the growing number of $1 million plus foreclosures. This is the fastest growing category of delinquencies and defaults, and about 12% of these borrowers were late on their mortgages last fall. Defaults on these high end properties went up 300% in the past year and we are likely to see increased activity in this category this year.

What about Shadow Inventory?
Another factor worth discussing is what is called “Shadow Inventory”. This is defined primarily as inventory held by lenders that has not been released into the marketplace yet. Since these properties have already been foreclosed on, this will not affect the foreclosure rates, but some people believe it could have a dramatic effect on our real estate market. There are estimates that shadow inventory includes as many as 7 million properties nationwide, which is roughly a year and a half worth of inventory. Now, if this entire inventory was released for sale in a short period of time then I could see why it would be an issue. But, even if the banks could get their act together and release their inventory quickly, why would they? Banks may be smarter than you think (yes, I said that). They make balance sheet decisions every day that ultimately dictate when to sell property and they know that dramatically increasing the supply of property will have a downward effect on values. Wouldn’t that be shooting themselves in the foot? On second thought, it might not surprise me if a bank shot itself in the foot, but I’m still not worried. While our foreclosure problem is not going away soon, it seems to have reached equilibrium and the players involved (short sale real estate agents, banks, etc.) are figuring out how to dispose of these properties more efficiently.

Should You Worry?
Bottom line, there are better things to worry about, like unemployment and rising interest rates. And, if you are a buyer, there are plenty of great deals out there right now and there will continue to be deals for years to come. I wouldn’t wait too long though, since interest rates are not likely to stay low as long as foreclosures stay high. And if you need to sell, the good news is that there are more companies like us that can help you sell your property in this market, even if you are under water.

Have you been thinking about upgrading your house, but find yourself procrastinating or wondering if the real estate market has yet to find a bottom? If you are fortunate enough to have the income and resources necessary to sell your current home and upgrade to your dream home, then now is the time. In many parts of the country, we’ve already seen the bottom of the market and if you haven’t seen it in your market, then it is probably closer than you think. Even if I’m wrong and values continue to drop (they will in some markets), if you wait for the absolute bottom, you’ll miss it and you may never have the opportunity to buy your dream home again. Please note: this post is about upgrading your personal residence and assumes you will stay in your new home for at least 10 years. This math is not necessarily for investors or real estate speculators (although they may still learn a thing or two). There will not be a test at the end of this blog.

It’s Time To Trade Up: 3 Reasons It Makes Sense

1. By trading up, you’ll likely make more money in the long run than you would just staying put. Here is how the math works. Let’s say you paid $500,000 for you house 5 years ago and the market has depreciated 30% since then, so your house is now worth$350,000. You are now $150,000 in the hole, right? Well, the answer is yes, unless you take advantage of the buyer’s market and upgrade. Let’s say your dream house that you couldn’t afford 5 years ago was $1,000,000 and now you can buy it for $700,000. So with the $300,000 discount on the new house you are already $150,000 ahead on the trade-up ($129k after commissions). Wait, it gets better. Let’s say in 10 years your new home has appreciated another 30% which equals $210,000 versus the $105,000 you would have gained on your original home. That’s a $105,000 difference in gain for a total upgrade benefit of $234,000!
2. It is better to trade up in a down market than in an escalating market. If you wait for the market to improve, it will cost you on the upswing. Let’s say that you wait 3 years to buy and the market goes up 10%. Your $350,000 house is now worth $385,000 and your dream home is now worth $770,000 so you’ve lost another $35,000 by waiting. I know what you’re thinking, “But if the market keeps going down, then I’ll be able to buy my dream house for even cheaper”. Sure, that could happen, but once again, if you wait for a true bottom then you’ll probably miss it. And, have you considered the effect of interest rates changes?
3. If you will be financing your upgrade, let’s assume that interest rates are going up. You really don’t think rates are going to stay this low forever, do you? Current interest rates have been hovering around 5%, the lowest in 40 years. So, yes, they are going back up and it will likely be a long time before we see them this low again (if ever). Here is the math on interest rates. Let’s assume that you will stay in your new home for 10 years. After all, it is your dream home. If you put 20% down on your $700,000 home, you will borrow $560,000 which will cost you about $256,000 in interest (not including principal) over 10 years at today’s rates (5%). If rates go up only one point to 6% on a 30 year fixed mortgage, you will pay an additional $56,000 in interest over 10 years. If rates go to 7% (still historically low), it will cost you $112,000 more, and so on.

The bottom line is that if you are considering an upgrade and if you have the resources, there is no better time than the present. Oh, I almost forgot; if you qualify for the new home-buyer tax credit, there is another $6,500 benefit to you if you get under contract by April 30 and close by June 30, 2010. See my post: “Homebuyer Tax Credit Extended, Includes Current Homeowners” for more information. If you want to run these numbers on your actual situation then please give us a call. We have a special calculator that does the math for you.

