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The Wall Street Journal

Banks push home buyers to put down more cash
Many economists and housing analysts blame lax lending standards – including no-down payment, no-document loans – for contributing to the challenges in the current real estate cycle. As a result, most lending institutions have increased minimum down payment requirements. Now, a new proposal by the Obama administration calls for gradually raising down payments to a minimum of 10 percent on conventional loans – those that can be bought or guaranteed by Fannie Mae and Freddie Mac.

MAKING SENSE OF THE STORY
• Banks have found that larger down payments discourage delinquencies by increasing the buyers’ exposure to loss and reducing the impact of declining prices. According to a study by the Federal Reserve Bank of St. Louis, buyers who made smaller down payments were more likely to default during “unfavorable economic circumstances, such as a housing market slowdown or job loss.”
• A recent analysis showed the median down payment in nine major U.S. cities rose to 22 percent last year on properties purchased with conventional mortgages. That percentage doubled in three years and represents the highest median down payment since the data were first tracked in 1997.
• Higher borrowing costs and larger down payments could cause housing prices to decline further, analysts say. For now, borrowers who can’t afford such amounts are turning to alternative programs, such as loans for veterans or those backed by the Federal Housing Administration. Some industry experts say this has created a nonconventional mortgage market for riskier borrowers and those who don’t qualify for conventional loans
.

Read the full story
http://online.wsj.com/article/SB10001424052748703312904576146532935600542.html?mod=WSJ_hp_LEFTTopStories

Feb. 17, 2011

In Other News…

CNN Money

30 percent of mortgages are underwater
Home prices dropped 2.6 percent nationwide during the last three months of 2010, pushing more borrowers underwater, according to a quarterly real estate market survey from Zillow.com.

Read the full story

http://money.cnn.com/2011/02/09/real_estate/underwater_mortgages_rising/index.htm

San Diego Union-Tribune

Will Millennials reinvigorate the U.S. housing recovery?
Millennials, those between18-34, will drive America’s housing recovery as prices have generally become more affordable and mortgage rates are still historically low, said Pete Flint, CEO of real estate website Trulia.com.

Read the full story

http://www.signonsandiego.com/news/2011/feb/09/will-millennials-reinvigorate-us-housing-recovery

San Francisco Chronicle

Foreclosures raise U.S. economic stress The nation’s economic stress inched up in December because higher foreclosures outweighed lower unemployment, according to The Associated Press’ monthly analysis.

Read the full story

http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2011/02/08/financial/f031330S84.DTL

The New York Times
Calculating the annual percentage rate
The lending industry has tried to make it easier for borrowers to understand the true cost of a mortgage by disclosing both its interest rate and its annual percentage rate, or A.P.R. But consumers may often wonder which figure they should focus on when buying or refinancing a property.

Read the full story

http://www.nytimes.com/2011/02/13/realestate/mortgages/13mortgages.html?_r=1&ref=realestate

Feb. 17, 2011

CNN Money

Foreclosures are falling – but it’s a fake out
Foreclosure filings plunged in January, but don’t shake those pom-poms yet. It’s strictly a fake out.

Read the full story

http://money.cnn.com/2011/02/10/real_estate/foreclosure_filings_fall/index.htm

Los Angeles Times

Rising construction costs could boost new-home prices soon
With interest rates near rock-bottom levels, most people realize it’s only a matter of time before loan costs start to rise. After all, what comes down in the mortgage world always has a way of going up
.
Read the full story

http://www.latimes.com/business/realestate/la-fi-lew-20110213,0,6809981.story

CNN Money

Home sales grow, aided by more stable prices
Home sales volume rose sharply in the final three months of 2010, aided by more stable prices on a year-over-year basis, a real estate industry group reported last week.

Read the full story

http://money.cnn.com/2011/02/10/real_estate/realtors_home_prices/index.htm

Los Angeles Times

Federal Housing Agency backs off proposal to ban transfer fees
Thousands of homeowner associations and condominiums around the country just sidestepped a potentially costly problem: A federal agency this month backed off its controversial plan that would have made obtaining mortgages in their communities much more difficult, and would have dried up a key source of revenue that associations use to pay for improvements and property maintenance.

Read the full story

http://www.latimes.com/business/realestate/la-fi-harney-20110213,0,6473192.story

Feb. 17, 2011

What you should know about the market…
• When preparing for the purchase of a house, there are several items buyers must think about, such as their main priorities. Buyers should determine whether it’s more important to live in a particular type of home, such as a single family home with a garage, or in a particular neighborhood.
• Some neighborhoods hold value more than others during a housing downturn. Buyers can work with a knowledgeable REALTOR® to find a neighborhood that meets their needs as well as one where home values are stabilizing or rising.
• Once a buyer finds a home he want to make an offer on, he should be sure not to make a low-ball offer. Some sellers are willing to negotiate and others are not. Working with a REALTOR® can help ensure the buyer is dealt with fairly and guided through the process.

Feb. 17, 2011

Top News Stories

Fewer Homes 'Underwater' as Foreclosures Increase

Fewer Homes 'Underwater' as Foreclosures Increase

By NICK TIMIRAOS And S. MITRA KALITA

The number of U.S. homeowners who owe more on their mortgages than their homes are worth fell in the third quarter, but the decline stemmed from banks getting more aggressive on foreclosures, not from home values going up, according to trade-industry data released Monday.

