Article of the Day

Forecasting Home Price Recovery: Turnover Rate as a Powerful Indicator

03/29/2012 By: Carrie Bay 

Home prices in many areas are already rebounding from the bottom of the market, according to the March HomeValueForecast.com update from Pro Teck Valuation Services.

This month, the company explores the turnover rate, which is the number of non-distressed sales divided by the total housing stock in a particular market. Pro Teck says this calculation is one of the most powerful and, yet, simplest leading indicators of the future direction of home prices.
The company’s data shows that the turnover rate hits bottom six to 18 months before the bottom in home prices. The relationship between turnover rate and sales price is highlighted with the numbers for Los Angeles and Miami-Dade counties.
The peak in sales in these markets occurred in 2005 and approximately a year before the peak in prices, according to the HomeValueForecast.com update. Sales then proceeded to drop sharply for the next few years until their low points in early 2009. After the 2009 trough, regular sales activity jumped sharply on a percentage basis and has been on an increasing trend ever since.
Pro Teck says its fundamental interpretation is that the significant decline in prices made home values so compelling that both new owner-occupant homebuyers and astute U.S. and foreign investors came into these markets. The new demand prevented further declines, creating the longer-term bouncing around the bottom in prices we are experiencing today, the company explained.
“Our data illustrates that many markets actually hit bottom in early 2009 despite others predicting that home prices had much further to fall,” said Tom O’Grady, president and CEO of Pro Teck Valuation Services.
“The Miami and Los Angeles markets are highly representative of what we foresee for most of the important

coastal U.S. real estate markets,” O’Grady noted. “In particular, we see stabilizing and then gradually increasing prices over the next few years.”
Each month, HomeValueForecast.com also includes a listing of the 10 best and 10 worst performing metros according to its market condition ranking model. The rankings are run for the single-family home markets in the 200 largest core-based statistical areas (CBSAs) and derived from a number of real estate market indicators, including: number of active listings, average listing price, number of sales, average active market time, average sold price, number of foreclosure sales, and number of new listings.
“In March, the top ranked metros show a strong connection to states such as Texas and Oklahoma, which directly benefit from the resurgence in the U.S. oil exploration industries,” said Dr. Michael Sklarz, a contributing author to HomeValueForecast.com and a principal with Collateral Analytics, which worked alongside Pro Teck to develop HomeValueForecast.com.
“In addition,” Sklarz said, “most of these markets did not experience price bubbles during the mid-2000s boom period and, thus, never became overpriced in the first place.”
The top CBSAs for March were:

• Midland, Texas
• Tulsa, Oklahoma
• Clarksville, Tennessee-Kentucky
• Billings, Montana
• Provo-Orem, Utah
• Salt Lake City, Utah
• Crestview-Ft. Walton Beach- Destin, Florida
• Dallas-Plano-Irving, Texas
• Corpus Christi, TX Texas
• Oklahoma City, Oklahoma

The bottom ranked metros include a number of areas which are still in the midst of price corrections from the 2000 to 2006 run-ups. At the same time, a number of these markets have experienced sizable declines in employment over the past several years.
The bottom CBSAs for March were:

• Hartford-West Hartford-East Hartford, Connecticut
• Eugene-Springfield, Oregon
• New Haven-Milford, Connecticut
• Daphne-Fairhope-Foley, Alabama
• McAllen, Edinburg, Mission, Texas
• Tyler, Texas
• Hickory-Lenoir-Morganton, North Carolina
• Harrisonburg-Carlisle, Pennsylvania
• Jacksonville, North Carolina
• Cleveland, Elyria, Mentor, Ohio

Article of the Day

Default Risk of New Mortgages Continues to Edge Lower: Study

03/28/2012 By: Carrie Bay 

With today’s economic conditions, investors and lenders should expect defaults on mortgages currently being originated – both prime and nonprime – to be 28 percent higher than the average of loans originated in the 1990s, according to the latest UFA Mortgage Report by University Financial Associates of Ann Arbor, Michigan.