Another Government Acronym
When this program was first announced last May it was referred to as the Foreclosure Alternatives Program (FAP), an easy name to understand and a concept that we have all been anxiously awaiting. When the details were finally released last week it was no surprise that the program was 7 months late, provides no real incentives for banks to participate and has absolutely no “teeth”. What is surprising is that the government has chosen to make this program part of its already questionable Home Affordable Modification Program (HAMP) and they have created a totally new acronym that is equally as surprising – HAFA, or the Home Affordable Foreclosure Alternatives Program. Is it me or is this a really sad oxymoron? Hello! Making Homes Affordable is about keeping your home and Foreclosure Alternatives is about losing your home (but avoiding foreclosure). Is the administration so stubborn that they cannot come up with a new program for people that clearly cannot afford their home anymore? Shouldn’t banks be able to determine whether or not a borrower should get a loan modification or a short sale? See my post: “Are Loan Modifications Working?”

I will share some basic details on the HAFA guidelines but honestly, even if banks decide to participate in the program, they likely won’t follow the guidelines anyway. We specialize in short sales and we frequently work with FHA borrowers that qualify for the 15 year old HUD Pre-Foreclosure Sale (PFS) program. If HUD actually enforced their guidelines and the banks actually followed them, we wouldn’t get any PFS deals done, and the fact is that we are successfully helping homeowners with their PFS transactions. So, the bottom line is that we now have another government program that will be loosely enforced and may just create more aggravation than it is worth. If you are facing foreclosure and don’t know what to do, your best bet is to contact a real estate professional, and even better, a Certified Distressed Property Expert®, for expert advice on how to avoid foreclosure. The banks don’t want to foreclose any more than you do, but if you want to successfully avoid foreclosure, you’ll need the help of a real estate professional who understands the banks and their ever changing policies and procedures. Note: Your friend, neighbor, relative, etc. that has their real estate license does not necessarily qualify to help you.

The HAFA Guidelines (In Theory)
PLEASE NOTE: These guidelines DO NOT apply to all homeowners and to my knowledge, no banks have adopted these guidelines yet. Furthermore, Fannie Mae and Freddie Mac have yet to release their final guidelines (which represent the majority of loans) so if these guidelines do not apply to you, it does not mean you are not eligible for a loan modification, short sale or deed in lieu of foreclosure. So, with hesitation, here are the basic requirements for HAFA, which are the same requirements for HAMP:

• The property is the borrower’s principal residence
• The mortgage loan is a first lien mortgage originated on or before January 1, 2009
• The mortgage is delinquent or default is reasonably foreseeable
• The current unpaid principal balance is equal to or less than $729,750
• The borrower’s total monthly mortgage payment exceeds 31 percent of the borrower’s gross income

Bottom Line on Avoiding Foreclosure
Bottom line, if you are facing foreclosure and you want to know your options, please contact us or any other real estate professional who specializes in distressed property.

Happy Thanksgiving!

As I write my blog this morning I can’t help but think about how thankful we should be for our real estate market in Denver. Other parts of the country are still trying to find the bottom of their markets and in some areas foreclosure rates continue to rise. So, if you’re someone who has watched the value of your Denver area property diminish over the past few years, be thankful that you live in a place where there is a light at the end of the tunnel.

Good Housing News

I’ll be honest, we are far from being out of the woods on this nationwide housing crisis, but there is plenty of good news for Denver. According to the latest S&P/Case-Shiller Home Price Index (September 2009), Denver home values are down only 1.2% from a year ago, the lowest of the 20 metropolitan areas tracked. By the way, nationwide values are down 8.9%, so are you thankful now? As we drill down into more recent data from our local MLS, there is even more good news.

• The average sold price of residential homes in the Denver Metro area (not including condos) in October was $261,771, a 4.6% increase from October of last year and a 13.4% increase from our annual low in January.
• Denver’s residential homes averaged 92 days on market in October, our lowest level in over 2 years and significantly better than our annual high of 107 days in February.

Now, it is likely this data is skewed slightly because of the First Time Homebuyer Tax Credit (and seasonality), but fortunately Congress extended the tax credit until June of 2010 (which we are also thankful for), so we can expect to feel the same benefit during the extended tax credit period. Forecasts are also good for November, but we should expect to see a normal seasonal slowdown for December and January before continuing our upward trend in the springtime. Nationwide trends are also promising, so Denver is well positioned for a strong housing recovery. Translation: if you have been waiting for the bottom of the Denver Real Estate market, you probably missed it.

What about Foreclosures?