The total of so-called underwater mortgages fell to 10.8 million at the end of September, down from a peak of 11.3 million at the beginning of the year, according to CoreLogic, a real-estate data firm. The latest total accounts for nearly 22.5% of U.S. homeowners with a mortgage.

The drop in underwater mortgages hardly reflects a rebound in the housing sector because home prices didn't rise in the third quarter. Rather, the number of underwater homes declined as banks took back those homes and wiped out the debt through foreclosure.

Home prices, meanwhile, appear to be declining again after tax credits that spurred sales produced modest price gains during the first half of the year.Home values could drop by an estimated $1.7 trillion this year, a 40% increase from a year ago, according to Zillow.com, a real-estate website. Most of the decline is expected in the second half of the year.

The figures underscore how fragile the housing market remains. As home prices fall, more borrowers will sink underwater. Another 5% decline in prices would leave an additional 2.4 million homeowners underwater, according to CoreLogic.

Underwater borrowers pose a serious risk because they are far more likely to default if they lose their jobs or meet other financial shocks. It is difficult for them to refinance and take advantage of low mortgage rates and they are unable to sell their homes unless they cover the shortfall out of savings or convince the bank to sell at a loss in what is known as a short sale.

"It's a giant anchor that's holding back the economy," said Sam Khater, senior economist at CoreLogic. "Until that negative equity recedes, the housing market is not going to recover. It's as simple as that."

How long borrowers will remain underwater largely depends on the future path of home prices.

Even assuming flat prices, roughly half of underwater borrowers are expected to still be underwater after five years, according to a May report by economists at the Federal Reserve Bank of New York. The Fed report estimates one-third of underwater borrowers will return to positive equity within three years just by paying down debt.

Many are finding themselves in the unenviable position of "accidental landlord." Matt Doebler and his wife thought they had bought at the bottom of the market when they paid $217,000 for a bank-owned home with no money down in Chantilly, Va., three years ago.

But Mr. Doebler, who teaches high school English, lost his job months later and has moved his family twice, most recently to Chattanooga, Tenn. He has rented out the two-bedroom condo for $500 less than his monthly payments. He said he hasn't missed any payments on the home, which he said is now worth less than $150,000.

Mr. Doebler, 30 years old, has begun to ask himself whether he has a moral obligation to keep paying for a home that "not only doesn't provide us shelter, but actually makes it almost impossible for us to pay our monthly living expenses," he said.

Economists say borrowers with small amounts of negative equity are likely to keep paying their mortgages absent shocks such as job loss or divorce. But if more underwater homeowners—even those who are able to make monthly mortgage payments—decide it is better to "strategically" default and abandon heavily underwater properties, distressed sales will continue battering hard-hit housing markets and impede the recovery of the overall economy.

Alicia L. Koch's condo in Sacramento, Calif., had been depreciating in value for years, but it wasn't until about six months ago that the 37-year-old single mother decided she'd had enough. She bought the three-bedroom townhouse in 2005 for $230,000 with a $1,000 down payment. It was recently appraised for about $69,000, and she said she stopped making payments in April. She is trying to offload the property in a short sale.

"I realized I could never catch up to what I owe," said Ms. Koch, who works as a program manager in information-technology training. She and her 15-year-old daughter plan to move in with her fiance, who recently bought a newly constructed home nearby.

At current rates, about one in four borrowers who owe between 100% and 120% of their home's value will ultimately default, and half of all borrowers above those levels will go into foreclosure, estimates Laurie Goodman, a senior managing director at Amherst Securities Group LP.

Efforts to modify loans through the Obama administration's Home Affordable Modification Program have largely failed to address negative equity and frequently leave borrowers further underwater, according to a report to be released Tuesday by the Congressional Oversight Panel. Borrowers in the program "have a slim chance of returning to positive equity in the foreseeable future," the report says.

The underwater problem could also weigh on housing markets because homeowners without equity are less likely to act like traditional homeowners and spend money on their homes. While the homeownership rate during the third quarter fell to 66.9%, according to U.S. Census Bureau data, the effective homeownership rate, which excludes underwater homeowners, is just 56.6%, according to CoreLogic.

That problem is particularly acute in boom-to-bust markets such as Las Vegas. The official homeownership rate stood at 58.6%, but after excluding borrowers with negative equity, the rate fell to just 14.7% in August 2009, according to the New York Fed study.

While the homeownership rate has fallen back to 1999 levels, homeowners' equity as a share of household real estate is lower by one third and is below 40% for the first time since World War II.

"It just kind of leaves you wondering what the safety net is for my generation, because it's obviously not our home," Mr. Doebler said.

After The Foreclosure Debacle

After The Foreclosure Debacle

One of premier housing analysts for Moody's Dismal Scientist, Celia Chen recently co-authored these projections for the housing industry:

"Prices could decline more than anticipated next year, once the processing issues are resolved. The number of loans affected by recent servicer-imposed moratoriums and the length of those freezes will determine their effect on the housing market and the broader economy."

"...self-imposed moratoriums affect approximately 27% of all properties in foreclosure."

"About 38% of foreclosure filings and 41% of foreclosure inventory are in judicial states, according to RealtyTrac."

"...Fannie Mae has suspended sales of properties purchased from their servicers."

