RealEstateJournal.com
Exotic Mortgages Remain Popular Despite Their Increasing Risks Jun 07, 2006, 9:00 pm PDT
Exotic Mortgages Remain Popular Despite Their Increasing RisksBy Rachel Koning Beals
Call it the triumph of the exotic mortgages.
Such loan innovations allow home buyers to put little money down and make low monthly payments. They've also poured fuel on one of the hottest and longest housing booms in the nation's history.
But in the wake of the Federal Reserve's push to take away easy money, low interest rates and red-hot home prices have faded away. With them went the main conditions that made interest-only and other flexible mortgages worth their risks. So the consumer's love affair with such loans is drawing to a close now, right?
Wrong.
Far from just another financing fad, exotic mortgages have become such a fixture on the U.S. housing landscape that they've proven to be a key lever for many borrowers even as they have become a greater danger at the same time.
"In our changing market, from unprecedented low rates to a steady rising of interest rates, these varieties of loan programs have become much more popular," says Bill Callanan, a partner with Mortgage Management Systems, a San Francisco mortgage broker. "But if you're scraping nickels together, they're not for you."
While traditional long-term, fixed-rate mortgages remain the loan of choice for the majority of home buyers, more borrowers are also shopping for interest-only loans, pay-option ARMs and hybrid fixed-ARM loans.
That's particularly true in high-cost housing markets, where taking one of those loans may be the only way to afford a house.
It worked well when double-digit home-price gains built equity while leaving more cash in homeowners' pockets. Low interest rates muted the potential sting of upward rate adjustments.
But neither of those conditions exist today: Interest rates are well above year-ago levels and home-price gains have cooled or, in some of the hottest markets, already started to erode.
One big problem, says Callanan, is that household incomes haven't been rising as fast as interest rates, creating greater affordability hurdles for home buyers. Borrowers who use these loans now are challenged more than ever to gauge the health of home prices in their area and measure their ability to stay on top of payments, and to know when to refinance.
Paying off
For some, the gamble still pays off. Regardless of the health of the housing market, say mortgage experts, increasingly savvy consumers want more control over their own finances, including being able to invest money that would otherwise be tied up in a mortgage.
They say the mortgage market should never be viewed as one-size-fits-all process, particularly because few homeowners keep the same loan for more than a few years -- they either move or refinance.
"There's a risk-taking attitude," says Anthony Hsieh, president of Lending Tree.com, an online brokerage. "People aren't as motivated to pay off their home. Most people aren't in their home for more than five to seven years, anyway."
That penchant for added risk, including some mortgages that allow borrowers to vary their payments or skip a payment, has drawn several warnings from regulators and from consumer watchdog groups, who anticipate a shock to monthly budgets once the impact of higher interest rates is fully felt. For many, that time is coming soon.
Since the Fed's two-year campaign to tighten monetary policy, there has been a pronounced effect on mortgage rates. The 1-year, Treasury-indexed adjustable-rate loan, for instance, has jumped to a national average rate of 5.68%, according to Freddie Mac, up from 4.26% a year ago and from a low of 3.39% in March of 2004.
Mortgage bankers concede that demand for alternative loans that reduce payments isn't as brisk as 12 months ago, in part due to the warnings. But marketing remains aggressive and mortgage lenders continue to compound the options: qualifying buyers now face an often confusing buffet of loans with terms of anywhere from 1 to even 50 years. Some of them can result in negative amortization -- an increasing monthly principal balance.
The complexity of these options can leave less-sophisticated borrowers at the mercy of lenders, who consumer groups charge are all too willing to entice home buyers with looser financing so that they may go after properties well out of their conventional reach.
"While the lending industry has characterized nontraditional borrowers as financially sophisticated and savvy consumers, the truth is that many are far from affluent and could be betting the house on their mortgage," says Allen Fishbein, director of credit and housing policy at the Consumer Federation of America. "Because homeownership is so critically important in financial security, these Americans are unwittingly putting their entire financial livelihood at risk."
The federation analyzed certain borrower and loan characteristics of more than 100,000 mortgages originated between January 2005 and October 2005. Their findings show that more than one-third of interest-only borrowers earned below $70,000 annually; about 1 in 6 earned less than $48,000. Some 35% of borrowers with the option to make a payment or not earned under $70,000; 1 in 8 earned less than $48,000.
Cash flow
"Truth is, an option ARM is appropriate for a very small part of the population," says Steve Habetz, president of Threshold Mortgage in Westport, Conn. "Think of a doctor just out of medical school, maybe with kids, and who wants a home in a desired school district and so is maybe going after more house. Negative amortization is worth it in this case because ultimately, that doctor's income will pick up and he's cut out transaction costs of moving up in house soon after that income kicks in."
Adds Habetz: "But that's not who [this loan] is being sold to. It's sold as this great cash-flow thing, eating up equity."
Interest-only mortgages carry their own risks, but Habetz says they typically make sense for a wider range of borrowers, offering the benefit of more control over monthly cash flow and providing a tax deduction on the interest payment.
While interest-only loans push back payments on principal to a set date (there's typically no penalty for paying toward principal early), an option ARM allows home buyers to vary their monthly payment. But as with many nontraditional loans, payments early on won't reduce the size of the loan, limiting the equity buildup and increasing the risk of default should home prices falter.
"We're socialized to think we ought to be paying down debt, but you can use debt to create wealth," Callanan says of the rationale behind taking out such loans.
Despite their prominence in the news, exotic mortgages do not, in fact, entice all that many Americans. The good old 30-year fixed-rate mortgage is still used by 72% of U.S. homeowners, although that loan type is less popular in the West, where home prices have been highest.
"Fixed rates are a great deal right now," says Greg Eckert, vice president of Centennial Mortgage in Kingston, N.Y. "Historically, rates under 7% are low and that is what we have at this time. This payment offers stability and predictability."
Even those wooed by adjustable rates are moving out on the spectrum. Five to 10-year ARMs are in much greater demand these days than 1-to-3-year plans, says D.C. Aiken, a North Carolina-based lender with Homebanc.
But that presents another personal-finance dilemma: Many of those holding 30-year mortgages are paying for security they don't need.
Rates on longer-term fixed loans are higher to compensate lenders for the interest-rate risk. With an adjustable-rate loan, homeowners share that risk with the lender and so get a break on rates, at least initially. Since homeowners move, on average, every seven years or so, it makes little sense for them to hold a 30-year loan.
