Real Estate Info for Salt Lake & Davis County

Charles Dailey out of the Twin Cities market, did a wonderful job illustrating some of the impacts of the new FHA guidlines on potential home buyers/borrowers looking to utilize FHA financing.  His outline is one the best I've seen recently and wanted to share it with you.  It follows up on the blog post I did in early August about this topic.

OK, so it may not be an official "tax" but it has some of the same characteristics (and besides the headline certainly caused you to give this a read). You didn't hear about this one? Well, it's part of the package included in HR 5981 which was recently passed by the Senate. This bill allows FHA to increase its annual mortgage insurance premiums for single family home loans originated through its programs. Now, on its surface, that's not necessarily a bad thing as it is designed to assist FHA in returning its mortgage insurance fund to mandated levels.  This will be very important as our economy continues to digest all of the foreclosure activity currently taking place.  Once these bills are signed by Pres. Obama, the changes will take effect as soon as September 7 of this year.

The major change which will be felt by home buyers in the near term is the decrease in financed mortgage insurance offset by an increase in the annual mortgage insurance (which is generally broken down into monthly amounts). Anyone who doesn’t have an FHA case number prior to September 7, will be impacted by these changes. Understanding I am not a mortgage professional (but as a Realtor - a highly interested bystander) here is a quick summary of key aspects of the changes: This illustration uses a $175,000 loan amount with a 5% fixed interest rate and a 30-year amortization (numbers in the following table have been rounded for ease of display)

* 0.85% for those putting down 5% or more, 0.90% for those putting down less than 5%. The bill authorizes the fee to go as high as 1.50% (although FHA Commissioner Stevens hasn’t expressed any timetable or intent to raise the fee to the maximum allowed)

Although this is just an illustration, you can begin to see the impact this fee change may have on home buyers in less than 30 days who plan to utilize FHA financing options. Is it a deal breaker for home buyers, I would doubt it as the changes are somewhat nominal (but do increase as loan amounts increase) but there certainly seems to be a financial incentive to get your purchase process moving in time to get an FHA case number prior to September 7.

I am recommending to my buyer clients who are considering an FHA loan for their purchase to contact their mortgage professional(s) in order to get a complete assessment of what this change may mean for them.

....when you come across stories like this. I understand this post has nothing to do with real estate, but it is important enough that I thought our network of nearly 200,000 people should receive a heads up.  This medal of honor recipient (he was nominated for three) passed away.  May you rest in peace soldier and thank you for your many sacrifices.

A number of agents and I were discussing the fact that buyer activity (as measured by under contract activity) seemed to have gone on a hiatus recently. Several theories were discussed including the front loading of activity into the first trimester of the year due to the home buyer tax credit; the increase in number of multiple family households due to job losses in the current economy;even the flood of inventory thanks to short sales and foreclosures. My contribution to the mix was the article put forth by many news outlets a few weeks ago that highlighted the fact that over a quarter of all consumers now have credit scores below 600. That’s right, over 40 million consumers have a sub-600 credit score (as reported by FICO).

Now, combine that bit of information with the current minimum FICO score of 580 to qualify for FHA’s 3.5% down payment program  (the down payment requirement increases to 10% for a FICO score of 579 or less) and the reduction of allowable seller concessions from 6% of the purchase price to 3% and you have a recipe for a reduction in buyer demand in the market. Now, tighter credit requirements are something we all knew was taking place in the market (didn’t have to be a rocket scientist to figure that one out). But, tighter credit processes combined with an increasing number of FICO score challenged consumers (with the ranks growing each day the recovery doesn’t take hold) means there are fewer and fewer buyers capable of buying in what is otherwise a wonderful buyer’s market here in Davis and Salt Lake Counties.