"Since, according to RealtyTrac, foreclosure sales represent 31% of combined US new– and existing-home sales in September, the foreclosure suspensions could depress home sales by 84% until they are lifted. This would lower the foreclosure share of home sold to 25%, a substantial reduction that would tend to cause house prices to rise rather than fall."

"Once the [foreclosure] issues are resolved and foreclosures are completed, distress sales will cause house prices to dive again."

"The foreclosure freeze means that it will take longer to work through the huge backlog of distresses homes."

"Uncertainty…will hold banks back from lending to both businesses and households. Despite being flush with cash, banks will remain reluctant to lend more aggressively without clarity about the impact on their capital positions and profitability."

"Servicers are optimistic that few loans have been improperly processed…Further, the whiff of improperly foreclosure filings may embolden borrowers and their lawyers to tie up foreclosures in the legal system."

"Higher borrowing costs could weigh on housing demand…Servicers will pass along the costs of the current delays - for property preservation, taxes and insurance, additional court filings, attorney fees. And labor - to consumers in higher mortgage interest rates."

"Constrained credit will constrain housing demand…Buyers who were planning to buy non-distressed homes may put off purchases until the situation is resolved, fearing another wave of foreclosure sales that could drive down values. Additional, buyers might be wary of purchasing foreclosed homes from any servicer, knowing the potential for litigation. The consequence of this deterioration in confidence will be some combination of fewer home sales and lower prices."

A New Way to Cut a Mortgage - Recasting Your Mortgage

Written by M.P. McQueen at mp.mcqueen@wsj.com

Some homeowners who already have refinanced into low-interest-rate mortgages are using a little-known strategy to make their monthly payments even smaller.

Called "recasting" or "re-amortizing," the strategy allows a borrower to lower the monthly payment on an existing fixed-rate home loan for a small fee without having to apply for a new loan and without having to pay reappraisal and other fees.

Recasting also may enable homeowners to save on interest paid over the life of the loan, merely by putting a large sum of cash against the principal, whether or not they have refinanced already.

The bad news? Banks don't advertise the strategy, perhaps because it is less lucrative than refinancing a mortgage. And not all loans are eligible. To find out more, you will have to ask your lender directly.

At J.P. Morgan Chase & Co.'s Chase Home Finance unit, less than 200 mortgages a month are recast out of 10 million home loans outstanding, a spokesman says. At Bank of America Corp., about 200 to 300 a month recasting requests are received out of about 14 million home loans serviced by the company, a spokesman says. Neither bank has seen increased demand.

Here is how it works: A homeowner asks his loan servicer if he can put a large sum of money against the outstanding principal on the mortgage. Ordinarily, doing so would enable him to pay off the loan early, but he would still have to pay the same monthly note. But if the lender agrees to recast the mortgage, he may be able to reduce the monthly payment over the remaining term of the loan.

For example, a person with a 30-year $300,000 fixed-rate mortgage and an interest rate of 4.75% who recasted one year into the loan by putting in $60,000 toward the principal would trim his balance to $235,371. Assuming there were 29 years left on the loan, that would result in a monthly payment of $1,247 instead of the original $1,565.

Recasting can be a good choice for borrowers who have cash and want to reduce monthly payments but who can't refinance, such as those with no-documentation loans, most of whom can't get the same types of mortgages today due to tighter regulations, even if they have high income and good credit. (Self-employed professionals often find themselves in this boat.) And at a time of low interest rates on certificates of deposit and U.S. Treasury bills, paying off a mortgage early is a relatively safe investment that brings a return at least equivalent to the interest rate on the mortgage itself.

There are downsides to the strategy. Many financial experts advise against putting additional cash into one's residence, arguing that higher returns historically have been available in the financial markets and interest rates on bonds are likely to rise eventually.

They also warn of the possible tax consequences of retiring a mortgage early, because mortgage interest on a primary residence can be tax-deductible.

Mortgage recasting resembles a "cash in" refinancing—a newly popular strategy in which a borrower pays down principal on an existing loan in order to qualify for a new loan with a lower interest rate. In a recasting, though, the interest rate and the number of payments remain the same, and there are no transfer and title costs.

Getting permission to recast a loan can be tricky. The loan must be in good standing, and you need to secure permission from the loan servicer, who may or may not be the original lender. If the loan has been sold to an investor, the servicer also must secure its approval.

Since nearly two-thirds of all outstanding mortgages have been sold to investors via mortgage-backed securities, some homeowners could find this step difficult, especially those with subprime and "jumbo" mortgages. (Jumbos are loans that are too big to receive government backing through Fannie Mae, Freddie Mac or the Federal Housing Administration.) If approved, the borrower will need to sign a modification agreement, a legal document recording the change of contractual terms.

Each lender sets its own fees and requirements. Chase requires a minimum $5,000 principal payment to recast a loan and charges a $150 fee, for example. Bank of America generally charges $250. It suggests at least $1,000 be paid toward the principal, but has no minimum.

John Henry Low, a fee-only financial planner in Pine Plains, N.Y., says homeowners should have one to three years in savings as an emergency fund before tying up additional cash in their homes, even if the account is "paying nothing."

