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.

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.

Price vs Rate---Focusing on the right aspect

Where will home prices go in the future? In most markets in the US it is unlikely we will see any more radical deterioration in home prices. Data suggests flat or slighlty rising home prices on a natioanal scope with some markets going up and fewer going down.

I would suggest that a more important question to be asked is: Where will rates go? And that's really easy to answer...up. Rate increases will have a bigger effect on a buyer's ability to afford a home ( or not ) than where prices will go. So as we talk to potential buyers about what the future holds I will almost always focus on rates.

Why? For one simple reason. In order to offset an increase of 1% in an interest rate on a 30 year term loan a borrower's loan amount would have to drop by approximately 10% to keep the same approximate principle and interest payment. For almost every borrower,  payment, not the price is the major determinant in what to pay for a home. When I talk to borrowers they don't ask me what they should pay for a home they ask what payment the payment will be. Are they shopping price or rate?

Tax Time Advice--Watch those deductions

Well not exactly tax advice but a caution on how taking deductions can limit your ability to borrow later on.

As most self employed folks know conventional lending can be a challenge. Taking all the deductions you are allowed tends to limit your borrowing ability. Even though someone can be bringing in literally hundereds of thaousands of dollars a year if they follow the rules they can avoid paying taxes on that income. The issue is that these deductions are a "hit" to the borrower's income in an underwriter's eye. The solution is to limit your use of deductions ( yes pay the damn taxes, it's a quality problem to have ) so as to not box yourself out of the ability to borrow down the road.


For those that are W2 employees there is a tax deduction trap that many don't know about, 2106 unreimbursed employee expenses. Any of these deductions are looked at just like an ongoing debt obligation like a car payment, student loan or credit card payment. These can be a killer for a potential borrwer because they don't expect it to be a hit to income. As an example, I had a borrower take 43,000 miles in unreimbursed expenses at .55 a mile. The effect on the tax return was no doubt a positive one, Uncle Sam gave the borrower back every dime that had been taken in withholding. But...the underwriter hit them for $1182 a month for the "ongoing" obligation basically wiping out 1/2 of the income to qualify for a loan. Yes the underwriter gave back .22 a mile in their analysis but it was too great an obstacle to overcome.

The tax time advice?  You should be talking to your mortgage professional about the implications of taking ALL of your allowed deductions BEFORE you file. Once the IRS has your information it is set in stone.

Bye Bye Tax credit Down Payment..Sanity Rules at FHA?

Under the heading of something that was too good to be true:


Tax credit ineligible for down payment

Feds reverse rule to assist first-time home buyers
by J. Craig Anderson - May. 19, 2009 12:00 AM The Arizona Republic


Federal officials on Monday reversed an earlier decision to allow first-time home buyers to use an $8,000 tax credit to borrow the down payment on a home.
A week earlier, U.S. Department of Housing and Urban Development Secretary Shaun Donovan had told the National Association of Home Builders that HUD would let banks and local governments offer short-term "bridge loans" to cover the down payment for first-time buyers eligible for the tax credit. The loans would have been available to applicants for federally insured mortgages such as Federal Housing Administration loans.
Lenders, home builders and real- estate agents had reacted favorably to the bridge-loan proposal, saying it would open up the housing market to more first-time buyers.
However, not everyone was in favor of using the tax credit as collateral on a down-payment loan.
"That tax credit should be savings, not debt," said Patricia Garcia-Duarte, executive director of Neighborhood Housing Services in Phoenix.
Garcia-Duarte said the proposal too closely resembled a now-illegal practice known as seller-funded down-payment assistance, which allowed a home's seller to "gift" the down payment to a specific buyer through a non-profit organization.
The loans also could have created income-tax issues, according to the IRS officials who shot down HUD's plan.

Well, well what a surprise! At least there are some sane decisions being made at FHA. So let's recap who wanted this..

Builders....check! Gotta get rid of that pesky inventory that is costing them interest payments every month
RE Agents..check! Gotta get after those first timers 'cause nobody else is even looking in some markets.
Lenders.. how about we change that to LOs looking to make a score. Some that still haven't figured out how to do a loan that isn't stated. Certainly not this one and many others that actually thought this through ( see my post from last week). I redacted part of the post that announced this. There is a quote from an LO that pointed out what I have, it was a bad idea, a very bad idea.

Bridge loan, too funny. First timers are the least educated group of buyers out there and most often need to be walked through the whole process. Not only does the whole process of buying a home look like smoke and mirrors, the lending side can put them down for the count if they don't have someone looking out for their interests.Throw something like this at them and we were headed for disaster.

The whole situation now kind of reminds me of a scene in the first Naked Gun movie. "Move along, there's nothing to see here people. "

100% Loans for Everyone...Not so fast Mister

Even in today's environment we can still find Loan Officers pitching the miracle of no money down loan programs. In some cases they are assisted by a Title/Escrow company or a Realtor in putting together a "class" on how to take advantage of these programs. There are 100% LTV programs but these loans are not for everyone. So why pitch these programs? Let's call a spade a spade. Those touting these loans are really only on a big fishing expedition for potential buyers. Some that probably shouldn't be buying in the first place.