Now the good news for sellers (for the glass half full folks), buyers who are pre-approved (not just pre-qualified) and have their financing in place are like gold and should you get an offer from one, don’t let them get away!!! You have a shrinking pool of consumers capable of buying your home, best not let one who is capable walk. Be creative in your counter offers, be flexible in your showing schedule, keep your house in “show mode” as much as possible. Those buyers are out there and, as sellers, you want them to know you would really like them to take an interest in you (errr, your property).

Another buyer group sellers should be anxious to see in this type of environment is buyers with money to put down. Having a down payment opens a whole world of financing options and thus flexibility on the part of the buyer (not as much flexibility as 2-3 years ago, but a good amount relatively speaking).

Now for you buyers out there….take the hint. Get pre-approved, not just pre-qualified. Have your financing ready to go on short notice, flex your down payment muscles in any offer you present (perhaps as larger earnest money deposits) and get aggressive. Listing agents know your value so encourage them to promote you to their client with well structured, aggressive offers which highlight your strength: the ability to close quickly in a slow market.

I find many buyers downplaying their strength thinking there is some negotiating advantage to holding your “cards close to your chest.” Not today. With ever lengthening days on market, sellers will figuratively salivate if you come in showing your purchasing strength right at the beginning.

So, what on the surface appears to be negative news (OK, it ain’t great) doesn’t mean there isn’t a silver lining for both buyers and sellers in the details.

As many of my clients and friends know, I am a data geek. So be prepared for what is about to follow (and for those of you with insomnia – I may have found your cure).

There was an article/analysis done by Dhaval Joshi, chief strategist for London based hedge fund RAB Capital. I found it referenced in Barry Ritholtz’s blog article on July 15. WARNING: lots of data to digest in the linked article. Granted, I am generally suspect of data analysis put forth by hedge funds (there always seems to be an ulterior motive) but in this case, the data appears to be well thought out and dissected from several different perspectives.

Here is a quick summary, it is Joshi’s perspective that the US housing market has approximately $4 Trillion of excess mortgage debt (which represents 30% of current GDP). His article goes on to make the case through statistical and graphical analysis of historic trends in the housing market. For those of you interested in the macro operation of our housing system, I highly encourage you to give it a read.

The analysis addresses several factors we all agree are present in the current market, excess inventory, negative equity in a large portion of the current housing stock, escalating default rates, etc. Midway through the report, however, there was some data I found quite interesting for the potential impact it could have on our ongoing market. Joshi covers the issues of why homeowners default on their mortgages, more specifically the current trend toward “strategic defaults."

Joshi references a recent Federal Reserve analysis that found the cause of strategic defaults vary considerably based on a particular event. In the Fed’s analysis (as reported by Joshi), if a homeowner is considering a strategic default on the basis on negative equity alone, the average borrower doesn’t walk away until the property is really upside down (average negative equity of 62%). However, the report noted that borrower’s will strategically default much sooner ("much, much earlier" was the language in the report) should interest rates increase. The report noted higher interest rates were even more significant in triggering defaults than higher unemployment (in the case of borrowers with negative equity).

The reason this caught my eye is the impact this could have should the Fed decide to adjust interest rates as the economy begins to recover as a hedge toward managing inflationary pressures. Talk about being caught between a rock and a hard place!! Inflation can wreak havoc on our economy (as seen in the late 70’s and early 80’s) but at the same time, increasing interest rates to combat that economic dirge could cause a steep increase in the number of strategic defaults. So, anyone want to be on the Federal Reserve’s Board of Governors when that decision has to be made?

I bet I got your attention with that headline!  The housing market of the last 24 months highlights a concept I have tried to explain to all of my buyer clients over the last several years (yes well before the current meltdown). It is a simple concept but one which I have been derided for by other members of my industry. The concept of which I speak, primary residences are not investments but rather lifestyle choices (oh, the horror, the heresy).