A financial adviser in Pennsylvania says he refinanced a $270,000, 15-year mortgage in November 2009 on a second home at a 4.25% interest rate. This year, he inherited some money and instead of having money "sitting around in a money-market fund earning a fraction of 1% interest," he decided to put $75,000 to pay down principal on his mortgage.

So he requested a recast in a letter to Chase, which had acquired the loan. To get it, he paid a $150 fee.

With 14 years remaining on the mortgage, his balance was reduced to $170,020, factoring in additional payments he had been making toward the principal. This reduced his monthly payment of principal and interest from $2,032 to $1,322, excluding escrow payments—a savings of $710 a month.

If he puts the $710 monthly savings back into the principal, he will pay off the mortgage in a little less than eight years, saving $24,300 in interest. He also has the flexibility of a reduced monthly payment "in case I lose my job or something in the future," he says.

You don't need to recast your loan in order to save thousands of dollars in interest over its life. You can simply make additional payments toward principal on an existing mortgage without paying a dime in additional fees, or make a 13th mortgage payment each year—assuming, of course, the loan has no prepayment penalty.

One thing in homeowners' favor: The recent overhaul of banking regulations has severely restricted prepayment penalties on new mortgages.

10 Reasons To Buy a Home

10 Reasons To Buy a Home

Enough with the doom and gloom about homeownership. Brett Arends explains why owning a home is a good thing.

By BRETT ARENDS.

Enough with the doom and gloom about homeownership.

Sure, maybe there's more pain to come in the housing market. But when Time magazine starts running covers that declare "Owning a home may no longer make economic sense," it's time to say: Enough is enough. This is what "capitulation" looks like. Everyone has given up.

After all, at the peak of the bubble five years ago, Time had a different take. "Home Sweet Home," declared its cover then, as it celebrated the boom and asked: "Will your house make you rich?"

But it's not enough just to be contrarian. So here are 10 reasons why it's good to buy a home.

1. You can get a good deal. Especially if you play hardball. This is a buyer's market. Most of the other buyers have now vanished, as the tax credits on purchases have just expired. We're four to five years into the biggest housing bust in modern history. And prices have come down a long way– about 30% from their peak, according to Standard & Poor's Case-Shiller Index, which tracks home prices in 20 big cities. Yes, it's mixed. New York is only down 20%. Arizona has halved. Will prices fall further? Sure, they could. You'll never catch the bottom. It doesn't really matter so much in the long haul.

Where is fair value? Fund manager Jeremy Grantham at GMO, who predicted the bust with remarkable accuracy, said two years ago that home prices needed to fall another 17% to reach fair value in relation to household incomes. Case-Shiller since then: Down 18%.

2. Mortgages are cheap. You can get a 30-year loan for around 4.3%. What's not to like? These are the lowest rates on record. As recently as two years ago they were about 6.3%. That drop slashes your monthly repayment by a fifth. If inflation picks up, you won't see these mortgage rates again in your lifetime. And if we get deflation, and rates fall further, you can refi.

3. You'll save on taxes. You can deduct the mortgage interest from your income taxes. You can deduct your real estate taxes. And you'll get a tax break on capital gains–if any–when you sell. Sure, you'll need to do your math. You'll only get the income tax break if you itemize your deductions, and many people may be better off taking the standard deduction instead. The breaks are more valuable the more you earn, and the bigger your mortgage. But many people will find that these tax breaks mean owning costs them less, often a lot less, than renting.

4. It'll be yours. You can have the kitchen and bathrooms you want. You can move the walls, build an extension–zoning permitted–or paint everything bright orange. Few landlords are so indulgent; for renters, these types of changes are often impossible. You'll feel better about your own place if you own it than if you rent. Many years ago, when I was working for a political campaign in England, I toured a working-class northern town. Mrs. Thatcher had just begun selling off public housing to the tenants. "You can tell the ones that have been bought," said my local guide. "They've painted the front door. It's the first thing people do when they buy." It was a small sign that said something big.

5. You'll get a better home. In many parts of the country it can be really hard to find a good rental. All the best places are sold as condos. Money talks. Once again, this is a case by case issue: In Miami right now there are so many vacant luxury condos that owners will rent them out for a fraction of the cost of owning. But few places are so favored. Generally speaking, if you want the best home in the best neighborhood, you're better off buying.

6. It offers some inflation protection. No, it's not perfect. But studies by Professor Karl "Chip" Case (of Case-Shiller), and others, suggest that over the long-term housing has tended to beat inflation by a couple of percentage points a year. That's valuable inflation insurance, especially if you're young and raising a family and thinking about the next 30 or 40 years. In the recent past, inflation-protected government bonds, or TIPS, offered an easier form of inflation insurance. But yields there have plummeted of late. That also makes homeownership look a little better by contrast.

7. It's risk capital. No, your home isn't the stock market and you shouldn't view it as the way to get rich. But if the economy does surprise us all and start booming, sooner or later real estate prices will head up again, too. One lesson from the last few years is that stocks are incredibly hard for most normal people to own in large quantities–for practical as well as psychological reasons. Equity in a home is another way of linking part of your portfolio to the long-term growth of the economy–if it happens–and still managing to sleep at night.

8. It's forced savings. If you can rent an apartment for $2,000 month instead of buying one for $2,400 a month, renting may make sense. But will you save that $400 for your future? A lot of people won't. Most, I dare say. Once again, you have to do your math, but the part of your mortgage payment that goes to principal repayment isn't a cost. You're just paying yourself by building equity. As a forced monthly saving, it's a good discipline.

