“Home prices are a key factor for any positive movement in the housing market, and the large inventory of distressed homes working their way through the market is putting downward pressure on prices,” notes Fannie Mae Chief Economist Doug Duncan.
“Now that we are entering a traditionally weak seasonal sales period, we expect home prices to show renewed declines after firming for several months,” Duncan added.

There are other dragging factors outside of housing as well such as the Greek debt crises spreading to other economies in Europe.  Closer to home, things like the scheduled expiration of various tax cuts and unemployment benefits will likely diminish monetary spirits.  Continuing financial reform is also stifling business growth.

The estimations are very much in line with other predictions.  Citing the same reasons as Fannie Mae, Moody’s Analytics Chief Economist Mark Zandi said in September there is a 40% chance the economy will slide back into recession within the next year.

Views vary at this stage in the game though – no one really knows at this point.  We can only speculate based on what we see, read and hear.

On The Brighter Side

On the more positive side of things the September employment report, while not great, showed that the economy added 103,000 jobs during the month.  The thinking is, if the economy was heading toward recession, it wouldn’t be adding jobs.

The latest piece of clarifying news came late last week in the form of stronger than expected retail sales.  Yes, consumers were spending again, and not just on necessities.  Even car sales were up substantially.

Businesses adding jobs and consumers spending money seems to indicate, in the minds of traders, that the economy may still be week, but it’s not headed for recession.

Job Situation

While the unemployment rate is too high, a number of business executives have complained they have openings they can’t fill because they can’t find qualified applicants.  Some estimates put the total of unfilled jobs as high as three million!

All of this suggests that recent worries about a double dip recession have more to do with economic problems in Europe and less about what’s happening in the U.S. economy.

While a stronger-than-expected economy is good news, for consumers it’s likely to mean that gasoline prices have stopped their slide toward the $3 a gallon mark and will probably start heading up again.

Varying opinions and mixed indicators make it tough to determine.  I check it daily because it’s so unpredictable right now.  I think the one thing everyone agrees on is that the economy will recover – it’s just a matter of when.  Hopefully, we won’t see another recession in the interim.  Let’s hope Fannie Mae is 100% wrong about their 50% prediction!

In August, first time home buyer short sale purchases dipped to 39.7 percent of short sale transactions for the month. First time home buyer short sales peaked back in November of 2009 right before the initial expiration of the home buyer tax credit by the Federal Government.

Short sales are no walk in the park so it’s not surprising that this trend is taking place. So many players to deal with – lenders, investors, sellers, buyers, agents, title companies, etc. – and so much time involved in trying to negotiate all of these entities to come up with agreeable terms and appropriate paperwork to make the short sale happen.

Up until this point, it’s my guess that this was all overshadowed by the substantial cost savings with short sales – 27 percent lower than the prices of typical properties.

However, overall distressed properties are slowly decreasing as a dominant part of the real estate market. In August, these properties fell to 45.9 percent of the market – still a significant number but declining nonetheless.

It appears from agent responses, that first time home buyers are now making offers on multiple properties with the intent of only purchasing one as a last resort to the delays of short sales.

The majority of time delays are literally caused by the lenders and investors of short sale properties. Sellers can also be problematic but as a prior short sale department manager, the biggest time lags I witnessed were on the lender end.

This sends a big signal to the investors if you ask me – get the system up to par, or lose the sales altogether. If the processes aren’t refined and time lags addressed, investors could see short sales continue to decline in number, despite appealing prices!

Even so, today’s home buyers have a lot working in their favor too.  Interest rates are at historic lows with 30-year fixed rates around 4-5 percent.  This makes a huge difference in a borrower’s monthly mortgage payment.  Consider a $100,000 loan with 20% down (the standard) at about $568 a month as opposed to the same loan at 13% with a payment of a little over $1,000. Big difference!

Prices today are also working in the buyer’s favor.  Affordability rates are at unconventional highs.  Additionally, with a large number of short sale and foreclosure properties, there is even more savings to be had.  So prices are low and interest rates keep them that way.  And remember, if a buyer plans on staying in their new home for many years to come, now is a great time to buy regardless of pricing fluctuations.  The social benefits still remain strong and a home can be considered a long term investment. In fact, many are taking advantage of the market by investing and renting out homes.  The renter ends up paying the mortgage and interest while the property accrues equity.  Meanwhile, when the market inevitably turns around, the property value will likely soar!

There are still some legitimate concerns for home buyers today however.  Home values are still falling so it’s very important that potential buyers do their homework.  Buyers should check out what employment rates are like around communities they are considering buying in.  What are the values like – are they going down quickly or are they steady?