I look at investments as being things I don't have to water, paint, replace roofs, fix sprinklers, and a whole host of other items which fall on the expense/maintenance side of the ledger (just an FYI – new paint or carpet is not a capital improvement, it an expected maintenance item). Now for those of you in my industry who will immediately respond “but what about income property/rental property?” we are in full agreement: income-producing items are investments. The key word there is income (as in ongoing consistent income). Since a primary residence does not generate ongoing income (and no I don't wish to get into the theoretical discussion on investment economics), I place a personal residence in the category of lifestyle choice.

What do I mean by lifestyle choice? Very simply, it is the ability to conduct oneself on a day-to-day basis as they see fit within the confines of where they live. Want to knock out a wall? Go for it. Want to paint the living room purple? Go for it. Want to plant and cultivate an herbal garden? Go for it. No need to check with the landlord. You own it so feel free to be creative (within the confines of zoning laws, of course).

However, if your only reason for owning a home is a tax credit or a mistaken belief that you can simply sell this asset for a 50% profit in three years - perhaps you may not be an ideal candidate for home ownership (at least in terms of facing major disappointments at some point). Also, if you're going to only live in the property for one or two years before relocating or a job change, once again home ownership might not be the ideal choice. By the same token, if you value the lifestyle that home ownership provides, then even a short-term living situation may warrant owning a home.

As I talk with buyers, I always ask why they are considering purchasing a home. The range of responses one receives to that question is very instructive. The responses are invaluable to me as I advise my clients as to potential property “fits.” After some initial back-and-forth and a variety of different property types, my clients invariably come to appreciate the value of choosing based on their preferred lifestyle (one within their means of course) as opposed to what might make the best “investment.” All of a sudden, the way buyers look at properties takes on a different objective. I have also found as I follow up with my clients, those that truly did select a home based on their lifestyle focus, they tend to be happier with their purchase over time.

Now, should that lifestyle purchase happen to appreciate in value over the course of their ownership, that's a great bonus but should not be the primary motivator.

Well believe it or not, we've already reached the half way point for 2010 (seems like it was just snowing a few weeks ago -- oh, that's right, IT WAS). As I do at the end of each calendar quarter, I completed the current review of market activity in Farmington through the second quarter of this year.

Now that the first time home buyer tax credit has expired (although the June 30 deadline to close was extended recently by Congress to September 30 for properties put under contract by April 30), we can see the actual impact the tax credit had on market activity.

Year to date closed sales are up over 42% from the same period a year ago (thanks again, tax credit) but average and median sales prices declined nearly 11% and 8% respectively year to date. So, although unit sales increased, the majority of the increase is occurring in the lower price ranges thereby driving down average sale prices. This isn't surprising given the current economic conditions we face in Davis County. Now, that said, average sale prices for the month of June did increase slightly over the June average from 2009. It will be interesting to see if this is an aberration or a potential signal of possible price stabilization. It is important, however, not to read too much into a single month's activity but it was nice to see nonetheless (it should be noted median sale prices did show a small decline in June year over year).

Overall, inventory levels remain elevated with nine months of inventory currently available (six months inventory on hand is generally considered a neutral market). So, the buyer's market continues. Farmington is not unique in this regard as we see similar trend lines throughout Davis County. There will likely not be significant change in these trend lines until the macro economic factors impacting our market (e.g. unemployment, declining household income levels, restrictive credit markets, etc) begin to show signs of improvement.

Another data metric I track is "under contract"activity. This is simply a count of the properties which go under contract in any given time period. A property goes under contract when a buyer and seller agree to the terms of a sale but the transaction has yet to close escrow (that process can take anywhere from two weeks to two months to complete and sometimes even longer). I like this data point because it more accurately depicts when buyers are actually making offers on properties and therefore is a good indicator of actual buyer demand at a point in time. This is where you can really see the impact of the tax credit on buyer behavior this year. In March and April, 830 properties went under contract (before the tax credit expired on April 30). In May and June only 471 properties went under contract: more than a 43% decrease in buyer activity immediately following the expiration of the tax credit (who says government programs don't spur activity?). Even with the significant impact of the tax credit on housing sales early in the year, overall under contract activity is only up 5% year over year (and last year under contract activity was down 41% from the peak in 2006).

