Why isn't the home selling? It's the Price.

Now nearly two months into "historically low rates" and home sales really haven't perked up as much as one would think they should. Theories abound as to the the reason(s) why, so it's time to comment on some of those out there.

1) We "borrowed" buyers from the future with the tax credit:

Yes we probably did. There were a number of buyers I had an opportunity to work with that specifically mentioned the tax credit as their motivation to buy at that time. As proof look at the massive run up in offers in the last two weeks prior to the expiration date. The effectiveness of the tax credit is certainly debatable. Some analysts argued that the credit didn't really add that many extra buyers to the market as the expectation was that there were going to be 2 million first timers out there anyway, regardless of the credit.

While not being able to confirm it, Christine Kites of Keller Williams Mid Willamette's Broker Duo believes that the slow down after the credit's expiration is due to the fact that the "immediacy and urgency" to buy was removed from the equation. That sounds very reasonable to me as we have more of a buyer's market mentality now with lowball offers or buyers simply sitting on the sidelines waiting for the sellers to bleed a little more. If she is right then maybe the fall and winter selling season will make up for a relatively anemic summer one.

2) Anxiety about future economic prospects:

We all have our own personal markers for when we decide to make a large purchase. Potential buyers are understandably concerned about their ability to make a house payment in light of the current economic conditions. The prospect of committing to the biggest obligation they will ever make when they are watching their friends and neighbors lose their jobs seems counter intuitive to being a prudent consumer.

If one is concerned with losing a job in the future having a mortgage on a home is a far better position to be in than being a renter. Moral arguments and other considerations aside,  if I were one that had a job that allowed me to qualify for a loan now and I was worried about my future employment I'd buy a house, now. The reason is simple; If you are a renter and you don't make your house payment you are going to be kicked out in 30 days. The last stat I saw showed that the average number of days from first missed payment to the date the sheriff shows up at the door is 444 days.  A year and 3 months sounds like a much better timeline to get my act together than 30 days.

3) Price:

Anybody in lending that understands it will always point out that the cost of the money being borrowed has a bigger impact on the "affordability" than price. So, here we are. The refinancers have figured it out. Drop the interest rate save money, period. a 1% change in the rate of 30 year loan drops the P/I nearly 10%. Potential buyers know it. Time for the sellers to get on board too.

I liken the amount of profit one could make on the sale of a home as "game show" money. If I come in to the Price is Right I start at 0. If I run up my winnings and then lose it all because I spin the wheel too many times I end up with what I started, 0. Despite NAR's contention a primary residence is NOT an investment, it's a place to call home that allows you to control your personal living environment. It gives the homeowner an opportunity to live in a place that is safe and secure, surrounded by others in the same economic cohort. Plus Uncle Sam gives us some tax spiffs to boot. That is not the definition of an investment.

To be sure, there are some sellers out there that can't sell without bringing money to the table because they bought at the top of the market. However, many others have the opportunity to sell their homes at a "profit" should they choose to. The only real challenge Realtors are being presented with right now is getting those sellers that can sell to lower their prices. Sellers need to embrace the horror and stop waiting for the market to bounce back, it's going to be a long while and once rates start going back up buyers will be pounding on them even harder than now.  The question sellers should be asking themselves is, do they want to be "on" the market, or "in" it.

Willamette Valley Oregon Rental Market

I had the pleasure of attending a meeting where Dolf De Vos of IPMG property management was the speaker. He was asked to give his assessment of the rental market in the Mid Willamette Valley. It was great timing as he had just published his quarterly newsletter, Valley RE-View and there was a very good piece on vacancies for the towns on our area.

As suspected Corvallis, OR  has and will continue to be a strong market for rentals. Given it is a smaller community and has seen little if any growth in the inventory of rental units vacancies have dropped from a little less than 5% to under 3%. Eugene, OR also being a university town, has consistently seen those rates below 5% as well.

Somewhat surprising, though it I guess it shouldn't be given the hype and excitement over the coming medical campus, is Lebanon. That town's vacancy rate has dropped from a little over 7% last year to less than 2% this year. Lebanon seems to have some things going for it, some good, some bad. The impending influx of people for the new medical college and VA center are certainly good so Lebanon can hopefully break free from its' timber based roots. The flip side is that the foreclosure problem has hit this town, along with the rest of Linn County very hard. Unfortunately, when people lose their homes they become renters.

Both of these events present a potential investor with opportunities in that area. Lebanon has historically shown to have lower home prices than the surrounding communities. This coupled with low interest rates in my mind puts Lebanon at the top of the list in the mid valley for investment real estate.

