Bipartisan Support for "Housing Relief"

Housing Relief is pronounced quite differently than it sounds: "your taxes pay for other people's mistakes." Or, depending on your dialect, it might sound something like this: "your taxes pay for big mortgage lenders' failed subprime bet." And, last but not least, if you live in Illinois, you probably pronounce it this way: "you give your tax money to the state government to hand out to its friends who want to buy properties with state funds."

Any which way you wish to pronounce it, you're right, and it looks like it might just become law. As Investor's Business Daily puts it, the bill that passed the senate in an 83-9 vote, is a pure promotion of dependence for the fiscally irresponsible upon the backs of the fiscally responsible. The bill would flood states with funds to purchase distressed properties, creating a dreadfully hazardous situation wherein states such as Illinois would be ripe for corrupt actions (maybe an opportunity for a fresh start for Tony Rezko, once he emerges from prison).

Finally, this is a bill that has been heavily lobbied for by Political Action Committee's from Home Builders, Lenders, and Realtors (yes, us too), in an effort to bring back the realty market at a dire time. What it fails to do, however, is settle the U.S. housing market into its level of equilibrium. We've come so far, albeit painfully, to cutting back inventories, bringing prices back to reality, and weeding out the lecherous practitioners in our business (lenders, too).

It has been interesting to see this bill develop over the past month, from when it was first introduced by Rep. Barney Frank. Would I like to see the marketplace flooded with buyers, and return to listing homes at prices reminiscent of spring, 2006? Of course. But sometimes you should be careful what you wish for.

Interest Rate Hikes, Local Inventory Levels, and Subprime Fraud Lip Service

Yes, the picture to the left is as accurate a depiction of how us real estate folks feel after the week we just endured.

Let's see what I can isolate as the 3 biggest issues that have come onto my radar screen for this second week of June...

Mortgage interest rates. UP, UP, and AWAY!!!

UP to 6.5 percent for conforming mortgages this week, even as high as 6.75% at one point. Good luck getting that quote to stick for more than a couple of hours.

UP again, for Jumbo Mortgages (over $417,000 of loan amount), reaching as high as 8.675 or higher. Jumbo's affect the luxury housing market in Chicago's far western suburbs, the Tri-Cities of St. Charles, Geneva and Batavia, certainly. They also affect modest dwellings in the nearer suburbs, like Oak Park or Arlington Heights (to stab blindly), where prices are substantially higher. The crowd of buyers that can afford a half-million dollar mortgage at close to 9% interest is an understandably small one, and they expect a lot more for their money nowadays.

Rates have been attributed to tough talk about inflation from the U.S. Federal Reserve. As I look at overall economic news, I start to wonder if housing isn't a small problem in the macro-picture. It seems that Ben and friends thought the same thing, and it caused a small ripple in the mortgage bond market, as concerns that bond values would drop in the face of higher rates (impacted by rate hikes at the Fed) over the next few months.

And AWAY! Away with mortgage perps'. Good to see that they've nabbed every last mortgage fraud'ster. 400 of our "finest" real estate practitioners were hauled off to jail for inflating stated incomes, misleading values or uses for properties, and other fraudulent tactics used to secure for loans. As the AP line depicts, the real victims in the subprime mess is "consumers" and "lenders." Consumers are the everyday folks who never fibbed on their stated incomes, source of funds (gifts depicted as savings, etc.), or never really heard or understood that their loans were adjustible. Lenders, we are told, were blissfully unaware of the sources of their record crushing revenues. The next step is arresting oil company executives, and then our ever-benevolent government will likely give us free gasoline out of the goodness of their hearts.

Looking at the data for housing inventory levels, locally, I am not yet inspired to announce the end of the housing downturn. Taking a closer look at our months' supply of inventory in the Tri-City area, you'll note that we are well above last year's inventory level, caused by fewer sales and more homes listed for sale. Foreclosures, of limited importance last spring and summer, are taking a heavier toll on the local market, along with short sales. Failed rehabs and new construction gluts, however, are far less prevalent this time around.

80% Down on Condo's May Spell B-A-R-G-A-I-N for Buyers

Looking for a steal on a condo or townhome in Chicagoland? You might find that the prices are good, but not nearly as exciting as the slashed values asked for detached homes. In fact, many areas in Chicagoland have relatively "normal" inventory levels for condo's and townhouses. Surprising, I know. And by "normal," I mean that 6 months or less of available inventory is on the market - 6 months or more typically indicating a buyers market, and common levels for detached homes hovering between 10 and 18 months.

The arrival of new lending rules may begin to change that trend, and bring similar woes that have struck the detached home market to the attached segment. Because of the effect foreclosures have had on associations (in states like Florida or California), Condominium values are particularly subject to volatility in value. When a buyer's cost for a property includes a downpayment, mortgage payment, property tax (or monthly escrow), and monthly association dues, that lattermost aspect is integral to deciding how much one can afford. If an owner in foreclosure is skipping out on association dues, the difference needs to be ether a.) picked up by other dues payers (that cost is distributed amongst the others), or b.) ammentities need to be eliminated, and the overall "attractiveness" of that condo declines. Knowing this, and wanting to avoid the mistakes made in places like Miami, lenders see 80% loan-to-value ratios (20% downpayments) as the solution.