Basically, buyers should ask themselves the same basic questions when considering buying a home today, or any time:  Can they afford the home?  Do they plan to stay and make today’s investment worthwhile?  Do they have the money for the down payment and closing costs and any necessary repairs that they may end up being responsible for?

Hiring a knowledgeable real estate professional when you are buying a home is highly recommended, especially with all of the additional concerns of today’s market.  A good agent will be able to answer all of the buyer questions about prices, rates, home values, and the process, as well as help them find a good home in a promising community, and also walk buyers through the lending process, helping them find the right lender and the perfect loan for them.

Buying a home is a big decision, but the often pessimistic headlines can make things seem far worse than they really are.  There are great deals to be had in today’s market.  Start by contacting a local REALTOR today!

Buying REOs Can Be Tricky

Now that the home has become part of the bank’s inventory, they’re likely to price it attractively in an effort to sell it off their books as soon possible. As a result, you may be able to buy the home for a knock-out price. But be prepared; buying an REO foreclosure is a bit trickier than a traditional home purchase. It’s imperative that you make an educated, reasonable offer if you want any hope of snatching an REO foreclosure property. The more you know before you begin the often complex process the greater your chances for success.

When submitting an offer for an REO foreclosure property, keep these six tips in mind:

1. Research three months of comparable sales. Select only those that closely match the REO foreclosure home with regard to amenities, number of bathrooms, number of bedrooms, square footage, etc. Keep in mind that REO foreclosure homes are generally priced a bit below comparables.
2. Determine the bank’s purchase price on the Trustee’s Deed or Sheriff’s Deed, and then compare that figure to the bank’s asking price.
3. If the REO foreclosure listing has been on the market less than 30 days, the bank is unlikely to deviate much from their asking price. Generally, the longer the home has been on the market, the greater your negotiating strength. If your offer is rejected, try resubmitting it in another 30 days.
4. Take a look at the REO listing agent’s sold properties. Compare the list price of several properties to the sale price. This will give you an idea of the list-price to sales-price ratio the listing agent’s properties generally fall within and might give you a good idea of where your offer needs to come in.
5. Realize that REO foreclosure homes are often priced to attract a great many buyers which generate a number of competing offers. Some offers may be cash, which banks smile upon. And some offers may be for more than the list price. Realize you’ll need to be flexible with your REO foreclosure offer if you want to close the deal.
6. If you need financing, be sure to get pre-approved and send a copy of your pre-approval letter with your offer.

A final word of advice

When submitting an offer on a REO foreclosure property, do not neglect a home inspection. It’s true that there are many REO foreclosure deals out there to be grabbed but there are also some lemons. Most REO foreclosures are “as is” properties and what first appears to be a bargain may suck your wallet dry with repair costs. Be sure your offer stipulates that the property is subject to a home inspection.

Lansing, MI

In Lansing, MI, really nice ranch houses can be purchased for less than $60,000.  Why?  Well, Lansing was struck by the decline of the automotive industry with several plants in the metro area having drastic workforce reductions.  As a result, many homeowners are missing house payments and now Lansing has the 38th highest foreclosure rate in the nation.  Not nearly as bad as here in Arizona, but this certainly has a lot of repressed homes on the market in Lansing and the price drops are expected to continue through much of 2011.

Toledo, OH

Moving on to Toledo, Ohio, the median price there is $64,900.  Again, the hard hit automotive industry really hurt this town with its General Motors and Jeep plants.  Population growth there has only risen about 2% since 2000 as a result.  This has created a large stock of homes on the market and pricing very low and also expected to remain there throughout 2011.

South Bend, IN

The median home price in South Bend, IN is only $68,700.  Here you have the University of Notre Dame, but this town too was a heavy hitter in the auto industry with names like Studebaker being manufactured there.  The median price in this area has dropped about 20% over the past three years making some prime properties very reasonable.

Akron, OH

Akron, OH is known as the “Rubber Capital of the World” and Goodyear is still headquartered there.  So they too were deeply affected by the major declines in the auto industry.  Certainly, this makes you realize just how imperative the auto industry is in today’s economy.  Actually, the town has lost residents continually since about 1960 and of course this has left a lot of underused real estate and very low home pricing.  The median price here?  Only $75,400.