According to the National Association of Realtors, foreclosures are expected to continue rising nationwide over the next 6 to 12 months, but once again, Colorado (and Denver) is better off than the rest of the country with current foreclosure rates below the national average. The reality is that high foreclosure activity will be a part of our real estate market for many years to come, but the good news is that more and more real estate brokerages (like iNET Property) are specializing in helping homeowners avoid foreclosure. Unlike the rest of the real estate market, foreclosure activity doesn’t slow down over the holidays, so we are committed to working overtime with our clients who are facing foreclosure. If you or someone you know needs help, please give us a call.

Happy Thanksgiving from the team at iNET Property!

In a long awaited move, the Senate and House voted in favor of extending the first-time homebuyer tax credit. President Obama is expected to sign the bill tomorrow. The amount of the tax credit to first time home buyers remains the same at $8,000. However, the bill includes some interesting amendments that are beneficial to first time homebuyers and current homeowners. All amendments and updates to the current bill become effective immediately when President Obama signs the bill. Here are some highlights of the new bill:

First Time Homebuyer Updates

• Tax credit remains the same at $8,000
• Property under contract by April 30th, 2010 will be eligible as long as the real estate closing occurs by June 30th, 2010.
• Income limits will be raised from $75,000 to $125,000 for singles and from $150,000 to $225,000 for married couples.

New Provisions for Current Homeowners

• Current homeowners are now eligible for a $6,500 tax credit on property under contract by April 30th and closed by June 30th, 2010.
• Homeowner must have used the home sold or being sold as a principal residence consecutively for 5 of the previous 8 years.

Now Is The Time
Don’t let this opportunity slip away. With the tax credit back on the table, and with interest rates and home values historically low, now is the time to buy. Give us a call and find out how easy it is to buy your first home or step up to another.

Thank you Congress – what is good for the housing market is good for the economy!

OK, I’ve blogged about the First Time Homebuyer Tax Credit before and I have asked Congress nicely to extend it on several occasions. But, one more time is not going to hurt and it just might make a difference. I’m not going to rant about it; I’ll just ask that you reach out to Congress and be heard. This is not just about getting money in the hands of first time homebuyers, but more about the housing recovery and our economy. Whether you are buying, selling or not even involved in the real estate market right now, this is important for you and for your country. We need the stimulus, we need the housing recovery, we need the credit! Read my previous blog for more: First Time Homebuyers on the Sidelines?

Sorry, I ranted a little, but now I’m going to stop. Don’t just listen to me, Google it and read the thousands of news articles and blogs about why we need this credit extended. Then call, write or email your Congressman.

REALTORS, send your message to Congress now!

Mortgage Metrics Report

Last March the Obama administration announced the Making Homes Affordable (MHA) program to help as many as 9 million households struggling with their mortgage payments, primarily utilizing loan modification or refinance. The success of the program has yet to be determined, but yesterday the Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) released their Mortgage Metrics report that, depending how you look at it, could be good news or bad news.

To fully understand the OCC report, you have to first understand their definitions. The MHA program provides for a 3 month trial period in which mortgagors are put on a payment program. If the payment program is successful, then they can be converted to a permanent loan modification. So, while actual loan modifications were down 25.2% from the first quarter to the second quarter, payment programs were up 73.9%. The true success of the program won’t be known until future reports, but the report shows a re-default rate for modified loans in 2008 and 2009 after 6 months at almost 58%! Even if re-default improves significantly, something else needs to be done.

Other findings in the OCC Report

• The number of loan modifications that included a reduction in principal balance increased to 10%, up from 3.1%.
• Mortgage delinquencies increased to 8.5% in the second quarter, an increase of 11.9%.
• Foreclosures in process increased to 2.9%, an increase of 16.9%.
• New short sales increased by 34.8% to 23,102, but remained a small percentage of total loss mitigation actions.
  NOTE: The report also acknowledges that short sales have less adverse impact on borrower’s credit than foreclosure.
  

As we anxiously await the next report, what we cannot afford to wait for is details on the Foreclosure Alternatives Program (FAP). As I wrote in my post “The Housing Recovery Needs Your Help”, the FAP details are long overdue and loan modifications alone (even if they are working) are not enough to reverse the housing crises. What are we waiting for?

We hosted a First Time Homebuyer seminar last week and the majority of our audience was primarily interested in the First Time Homebuyer Tax Credit of $8,000. I can’t say I blame them either. After all, $8,000 is real money and not just for first timers. Without getting too political I think it is safe to say that most people agree that government stimulus is getting mixed reviews – some of it is working and some of it, well, not so much. Listen up Congress: This $8,000 tax credit is something that is working and needs to get extended. Now, most people agree that will happen, but when will it happen is the question.