That's why lenders like Hsieh believe demand will remain strong for alternative mortgage products. He says more borrowers will tailor their loan to their predicted stay in a house.
"But plans do change," he says. And then consumers need to be prepared to refinance, and at the mercy of current market rates.
Here's a short list of some of the loans being marketed today, their advantages and their risks:
30-year, fixed-rate, interest-only mortgages
These relatively new mortgages allow the borrower to make interest-only payments for the first 10 years. The principal balance is repaid over the final 20 years.
Advantages: Rate doesn't fluctuate; lower initial payments
Disadvantages: Fixed rates are generally higher than adjustable-rate mortgages; borrower doesn't build equity in the first 10 years (unless the home is appreciating); payments increase dramatically starting in the 11th year (however, lenders assume that the borrower's income has grown substantially over the first 10 years).
Adjustable rate, interest-only loans
The program is best suited for borrowers who have a proven track record for managing their finances well and understand the product's pros and cons.
Advantages: Rate can go down; initial payments are lower; borrower can pay down principal balance at any time and it resets the next month's payment.
Disadvantages: Risk of payment shock as rate can go up; risk of payment shock when amortization period begins; borrower not building equity during the interest-only period; these loans can have a balloon payment at the end of the interest-only period; also, at the end of the initial fixed-rate term the rate can adjust as often as every month.
40-year fixed-rate loans
This loan offers a payment nearly halfway between interest-only and 30-year fixed. The 40-year fixed works for buyers focused on the long-term value of their property and who want to build equity each month.
Advantages: Stability of a fixed rate and predictable payments; lower payments than traditional 30-year fixed rate loan.
Disadvantages: Rate slightly higher than 30-year fixed; longer term to pay off loan (slower equity build); balloon payment after 30 years.
Option ARM
Advantages: A popular product over the past few years because it allows consumers the option of making their payments in one of four different ways: Interest only, fully amortizing over 30 years, fully amortizing over 15 years or a minimum payment for 12 months.
Disadvantages: This loan shouldn't be used to qualify someone who wouldn't normally qualify for a regular fixed-rate loan. Sees gradually increasing minimum payments for the first five years, resulting in a higher loan balance and a significant payment shock in year six, when the loan is recast and fully amortizing payments are required.
'Piggyback' with home-equity loan
A primary mortgage can be combined with a home-equity loan or line of credit.
Advantage: Tends to eliminate the requirement to pay private-mortgage insurance.
Disadvantage: Sees payment shock of 48% over five years, beginning in the second year when the floating rate on the home-equity line of credit begins to adjust and increasing in year four when the fixed period on the first loan expires.
Wednesday, June 14, 2006
Tuesday, June 13, 2006
ReutersFed's Olson says mortgage data raise questionsTuesday June 13, 11:16 am ET
WASHINGTON (Reuters) - Federal Reserve Governor Mark Olson said on Tuesday data collected under the U.S. Home Mortgage Disclosure Act raise troubling questions about lending to black and Hispanic borrowers and more research is needed.
"Black and Hispanic borrowers are more likely to obtain mortgage loans from institutions that tend to specialize in subprime lending," Olson said in testimony prepared for delivery to the House of Representatives Subcommittee on Financial Institutions.
In remarks that steered clear of the broad economy and monetary policy, Olson said while this may in part reflect such factors as borrower preference or credit scores not included in the HMDA data, there may be "more troubling causes."
"Segmentation may stem from borrowers being steered to lenders that charge higher prices than what is warranted by the credit characteristics of these borrowers," Olson said.
"Borrowers may also have different levels of financial literacy, or their knowledge of the mortgage lending process may be uneven -- for example, they may not understand the importance of shopping and negotiating for the best loan terms," he added, saying more research is needed on these subjects.
"The board will continue to conduct and promote research that explores the racial and ethnic differences in the incidence of higher-priced lending," Olson said.
He said the Fed will conduct hearings in June and July on the home equity lending market.
WASHINGTON (Reuters) - Federal Reserve Governor Mark Olson said on Tuesday data collected under the U.S. Home Mortgage Disclosure Act raise troubling questions about lending to black and Hispanic borrowers and more research is needed.
"Black and Hispanic borrowers are more likely to obtain mortgage loans from institutions that tend to specialize in subprime lending," Olson said in testimony prepared for delivery to the House of Representatives Subcommittee on Financial Institutions.
In remarks that steered clear of the broad economy and monetary policy, Olson said while this may in part reflect such factors as borrower preference or credit scores not included in the HMDA data, there may be "more troubling causes."
"Segmentation may stem from borrowers being steered to lenders that charge higher prices than what is warranted by the credit characteristics of these borrowers," Olson said.
"Borrowers may also have different levels of financial literacy, or their knowledge of the mortgage lending process may be uneven -- for example, they may not understand the importance of shopping and negotiating for the best loan terms," he added, saying more research is needed on these subjects.
"The board will continue to conduct and promote research that explores the racial and ethnic differences in the incidence of higher-priced lending," Olson said.
He said the Fed will conduct hearings in June and July on the home equity lending market.
Monday, June 12, 2006
A&L continues to build on mortgages
By Helen Thomas Mon Jun 12, 4:55 AM ET
Alliance & Leicester, which is being eyed as a possible bid target by France's Crédit Agricole, continued to increase its share of the UK mortgage market in the first quarter of the year.
The UK bank said on Monday that it took 6.3 per cent of net new mortgage lending in the first three months of 2006, up from 5.4 per cent in 2005. The bank's traditional share - its share of the UK's existing stock of mortgage lending - is around 3.4 per cent.
Crédit Agricole was forced to admit in May that it was mulling a bid for A&L but said that its evaluation was at a preliminary stage. The French bank has EU15bn to spend on acquisitions and is looking at Germany, Spain and the UK now it has integrated its last acquisition - the French bank Credit Lyonnais.
Costs for the first half should be broadly similar to last year, A&L said, but the interest margin - a measure of profitability- continued to come under pressure as the bank did more of its business in less profitable segments of the market.
A&L will shortly begin doing business in the risker parts of the UK market, selling buy-to-let, near-prime and sub-prime products in partnership with Lehman Brothers. The specialist loans will sit on the investment bank's balance sheet, enabling A&L to avoid rising charges for bad debts.