9. There is a lot to choose from. There is a glut of homes in most of the country. The National Association of Realtors puts the current inventory at around 4 million homes. That's below last year's peak, but well above typical levels, and enough for about a year's worth of sales. More keeping coming onto the market, too, as the banks slowly unload their inventory of unsold properties. That means great choice, as well as great prices.

10. Sooner or later, the market will clear. Demand and supply will meet. The population is forecast to grow by more than 100 million people over the next 40 years. That means maybe 40 million new households looking for homes. Meanwhile, this housing glut will work itself out. Many of the homes will be bought. But many more will simply be destroyed–either deliberately, or by inaction. This is already happening. Even two years ago, when I toured the housing slump in western Florida, I saw bankrupt condo developments that were fast becoming derelict. And, finally, a lot of the "glut" simply won't matter: It's concentrated in a few areas, like Florida and Nevada. Unless you live there, the glut won't have any long-term impact on housing supply in your town.

South Florida’s Broward Co. bucks trend: Pending home sales up 17%

South Florida’s Broward Co. bucks trend: Pending home sales up 17%

Posted By Kerry Curry On September 7, 2010 @ 11:14 AM

Pending home sales in Broward County, the county seat of Fort Lauderdale, rose 17% in August compared to August 2009, but were flat with July 2010 figures.

Sales rose from 6,705 to 7,845 when compared to the year-ago figure, according to the Miami Association of Realtors and the Southeast Florida Multiple Listing Service (SEFMLS).

The figure includes single-family homes and condominiums. Pending sales were up just 0.19% when compared to July figures. A sale is listed as pending when the contract has been signed but the transaction has not yet closed.

Contrary to national trends [1], which show home sales trending lower, the South Florida real estate market continues to strengthen, primarily due to the highest concentration in the U.S. of international buyers, the Miami association said in a news release.

Pending condominium sales in Broward fared better than that of single-family homes. Broward County pending condominium sales in August were 27.4% higher than they were in August 2009, up from 3,414 to 4,350, but just 0.63% higher than the previous month. Broward pending sales of single-family homes rose 6.2% from a year ago, up from 3,291 to 3,495, but they decreased 0.34% when compared to the previous month.

“We are optimistic about signs of stability in the Broward marketplace,” said Terri Bersach, 2010 president of the Broward County Board of Governors of the Miami Association of Realtors.

Sales are up do in large part to international buyers, the association said.

An estimated 60% of sales involve a foreign buyer, and the region continues to be tops in the nation for international buying activity, the association reported.

Beaches and great prices are drawing the foreign interest, said Natascha Tello, president-elect of the Broward County Board of Governors of the Miami Association of Realtors. “These buyers are instrumental in helping to strengthen the South Florida real estate market.”

The Miami group represents 23,000 real estate professionals in all aspects of real estate sales, marketing and brokerage in the South Florida region and is the largest local association in the National Association of Realtors (NAR).

Underwater, but Will They Leave the Pool?

January 24, 2010

Economic View

Underwater, but Will They Leave the Pool?

By RICHARD H. THALER

MUCH has been said about the high rate of home foreclosures, but the most interesting question may be this: Why is the mortgage default rate so low?

After all, millions of American homeowners are “underwater,” meaning that they owe more on their mortgages than their homes are worth. In Nevada, nearly two-thirds of homeowners are in this category. Yet most of them are dutifully continuing to pay their mortgages, despite substantial financial incentives for walking away from them.

A family that financed the entire purchase of a $600,000 home in 2006 could now find itself still owing most of that mortgage, even though the home is now worth only $300,000. The family could rent a similar home for much less than its monthly mortgage payment, saving thousands of dollars a year and hundreds of thousands over a decade.

Some homeowners may keep paying because they think it’s immoral to default. This view has been reinforced by government officials like former Treasury Secretary Henry M. Paulson Jr., who while in office said that anyone who walked away from a mortgage would be “simply a speculator — and one who is not honoring his obligation.” (The irony of a former investment banker denouncing speculation seems to have been lost on him.)

But does this really come down to a question of morality?

A provocative paper by Brent White, a law professor at the University of Arizona, makes the case that borrowers are actually suffering from a “norm asymmetry.” In other words, they think they are obligated to repay their loans even if it is not in their financial interest to do so, while their lenders are free to do whatever maximizes profits. It’s as if borrowers are playing in a poker game in which they are the only ones who think bluffing is unethical.

That norm might have been appropriate when the lender was the local banker. More commonly these days, however, the loan was initiated by an aggressive mortgage broker who maximized his fees at the expense of the borrower’s costs, while the debt was packaged and sold to investors who bought mortgage-backed securities in the hope of earning high returns, using models that predicted possible default rates.

The morality argument is especially weak in a state like California or Arizona, where mortgages are so-called nonrecourse loans. That means the mortgage is secured by the home itself; in a default, the lender has no claim on a borrower’s other possessions. Nonrecourse mortgages may be viewed as financial transactions in which the borrower has the explicit option of giving the lender the keys to the house and walking away. Under these circumstances, deciding whether to default might be no more controversial than deciding whether to claim insurance after your house burns down.