So what is really left out there for a borrower with no money of their own? 2 programs..VA and USDA Rural Housing. For everyone? Not exactly. As I have noted to some, these 2 programs are for specific subsets of all potential borrowers.

VA? Gotta be a vet or a qualifying widow of one. USDA? Can't make too much money and you must buy a home either in the country or in a town of less than 20,000 people. On top of those entry requirements the debt to income ( DTI ) restrictions are such that not even all the potential qualifiers are eligible. The VA makes sure the vet can not only afford the house payment but the utilities and food and clothing for the family. USDA has DTI restrictions as well. No wonder these programs have the lowest default rates of any loan programs..ever.

RE agents love any loan that can get a buyer into a home. Title and Escrow companies do too. The reason is simple, close a deal..get paid. To be fair a loan officer's mentality is pretty much the same. We don't get paid until a deal is closed either. The issue is that we as loan officers have an ethical, fiduciary responsibility to the borrower that far exceeds any that an RE agent has.

The loan officer is the only person in a position to inform the borrower of their choices AND the consequences of them. We have a responsibility to say, "wait a minute, is this really what you want to do?" We are the only ones that have a complete understanding of a borrower's financial state. We are the ones that know what they can truly afford. We are the ones that, if we are asking the questions we are supposed to, know how their household budget stands. We are the guardians of their financial future.

So why do I have a problem with pitching 100% loan programs to everyone? Because it puts a borrower into a position where emotion ( the desire to have the American dream ) can override logic. Who doesn't want to own a home? But it is an established fact that borrowers that don't have their own skin into the game are more likely to default on a loan. Need an example? One of the reasons that FHA no longer allows a seller to "contribute" ( through a sham of convolution using "non profit" entities ) the buyers down payment any longer is because borrowers using seller contributed down payment defaulted on their loans 3 1/2 times more frequently than borrowers with their own funds...nuff said.

So the question is, do we as an industry continue along the path that got us where we are today, giving anyone that wanted to buy a loan? Or do we have enough guts to say to a potential buyer, "maybe you should wait" or "let's look at something more reasonably priced for you"?

I know where I stand. I would prefer to advise a client to wait if it is appropriate for their situation. What do you think?

HVCC, Home Valuation Code of Conduct..The new world order for appraised values

Beginning this Friday, May 1st, new rules for appraisals for conventional conforming loans go into effect. Great news, right? All those fraudulent appraisers will be reigned in along with all those nasty mortgage brokers, real estate agents and lenders that "forced" values in the run up to the RE bubble. I am not so sure that the new world order will help all that much. In fact it may result in artificially continuing the slide in real estate values.

In a nutshell the HVCC is meant to keep the originator of the loan, whether it is a mortgage broker or loan officer, from influencing the appraisers opinion of value of the subject property. By removing this pressure the appraisers will be "free" to evaluate the market price of a home. What has really happened is that the local independent appraisers are looking at the real possibility of being run out of business by larger national or regional appraisal consolidation / management companies.

These are the entities that likely led to some of the abuses that forced the new rules on us in the first place. LandSafe ( owned by Countrywide ) or Hanson and LSI are large appraisal managment companies that hire "local" appraisers on a contract basis for national lenders. When I use the term local I mean within 20 miles. Local for these AMCs means within 100 miles or more. Any real estate agent that has to deal with one of these companies has likely received a call from one of these guys or gals asking for comps. If you gotta ask one of the agents involved in the deal then you have no business appraising the value of a home in that market.

In the interest of full disclosure as a both a broker and a loan officer for a mortgage bank I have never asked an appraiser to "get me a value". The logic is fairly simple. If an appraiser is capable enough to research, analyze and write a report that they can make all the disparate parties in a RE transaction happy then who am I to think I should try to influence their opinion. You have an underwriter, buyer, seller, and thier agents. Each with their own motivations in a deal. Never would want to be an appraiser, even if I owned a bullet proof vest.

The new rules will certianly shield the appraisers from the loan offier and brokers but they won't insulate them from the agents. In fact there will be likely more contact between agent and appraiser as most lenders will require the appraisers to get the sales contract from one of the agents associated with the deal. So who has more to gain from a property "coming in at value"?An agent that makes 3% to 6% on a deal or the loan officer that will make .5% to 2% of the loan amount.

So will Real Estate values go further down the toilet than they already have as a result of the new rules? Those that are slightly paranoid would have us believe that HVCC is a government plot drive values even farther down than they already are. Plot or no, what will certainly happen initially is longer times in getting loan closed. And it is going to be a big pain in the ass for those of us that have to become accustomed to yet another new world requirement in the return to old time underwriting guidelines.