The mortgage bank, which has always focused on prime residential lending rather than these riskier areas, said in Monday's statement that its asset quality remained strong, particularly in mortgages and commercial lending.
In unsecured lending, A&L said it had tightened its credit criteria this year as the overall market deterioriates. The proportion of loans in arrears rose to 5.7 per cent at the end of May, up from 5.1 per cent at the end of December.
But A&L said that its leading credit indicators, the quality of the loans it has written most recently, were showing signs of improvement.
Unsecured loan balances remained stable compared to the end of 2005, at £3.5bn, while the UK's shaky consumer environment and A&L's more stringent criteria meant unsecured lending fell in the first quarter to £565m, from £890m last year.
The bank said that sales of new current accounts were "significantly higher" than in the first three months of 2005, while the number of new business accounts opened was more than 30 per cent higher.
Shares in Alliance & Leicester rose 1.6 per cent to £11.82 in early trade.
James Eden, analyst at Dresdner Kleinwort Wasserstein, said that the statement would not prompt a change in his numbers for A&L and that shareholders would be waiting for news from Crédit Agricole, or from Spain's Santander, another potential A&L suitor.
Mr Eden added: "There's no doubt the company looks expensive on a standalone basis...but we have always argued that you should pay something for a take-out hope: A&L remains the best takeover target in the UK."
By Helen Thomas Mon Jun 12, 4:55 AM ET
Alliance & Leicester, which is being eyed as a possible bid target by France's Crédit Agricole, continued to increase its share of the UK mortgage market in the first quarter of the year.
The UK bank said on Monday that it took 6.3 per cent of net new mortgage lending in the first three months of 2006, up from 5.4 per cent in 2005. The bank's traditional share - its share of the UK's existing stock of mortgage lending - is around 3.4 per cent.
Crédit Agricole was forced to admit in May that it was mulling a bid for A&L but said that its evaluation was at a preliminary stage. The French bank has EU15bn to spend on acquisitions and is looking at Germany, Spain and the UK now it has integrated its last acquisition - the French bank Credit Lyonnais.
Costs for the first half should be broadly similar to last year, A&L said, but the interest margin - a measure of profitability- continued to come under pressure as the bank did more of its business in less profitable segments of the market.
A&L will shortly begin doing business in the risker parts of the UK market, selling buy-to-let, near-prime and sub-prime products in partnership with Lehman Brothers. The specialist loans will sit on the investment bank's balance sheet, enabling A&L to avoid rising charges for bad debts.
The mortgage bank, which has always focused on prime residential lending rather than these riskier areas, said in Monday's statement that its asset quality remained strong, particularly in mortgages and commercial lending.
In unsecured lending, A&L said it had tightened its credit criteria this year as the overall market deterioriates. The proportion of loans in arrears rose to 5.7 per cent at the end of May, up from 5.1 per cent at the end of December.
But A&L said that its leading credit indicators, the quality of the loans it has written most recently, were showing signs of improvement.
Unsecured loan balances remained stable compared to the end of 2005, at £3.5bn, while the UK's shaky consumer environment and A&L's more stringent criteria meant unsecured lending fell in the first quarter to £565m, from £890m last year.
The bank said that sales of new current accounts were "significantly higher" than in the first three months of 2005, while the number of new business accounts opened was more than 30 per cent higher.
Shares in Alliance & Leicester rose 1.6 per cent to £11.82 in early trade.
James Eden, analyst at Dresdner Kleinwort Wasserstein, said that the statement would not prompt a change in his numbers for A&L and that shareholders would be waiting for news from Crédit Agricole, or from Spain's Santander, another potential A&L suitor.
Mr Eden added: "There's no doubt the company looks expensive on a standalone basis...but we have always argued that you should pay something for a take-out hope: A&L remains the best takeover target in the UK."
Sunday, June 11, 2006
Quicken Loans
Online Chat Helps Deaf Clients Get Mortgages Jun 09, 2006, 11:04 am PDT
News provided by Quicken Loans
Lenders are continually making it easier for clients to get a mortgage. Some have even gone to great lengths by using innovative technology such as the Internet. Lenders such as Quicken Loans have taken it a step further by using popular Web-based features such as online chat. This tool has become particularly valuable for the deaf community who generally either has to use e-mail or rely on a "relay service" to communicate.
And, considering obtaining a mortgage is one of the most stressful situations a person may ever have to deal with, having the appropriate means for communication is key. Innovative lenders give their clients several ways to contact them, be it telephone, e-mail, chat, or telephone and video relay service. But the company's mortgage bankers have learned that their deaf clients prefer online chat and e-mail as their primary form of communication.
"We are embracing the deaf community with our new online chat feature," said Bryan Stapp, chief marketing officer, Quicken Loans. "Using online chat, our deaf clients can conduct the most important parts of their home financing transaction directly with their mortgage banker without having to rely on a third party service."
In a secure setting, clients provide their personal information via chat, allowing mortgage bankers to ask questions about their personal financial goals and needs in order to research the best purchase and refinance programs for the client's situation.
"Online chat is great for hearing-impaired people to communicate with hearing people," said Ted Baldwin, a deaf client who used the Quicken Loans chat service to carry out his mortgage transactions.
Baldwin, of Oakland, Calif., planned to browse the Quicken Loans Web site for home loan information, when he noticed the "Chat Online Now!" button.
"Because of the chat service, I was able to get more information than I expected," he said. "And I'd rather chat directly with a person. It doesn't take a lot of time."
While online chat is popular with Quicken Loans deaf clients, Stapp adds that anyone with a computer and Internet connection can use it, and many do. He said chat is a helpful service for clients who don't have a lot of privacy at work or parents who use chat late at night, so as to not disturb their sleeping family.
By using technology such as online chat, lenders like Quicken Loans are getting ahead of the game by encouraging all types of clients to apply for a mortgage. That kind of technology makes it easier to communicate with the lender and get through a complicated and sometimes overwhelming process.
This article is reprinted by permission from Quicken Loans © 2006 Quicken Loans Inc. All rights reserved.