In fact, borrowers in nonrecourse states pay extra for the right to default without recourse. In a report prepared for the Department of Housing and Urban Development, Susan Woodward, an economist, estimated that home buyers in such states paid an extra $800 in closing costs for each $100,000 they borrowed. These fees are not made explicit to the borrower, but if they were, more people might be willing to default, figuring that they had paid for the right to do so.

Morality aside, there are other factors deterring “strategic defaults,” whether in recourse or nonrecourse states. These include the economic and emotional costs of giving up one’s home and moving, the perceived social stigma of defaulting, and a serious hit to a borrower’s credit rating. Still, if they added up these costs, many households might find them to be far less than the cost of paying off an underwater mortgage.

An important implication is that we could be facing another wave of foreclosures, spurred less by spells of unemployment and more by strategic thinking. Research shows that bankruptcies and foreclosures are “contagious.” People are less likely to think it’s immoral to walk away from their home if they know others who have done so. And if enough people do it, the stigma begins to erode.

A spurt of strategic defaults in a neighborhood might also reduce some other psychic costs. For example, defaulting is more attractive if I can rent a nearby house that is much like mine (whose owner has also defaulted) without taking my children away from their friends and their school.

So far, lenders have been reluctant to renegotiate mortgages, and government programs to stimulate renegotiation have not gained much traction.

Eric Posner, a law professor, and Luigi Zingales, an economist, both from the University of Chicago, have made an interesting suggestion: Any homeowner whose mortgage is underwater and who lives in a ZIP code where home prices have fallen at least 20 percent should be eligible for a loan modification. The bank would be required to reduce the mortgage by the average price reduction of homes in the neighborhood. In return, it would get 50 percent of the average gain in neighborhood prices — if there is one — when the house is eventually sold.

Because their homes would no longer be underwater, many people would no longer have a reason to default. And they would be motivated to maintain their homes because, if they later sold for more than the average price increase, they would keep all the extra profit.

Banks are unlikely to endorse this if they think people will keep paying off their mortgages. But if a new wave of foreclosures begins, the banks, too, would be better off under this plan. Rather than getting only the house’s foreclosure value, they would also get part of the eventual upside when the owner voluntarily sold the house.

This plan, which would require Congressional action, would not cost the government anything. It may not be perfect, but something like it may be necessary to head off a tsunami of strategic defaults.

Richard H. Thaler is a professor of economics and behavioral science at the Booth School of Business at the University of Chicago.

The Way We Live Now - Walk Away From Your Mortgage!

John Courson, president and C.E.O. of the Mortgage Bankers Association, recently told The Wall Street Journal that homeowners who default on their mortgages should think about the “message” they will send to “their family and their kids and their friends.” Courson was implying that homeowners — record numbers of whom continue to default — have a responsibility to make good. He wasn’t referring to the people who have no choice, who can’t afford their payments. He was speaking about the rising number of folks who are voluntarily choosing not to pay.

Such voluntary defaults are a new phenomenon. Time was, Americans would do anything to pay their mortgage — forgo a new car or a vacation, even put a younger family member to work. But the housing collapse left 10.7 million families owing more than their homes are worth. So some of them are making a calculated decision to hang onto their money and let their homes go. Is this irresponsible?

Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. Former Treasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.” (Paulson presumably was not so censorious of speculation during his 32-year career at Goldman Sachs.)

The moral suasion has continued under President Obama, who has urged that homeowners follow the “responsible” course. Indeed, HUD-approved housing counselors are supposed to counsel people against foreclosure. In many cases, this means counseling people to throw away money. Brent White, a University of Arizona law professor, notes that a family who bought a three-bedroom home in Salinas, Calif., at the market top in 2006, with no down payment (then a common-enough occurrence), could theoretically have to wait 60 years to recover their equity. On the other hand, if they walked, they could rent a similar house for a pittance of their monthly mortgage.

There are two reasons why so-called strategic defaults have been considered antisocial and perhaps amoral. One is that foreclosures depress the neighborhood and drive down prices. But in a market society, since when are people responsible for the economic effects of their actions? Every oil speculator helps to drive up gasoline prices. Every hedge fund that speculated against a bank by purchasing credit-default swaps on its bonds signaled skepticism about the bank’s creditworthiness and helped to make it more costly for the bank to borrow, and thus to issue loans. We are all economic pinballs, insensibly colliding for better or worse.

The other reason is that default (supposedly) debases the character of the borrower. Once, perhaps, when bankers held onto mortgages for 30 years, they occupied a moral high ground. These days, lenders typically unload mortgages within days (or minutes). And not just in mortgage finance, but in virtually every realm of our transaction-obsessed society, the message is that enduring relationships count for less than the value put on assets for sale.

Think of private-equity firms that close a factory — essentially deciding that the company is worth more dead than alive. Or the New York Yankees and their World Series M.V.P. Hideki Matsui, who parted company as soon as the cheering stopped. Or money-losing hedge-fund managers: rather than try to earn back their investors’ lost capital, they start new funds so they can rake in fresh incentives. Sam Zell, a billionaire, let the Tribune Company, which he had previously acquired, file for bankruptcy. Indeed, the owners of any company that defaults on bonds and chooses to let the company fail rather than invest more capital in it are practicing “strategic default.” Banks signal their complicity with this ethos when they send new credit cards to people who failed to stay current on old ones.

Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property. The borrower isn’t escaping the consequences; he is suffering them.

In some states, lenders also have recourse to the borrowers’ unmortgaged assets, like their car and savings accounts. A study by the Federal Reserve Bank of Richmond found that defaults are lower in such states, apparently because lenders threaten the borrowers with judgments against their assets. But actual lawsuits are rare.

And given that nearly a quarter of mortgages are underwater, and that 10 percent of mortgages are delinquent, White, of the University of Arizona, is surprised that more people haven’t walked. He thinks the desire to avoid shame is a factor, as are overblown fears of harm to credit ratings. Probably, homeowners also labor under a delusion that their homes will quickly return to value. White has argued that the government should stop perpetuating default “scare stories” and, indeed, should encourage borrowers to default when it’s in their economic interest. This would correct a prevailing imbalance: homeowners operate under a “powerful moral constraint” while lenders are busily trying to maximize profits. More important, it might get the system unstuck. If lenders feared an avalanche of strategic defaults, they would have an incentive to renegotiate loan terms. In theory, this could produce a wave of loan modifications — the very goal the Treasury has been pursuing to end the crisis.

No one says defaulting on a contract is pretty or that, in a perfectly functioning society, defaults would be the rule. But to put the onus for restraint on ordinary homeowners seems rather strange. If the Mortgage Bankers Association is against defaults, its members, presumably the experts in such matters, might take better care not to lend people more than their homes are worth.

Roger Lowenstein, an outside director of the Sequoia Fund, is a contributing writer for the magazine. His book “The End of Wall Street” is coming out in April.

This article has been revised to reflect the following correction:

Correction: January 10, 2010
An essay on Page 15 this weekend about underwater mortgages misstates the parties who believe their homes will go up in value quickly. It is the homeowners — not the “mortgagees,” who issue mortgages.

Federal Housing Tax Credit

* The $8,000 tax credit is for first-time home buyers only. For the tax credit program, the IRS defines a first-time home buyer as someone who has not owned a principal residence during the three-year period prior to the purchase.
* The tax credit does not have to be repaid.
* The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $8,000. * The tax credit applies only to homes priced at $800,000 or less.
* The tax credit now applies to sales occurring on or after January 1, 2009 and or before April 30, 2010. However, in cases where a binding sales contract is signed by April 30, 2010, a home purchase completed by June 30, 2010 will qualify.
* For homes purchased on or after January 1, 2009 and on or before November 6, 2009, the income limits are $75,000 for single taxpayers and $150,000 for married couples filing jointly.
* For homes purchased after November 6, 2009 and on or before April 30, 2010, single taxpayers with incomes up to $125,000 and married couples with incomes up to $225,000 qualify for the full tax credit.


The $6,500 Move-Up / Repeat Home Buyer Tax Credit at a Glance

* To be eligible to claim the tax credit, buyers must have owned and lived in their previous home for five consecutive years out of the last eight years.
* The tax credit does not have to be repaid.
* The tax credit is equal to 10 percent of the home’s purchase price up to a maximum of $6,500. * The tax credit applies only to homes priced at $800,000 or less.
* The credit is available for homes purchased after November 6, 2009 and on or before April 30, 2010. However, in cases where a binding sales contract is signed by May 1, 2010, the home purchase qualifies provided it is completed prior to July 1, 2010.
* Single taxpayers with incomes up to $125,000 and married couples with incomes up to $225,000 qualify for the full tax credit.

One in Four Borrowers Under Water (25%)

ovember 24, 2009, WSJ
By RUTH SIMON and JAMES R. HAGERTY

The proportion of U.S. homeowners who owe more on their mortgages than the properties are worth has swelled to about 23%, threatening prospects for a sustained housing recovery.

Nearly 10.7 million households had negative equity in their homes in the third quarter, according to First American CoreLogic, a real-estate information company based in Santa Ana, Calif.

These so-called underwater mortgages pose a roadblock to a housing recovery because the properties are more likely to fall into bank foreclosure and get dumped into an already saturated market. Economists from J.P. Morgan Chase & Co. said Monday they didn't expect U.S. home prices to hit bottom until early 2011, citing the prospect of oversupply.

Home prices have fallen so far that 5.3 million U.S. households are tied to mortgages that are at least 20% higher than their home's value, the First American report said. More than 520,000 of these borrowers have received a notice of default, according to First American.

Most U.S. homeowners still have some equity, and nearly 24 million owner-occupied homes don't have any mortgage, according to the Census Bureau.

But negative equity "is an outstanding risk hanging over the mortgage market," said Mark Fleming, chief economist of First American Core Logic. "It lowers homeowners' mobility because they can't sell, even if they want to move to get a new job." Borrowers who owe more than 120% of their home's value, he said, were more likely to default.

Even home buyers who thought they were getting a bargain are now finding themselves underwater. The News Hub panel discusses a mortgage crisis that has left millions owing more than their homes are worth.

Mortgage troubles are not limited to the unemployed. About 588,000 borrowers defaulted on mortgages last year even though they could afford to pay -- more than double the number in 2007, according to a study by Experian and consulting firm Oliver Wyman. "The American consumer has had a long-held taboo against walking away from the home, and this crisis seems to be eroding that," the study said.