Mr. Congressman – This Is Not Cash for Clunkers
So the feds decided to keep Cash for Clunkers alive, which may or may not have been a good thing, but they waited until the last minute. We can’t afford to wait for the government to extend the homebuyer credit. Here is how it breaks down. If you don’t have a property under contract by early October, you are risking you won’t be able to close by November 30th and claim your tax credit. And, if you want to consider buying a short sale (they are hard to avoid) then forget about it unless you are under contract already. It would be a shame to see qualified homebuyers sitting on the sidelines because they don’t know if they will get their tax credit. What can we do? Write your congressman and tell them to act now to extend the tax credit! While you’re at it, ask that the new tax credit be increased to $15,000 and be available to everyone, not just first time homebuyers. Its worth a try.

Interest Rates and Affordability
The real crime is that homebuyers may be sitting on the sidelines and it is the perfect time to buy a home (in most markets). Interest rates are at historical lows and property is affordable again. In fact, the National Association of Realtors released their latest “Affordability Index” this morning, which is at 158.5 for July – a huge indication of how great this buyer’s market is. Basically, an index of 100 means that a family with the median income makes enough money to qualify for the median priced home. So, an index of 158.5 means that same family has 158.5% of the income necessary to qualify for that median priced home. I would argue that even without the home buyer tax credit, this is still a great time to buy. You should still write your congressman though ;0)

When it comes to housing news, we seem to be on a roller coaster ride driven by a variety of contributors, including global banks, big city newspapers and blogging real estate professionals. What does it all mean to you? What is happening in the overall market is not as important as what is happening in your household. Here’s some recent news and what it may mean to you…

Underwater?

If you owe more money on your home than it is worth, you are considered underwater. Deutsche Bank released a report this week that estimates as many as 48% of homeowners with mortgages will be underwater by the first quarter of 2011. Depending on where you live and your particular situation you may already be underwater, but that is not necessarily a reason to panic. If you live in one of the “recovering” markets like we have here in Denver, then things are looking up. Median prices here are higher than they were a year ago and activity in the lower price ranges is strong.

If you like where you live and you can afford your payment, then your best bet is probably to sit tight and wait it out. If you can refinance, talk to a mortgage professional right away because rates will go up eventually, just like housing values.

If you would like to move and take advantage of the buyer’s market, don’t let your current home value keep you from investigating this opportunity. Sometimes it is better to “take a hit” or go to the closing table with a check than to miss out on buying the home you really want to be in.

If you are struggling to make your payment, are worried about foreclosure and you have a legitimate hardship, then you may want to consider a short sale. Many banks will try to offer you a loan modification first, but be careful since entering a “loan mod” program may delay your ability to short sale if you need to. Selling your home short is often the best way to avoid foreclosure and will put you in a position to buy another home in a much shorter period of time. If you decide to go the short sale route, make sure you work with a real estate broker who is a short sale specialist (like us). These are difficult transactions and require professional expertise and full-time attention to the details.

Where is the bottom?

The New York time recently reported this: “Home building and home prices, which have fallen for almost 3 years, appear to have almost no place to go but up.” Now, it really depends on what part of the county you live in whether you believe this or not, but for the most part this is probably a true statement. Once again, here in Denver, we are fortunate to be in the beginning stages of a recovery and our value are going up.

If you’re a seller, depending on your price range, this doesn’t mean you’ll be able to sell your home. For example, we have over 7 years of inventory in SE Denver over $1,000,000. Even if prices stabilize at this price level, it will be a long time before those inventories come down. So, if you are considering selling, refer to the Underwater section above.

If you’re a buyer, then what are you waiting for? Even if we are not at a bottom, if you wait for it to go down further then chances are you’ll miss it. And, with historically low interest rates and first-time homebuyer incentives, this is the perfect storm. The saying is “buy low, sell high”, not “buy at the bottom, sell at the top”. If you know how to do the latter, can we get together for lunch sometime?

Unemployment and Housing

Now this is news that is really promising. Today the Labor Department released better than expected employment news with job losses slowing and an actual drop in the unemployment rate. It was only a one tenth of one percent improvement (9.5% to 9.4%), but still better than expected. And, despite the White House stating that we can still expect 10% unemployment, the stock market rallied and as I type this blog the DOW is up 160 points. The bad news is that interest rates are up too, but you can’t have it all. And, if you were waiting for rates to go below 5% again, then you probably don’t understand how lucky we are to have rates under 7%.

The bottom line is that unemployment is the biggest problem for the housing market. If people don’t have jobs, they can’t qualify for loans and buy homes, keeping demand flat. So, if we are truly seeing the end of rising unemployment, then here comes the rebound and if you’re on the sidelines you’re going to miss it!