Online Chat Helps Deaf Clients Get Mortgages Jun 09, 2006, 11:04 am PDT
News provided by Quicken Loans
Lenders are continually making it easier for clients to get a mortgage. Some have even gone to great lengths by using innovative technology such as the Internet. Lenders such as Quicken Loans have taken it a step further by using popular Web-based features such as online chat. This tool has become particularly valuable for the deaf community who generally either has to use e-mail or rely on a "relay service" to communicate.
And, considering obtaining a mortgage is one of the most stressful situations a person may ever have to deal with, having the appropriate means for communication is key. Innovative lenders give their clients several ways to contact them, be it telephone, e-mail, chat, or telephone and video relay service. But the company's mortgage bankers have learned that their deaf clients prefer online chat and e-mail as their primary form of communication.
"We are embracing the deaf community with our new online chat feature," said Bryan Stapp, chief marketing officer, Quicken Loans. "Using online chat, our deaf clients can conduct the most important parts of their home financing transaction directly with their mortgage banker without having to rely on a third party service."
In a secure setting, clients provide their personal information via chat, allowing mortgage bankers to ask questions about their personal financial goals and needs in order to research the best purchase and refinance programs for the client's situation.
"Online chat is great for hearing-impaired people to communicate with hearing people," said Ted Baldwin, a deaf client who used the Quicken Loans chat service to carry out his mortgage transactions.
Baldwin, of Oakland, Calif., planned to browse the Quicken Loans Web site for home loan information, when he noticed the "Chat Online Now!" button.
"Because of the chat service, I was able to get more information than I expected," he said. "And I'd rather chat directly with a person. It doesn't take a lot of time."
While online chat is popular with Quicken Loans deaf clients, Stapp adds that anyone with a computer and Internet connection can use it, and many do. He said chat is a helpful service for clients who don't have a lot of privacy at work or parents who use chat late at night, so as to not disturb their sleeping family.
By using technology such as online chat, lenders like Quicken Loans are getting ahead of the game by encouraging all types of clients to apply for a mortgage. That kind of technology makes it easier to communicate with the lender and get through a complicated and sometimes overwhelming process.
This article is reprinted by permission from Quicken Loans © 2006 Quicken Loans Inc. All rights reserved.
Saturday, June 10, 2006
Realty Times
What Do Wealthy Real Estate Holders Do To Get Richer? Jun 10, 2006, 12:00 pm PDT
Recent reports have suggested that America's wealthiest people don't place much stock in real estate values going up this year. But with the stock market so volatile, where else would they put their money? According to asset manager U.S. Trust in its 2006 Survey of Affluent Americans, nine out of 10 wealthy portfolio holders said they expect an 8 percent return from U.S. stocks, while only 48 percent said they expect real estate to increase in value over the next year. Thirty-three percent of survey respondents expect real estate values to decline, up from 14 percent who felt that way last year. Respondents had an annual adjusted gross income of more than $300,000 or net worth greater than $5.9 million, including real estate.
While the report failed to mention what percentage of their portfolios are held in real estate, it's clear that these investors aren't any better off investing in the stock market (unless they're insiders with inside information that allows them to dump before getting dumped.)
As rising interest rates have cooled housing in formerly hot markets, the stock market has taken several 100-point nosedives over interest rate fears, rising global interest rates, high gas prices, world unrest and rising inflation, illustrating that it's more volatile than housing as far as investment earnings go. Home prices have continued to rise over 2006, but are far from reaching the double-digit increases of the past five years. This year, says the National Association of Realtors, home prices are likely to rise in the 6 percent range, which is about a point or two higher than inflation. That's an historical and far more normal return on residential real estate. So how do wealthy people buy real estate? Do they choose the dividends over capital gains?
Like investors search for beaten down gems in blue chip and other oversold stocks, the wealthy spend their housing dollars on neighborhoods, houses and features that are likely to uphold and grow their investment.
They aren't overly lavish, and they buy for quality. They may have some widely-accepted luxuries such as designer kitchens, media rooms and wine cellars, but they don't tend to spend on amenities such as heated floors, tennis courts, or backyard putting greens.
Says a recent Coldwell Banker Previews International Luxury Survey, owners of million-dollar properties like to live well and they buy for comfort, but they make sure they have enough money left over to fund other discretionary purchases -- like second homes (35 percent) or investment properties.
"What that tells us is that they understand that real estate remains a solid, long-term investment, and one they can enjoy," says Jim Gillespie, president and CEO, Coldwell Banker Real Estate Corporation.
Eating well and entertainment are priorities for million-dollar homeowners, among others, suggests the survey:
65 percent have designer kitchens
37 percent have or are considering adding a wine cellar to their homes
59 percent have a room devoted exclusively to entertainment and of these, 89 percent can accommodate more than six people
84 percent have media systems such as DVD players and surround sound
57 percent have a wet bar
24 percent have movie-theater seating
54 percent own or plan to buy original artwork
86 percent have a security system
67 percent have professional landscaping
38 percent have an in-ground swimming pool
35 percent have a hot tub
Coldwell Banker supplies the investments that U.S. Trust failed to provide. Surprisingly, million-dollar homeowners don't appear to be large risk-takers when it comes to their holdings when they view them as retirement funds:
29 percent own stocks
23 percent own mutual funds
19 percent own real estate
14 percent own mixed portfolios including real estate
11 percent own bonds
11 percent own mixed portfolios excluding real estate
7 percent own a 401K
2 percent own CDs
2 percent own IRAs
2 percent own annuities
1 percent have a pension fund
Forty-three percent of luxury homeowners surveyed made more than $500,000 annually, with 41 percent earning between $200,000 and $500,000.
"Because of smart investments, equity in their homes, and in some cases, inheritances, luxury properties have become attainable for many Americans," says Gillespie.
What Do Wealthy Real Estate Holders Do To Get Richer? Jun 10, 2006, 12:00 pm PDT
Recent reports have suggested that America's wealthiest people don't place much stock in real estate values going up this year. But with the stock market so volatile, where else would they put their money? According to asset manager U.S. Trust in its 2006 Survey of Affluent Americans, nine out of 10 wealthy portfolio holders said they expect an 8 percent return from U.S. stocks, while only 48 percent said they expect real estate to increase in value over the next year. Thirty-three percent of survey respondents expect real estate values to decline, up from 14 percent who felt that way last year. Respondents had an annual adjusted gross income of more than $300,000 or net worth greater than $5.9 million, including real estate.