It is interesting to note that in the run up in RE from 2004 to 2007 the market was flooded with would be investors looking to cash in. Some were taking the chance to "turn and burn" because values were moving so quickly. It's time for those individuals interested in making a long term investment in RE to get off the fence and take advantage of the current environment. Because interest rates are so low month to month cash flow is a reality in many homes available.

Timing the Market and the bottom of the Gravy Boat

Timing the market comes up in every conversation with a potential buyer. Some are convinced that prices will fall another 30%; they might, in some places. Others are concerned with the future of their personal economy. And though some can't articulate their specific concerns, nobody wants to "overpay" for a home. If there is no way to quantify every consideration in the decision to buy a home that means the conversation needs to be about being near the bottom of the bowl.


As any investor will know timing a market to maximize return is nearly impossible. The more factors, conditions or considerations that go into assessing the value of an investment the less likely one can hit the sweet spot. Real Estate is one of the most difficult to time. Condition of the home and surrounding neighborhood, time on market, sales prices of homes in close proximity, intensity of the owner's desire to sell, interest rates, borrower's confidence of continued employment, etc...don't forget location.  All these and more go into the determining the value of a home.


 Probably everyone in Real Estate has seen this type of graph:

I don't necessarily agree with the text, but I like the graphic. See all the happy sellers running away with their money on the right side. What we need to do is educate the buying public is that being near the bottom of the Gravy Boat is a great place to be and getting to the bottom is fairly impossible to accomplish. Maybe we say that if you are swimming in gravy you did OK.

Is your Loan Officer a Marketer or a Closer?

First a disclaimer or two:
Markeing is a necessary tool for any business to succeed. Without it you have no way to "get the message out" on your specific product or service. It gives you a "presence" before an opporunity to sell. Second, I have never been espeically good at it so I am a bit jealous of those that are,  but that is a curable issue.

It is incredible to me some Realtors are convinced into believing that just because someone has a great marketing plan means they can close deals. There are a couple of these "marketers"  in my area that are guilty as charged but will not be mentioned by name because, well, it just isn't nice and most who read this will know of whom I speak.

So here's the scoop: If you, the Realtor, are going to be referring your valuable clients ( AKA your next commission )  to a lender or if  your client absolutely must use "their guy" then for heavens sake make sure they can close the deal. Not by asking them, but by asking other agents that have worked with him/her in the last 6 months, yep 6 months max.  Just because someone sends you or your clients volumes of information or brings you cute little "pop by's"  ( that's a RESPA violation, $25K and some jail time ) to get your attention about all the cool programs they have ( 4 or 5 max, and we all have the same ones ) doesn't mean they or their company have the capacity to get a deal closed.


Closing a loan is dependent on the LOs understanding of the complete environment we are in.  Lenders are under ever increasing scrutiny. Not just from regulators but from the investors they sell the loans to. EVERYONE sells their loans to someone or retains the rights to do so at anytime so all must toe the line with investor overlays whether a LO wants to admit it or not ( or even knows ). What the LO knows about these changes and the effect they may have on your transaction matters, a lot. We all have little morphs and twists, often.

Is your buyer's LO a marketer or a closer? Here's the test...

1) Are the clients completely approved with specific conditions requested of them within 7 business days? An answer of no means you have a Marketer. Yes, means a Closer.

2) Does the LO "switch" programs to get a borrower through underwriting? An answer of yes doesn't necessarily mean you have a Marketer but a Closer is able to explain EXACTLY why it's being done and what the chances are for success.

3) Can the LO explain to you and your client in laymans terms what is required to get mortgage insurance on a conventional loan? An answer of no means you have a Marketer. Yes, means a Closer.

4) Can your LO offer you creative, alternative solutions to a difficult situation?  An answer of no means, well...a dead deal, and you guessed it, a Marketer. Like number 2 a Closer will have already fleshed out potential issues before an underwriter sees the file and has prepped the Realtor and client for this.

I pass this test as a closer. Marketing pieces ( except for this one ) don't talk about these issues because they are not sexy or attention getters. These are the nuts and bolts of the transaction. But these are the things that get your client a home and you your next commission check. If I was a Realtor or a buyer, I would take zero chances on a marketer and put all my money on a closer. Even if the closer seemed a little crabby every now and then.

Why are rates so low, I have a guess

As most consumers know because they have been pounded on by national lenders, rates continue to live in uncharted territory. Back in April there was a swing up in reaction to the fed exiting the Mortgage Backed Securities market. Within a couple of weeks though we returned to the 5% range.

