Heading in the Right Direction

Monthly Home Sales Reach 7-Month High

Sales of existing homes rose in January, reaching the highest level in seven months, according to the NATIONAL ASSOCIATION OF REALTORS®.

Total existing-home sales — including single family, townhomes, condominiums, and co-ops — increased 3 percent to a seasonally adjusted annual rate of 6.46 million units in January from an upwardly revised pace of 6.27 million in December. Sales were 4.3 percent below the 6.75 million-unit level in January 2006.

David Lereah, NAR’s chief economist, says observers shouldn’t overreact to the sales gain or to other short-term effects. “Although we’re expecting existing-home sales to gradually rise this year, and buyers are responding to the price correction, some unusually warm weather helped boost sales in January,” he says.

“On the flip side, the winter storms that disrupted so much of the country in February could negatively impact the housing market. “Although the data is seasonally adjusted, these weather events are unusually large — many transaction closings were postponed in February, and home shopping was essentially shut down for about a week in many areas,” he says. “We shouldn’t be surprised to see a near-term sales dip, but that will be followed by a continuing recovery in home sales.”

Inventories Drop

Total housing inventory levels rose 2.9 percent at the end of January to 3.55 million existing homes available for sale, which represents a 6.6-month supply at the current sales pace — unchanged from the revised December level. Supplies peaked at 7.4 months in October 2006.“Inventories are looking better, but price softness should continue until spring when the market is expected to become more balanced,” Lereah says.What Happened RegionallyHere’s a breakdown of home sales by region:

West Coast: Existing-home sales in the West rose 5.6 percent to an annual pace of 1.32 million in January but were 9.6 percent lower than a year ago. The median price in the West was $321,300, down 4.6 percent from January 2006.

Midwest: Existing-home sales increased 4.8 percent in January to a level of 1.53 million, and were 0.6 percent lower than January 2006. The median price in the Midwest was $162,600, which is 3.5 percent below a year ago.

South: Existing-home sales in the South rose 2 percent to an annual sales rate of 2.54 million in January, but were 7.3 percent below a year ago. The median price in the South was $174,600, which is 1.7 percent below January 2006.

Northeast: Existing-home sales in the Northeast were at a level of 1.07 million in January, unchanged from December, and were 5.9 percent higher than January 2006. The median existing-home price in the Northeast was $260,700, down 1.2 percent from a year earlier.

National Single-family and Condo Home Sales

Single-family home sales rose 3.5 percent to a seasonally adjusted annual rate of 5.69 million in January from an upwardly revised 5.50 million in December. But that still accounts for 4.2 percent below the 5.94 million-unit level in January 2006. The median existing single-family home price was $209,200 in January, down 3.5 percent from a year earlier.Existing condominium and cooperative housing sales slipped 0.1 percent to a seasonally adjusted annual rate of 767,000 units in January from a downwardly revised pace of 768,000 in December. Last month’s sales activity was 5.7 percent below the 813,000-unit pace in January 2006.The median existing condo price was $222,200 in January, up 0.5 percent from a year ago.

NAR President: Market is Stabilizing

The national median existing-home price for all housing types was $210,600 in January, down 3.1 percent from January 2006 when the median was $217,400. The median is a typical market price where half of the homes sold for more and half sold for less.

NAR President Pat Vredevoogd Combs, from Grand Rapids, Mich., says a broader view shows the housing market stabilizing. “The market is trending up from its low last fall, and that is important in restoring confidence to buyers who’ve been on the sidelines,” Combs says. “Since buyers can find more favorable terms, and they are looking for a place to call home for some years to come, getting into the market now makes sense. It’s a choice many didn’t have during the boom period of bidding wars in much of the country.”

source— REALTOR® Magazine Online

Overextended Loans

So many loans in the past few years have been granted to what are called subprime or alt-a loans. Loans where people of not so solid or even worse, not so worthy credit are given loans at much higher rates overextending many people who have no business being in the financual risjky situation they were put in (or put themselves in).

These types of loans put not only those who took out the loans at risk, but the entire national real estate market.

If these loans start causing an increase in the already accelerated foreclosures we are seeing in some areas (including Illinois) then this trickle affect could create a spiral downward in the real estate industry.

Every financial reporter and news outlet has for a month been all over the demise of the subprime mortgage, the accent on foreclosures. In the mortgage market, everybody has been blaming everybody: it's only the 2006 originations, it's only the bad actors ... big guys stuffing faulty paper back down the throats of little guys until they fold, giant guys taking big losses (HSBC $10 billion so far), but not giant losses.

As of Friday there are not enough buyers of subprime risk to cover loans recently closed or in process. In panicky conditions, no buyers at any price. Subprime loans this week from time to time may be unobtainable until their rates move high enough and credit standards tighten enough. Trash, like other things, rolls downhill: Alt-A loans are closer to junk than trash, but high loan-to-value-ratio Alt-A loans are still trash. By next week there will be few buyers of Alt-A risk, and that market may lock up just like subprime.

A sudden withdrawal of mortgage credit is a new hazard to vulnerable housing markets, but I think (hope) the damage will no more than prolong the correction. One leading reason: the price of good, mainstream loans may well improve in this rapidly flapping flight to quality.

Here is a WSJ article discussing the topic:

Mortgage Defaults Spread,Snagging More Borrowers

By Ruth Simon and James R. Hagerty From The Wall Street Journal Online

The mortgage market has been roiled by a sharp increase in bad loans made to borrowers with weak credit. Now there are signs that the pain is spreading upward.
At issue are mortgages made to people who fall in the gray area between "prime" (borrowers considered the best credit risks) and "subprime" (borrowers considered the greatest credit risks). A record $400 billion of these midlevel loans -- which are known in the industry as "Alt-A" mortgages -- were originated last year, up from $85 billion in 2003, according to Inside Mortgage Finance, a trade publication. Alt-A loans accounted for roughly 16% of mortgage originations last year and subprime loans an additional 24%.