While the report failed to mention what percentage of their portfolios are held in real estate, it's clear that these investors aren't any better off investing in the stock market (unless they're insiders with inside information that allows them to dump before getting dumped.)
As rising interest rates have cooled housing in formerly hot markets, the stock market has taken several 100-point nosedives over interest rate fears, rising global interest rates, high gas prices, world unrest and rising inflation, illustrating that it's more volatile than housing as far as investment earnings go. Home prices have continued to rise over 2006, but are far from reaching the double-digit increases of the past five years. This year, says the National Association of Realtors, home prices are likely to rise in the 6 percent range, which is about a point or two higher than inflation. That's an historical and far more normal return on residential real estate. So how do wealthy people buy real estate? Do they choose the dividends over capital gains?
Like investors search for beaten down gems in blue chip and other oversold stocks, the wealthy spend their housing dollars on neighborhoods, houses and features that are likely to uphold and grow their investment.
They aren't overly lavish, and they buy for quality. They may have some widely-accepted luxuries such as designer kitchens, media rooms and wine cellars, but they don't tend to spend on amenities such as heated floors, tennis courts, or backyard putting greens.
Says a recent Coldwell Banker Previews International Luxury Survey, owners of million-dollar properties like to live well and they buy for comfort, but they make sure they have enough money left over to fund other discretionary purchases -- like second homes (35 percent) or investment properties.
"What that tells us is that they understand that real estate remains a solid, long-term investment, and one they can enjoy," says Jim Gillespie, president and CEO, Coldwell Banker Real Estate Corporation.
Eating well and entertainment are priorities for million-dollar homeowners, among others, suggests the survey:
65 percent have designer kitchens
37 percent have or are considering adding a wine cellar to their homes
59 percent have a room devoted exclusively to entertainment and of these, 89 percent can accommodate more than six people
84 percent have media systems such as DVD players and surround sound
57 percent have a wet bar
24 percent have movie-theater seating
54 percent own or plan to buy original artwork
86 percent have a security system
67 percent have professional landscaping
38 percent have an in-ground swimming pool
35 percent have a hot tub
Coldwell Banker supplies the investments that U.S. Trust failed to provide. Surprisingly, million-dollar homeowners don't appear to be large risk-takers when it comes to their holdings when they view them as retirement funds:
29 percent own stocks
23 percent own mutual funds
19 percent own real estate
14 percent own mixed portfolios including real estate
11 percent own bonds
11 percent own mixed portfolios excluding real estate
7 percent own a 401K
2 percent own CDs
2 percent own IRAs
2 percent own annuities
1 percent have a pension fund
Forty-three percent of luxury homeowners surveyed made more than $500,000 annually, with 41 percent earning between $200,000 and $500,000.
"Because of smart investments, equity in their homes, and in some cases, inheritances, luxury properties have become attainable for many Americans," says Gillespie.
Friday, June 09, 2006
Fixed mortgage rates fallThursday June 8, 6:00 am ET Holden Lewis
Numbers spoke louder than words this week as long-term mortgage rates fell.
Ben Bernanke, chairman of the Federal Reserve, caused bond yields to rise when he implied that the central bank might raise short-term interest rates again. But in the mortgage world, Bernanke's words were considered just that -- mere words, subject to interpretation.
The thing that moved mortgage rates came a few days before Bernanke's speech, in the May employment report. It needed little interpretation. Job growth was weak, when Wall Street had expected it to be strong. Bond yields tumbled, and long-term mortgage rates followed.
The benchmark 30-year fixed-rate mortgage fell 3 basis points to 6.69 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.35 discount and origination points. One year ago, the mortgage index was 5.61 percent; four weeks ago, it was 6.67 percent.
The 15-year fixed-rate mortgage fell 1 basis point to 6.31 percent. The 5/1 adjustable-rate mortgage rose 3 basis points to 6.32 percent.
The rate-moving trioMortgage rates tend to move up and down with Treasury yields, which in turn move up and down in reaction to a lot of economic factors. Lately, Treasury yields have been especially sensitive to three of these: the Consumer Price Index, the monthly employment report and decisions of the Federal Reserve's rate-setting committee. The latter two came into play in the past week.
First came the May employment report, in which the Labor Department said that the economy grew by a net 75,000 jobs last month. That's fine if you're one of those 75,000 people, but investors were dismayed, because they had expected the number to be around 170,000. Wall Street expected the employment report to rumble like a Harley, but it putt-putted like a Vespa.
"Dear Mr. Bernanke: You wanted weakness, you got weakness," wrote economist Joel Naroff, adding that job growth in May was "extremely disappointing." He said it was ominous that the preliminary estimates for job growth in March and April were revised downward.
Given the anemic job growth, it's no surprise that hourly income barely budged upward and the average workweek was six minutes shorter. The employment report painted a portrait of a modestly growing economy in which inflation shouldn't be much of a threat. Investors concluded that the odds were against another Fed rate increase at the end of this month. The yield on the 10-year Treasury note fell 11 basis points, hinting at a corresponding drop in the 30-year fixed mortgage rate.
Inflation concerns reappearThree days later, Bernanke spoke in Washington at the International Monetary Conference, and he complained about inflation. He said core inflation -- consumer prices minus volatile food and energy costs -- might be "at or above the upper end of the range that many economists, including myself, would consider consistent with price stability and the promotion of long-run growth." He called recent price trends "unwelcome developments."
Wall Street saw this as a signal that the Fed is likely to raise the federal funds rate again June 29. The yield on the 10-year Treasury rose only a couple of basis points, because the long-term outlook for inflation is benign. But the five-year Treasury jumped, taking back the drop that came in reaction to the employment report.
Numbers spoke louder than words this week as long-term mortgage rates fell.
Ben Bernanke, chairman of the Federal Reserve, caused bond yields to rise when he implied that the central bank might raise short-term interest rates again. But in the mortgage world, Bernanke's words were considered just that -- mere words, subject to interpretation.
The thing that moved mortgage rates came a few days before Bernanke's speech, in the May employment report. It needed little interpretation. Job growth was weak, when Wall Street had expected it to be strong. Bond yields tumbled, and long-term mortgage rates followed.
The benchmark 30-year fixed-rate mortgage fell 3 basis points to 6.69 percent, according to the Bankrate.com national survey of large lenders. A basis point is one-hundredth of 1 percentage point. The mortgages in this week's survey had an average total of 0.35 discount and origination points. One year ago, the mortgage index was 5.61 percent; four weeks ago, it was 6.67 percent.