Ocala, FL

You don’t have to be in the Midwest to find this kind of situation.  Ocala, FL had the lowest median home price of any Sun-Belt metro area during early 2011 at just $75,400.  As with many other towns, many of the homes became distressed properties.  Similar to Arizona, Ocala was affected by the housing market with a peak during the boom years and a lot of residential building.  When the housing bubble burst, the area was hit hard as many construction jobs went away.  Unemployment there is still more than 12%!  So again, you can get a house that’s only 5 years old with 1,400 square feet in a great neighborhood for only $75,000.  And that’s in Florida!!

Add to this list, Dayton, OH with a median home price of only $78,000, Cumberland, MD, at a median of $80,700 and Grand Rapids, MI, with a median price of $81,100 and you start to wonder, is any place in the U.S. still in decent shape after the bubble burst?

Now granted, some of these places have had other changes that contributed to their current state like in Cumberland, where the prevailing industries changed altogether after WWII from iron and coal mines to health care and government, both of which have also been greatly affected by the flailing economy.

The shame of it all is that most people in our economy today are struggling.  It’s like dangling a carrot in front of a rabbit.  Hoards of nicer homes for dirt cheap prices, but who can afford to move and buy a new home right now?  All I can say is, if you can DO!  You’ll be one of the few who comes out on top when the market turns around, that’s for sure.

But that hasn’t been nearly enough.  During the recession GDP shrank by 5%.  In reality, it took from June 2009 until last quarter just to recover.  Now indicators support a forecast of 3.5% GDP growth this year, up from 2.9% posted during 2010.

The Consumer Confidence index is now above 60 for only the second time since it took a downward dive from a pre-recession high of over 100 to a recession low of 25.  And consumers are starting to spend more.  January sales were up from last year and car dealers alone experienced more customer traffic and more sales.  In fact, consumer spending surged in the fourth quarter last year with an increase of 4.4%.  Experts predict that a gain of about 3% is likely this year following an increase of 1.8% in 2010.

The Cause And Effect

As consumers spend more and exports continue to increase, businesses will see more demand.  There have been gains in durable goods orders for 4 out of the last 5 months.  In January, a survey of purchasing managers in manufacturing indicated that activity was at a seven-year high.  The survey of purchasing managers in service industries indicated the strongest showing since 2006!!  Now that gives one some hope!

All of this spurs optimism, which then further encourages a stronger economy.  Even in the most repressed industry – home building – rock bottom seems to have been reached.  In addition, in the stock market, the Standard & Poor’s 500 index nearly doubled in the past two years, and it’s climbing higher with the expectation that there will be additional gains in corporate profits.

Though changes are coming slowly, manufacturers began adding to their staff in 2010 for the first time in 10 years.  And initial filings for unemployment insurance payments have been trending downward for months now.

Two Sides To Every Coin

On the other hand, the housing industry is still staggering – which is horrible news considering 2 million construction workers lost their jobs over the past three years and of course this trickles down to the manufacturers and store owners who deal in tile, furniture, appliances, carpet, etc.  Additionally, budget cuts by state and local governments will take away from gains made in other sectors.

Federal Chairman Ben Bernanke said earlier this month, “The economy, though it appears to be growing, is still in a deep hole.”  So while we’re not moving at warp speed, we seem to at least be going down the right road.

Why Such High Vacancy Rates in Arizona?

Source: U.S. Department of Housing and U.S. Postal Service

Shadow Inventory?

This information provides us with some type of an idea that there are quite a few homes that are just plain vacant. I don’t want to continue the “Urban Myth” that there is a lot of shadow inventory out there, however when you see the numbers from these two federal agencies this clearly illustrates my point that the supply is artificially low right now on the MLS and at trustee sale as well.

Your Thoughts

So what gives, what’s the scoop, don’t see much of this in the local news media? Why only 21,000 active home listings on the MLS when there are over 91,000 vacant homes in the Greater Phoenix metro area?

Would love to hear your thoughts on this, anybody with a good idea on when the inventory levels will go back up on the MLS?

Related Article: Where Have All The Properties Gone?

An attractive strategy is direct ownership in forthcoming real estate acquisitions:  10 up to 100+ units.  The common experience has been that a prudent direct multi-family property can yield more attractive operating as well as long-term returns than alternative opportunities. 

Consistent Returns

Multi-family investments tend to generate relatively consistent returns due to the fact that the demand is a function of population and income, neither of which are likely to change very quickly, and both of which can be identified in emerging markets.  This strategy statistically makes sense as well with declining home ownership rates which peaked at 69% in 2004 and dropped to 66.4% in 2010.  This rate is expected to continue to drop to 64% by 2015.  Demographic changes play a significant role with a substantial jump in the older population due to the baby boomers, and the fact that 5 million households over the age of 65 rent.  In addition, immigrants are now an important element with 26 million immigrant renters who make up 45% of all rental growth between 1998 and 2008.  65% of immigrant households rent.  When you add to this a decrease in the median asking price per unit for multi-family properties, the appeal becomes even more obvious.