Returning briefly to the topic of interest rates (and understanding I am not a mortgage professional, I do not play one on TV and I haven't stayed at a Holiday Inn Express recently).  I have clients who are waiting for rates to drop even further. I try to explain that it will be difficult for rates to decline further given the current Federal Reserve discount rate at 0.75% (it reached a low point of 0.50% a few months ago) and a Fed Funds rate in the 0% - 0.25% range. You can't get much closer to zero. As the economy improves, the Federal Reserve may well use its interest rate policy to keep inflationary pressures under control. Given the housing market is a lagging indicator of economic recovery, it is likely interest rates will begin adjusting before housing prices begin to reflect the recovery (even then most analysts project relative flat housing prices for the foreseeable future). Interest rates, more so than home prices themselves, have a significant impact on buyers' purchasing power. This is because most home purchasers utilize significant leverage (borrowing 85%, 90% or even 100% of the purchase price) and interest rates impact highly leveraged transactions. I did a blog post on this very topic just a short time ago.

Overall, it appears the market has begun the stabilization process. Time will tell if this is the proverbial "bottom" everyone keeps talking about.

If you have any questions on any of this information, please don't hesitate to contact me by phone, text, email, blog comment, or carrier pigeon.

In our industry, we are constantly barraged with information, statistics, data sets, and the like and it can be a chore to work through the seemingly unending torrent of information that comes at us. The "Information Age" was supposed to make us all smarter, better informed, and more educated in our decision making process.

However, the issue with this concept is that it assumed the information we were to have at our fingertips would be quality information. Unfortunately, with the 24/7 news cycle, the internet, blogs outnumbering people (OK, bit of an exaggeration there), wiki-this & wiki-that, and all of the sundry other sources of information out there, the quality component has suffered greatly. I have long felt that there has been a lack of critical evaluation of all of the data put forth (hence the incredible growth of sites such as Snopes.com and FactCheck.org).

For those of us in the real estate industry, the issue is just as relevant (if not more so). This was brought home once again by an innocuous article put forth recently in a Trulia blog where they introduced the "Trulia Rent vs. Buy Index." Always tempted to read about the latest index about our industry, I took a look. On the surface it appears to be a straightforward ranking of the rent vs buy outcomes for various US cities. But, as I read the article the statistical geek in me had serious questions about this report/index.

As stated by Trulia, the ratio was calculated "...using the average list price compared with average rent on 2 bedroom apartments, condos and townhomes listed on Trulia.com." Oh where to start with the concerns?

First using "average list price" as the basis for calculating the "buy" side of the equation? Wouldn’t the sale price be a more appropriate measure? Also, everyone knows using averages for a broad statistical group such as housing inventory is at best risky. Median prices would be a much better indication, especially when dealing with an entire metro area inventory (the same can be said for the rent component).

Second, the comparison is based on "…2 bedroom apartments, condos and townhomes listed on Trulia.com." So, this isn’t a market based inventory calculation but rather a subset based exclusively on Trulia’s data set. A couple of questions: a) what is the size, per metro area listed, of the data set used and b) how does that compare to the aggregate market inventory? Are we dealing with sample sizes of just 15 properties or 1,500? Is the Trulia data set equivalent to 2% of the aggregate market or 65%? These are critical data points in determining the value of this information.

Third, is the average list price only for "…2 bedroom apartments, condos and townhomes on Trulia.com" or is it for all listings on Trulia for that metro area. The sentence doesn't clearly articulate this, so the reader is forced to assume one of two potential scenarios: a) the average list price and rent figures are both based on 2 bedroom apartments, condos and townhomes, or b) the rent is for 2 bedroom apartments, condos and townhomes while the list price is for all properties. This simply gets to the question "are we comparing apples to apples or apples to steak?" And really, in either scenario are we really dealing with anything that can provide a substantive aggregate market assessment for these metro areas?  Scenario A is such a small sub-section of a real estate market is it worthwhile to try to project it over the entire market? Scenario B is just not worth anything from a statistical point of view.

