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.

Appraisals & Underwriting

A full 12-16 months ago, the process of appraising and underwriting, in the course of properly vetting a home loan, was pretty cut and dry. An appraiser's work needed to conform to his or her industry's standards, and closed comparables could be no older than 12 months prior to the sale date. An appraiser's report is then reviewed by an underwriter. Underwriters are the gods of mortgage lending, as they get the final say on whether a loan is approved or disapproved, and they have typically been appraisers or loan officers for many years before getting the nod.



"Underwriting has one more contingency they need to clear..." or "My underwriter wants to see [insert unexpected document]..." These are the sorts of things that lenders tell us, and their clients, in the final hours of putting together, or declining, a loan. Today, the things they ask for have changed.



Appraisers are now allowed only 3 months or newer closed comparables to a property. Where they were previously required 3 closed comparables, they often must produce 5, 6, even 7 comps. Underwriters may not want the best comps, but they want to push liability for botched loans onto someone other than the note-holder. In a market where fewer homes are selling, finding more comps within a shorter time frame is often a beguiling task. Read on about declining values and the havoc they've wrought upon the numerous deals they affect. As you can see, by following the link, the Realtor PAC is working hard to strike back at declining value lending policies, with some early success.

One, Two, maybe Three Items for Your Review...

When I first started clicking off rather incidental messages on Twitter.com I didn't see how it would really apply to a Realtor. A mortgage lender, sure, or a high school student, TOTALLY, but what is there for me to offer that would really seem relevent to the public? It took me a little while, but I think I know what it is. HOTSHEETS. The number of homes that have come onto the market, reduced price, gone under contract, cancelled/expired from the MLS, or closed, is actually a very base way to tell the direction of the market. For me, it's actually helpful to spit that kind of data out more often, and for the reader, I think it's in the same ballpark as the graphs that I try to showcase here on a weekly basis. If you live in the Tri-City or Fox Valley area, you might find that this is something worth watching.

NEXT. Interested in moving to Morrocco? As a Baird & Warner agent who has had many properties featured in the Luxury Portfolio Fine Property Collection, this caught my eye this week. It's not my listing, fyi.

LASTLY. Do you use Realtor.com for your casual property searches? Well, I happened upon a very fresh podcast from NAR's CEO, Dale Stinton (my childhood best-buddy's dad, as odd as that sounds. That's a true fact.). Go here to see a sneak peak at The New Realtor.com.

Property Taxes: Fight the Power

If you live in Illinois, but not in Cook County, then if you don't have your property taxes, by now, then you must either:

1. Escrow your taxes and insurance through your mortgage lender
   
   OR
   


2. Be a Lessee

If you aren't a member of the latter group, then you are probably interested in paying as little taxes as possible. Unfortunately, the revulsion that we feel when we receive our tax bill is not very useful: This is NOT the time to appeal your taxes. Even so, some facts about how property taxes are determined surprise many-a-taxpayer.

For instance, as the Beacon News pointed out in their piece "Property Tax Bills Causing Concern," the present market value has very little to do with the "Assessed Market Value" of your home. In fact, the county utilizes an average over the past 3 years to determine your tax amount.

I have noted for years, however, that tax bills were terribly outpaced by appreciation during the boom years. They were guaranteed to go up because they were typically 5-10% lower than market values. Now that property values have slid downwards, they are now looking as much as 5% too high.

The moral of the story, however, is that most townships finish their assessments right around the holiday season. So the next time you start getting out Halloween decorations, instead of looking forward to Thanksgiving and Christmas, start thinking about what your property taxes will eventually be. And FIGHT THEM. If you're unsuccessful, it will at least make for more realistic holiday shopping!

The Federal Reserve Bank of New York offers us a handy tool with which to view the state of the nation in terms of mortgage delinquencies, and precursors thereof. Check it out. You can ZOOM IN ON YOUR ZIP CODE, and compare the foreclosure rates, loan to value ratios, number of ARMs adjusting, percent of no-doc loans, and so forth.

Comparing the Counties

Last month we compared areas from the interior and collar counties as to the level of housing inventory. This month, we'll generalize to gather as broad a trend as possible (and avoid comparing cities that are the exception to their area's "rule"). Additionally, we are removing New Construction homes from the equation. Not because new construction home sales are in any way not significant, but because builders often enter vacant land as built homes for sale - they are casting as wide a net as possible right now. We refer to some of these listings as "phantom listings," as they are not really properties "on the market." The vacant homes for sale are an important factor in this market, but the distortion is greater than you would ever expect.

Cook County

DuPage County

Kane County

DeKalb County

Starting in Cook County, we have gathered information along the Union Pacific West Metra Line, or going West, with DuPage, Kane, and DeKalb Counties. Tomorrow we'll contrast this data with the Northwest and Southwest suburban areas.

What's interesting about this data, is that ACROSS THE BOARD these counties have halved the total inventory level highs from this past December. These levels, however, have not receded to last year's lows, which were in March and April. It should definitely be noted, with this snapshot of the market's health, that by broadening the scope of examination, we are also amalgamating such areas as the Gold Coast with the east side of Elgin, or Northwest Aurora with downtown Geneva.

Stay tuned for tomorrow's data.

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.

Are 1st Floor Master Bedrooms Any HOTTER than the Rest of the Market?