Multi-Family Investment Strategy

Without extensive knowledge and experience in this arena, an investor needs to have a multi-family real estate strategy which should include:

1. Ongoing searches for real estate acquisitions that appear to be stable and profitable
2. Once identified, an objective financial and marketing analysis should be developed to eliminate any potential acquisition that fails to meet goals for performance.  Depending upon preferences and goals, current criteria generally seek cap rates of not less than 8% and “cash-on-cash” returns of not less than 12%, loan-to-value (LTV) ratios of 70% to 80% (depending upon whether recourse or non-recourse financing is used), and debt service coverage of at least 1.25.
3. Following an acceptable analysis, a Limited Liability Company (LLC) will often be established to ultimately take title to the property.
4. The LLC will then present an Offer and undertake the subsequent “due diligence,” e.g., professional property inspection, professional appraisal, title search, ASTM E-1528-00 Environmental Transaction Screen, and lead paint and asbestos inspections, if required.
5. The satisfactory completion of “due diligence” and ultimately a Purchase and Sales Agreement.  If the due diligence examination uncovers problems or deficiencies that cannot be cured, the negotiations should be terminated.
6. Following execution of the Purchase and Sales Agreement, negotiations will be initiated to secure mortgage financing.
7. All due diligence analyses and reports are made available to all parties to facilitate timely decisions as the goal is to negotiate expeditiously, which is in the best interest of the buyer and the seller.
8. All conditions of the transaction (i.e. terms, interest rates, amortization, and payment schedule) are to be designed to meet owner’s financial goals.
9. While understandably subject to the constraints of the Seller, the target is to complete a transaction within 60 to 75 days of the initial commitment to proceed.

This is a good list to follow.  Avid real estate investors will want to consider these types of opportunities because with the demographics listed above, a huge upward pressure on occupancy and rental rates may very well make this a golden age of multifamily housing!

Shadow Inventory

The downtrend will still continue as the tremendous “shadow inventory” of houses have yet to be released by the banks.  These are repossessed properties which are in institutionally owned portfolios of assets, but aren’t presently listed for resale on the public market.

The National Association of Realtors (NAR) reported that the PHSI during the month of March rose 5.1% to 94.1 from 89.5 in February.  This is the second consecutive month the PHSI has increased, reaching its highest level since November 2010.  These figures don’t actually reflect the number of closings.

March Existing Home Sales

New and existing home sales were also up in March. Experts tend to agree that as people see the economy starting to rebound, they decide to make a move to enter into a contract to purchase a home.  In addition, when companies start hiring more, the number of potential home buyers increases with more people able to pay for larger purchases such as homes.

Despite this wave of activity, housing prices continue to fall.  While this make homes more affordable, others say if prices continue to fall, it may hurt the real estate market, possibly bringing it into a double-dip recession.

Bottoming Out?

Most predictions indicate it is too soon to tell when the market will “bottom out.”  Hopefully, lower pricing and more hiring will encourage hesitant home buyers to purchase.  As more homes are sold, inventory will decrease and prices will be pushed up, precluding the uncertain and elusive shadow inventory.

With any luck, the amount of home buyers will continue to increase and sales will go up, and then the shadow inventory will provide the housing needed to keep the market going in a positive direction without extensive pricing increases.  Here’s hoping!

Inflation accelerated as it’s fastest rate since June 2009.  Incomes also increased in February by 0.3%.  Spending is expected to have slowed however, in the first quarter of 2011.

The good news is, even with all of the vacancies, housing is spread liberally across the market.  Pending home sales compiled by a National Association of Realtors (NAR), were up by 2.1% in February over the month before.  While this is 8.2% below figures from 2010, this is still a promising trend.

Dr. Lawrence Yun, NAR Chief Economist says,  “Month-to month movements can be instructive but in this uneven recovery it’s important to look at the longer term performance.  Pending home sales have trended up very nicely since bottoming out last June even with periodic monthly declines, contract activity is now 20% above the low point immediately following the expiration of the home buyer tax credit.”  He went on to say that while we may not see notable gains in home sales in the near term, sales are expected to rise 5 to 10 percent this year.   Job creation and more affordable conditions will allow for more confident buyers in the market and thus, increased spending and more home sales.