The 15-year fixed-rate mortgage fell 1 basis point to 6.31 percent. The 5/1 adjustable-rate mortgage rose 3 basis points to 6.32 percent.
The rate-moving trioMortgage rates tend to move up and down with Treasury yields, which in turn move up and down in reaction to a lot of economic factors. Lately, Treasury yields have been especially sensitive to three of these: the Consumer Price Index, the monthly employment report and decisions of the Federal Reserve's rate-setting committee. The latter two came into play in the past week.
First came the May employment report, in which the Labor Department said that the economy grew by a net 75,000 jobs last month. That's fine if you're one of those 75,000 people, but investors were dismayed, because they had expected the number to be around 170,000. Wall Street expected the employment report to rumble like a Harley, but it putt-putted like a Vespa.
"Dear Mr. Bernanke: You wanted weakness, you got weakness," wrote economist Joel Naroff, adding that job growth in May was "extremely disappointing." He said it was ominous that the preliminary estimates for job growth in March and April were revised downward.
Given the anemic job growth, it's no surprise that hourly income barely budged upward and the average workweek was six minutes shorter. The employment report painted a portrait of a modestly growing economy in which inflation shouldn't be much of a threat. Investors concluded that the odds were against another Fed rate increase at the end of this month. The yield on the 10-year Treasury note fell 11 basis points, hinting at a corresponding drop in the 30-year fixed mortgage rate.
Inflation concerns reappearThree days later, Bernanke spoke in Washington at the International Monetary Conference, and he complained about inflation. He said core inflation -- consumer prices minus volatile food and energy costs -- might be "at or above the upper end of the range that many economists, including myself, would consider consistent with price stability and the promotion of long-run growth." He called recent price trends "unwelcome developments."
Wall Street saw this as a signal that the Fed is likely to raise the federal funds rate again June 29. The yield on the 10-year Treasury rose only a couple of basis points, because the long-term outlook for inflation is benign. But the five-year Treasury jumped, taking back the drop that came in reaction to the employment report.
Thursday, June 08, 2006
Realty Times
Realty Reality: NAR Adopts Ethics Rules for Internet Jun 08, 2006, 12:00 pm PDT
Over the years the National Association of Realtors® (NAR) has developed a comprehensive Code of Ethics dealing with a wide variety of situations and circumstances that may arise in the real estate business. Members of NAR -- the only persons entitled to claim the designation of "Realtor®" -- agree to abide by the spirit and the requirements of that code.
In recent years, though, it has sometimes not been entirely clear as to how, or even if, the provisions of the Code of Ethics apply to the business activities in which Realtors® engage on the internet. This lack of clarity has no doubt been exacerbated by the anything-goes, no-rules, wild-west atmosphere that has sometimes been associated with the net. For Realtors®, questions about the applicability of the ethics code have recently been answered.
Recently the Professional Standards Committee of NAR submitted to its Board of Directors a number of recommendations for internet-related amendments and additions to the Code. This occurred at the association's mid-year meetings which were held in Washington, D.C. The recommendations were wholeheartedly adopted, and will become effective with next January's publication of the updated edition of the Code. It is clear that these recommendations represented only a beginning, and that further internet-related updates will be forthcoming.
Of the recommendations presented in Washington, those that had to do with internet advertising are the ones that will probably have the greatest impact on Realtor® practices. These fall under the general provision of the Code of Ethics, Article 12, which stipulates that "Realtors® shall be careful at all times to present a true picture in their advertising and representations to the public."
Article 12 deals with more than what most might think of as "false advertising." That is, it doesn't only relate to what is said about a Realtor®'s products (properties for sale) or services. It also requires that an ad must be truthful about who is doing the advertising. Thus, when a Realtor® advertises a property for sale, he or she must include some indication of their professional status. (In California, this is a requirement of state law as well.) Not only does the Code require that the professional status of the individual be indicated, but also it requires that the name of the firm must be stated in the ad.
Article 12 is occasionally breached in print media, but it seems to be done with much greater frequency in the electronic environment. Agent websites, particularly those of teams, will sometimes lack the name of the broker or realty firm with which the agent is associated. The newly-adopted amendment makes clear that, even in electronic environments, the name of the broker's firm must be displayed.
Moreover, it is also required that the Realtor®'s firm name be displayed in "a reasonable and readily apparent manner." We've all seen signs where a firm name appears in considerably smaller print than does that of the agent. On a web page, it is even easier for a firm name to be "lost" as it may take a bit of scrolling even to find it. There is little doubt that this issue will be revisited as disputes arise as to what "readily apparent" may mean. An agent website typically consists of a number of pages, will the firm name have to appear on every page, or on the "frame" of each page?
At this point, more questions than answers have been raised with regard to applying the Code to the internet environment. There will be further discussions about misleading domain names (e.g. nameofcitymls.com) and even meta tags that trick a search engine and lead a consumer to an agent site posing as something else. All of this will get sorted out in time, maybe. But one thing is crystal clear right now: Realtors® should know that the Code of Ethics definitely applies to advertising and other business activities on the internet.
Realty Reality: NAR Adopts Ethics Rules for Internet Jun 08, 2006, 12:00 pm PDT
Over the years the National Association of Realtors® (NAR) has developed a comprehensive Code of Ethics dealing with a wide variety of situations and circumstances that may arise in the real estate business. Members of NAR -- the only persons entitled to claim the designation of "Realtor®" -- agree to abide by the spirit and the requirements of that code.
In recent years, though, it has sometimes not been entirely clear as to how, or even if, the provisions of the Code of Ethics apply to the business activities in which Realtors® engage on the internet. This lack of clarity has no doubt been exacerbated by the anything-goes, no-rules, wild-west atmosphere that has sometimes been associated with the net. For Realtors®, questions about the applicability of the ethics code have recently been answered.
Recently the Professional Standards Committee of NAR submitted to its Board of Directors a number of recommendations for internet-related amendments and additions to the Code. This occurred at the association's mid-year meetings which were held in Washington, D.C. The recommendations were wholeheartedly adopted, and will become effective with next January's publication of the updated edition of the Code. It is clear that these recommendations represented only a beginning, and that further internet-related updates will be forthcoming.