I incorrectly assumed that somewhere in this article we would see the disclaimers providing the definitions and characteristics of the sample sizes involved in making the calculations. What was the minimum sample size criteria to "make the list" (they simply state in the actual downloaded report that Fort Worth had an “insufficient” sample size – but they still reported a ratio for Forth Worth).

Now on to the "Interpretation Key" for the "Price-to-Rent Ratio." They explain the Price to Rent Ratio bands of 1-15, 16-20, and 21+. But there is no definition or explanation on how these ranges were established. Why is the split between 15 & 16 critical?  Why not 11 or 19? 

There were so many statistical holes in the data I wasn’t going to give it much of a thought, until I read the following comment by a reader: "…I expected to see San Diego on the Rent v Buy list, but like you am surprised that Omaha, Oklahoma City and Portland outprice our balmy environs. And Cleveland is just behind us??? Interesting numbers!"  So, the information age has brought us information, but clearly lagging is our ability to critically assess the quality of the information put forward. It does highlight the concept that if it’s on the internet, it must be true!!!!

As a professional in this industry, I find it disturbing that all the data assessments I do with full regard to disclosure and proper statistical evaluation techniques can be easily discarded by a consumer as they read articles on the internet that may have a contrary perspective but no delineation of where that data originated.

It reminds me of a listing appointment a few years ago where the homeowner was offended by the estimated market price I had developed as he knew his home was worth far more than that because the newspaper said "average prices" for the metro area were up 16%. I guess he didn’t factor in the fact he was located on a large, arterial highway in the middle of a well established and well known drug trafficking area and whose property line was shared with an abandoned industrial warehouse. Clearly, the newspaper knew better……..

The information age has highlighted the importance of assessment skills related to the reams of data available.  The question is, does the consumer value those assessment skills?

There is a good deal of discussion regarding the current status of the real estate market. Has the market bottomed? Have inventory levels stabilized? What impact will foreclosures and short sales have on absorption rates going forward? Along with the always popular, what are interest rates doing?

I recently had a conversation with a buyer client who expressed his perspective that our current market hasn’t yet "bottomed" and that there may be another 5% of downward price correction still to occur. After our conversation, I decided to run some numbers (yes, I’m a devout data geek) and see what the correlation to further price erosion relative to upward pressure on interest rates as the economy begins to recover. This is with the understanding it will be tough for rates to decline further with the current discount rate at 0.75% - it was at its lowest point of 0.50% a few months ago.

So, I did a quick spreadsheet evaluating a buyer’s "purchasing power" at various combinations of interest rates, down payments, and monthly payment amounts. I found some very interesting data elements that I thought others might like as well.

My first step was to determine the impact of interest rates on loan amounts assuming a constant monthly payment. The underlying logic being that if a buyer budgets for a say a $1,750 monthly principal and interest payment the amount the buyer is able to borrow for that monthly figure will decline as interest rates increase (quite a shock, eh?).

As expected, the amount of the loan, at specific monthly principal and interest payment amounts, dropped as interest rates increased. Not surprisingly, the bigger percentage drops occurred at the lower interest rate levels as a half point increase has a larger percentage impact to the base rate (math 101 on display here). OK, this wasn't the interesting part.

What get’s interesting (and not necessarily in a good way) is the impact small changes in interest rates can have on a buyer’s purchasing power. For example, let’s go back and see what happens to that buyer who wants to keep their monthly principal and interest payment at $1,750. If they are putting 10% down and the current interest rate is 5%, that $1,750 would equate to an estimated purchase price of $362,214.