The UFA Default Risk Index for the first quarter of 2012 registered a reading of 128. The index slipped slightly compared to the previous quarter, which was revised downward from 131 initially reported to 129.
Currently, mortgage default risk is significantly lower than the worst vintages of this cycle – from 2006 to 2008 – when the index hovered around 225, which means loans made during that three-year period are 125 percent more likely to default than loans extended in the 1990s. A reading of 100 represents UFA’s baseline scenario of the 1990 decade.
UFA says the risk of default today is due solely to the local and national economic environment.
“Our baseline macro scenario is based on consensus expectations and has real GDP growing at 2.5 percent for the next two years and core inflation at 1.6 percent,” said Dennis Capozza, who is the Dale Dykema professor of business administration in the Ross School of Business at the University of Michigan, and a founding principal of UFA.

According to the UFA Default Risk Index, the risk of default for residential mortgages has been on the decline ever since early 2008, and it’s continuing to fall. However, Capozza notes that positive, unexpected economic events would reduce defaults even more.
“We believe that surprises are more likely to be on the upside than the downside of this consensus,” he explained, referring to the company’s GDP growth and inflation forecasts over the next two years.
“Upside surprises for the macro scenario would reduce defaults relative to this baseline. Currently, record low mortgage rates and accommodative monetary policy are helping to support the housing market and reduce defaults relative to what would otherwise prevail,” Capozza said.
The UFA Default Risk Index measures the risk of default on newly originated prime and nonprime mortgages. UFA’s analysis is based on a “constant-quality” loan, that is, a loan with the same borrower, loan, and collateral characteristics.
The Index reflects only the changes in current and expected future economic conditions, which UFA says “are much less favorable currently than in prior years.”
Each quarter UFA evaluates economic conditions in the United States and assesses how these conditions will impact expected future defaults, prepayments, loss recoveries, and loan values for prime and nonprime loans.
A number of factors affect the expected defaults on a constant-quality loan, UFA says. Most important are worsening economic conditions. A recession causes an erosion of both borrower and collateral performance. Borrowers are more likely to be subjected to a financial shock such as unemployment, and if shocked, will be less able to withstand the shock, according to the analytics and modeling company.
UFA was founded in 1990 by two renowned professors of finance to bring state-of-the-art analytical techniques to lenders. The principals bring over 50 years of experience in mathematical modeling and data analysis to financial problem solving.

Article of the Day

Home Prices Have Been Rising for Three Months: Report

03/27/2012 By: Carrie Bay 

Standard & Poor’s reported Tuesday that it’s closely watched Case-Shiller index declined in January for the fifth straight month, with both the 10-city and 20-city composite readings slipping 0.8 percent from December.
But according to John Burns Real Estate Consulting (JBREC), that’s stale news and doesn’t reflect what’s actually happening in the market right now. In fact, the independent research company says home prices are rising.

JBREC conducted its own analysis of home prices in 97 markets and found that over the January-to-March period prices are up in 90 of them. The average price increase over the last three months is 1.1 percent, or a 4.5 percent annual rate, according to data issued by JBREC just before S&P’s Case-Shiller release.
The company also found that home prices have been trending up nationally since January, and even more markets have turned positive recently, with 93 of the 97 markets it analyzed showing appreciation over the last month.

So why are other industry indices still painting a picture of the doom and gloom of freefalling home prices? Wayne Yamano, VP and director of research for JBREC, says it’s because most price indices are on a three-month lag.
Yamano explains that after hundreds of hours of research vetting 23 data sources and running calculation after calculation, JBREC developed the Burns Home Value Index (BHVI), which calculates home values based on prices that are set at the time purchase contracts are negotiated and signed.
Nearly all other indices are based on when the purchase transaction closes, he says, which is typically two months after the purchase contracts were negotiated. Then, it takes one to two months for the closing price data to be compiled and reported, according to Yamano.
He contends that the BHVI is a better assessment of current changes in home prices and precedes median price data from the National Association of Realtors by three months and the S&P/Case-Shiller index by four to six months.
“It is current because it uses what is happening in MLS databases all over the country, as well as some leading indicators we have determined are reliable,” Yamano explained. “We call it a Home Value index because it is partially based on an ‘electronic appraisal’ of every home in the market, rather than just the small sample of homes that are actually transacting.”
JBREC has calculated BHVI index values for the United States and 97 major metro areas, with history going back to January 2000.
“The slow housing market recovery is underway, and it can accelerate or turn down quickly,” said Yamano. “The future is uncertain, and it is even more uncertain when you are using data that is three months old.”