Of the recommendations presented in Washington, those that had to do with internet advertising are the ones that will probably have the greatest impact on Realtor® practices. These fall under the general provision of the Code of Ethics, Article 12, which stipulates that "Realtors® shall be careful at all times to present a true picture in their advertising and representations to the public."
Article 12 deals with more than what most might think of as "false advertising." That is, it doesn't only relate to what is said about a Realtor®'s products (properties for sale) or services. It also requires that an ad must be truthful about who is doing the advertising. Thus, when a Realtor® advertises a property for sale, he or she must include some indication of their professional status. (In California, this is a requirement of state law as well.) Not only does the Code require that the professional status of the individual be indicated, but also it requires that the name of the firm must be stated in the ad.
Article 12 is occasionally breached in print media, but it seems to be done with much greater frequency in the electronic environment. Agent websites, particularly those of teams, will sometimes lack the name of the broker or realty firm with which the agent is associated. The newly-adopted amendment makes clear that, even in electronic environments, the name of the broker's firm must be displayed.
Moreover, it is also required that the Realtor®'s firm name be displayed in "a reasonable and readily apparent manner." We've all seen signs where a firm name appears in considerably smaller print than does that of the agent. On a web page, it is even easier for a firm name to be "lost" as it may take a bit of scrolling even to find it. There is little doubt that this issue will be revisited as disputes arise as to what "readily apparent" may mean. An agent website typically consists of a number of pages, will the firm name have to appear on every page, or on the "frame" of each page?
At this point, more questions than answers have been raised with regard to applying the Code to the internet environment. There will be further discussions about misleading domain names (e.g. nameofcitymls.com) and even meta tags that trick a search engine and lead a consumer to an agent site posing as something else. All of this will get sorted out in time, maybe. But one thing is crystal clear right now: Realtors® should know that the Code of Ethics definitely applies to advertising and other business activities on the internet.
Wednesday, June 07, 2006
Arizona is definitely a hot spot. Who woulda thought the desert was the place to be?
Investing in 'Hot' Markets Like Phoenix Without Getting Burned Jun 01, 2006, 9:00 pm PDT
Investing in 'Hot' Markets Like Phoenix Without Getting BurnedBy June Fletcher
Question: I am looking to buy a couple of condominiums -- having them as rental units and then selling them. I am interested in areas that are up-and-coming and have good growth potential but where property prices are still reasonably inexpensive. From the little research I have done, Phoenix seems like a good place. What are your thoughts?
-- Shivanee Nadarajah, Oakland, Calif.
Shivanee: I certainly can see why you'd be interested in Phoenix. At a time when media chatter is all about how much housing is cooling, Phoenix has been as hot as a mid-summer day in the desert. According to the National Association of Realtors, in the first quarter of 2006, the largest single-family home price increase in the country was in Phoenix, where the median price rose to $268,300, up 38.4% from the same period a year ago. Phoenix topped the list in the condo sector, too -- the median price hit $179,600, up 38% from a year ago. Multi-Housing News says it expects Phoenix to be "one of the better performing markets in the nation," over the next year, with 8,000 new residents expected to come to the metro area each month in 2006, as employers add 71,000 new jobs, an increase over last year of 4%. The trade publication expects that over the rest of the year, vacancy rates will decline 70 basis points, to 7.4%.
But the city's housing heat wave may not last much longer. Arizona State University's Arizona Real Estate Center noted that the housing market in Phoenix and its suburbs slowed in April, with sales of existing homes falling to 5,980, a 32% drop from the year before -- the weakest April since 2000. Price growth is slowing, too, the center notes, since the rapid gains of the past year have made homes less affordable. The financial Web site Bankrate.com recently put Phoenix on its "bubble buster" list, partly because lot prices are rising rapidly and the area is being flooded with new homes.
So I'd suggest that you exercise some caution. While an influx of job-seekers and rising home prices will strengthen Phoenix's rental market in the short run, in the long term, supply may well outpace demand. If that happens, today's hot housing buys will be tomorrow's hot potatoes.
To hedge against that risk -- in Phoenix or any other potentially bubblicious city -- you may want to buy a property and then offer your tenants a lease with an option to buy. A lease option will attract renters who are serious about buying but are put off temporarily because of high prices, rising mortgage interest rates or other factors. No matter what happens to home prices in the area, your tenants will still have an incentive to buy from you, since you won't have to pay a real-estate commission and will be able to offer buyers a lower price -- and the place will already be their "home."
Investing in 'Hot' Markets Like Phoenix Without Getting Burned Jun 01, 2006, 9:00 pm PDT
Investing in 'Hot' Markets Like Phoenix Without Getting BurnedBy June Fletcher
Question: I am looking to buy a couple of condominiums -- having them as rental units and then selling them. I am interested in areas that are up-and-coming and have good growth potential but where property prices are still reasonably inexpensive. From the little research I have done, Phoenix seems like a good place. What are your thoughts?
-- Shivanee Nadarajah, Oakland, Calif.
Shivanee: I certainly can see why you'd be interested in Phoenix. At a time when media chatter is all about how much housing is cooling, Phoenix has been as hot as a mid-summer day in the desert. According to the National Association of Realtors, in the first quarter of 2006, the largest single-family home price increase in the country was in Phoenix, where the median price rose to $268,300, up 38.4% from the same period a year ago. Phoenix topped the list in the condo sector, too -- the median price hit $179,600, up 38% from a year ago. Multi-Housing News says it expects Phoenix to be "one of the better performing markets in the nation," over the next year, with 8,000 new residents expected to come to the metro area each month in 2006, as employers add 71,000 new jobs, an increase over last year of 4%. The trade publication expects that over the rest of the year, vacancy rates will decline 70 basis points, to 7.4%.
But the city's housing heat wave may not last much longer. Arizona State University's Arizona Real Estate Center noted that the housing market in Phoenix and its suburbs slowed in April, with sales of existing homes falling to 5,980, a 32% drop from the year before -- the weakest April since 2000. Price growth is slowing, too, the center notes, since the rapid gains of the past year have made homes less affordable. The financial Web site Bankrate.com recently put Phoenix on its "bubble buster" list, partly because lot prices are rising rapidly and the area is being flooded with new homes.