The catch-all Alt-A category includes many of the innovative products that helped fuel the housing boom, such as mortgages that carry little, if any, documentation of income or assets, and so-called option adjustable-rate mortgages, which give borrowers multiple payment choices but can lead to a rising loan balance. Loans taken by investors buying homes they don't plan to occupy themselves can also fall into the Alt-A category.

Borrowers who take out Alt-A mortgages are considered less risky than subprime borrowers because of their higher credit scores. But as the housing market cooled and loan volume declined, some lenders lowered their standards for Alt-As. Now a rising number of borrowers who took out these loans are running into trouble.

Data from UBS AG show that the default rate for Alt-A mortgages has doubled in the past 14 months. "The credit deterioration has been almost parallel to what's been happening in the subprime market," says UBS mortgage analyst David Liu. The UBS report contrasts with testimony Federal Reserve Board Chairman Ben Bernanke gave to Congress yesterday. "Our assessment is that there's not much indication that subprime issues have spread into the broader mortgage market," Mr. Bernanke said.

To be sure, defaults have remained very low in the prime market -- and despite the uptick in bad loans, the problems in the Alt-A sector aren't as severe as those that have roiled the subprime market. Some 2.4% of Alt-A loans are at least 60 days past due, according to UBS, which looked at mortgages that were packaged into securities and sold to investors. That is well below the 10.5% delinquency rate for subprime mortgages. (During the housing boom, delinquencies were low for all types of loans because borrowers who wound up in trouble could refinance or sell.)

Some borrowers who took out Alt-A loans in recent years are starting to feel the strain. Johnny and Shirley Johnson, retirees in Cleveland, took out an option ARM when they refinanced their $92,700 mortgage in July 2005. The loan carried a 3.5% introductory rate that began moving upward a few months later. The couple, who live on a fixed income, are currently making the minimum payment on their loan. But they are afraid they won't be able to keep up with their loan and other debts once their monthly mortgage payment adjusts upward later this year.

"We don't want to lose our home," says Ms. Johnson. The couple is working with Acorn Housing Corp., a nonprofit group that provides housing counseling, in an effort to refinance into a 30-year fixed-rate mortgage. Though the monthly payment would be higher, the new loan would protect them against future increases.

Housing counselors and bankruptcy attorneys say they are seeing an increase in troubled borrowers who previously had good credit. "We have clients with 720-plus credit scores, and they are in awful products," says Jennifer Harris, executive director of the Home Loan Counseling Center in Sacramento, Calif. Some of these borrowers took out option ARMs with low introductory rates and are likely to fall behind when their monthly payment resets at a higher level, she says.

Thomas Gorman, a bankruptcy attorney in Alexandria, Va., says he is seeing more financially strapped borrowers who "probably bought more house than they could afford and then took on more credit-card debt" to furnish the house and pay for the move. When the housing market cooled, they were "caught in the middle," unable to sell their home or refinance and make their debt load more manageable.

Lenders are also tightening their standards. At a meeting with investors last week, IndyMac Bancorp Inc., the nation's largest Alt-A lender, said it had raised the minimum credit score at which borrowers could finance 100% of a home's value and took a number of other steps to tighten lending guidelines.

This week Lehman Brothers Holdings Inc.'s Aurora Loan Services unit raised the minimum credit score and reduced the maximum amount homeowners could borrower without documenting their income and assets.

Impac Mortgage Holdings Inc., which specializes in Alt-A loans, said recently that it had tightened its lending standards 17 times last year. The company cut back on riskier loans and began relying more on analytical tools to verify a borrower's income and creditworthiness. Other lenders were quick to scoop up many of those loans, but now they are also pulling back, says Impac President Bill Ashmore.

Lou Barnes, a mortgage banker in Boulder, Colo., says a client with a good credit score was turned down this week for a mortgage to buy an investment property with a small down payment and no documentation. That same borrower was approved for a "nearly identical" loan in August and November, he says. Still, Mr. Barnes calls the tightening "modest." Alt-A lenders are "nibbling at the edges," he says.

The UBS study found that the problems are greatest for Alt-A borrowers who took out interest-only adjustable-rate mortgages, which allow borrowers to pay interest and no principal in the loan's early years, with 3.71% of interest-only ARMs originated in 2006 at least 60 days past due. As in the subprime sector, the riskiest loans are those made to home buyers who put little, if any, money down and don't document their income or assets.

As delinquencies rise, some investors who bought lower-rated securities backed by these mortgages are likely to face losses, according to Mr. Liu of UBS. While defaults are expected to be lower than in the subprime sector, so are the reserves set aside to cushion bond investors
against such losses.

Defaults are much lower for option ARMs. But the problems with these loans could be "backloaded," says Mr. Liu, because borrowers with these loans are still making the minimum payment.

Glenn Costello, a managing director at Fitch Ratings Inc. in New York, expects the foreclosure rate for Alt-A loans to ultimately be only 10% to 20% of the rate for subprime borrowers.
Yet investor concerns about Alt-A loans are rising, according to Walter N. Schmidt, a mortgage investment strategist at FTN Financial Capital Markets in Chicago. A report from mortgage analysts at Barclays Capital in New York this week pointed to fraud as one reason for early defaults on Alt-A loans. The mortgage industry is battling a rash of cases in which borrowers, loan officers and appraisers collude in providing false information to induce lenders to advance more money than homes are worth.