Article of the Day

Pending Home Sales Index Slips in February

03/26/2012 By: Mark Lieberman, Five Star Institute Economist 

The Pending Home Sales Index (PHSI) edged down February to 96.5 from January’s 97, which had been the highest level since April 2010, the National Association of Realtors reported Monday.

The index slipped for just the second time in the last five months, but was 9.2 percent ahead of the level in February 2011. It remains down 26 percent from the April 2005 level. The index began in March 2005.
Pending home sales are counted when sales contracts are signed, and are viewed as a leading indicator of existing home sales; recent reports suggest that home re-sales should be a bit stronger over the next couple of months but at a level that is still fairly subdued.

The PHSI has been drifting upward, albeit modestly for most of the past two years but remains lackluster. A substantial number of sales contracts are failing to meet underwriting standards and/or other loan criterion as sales contract cancellations remain elevated. Although a hopeful movement, home sales still appear to be searching for a sustainable level and continue to be subject to conflicting trends in labor markets, house,hold formation, mortgage interest rates and underwriting standards.
The PHSI in the Northeast slipped 0.6 percent to 77.7 in February but is 18.4 percent above a year ago. In the Midwest, the index jumped 6.5 percent to 93.8 and is 19 percent higher than February 2011. Pending home sales in the South fell 3 percent to an index of 105.8 in February but are 7.8 percent above a year ago. In the West, the index declined 2.6 percent in February to 99.3 and is 1.8 percent below February 2011.
The index is based on a large national sample, representing about 20 percent of transactions for existing-home sales. An index of 100 is equal to the average level of contract activity during 2001, which was the first year to be examined as well as the first of five consecutive record years for existing-home sales; it coincides with a level that is historically healthy.
The dip in the index was consistent with declines in mortgage purchase applications edged down in January and with the month-over-month drop in new home sales, which are also tracked by contract signings.

Article of the Day

NPR and ProPublica Report GSEs Considering Principal Reduction

03/23/2012 By: Esther Cho 

NPR and ProPublica reported Friday that Fannie Mae and Freddie Mac might consider principal reduction as a means to help underwater homeowners.

“NPR and ProPublica have learned that both firms have concluded that giving homeowners a big break on their mortgages would make good financial sense in many cases,” NPR stated in an article.
Edward DeMarco, acting director of the FHFA, has stood firm in his decision to not allow for principal reduction, despite mounting criticism from Democrats and petitioning from organizations to have DeMarco fired.
But, in a statement to ProPublica and NPR, ProPublica reported that DeMarco said, “As I have stated previously, FHFA is considering HAMP incentives for principal reduction and we have been having discussions with [Freddie and Fannie] and Treasury regarding our analysis.”

Despite the Treasury’s offer to provide incentives to the GSEs for administering principal reduction, DeMarco told lawmakers during a hearing on February 28 that “both companies have been reviewing principal forgiveness alternatives. Both advised me they do not believe that it is in the best interest of the companies to do so.”
While many contend that allowing the GSEs to apply principal reduction would help the housing market to recover and keep people from going into foreclosure, others argue that while 60 percent of all mortgages are owned or guaranteed by the GSEs, they account for roughly 29 percent of seriously delinquent loans.
Mark Calabria, director of financial regulation at the Cato Institute, showed support for the FHFA’s stance on principal reduction during a separate hearing March 15, where he pointed that GSE loans display a smaller percentage, just 9.9 percent of underwater loans, compared to private label securities, with 35.5 percent of loans underwater.
But, since principal reduction is considered as part of the HAMP modification, it has also been noted that the GSEs account for about half of all HAMP modifications.
During the fourth quarter of 2011, the FHFA reported about 19,500 HAMP trials became permanent modifications, which brought the total number of active HAMP permanent modifications to about 400,000.
Another argument used against principal reduction is its potential cost to taxpayers. FHFAs estimate is principal reduction will cost taxpayers $100 billion, in addition to the $180 billion rescuing the GSEs has cost already.