So I'd suggest that you exercise some caution. While an influx of job-seekers and rising home prices will strengthen Phoenix's rental market in the short run, in the long term, supply may well outpace demand. If that happens, today's hot housing buys will be tomorrow's hot potatoes.
To hedge against that risk -- in Phoenix or any other potentially bubblicious city -- you may want to buy a property and then offer your tenants a lease with an option to buy. A lease option will attract renters who are serious about buying but are put off temporarily because of high prices, rising mortgage interest rates or other factors. No matter what happens to home prices in the area, your tenants will still have an incentive to buy from you, since you won't have to pay a real-estate commission and will be able to offer buyers a lower price -- and the place will already be their "home."
Tuesday, June 06, 2006
Is selling for-sale-by-owner worth the risk?
Jun 05, 2006, 5:00 am PDT
Most homeowners who attempt to sell without using a real estate agent do so in order to save the commission. In other words, the impetus to sell without an agent is to net more money from the sale. The irony is that the median price of for-sale-by-owner (FSBO) homes in 2004 was 15.4 percent less than the median price for home sales where an agent was involved.
One risk of selling without an agent is that you sell too low. FSBOs tend to attract buyers who are looking for a bargain. Like FSBO sellers, FSBO buyers want to save money by paying less. The FSBO seller hopes to save the cost of the commission; so does the buyer. Unless the asking price is clearly below market value, a FSBO buyer is likely to think he can negotiate an even lower price because there are no agents that need to be paid.
Another factor contributing to the lower sale price of FSBO properties is that many sell before they even hit the market. The National Association of Realtors (NAR) reported that approximately 17 percent of FSBO sellers sold to a relative, friend or neighbor. Nine percent sold to a buyer who contacted the seller directly.
Maximum exposure is the way to ensure that you sell for the best possible price. Multiple offers and higher sale prices are the result of exposing the property to multiple buyers, not simply to a friend or neighbor.
A big problem for FSBO sellers is determining what price to ask. If you don't know how much to ask, it's understandable that you might inadvertently leave money on the table by selling too low to the first buyer who expresses serious interest.
HOME SELLER TIP: You may be able to find out what price you should ask by interviewing potential listing agents. However, if you don't expose the property, you'll never know if you could have sold for more on the open market.
There are certainly reasons why you might choose not to openly market a property, even though it means accepting less money at closing. One couple sold to a neighbor in a direct sale that netted them approximately $200,000 less that they could have received on the open market. But, health and timing considerations made this an acceptable deal.
Most sellers, however, won't want to give up a significant profit just to avoid having to pay an agent. In fact, according to the NAR, the number of sellers choosing to sell without an agent has decreased in recent years from 18 percent in 1997 to 14 percent in 2004.
FSBO sellers take on other risks. The cost of a commission could be minimal compared to the risk a seller might take for failing to fulfill disclosure and compliance obligations. Disclosure requirements vary from state to state. If you do decide to sell without using an agent, be sure to hire a knowledgeable real estate attorney to help you abide by mandatory disclosure requirements.
Another risk of selling without an agent is that many direct sale transactions never close. Some deals fall apart because the buyers aren't properly qualified for financing before they enter into a purchase contract. A good real estate agent will make sure that you don't accept an offer from a buyer who isn't qualified. Prequalification and preapproval can be accomplished quickly if you know who to call for assistance and when it's appropriate to do so.
Another reason why many FSBO deals collapse is that there's no one with experience working to move the transaction along and resolve problems when they arise. This often involves negotiations.
THE CLOSING: It can be difficult for sellers to negotiate face-to-face with a buyer.
Jun 05, 2006, 5:00 am PDT
Most homeowners who attempt to sell without using a real estate agent do so in order to save the commission. In other words, the impetus to sell without an agent is to net more money from the sale. The irony is that the median price of for-sale-by-owner (FSBO) homes in 2004 was 15.4 percent less than the median price for home sales where an agent was involved.
One risk of selling without an agent is that you sell too low. FSBOs tend to attract buyers who are looking for a bargain. Like FSBO sellers, FSBO buyers want to save money by paying less. The FSBO seller hopes to save the cost of the commission; so does the buyer. Unless the asking price is clearly below market value, a FSBO buyer is likely to think he can negotiate an even lower price because there are no agents that need to be paid.
Another factor contributing to the lower sale price of FSBO properties is that many sell before they even hit the market. The National Association of Realtors (NAR) reported that approximately 17 percent of FSBO sellers sold to a relative, friend or neighbor. Nine percent sold to a buyer who contacted the seller directly.
Maximum exposure is the way to ensure that you sell for the best possible price. Multiple offers and higher sale prices are the result of exposing the property to multiple buyers, not simply to a friend or neighbor.
A big problem for FSBO sellers is determining what price to ask. If you don't know how much to ask, it's understandable that you might inadvertently leave money on the table by selling too low to the first buyer who expresses serious interest.
HOME SELLER TIP: You may be able to find out what price you should ask by interviewing potential listing agents. However, if you don't expose the property, you'll never know if you could have sold for more on the open market.
There are certainly reasons why you might choose not to openly market a property, even though it means accepting less money at closing. One couple sold to a neighbor in a direct sale that netted them approximately $200,000 less that they could have received on the open market. But, health and timing considerations made this an acceptable deal.
Most sellers, however, won't want to give up a significant profit just to avoid having to pay an agent. In fact, according to the NAR, the number of sellers choosing to sell without an agent has decreased in recent years from 18 percent in 1997 to 14 percent in 2004.
FSBO sellers take on other risks. The cost of a commission could be minimal compared to the risk a seller might take for failing to fulfill disclosure and compliance obligations. Disclosure requirements vary from state to state. If you do decide to sell without using an agent, be sure to hire a knowledgeable real estate attorney to help you abide by mandatory disclosure requirements.
Another risk of selling without an agent is that many direct sale transactions never close. Some deals fall apart because the buyers aren't properly qualified for financing before they enter into a purchase contract. A good real estate agent will make sure that you don't accept an offer from a buyer who isn't qualified. Prequalification and preapproval can be accomplished quickly if you know who to call for assistance and when it's appropriate to do so.
Another reason why many FSBO deals collapse is that there's no one with experience working to move the transaction along and resolve problems when they arise. This often involves negotiations.
THE CLOSING: It can be difficult for sellers to negotiate face-to-face with a buyer.
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