Then, Europe ( spcifically Greece ) began having problems with generating enough tax revenue to pay all its' bills. As with the beginning of the mortgage meltdown anything even remotely associated with Greece was perceived as having the same issues. While that was not entitrely the case the perception that the EuroZone was not a safe place to invest had folks looking elsewhere to put their money.

Enter the US MBS market and a flight to safety, or the perception of it. Ask any borrower in the last 18 to 24 months and to a fault they will all say how difficult it was to get approved. After all the twists and contortions in the mortgage industry underwriting standards have become much more stringent and these instruments were or appeared to be effectively insured by the US Government. Investors simply were looking for a safe haven and the MBS market has provided that.

As much as investors loved the incredible returns on their MBS plays in the 00's now the MBS market is giving them something they want more, safety and security. If I were an institutional investor looking to make up for the mistakes of the last 5 years it might be that going back into MBS's would be the way to go. It might seem odd to go back to the thing that caused the issue in the first place but I would hazard a guess that now that these securites are so antiseptic or sterile they look pretty spiffy.

No rates are not down because the banking system is going to hell or that there is some evil plot by the banks to take over the world. As Karl Denniger is fond of saying, that's moon bats and tinfoil hat talk.

ARMs and I/O Loan Changes

A new wrinkle has been introduced to ARMs and Interest Only loans that will have a huge impact on those wanting to use these instruments. Going forward a borrower will be underwritten on the payment associated with the highest possible payment. This is a major change as for the most part borrowers have been underwritten using the start rate until now.

These changes are significant in that now a borrower must qualify for a a short term conventional ARM ( less than a 5 year fixed period ) on the greater of the fully indexed rate or the current note rate +2%. Today that means a borrower that wants a 3/1 Intermediate Term ARM that has a rate of 3.5% will have to qualify at 5.5%, a rate that is 1/2 % above the current 30 year fixed note. My experience of late has been borrowers wanting to use these loans have an exit strategy that will occur well before the reset. Plus they are financially savvy enough to manage their money and understand all the implications of their choice of product.

I/O loans are being made over as well. Higher minimum FICO scores to qualify ( 720 ) and a whopper of a requirement of having up to 24 months in payment reserves after cash to close is accounted for. I/O loans have already been pretty well beaten up with other restrictions in the recent past that have made them look like an ugly step child anyway so I can't believe that this new requirement will do much in terms of people not qualifying.

All these changes are really designed to ensure that the borrower has a true capacity to repay the loan. But in the case of the I/O changes I have to believe it is the beginning of the end for these products. Just like the first changes to PayOption ARMs and 2nd liens to 100% CLTV  the requirements are becoming so restrictive no borrower will want to monkey with them. As always Freddie Mac will eventually follow Fannie Mae, sooner or later.

No surprise to those of us in lending that these have been instituted. These are a continuation of the mandate that borrowers show a capacity to repay a loan, just like the good ol' days. Plus Fannie and Freddie have to find new ways to keep their income up from new loans to make up for the fact they are losing their asses on all the bad ones they ate up in the 2000's.

Wa Mu and the "Power of Yes"..what the heck?

I have had the opportunity to talk to several people about the changes in lending in the last 3 years and 2004 to 2007 seem like a bizarro fantasy land. Consider for a moment the following actual loans that were done:

Purchasing a duplex as a non owner occupied investment with a 80/20 ( 100% finanacing ) combo. Buyer put $1000 in earnest money and seller covered the buyers' closing costs. All for the seller paid closing costs. It's the buyer's money coming to the table loan or not. May as well spend it where it garners the biggest benefit.

No doc loan, AKA the infamous NINJA loan ( No income No Job, No Assets ) to 95% financing. No mortgage insurance on a primary residence. Borrower provided their name, SS #, address and phone number and allowed a credit report to be pulled. These were really No No's. I still don't think these are such a bad idea for the right borrower, just not everybody.

Cash Out Refinance of a single family investment property to 85% of the appraised value...6 months after purchase. The property "appreciated" 22%.. Things that make you go "hmmmm".

Sounds weird that these could get done. Sounds even stranger that when these loans were available there was always another lender out there that was going to go one better than the competition. Countrywide's reps would say, " send it and we will get it done ", and they did. WaMu and their subprime side Long Beach Mortgage took the cake though. I don't WaMu ever saw a loan they couldn't sell. All of us in Real Estate were drinking from the fire hose. Now we get to share a garden hose.