Article of the Day

Mortgage Rates Up, With 30-Year Fixed Above 4 Percent

03/22/2012 By: Esther Cho 

Moving along side higher yields on bonds, mortgage rates continued to climb upwards, with the 30-year fixed-rate mortgage above the 4 percent benchmark for the first time since October 27, 2011, according Freddie Mac’s Primary Mortgage Market Survey.

“Bond yields rose over the past two weeks in part due to an improving assessment of the state of the economy by the Federal Reserve, better than expected results of commercial bank stress tests and the likelihood of a second bailout for Greece,” said Frank Nothaft, VP and chief economist for Freddie Mac.

The 30-year fixed-rate averaged 4.08 percent (0.8 point) for the week ending March 22. Last week, the 30-year averaged 3.92 percent, and during this time last year, it averaged 4.81 percent.
The 15-year fixed-rate managed to stay below 4 percent and averaged 3.30 percent (0.8 point), up from last week when it averaged 3.16 percent. Last year at this time, the 15-year fixed-rate averaged 4.04 percent.
The 5-year ARM inched up to 2.96 percent (0.7 point); last week, it averaged 2.83 percent. Like other averages, the 5-year ARM is still down compared to last year when it stood at 3.62 percent.
The 1-year ARM increased to 2.84 percent (0.6 point) this week. Last week, it averaged 2.79 percent and 3.21 percent during this time last year.
Bankrate, which uses data provided by the top 10 banks and thrifts in the top 10 markets, reported the 30-year fixed-rate mortgage climbed 14 basis points to 4.29 percent, a 5-month high.
The 15-year fixed-rate rose to 3.48 percent, up 10 basis points, and the five-year ARM also went up 10 basis points to 3.24 percent, according to Bankrate. The 7-year ARM moved upwards to 3.43 percent.

Article of the Day

Survey Suggests More Homeowners Are Open to Strategic Default

03/21/2012 By: Carrie Bay 

An alarming number of homeowners see strategic default as a viable option should their home continue to depreciate. Almost half of the homeowners participating in an online poll from Housing Predictor say they will walk away from their mortgage obligation if falling home values persist.

Five years into the housing downturn, and Housing Predictor found that 47 percent of those surveyed would intentionally stop making their mortgage payments even if they could afford to in order to get out from under the sinking investment of home-sweet-home.
The number of mortgage borrowers open to strategic default has risen sharply since Housing Predictor last surveyed public opinion on the issue roughly a year-and-a-half ago. In October 2010, 36 percent of homeowners participating in the poll said they would throw in the towel should housing prices continue to drop.
Housing Predictor says the foreclosure crisis, falling home prices, and lingering doubts that the value of homes will increase over most homeowners’ lifetimes are contributing to the increase in mortgage holders who say they will walk away.

Housing Predictor’s results are based on responses provided by 1,000 visitors to the company’s website.
A recent study commissioned by the Mortgage Bankers Association called attention to the fact that the vast amount of media coverage dedicated to the financial crisis and the persistent woes of the housing market has made homeowners take note of their equity position.
For those who owe a great deal more on the mortgage than the home is now worth, the idea of simply walking away before the situation worsens has its allure. A market report issued by Moody’s Analytics last July warned of the growing risk of strategic default among loans that have always performed, meaning the borrower has remained current since taking out the loan.
Moody’s analysts explained that as home prices fell over the previous year, the loan-to-value ratios (LTVs) of these always-performing loans began to approach, and in many cases surpass, average LTVs for loans that have defaulted since 2009. They point out that this is a departure from what they’d seen up until the middle of 2010, during which LTVs for always-performing loans had stayed flat or even decreased slightly.
Back in July, Moody’s analysts identified between 12 percent and 24 percent (depending on the asset type) of always-performing loans with LTVs that were higher and had risen more steeply than those of defaulted loans.
“Rapid rates of LTV increases may themselves be a factor in a borrower’s decision to strategically default, since they may quickly erode any remaining confidence in borrowers that they could ever restore positive equity in their property,” Moody’s said in its report.
FICO estimates strategic defaults to be more than a $20 billion problem annually.