The real estate market has benefitted from the Baby Boomer generation since their births caused the great housing boom after World War Two. As they've grown up and had families, they've been the largest economic catalyst in the modern era, with their luxury home, vacation home, and investment property purchases spurring the most recent boom. Experts have been predicting since well before the boom that the housing market would begin to pick up a trend of ranch homes, and first floor master bedroom homes, townhomes, and condos. With the first "official" baby boomers reaching the "senior" age range (62) this year, the purchase preferences of these buyers is more forward looking than ever. Empty nesters are often looking to move on from their 2 story home to downsize into something that gives them everything they want in terms of upgrades and ammentities, but with more lifestyle flexibility.

Now that the boom of housing has moved to what everyone hopes is the trench of it's decline, let's take a look at what many expect will be the economic engine of real estate's recovery: The 1st Floor Master Bedroom Home and Townhome [FFMH & FFMT]. By comparing the inventory level of these properties, with those of non-1st floor master properties [NFFH & NFFT], we'll be able to see if the trend is emerging, or if the experts' predictions are wrong. For the purpose of this analysis, we'll be examining the Tri-City area: St. Charles, Geneva, and Batavia, Illinois.

Looking at Figure 1, below, inventory levels and sale levels for NFFT's, with FFMT's below them. We can clearly see that at the present moment, the experts' predictions are not yet materialized. Townhomes are seen as more a promising housing sector for baby boomers, with the appeal of reduced maintenance, and lower expense during retirement years. Here, however, the number of homes on the market exceeds the prior six months of sales and contract activity by almost 5 to 1 for 1st Floor Master Bedroom Townhouses. Meanwhile, the general marketplace for townhomes over $300,000 is only a 4 to 1 balance between supply and demand. 1st Floor Master Bedroom Townhomes are presently demanded less than conventional townhomes that have 2 stories, with a master bedroom up at least 1 flight of stairs. We have seen townhomes inventory overall in check, but the over-$300,000 price range is clearly still in a strong buyers market.

Figure 1

On the other side of the coin, in Detached Homes, the entire market has been far from in-check during the market's decline. As seen below, in Figure 2, the FFMH and NFFH markets are at 4 to 1 and 3 to 1 ratios of inventory to demand. With a gross 798 actively for-sale homes of the NFFH variety, and 166 with first floor masters, buyers are in the drivers seat of the entire detached home marketplace.

Figure 2

Why is this the case? Are the experts wrong? I believe it is less to do with the preferences of baby boomers, as it is the effect that the housing market has had on their ability to execute purchases of homes that meet their evolving needs. Given the challenge they face in selling their existing homes, this trend is going to continue to lay in waiting for the boomer buying boom to come.

Condo's/Townhomes Vs. Detached Homes

As some readers may have noted, a trend has been playing out through this real estate cycle that deserves mention: Townhouses & condominiums are not in the same trough of this cycle as detached single family homes are.

St. Charles Detached Homes

St. Charles Attached Homes

In fact, attached houses are actually in territory that indicates they are neutral as to being a buyers/sellers market. This sample was taken of strictly St. Charles, Illinois, but I am seeing this play out through much of the suburban area. Looking at the market time statistics, below, one can see that attached properties are selling in less than 180 days, on average.

St. Charles Attached Market Times

Why is this happening? Three factors are at play- lower prices for attached properties put them within the reach of cautious first time homebuyers; todays buyer is looking for a more "move-in ready" home - less tolerance for major renovations that often come with older single family detached homes; and buyers often do not have time to do the yardwork and maintenance that goes along with a detached home. Today's buyer is changing, which has affected families and individuals selling their homes. With the challenges of being a "move-up" buyer in this market, first time buyers are a major driving force, despite the drastic reduction in their ranks due to the extinction of many high risk loan instruments that brought more first timers into the buying process than ever before.

[note: Market time statistics are problematic because of real estate agents cancelling or expiring property listings, and then re-listing them the same day. This is done in order to reintroduce a property to the "hotsheet." This is part of the reason that I utilize absorption statistics to indicate realistic expected market times.]

St. Charles, Geneva, Batavia - Housing Supply/Demand

The graphs featured here give as visually straight-forward an account of the balance between market supply and demand in our Tri-City area: St. Charles, Geneva, and Batavia, IL. The grey bars represent the months' supply of homes, or the number of homes available in a given month, divided by the number of sales per month. Two years of market data is displayed here, allowing one to quickly pass judgement as to whether the surplus of inventory in relation to buyers is improving or worsening on a seasonal basis, year over year. The X axis is a chronological timeline in months, while the Y axis represents Months of Inventory, or Absorption (how many months will it take, given the present rate of sales, for the market to convert all existing listings into closed sales). Dividing the almost 1,300 homes for sale across the significant price ranges gives some clarity as to our price ranges which face the greatest oversupply problems.

Up to $200,000

$200,000 - $300,000

$300,000 - $400,000

$400,000 - $500,000

$500,000 - $650,000

$650,000 - $850,000

$850,000 - $1.15 Million

$1.15 Million and more

In some cases, you'll note that zero sales activity results in gaps in the graphing data. This is a scary problem to have in this market. Absorption analysis is, in this Broker/Blogger's opinion, the singlemost powerful tool with which to decifer trends in any given market. Look forward to analysis breaking down the entire Chicagoland regional marketplace based on inventory imbalances across the distinct suburban areas, and what this means to the ebb and flow of price reductions and sales in each region.