However, if rates were to increase just 1%, all things being equal, the buyer can now only purchase a property with an estimated price of $324,217. That's a 10.5% drop in purchasing power based on just a 1% change in interest rates! If, in that same timeframe, average prices drop by the 5% estimated by my client, the “new” purchase price for that property would be $344,103. Ouch!!!!

So, IF the average price drops further but interest rates climb slightly, my buyer would no longer be able to purchase his targeted home without bringing more money to the table in terms of down payment. This doesn’t even address the differences in the “types” of homes which could be purchased for $362,000 versus $324,000 in any given market. What this simple exercise does is to reaffirm there is a significant “opportunity cost” for buyers who do not take advantage of the historically low interest rates currently available, especially when housing inventories are at such high levels in most of the country. This analysis also doesn’t factor in tax impacts or lifestyle impacts which should also be considered by buyers.

For those too young to remember what interest rates are capable of reaching, here is a quick history lesson in graphic detail (may be too intense for younger audiences). Given the Fed's immense concern about hyper-inflation should the economy begin to turn around (with all the excess money that has been injected into the economy to create the rebound), it is not unfathomable for us to see interest rates above 6% (which simply puts us back to where things were prior to the financial meltdown).

What this boils down to is advice I give to many of my buyer clients, don't miss out on a very good deal while chasing the "best" deal.  You may be sorry you did.

With the expiration of the home buyer tax credit, I thought this would be a good time to establish a base line report for reference later in the year in terms of market activity. For the first four months of the year, the activity levels in Farmington have been a mixed bag. Listing activity is in line with the same period last year while sales activity is up significantly over last year (impact of the tax credit).

In spite of the increase in the sales activity, average and median sale prices are down considerably from the same four month period last year. In addition, even with a similar level of new listings and an increase in sales activity, overall inventory levels, measured by “months inventory” remain elevated. So, what does all this mean??? The simple answer is our market continues to be in flux and this will likely continue through calendar year 2010. The primary macro economic factors impacting our market continue to be unemployment levels and the lack of growth in per capita household income levels. What it doesn’t mean is that our current real estate market has collapsed. As you can see from the enclosed report, transactions are continuing to occur. This is true in Farmington, in Davis County, Salt Lake County and Utah in general. There are still buyers in the market taking advantage of the historically low interest rates (more on that in a moment) and reduced home prices.

What it means for sellers is that properties need to be priced accurately to be competitive in this market. Buyers can and are being quite selective in the homes they choose to purchase. Why? Because they can. There is sufficient inventory available that buyers have the real estate equivalent of a smorgasbord.

As you review the average sale price comparisons it is important to note the 2009 data for Farmington was impacted by two sales over $700,000 occurring early in the year. Thus the large decrease in average prices in 2010 is actually overstated. A more useful figure for a year-to-year comparison is the median price. Not surprisingly, Farmington has experienced a somewhat larger overall decrease in median price points than Davis County as a whole. This is not surprising given Farmington higher overall sale prices over the years. Even with the price adjustments we have experienced over the past two years, Farmington continues to have one of the highest median home sale prices in Davis County. So far in 2010, the highest median home sale prices in Davis County are reported in Fruit Heights ($372,000) and South Weber ($272,000). However, in both of these cities there have only been 11 and 10 reported sales respectively for the first four months of the year.

Now, about interest rates. There was concern that interest rates would jump sharply when the Federal Reserve and the Treasury stopped purchasing mortgage backed securities as of the end of March. Overall, approximately $1.25 trillion (yes with a “T”) of mortgage backed securities were purchased under the program. When the buying stopped, there was concern interest rates would spike. Although they did increase somewhat, by the end of April, rates were nearly back to where they were in February & March. The next “big thing” being discussed in the financial markets is when will the Fed will begin selling the mortgage backed securities they just finished buying. I won’t even suggest I know an answer but if you are looking to make a move this summer, I would suggest talking to a mortgage professional to get their perspective. The number and types of financing options available today is much different from what was available just two years ago. Even if you need to sell a property first, a proactive discussion with a lender is recommended.