I know, I know, this is BAD news for sellers. But FHA mortgages are an exception. If your condo can be approved as an FHA property, and pass FHA inspection, then buyers can mortgage up to 97% of the value (ok, someone might be able to do 100% for you, you never know). This does not change the effect that the new rules have on values. The less buyers can afford, the less you can sell for.

For buyers, however, they will soon be seeing this "play out" in the form of falling condo prices. While we're all brainwashed into believing that prices are lower across the board, condos have not made the same kind of adjustment in the Chicagoland area as have detached homes, and that may be changing shortly...

The BIG Picture

National Home Values

Over this past week I've read two outstanding articles about the depths of housing woes. Two economists arguing fervently, and with impressive supporting evidence, to two completely different ends: On the one hand, we are at the absolute bottom in housing, but prices will not rebound for another 15 years (The Housing Crisis is Over, WSJ.com). And on the other hand, another 10-15% decline in values can be expected to come over the next year and a half, with a recovery to follow (Map of Misery, TheEconomist.com).

That's quite a difference in opinions! I believe I also recall reading something from the National Association of Realtors that said we already hit the bottom in the market. And that was in the spring of 2007, so I don't know what everyone is still whining about.

The problem with telling the future of the real estate cycle is not a failure in interpretting the implications of data, nor a matter of data quality, but a matter of accepting that building theory around such data is subject to your lense: optimistic, pessimistic, or just apathetic. Any economic market has data sets that support those holding half full and half empty glasses to their respective outlooks.

The Map of Misery identifies the data each group is utilizing to support gloomy or rosey outlooks for housing. One method, which utilizes the balance between housing prices and rental prices, purports that the crisis is nearing correction, with rents reaching their trough during the boom, and requiring another 10-15% of home price declines for them to reach equillibrium. This however, assumes that it is home prices that must decline, and that rents will remain stable in what has been a "landlord's market" (read: opposite of a renter's market).

The National Association of Realtors utilizes the most optimistic measure, not surprisingly, which indicates that housing costs (mortgage payments, not home prices) have returned to historic balance with household incomes. These neglect to mention the tightening of lending standards, which are preventing countless buyers from entering the market. Other measures compare home prices to incomes, which have not yet been reigned in (another 10-20% decline needed...).

Taking a look at these two graphs, you can tell the story of the market's coming doom, or its overdue recovery. Perhaps you'll better understand my viewpoint today:

Vehiament cases exist for both arguments, and with legislation being pushed forth by politicians for a fresh new band-aid (thank you P.A.C.'s and polls), all bets are about to be affected greatly as our tax dollars are put to the task. A little bit of helpful Q & A might guide someone who is a layman at the subject, or perhaps just someone as confused as the rest of us.

Do you think the market is due for a recovery this year, next year, or in 2020? Think that Chicago is subject to a different timeline altogether? I'm interested to hear your opinions!

Showing Activity as Leading Indicator for Sales?

Before a home sells, it must be shown. I dare you to try and dispute that fact.

As real estate brokerages arrange appointments for buyers agents to show listed homes to their clients, they create data. ShowingTime.com, known to agents as "ShowingDesk," is the premier online service provider for setting appointments. It is used by my broker, Baird & Warner, along with 40 other brokerages - from the big national brokerages to the independent regional ones. The data recorded for each appointment is logically one of the best indicators of market sales activity, as the more a property is shown, the more likely a buyer will write an offer, and the more likely that agreeable terms can be found, leading to a visit to a closing table.

I track my office's showing activity (above), in addition to online views of each individual property's webpage. In comparing this with a given property's number of showings, I can gauge how well a property is doing, relative to other indicators. ShowingTime.com offers us a snapshot of the nation-wide sales picture, by comparing the percent increase or decrease of showings, and the published record of closed sales. Or, at least, in theory.

If we are to believe the suggestion of ShowingTime.com's graph, then the upsurge of showing activity in March should have yielded a very positive April for home sales. While there was a definite increase (see graphs below), there is another trend represented in ShowingTime's graph: More showings per buyer. This is a definite trend in the marketplace, as buyers take more time to decide the right home for themselves. A buyer can see more houses, and have less worry over their "favorite" getting sold out from under their noses.

The data above, taken from Kane County, IL, includes April's sales number for Under Contract and Closed properties (both detached and attached residential housing). It does reflect an increase in the number of properties sold, but those numbers reflect a decrease as compared with last year's seasonal figures. April 2007 sales in Kane County amounted to 552 Closed properties, while April 2008 yielded 339. The number of properties that have gone under contract in April (606 in '07, 506 in '08), will inevitably revise downwards as transactions under contract fail to result in a closing (due to home inspection, mortgage financing, or other problems encountered).

It seems as though ShowingTime's March report reflects the dispositions of buyers towards a more thorough and deliberative home search, and not a surge indicating housing's recovery by summer time. An uptick, yes, but comparing year-over-year data gives us the whole story. There may not be any dispute to this post's leading statement, but plenty is left to argue for ShowingIndex's direct correlation to sales activity.