Just months after showing signs of leveling off, the housing market has thrown off conflicting signals in recent weeks. Jittery home builders and bad weather led to a 10.6% drop in new home starts in October, and applications for home-purchase mortgages have dropped sharply in recent weeks.

These same falling prices have boosted home sales from the depressed levels of last year. The National Association of Realtors reported Monday that sales of previously occupied homes in October jumped 10.1% from September to a seasonally adjusted annual rate of 6.1 million, the highest since February 2007.

The bump in sales was ahead of forecasts, spurred by falling prices, low mortgage rates and a federal tax credits for buyers. Congress recently expanded and extended the tax credits.

The latest First American data aren't comparable to previous estimates because the company revised its methodology. First American now accounts for payments made by homeowners that reduce principal, and it no longer assumes that home-equity lines of credit have been completely drawn down.

The changes reduced the total number of borrowers under water -- although both old and new methodology show increases from the previous quarter. Using the old methodology, the portion of underwater borrowers would have increased to 33.8% in the third quarter.

Homeowners in Nevada, Arizona, Florida and California are more likely to be deeply under water, according to the analysis. In Nevada, for example, nearly 30% of borrowers owe 50% or more on their mortgage than their home is worth, said First American.

More than 40% of borrowers who took out a mortgage in 2006 -- when home prices peaked -- are under water. Prices have dropped so much in some parts of the U.S. that some borrowers who took out loans more than five years ago owe more than their home's value.

Even recent bargain hunters have been hit: 11% of borrowers who took out mortgages in 2009 already owe more than their home's value.

Andrew Lunsford put 20% down when he bought his home in Las Vegas for $530,000 in 2004. Now, he said, his home was worth less than $300,000.

"I'm to the point where I feel I will never get my head above water," said Mr. Lunsford, a retired state trooper who works for an insurance company. He said his bank won't modify his loan because he can afford his payments, and he's unwilling to walk away, he said: "We're too honest."

Borrowers with negative equity are more likely to default if they live in a state where the bank can't pursue their assets in court, according to a study by the Federal Reserve Bank of Richmond.

But borrowers who are less than 20% under water are likely to maintain their mortgage if their loan is modified and the payments reduced, said Sanjiv Das, head of Citigroup's mortgage unit. "Beyond 120%, the most effective modification is a complete loan restructuring, including a principal reduction."

Mortgage companies have been reluctant to reduce mortgage principal over worries about "moral contagion, with people not paying their mortgage or redefaulting because they believed the bank would reduce their principal," Mr. Das said.

Many borrowers are so deeply under water that they can't take advantage of lower rates and refinance their mortgage. "We're declining hundreds of loans each month," said Steve Walsh, a mortgage broker in Scottsdale, Ariz. "The only way we will make headway is if we allow for a streamlined refinance where the appraisal is irrelevant."

Realtors reported that home sales in October were up 24% from a year earlier. The number of homes listed for sale nationwide was 3.57 million at the end of October, down 3.7% from a month earlier, the trade group said. But that inventory could rebound next year as banks acquire more homes through foreclosure.

About 7.5 million households were 30 days or more behind on their mortgage payments or in foreclosure at the end of September, according to the Mortgage Bankers Association. Many of those homes will be lost to foreclosure, adding to the supply of homes for sale.

A recovery could pay off for the roughly 30% of underwater borrowers who owe 110% or less of their home's value and are able to endure the slump. "Most people prefer to stay in their home" even if the value of their property has declined, said John Burns, a real-estate consultant based in Irvine, Calif.

California home sales and prices inch up

October 16, 2009|Peter Y. Hong

The state's housing market showed more signs of recovery in September, as the median sales price rose nearly 1% from August, to $251,000, a real estate research firm reported Thursday.

The number of homes sold in California also was up last month 1% from August. A total of 40,216 homes were bought in California in September, roughly the same number as the same month last year, according to San Diego-based MDA DataQuick.

The pricey San Francisco Bay Area accounted for a higher percentage of homes sold statewide, bolstering prices. The median Bay Area home sales price in September was up 1%, to $365,000. The number of Bay Area homes sold was up 5% from August; the total of 7,879 homes sold was also 9% greater than the number of homes sold the same month last year.

DataQuick said the relatively brisk activity was driven by sales of discounted homes that had been foreclosed as well as by a federal $8,000 tax credit for home buyers set to expire at the end of November.

"This market may be closer to normal than it was a half-year ago, but it's still out of kilter," said John Walsh, DataQuick's president. "The sales mix is still lopsided, tilting toward the low end, and lending institutions are only making really safe mortgage loans."

The percentage of foreclosed homes sold has been declining. Statewide, 42% of homes sold in September had been foreclosed within the previous 12 months, DataQuick said. In February, such homes hit a peak of 59% of sales.

In the Bay Area, 33% of homes sold in September had been foreclosed in the previous year, down from a high of 52% in February.

Those trends track with Southern California's September sales, which DataQuick reported Tuesday. The median sales price in Southern California last month was $275,000, unchanged from August, and the total of homes sold, 21,539, was roughly even with August and up 5% from a year ago.

Foreclosures as a percentage of sales also declined: 40% of Southern California homes sold in September were foreclosed in the previous 12 months, down from a high of 57% in February.

Even if foreclosures no longer constitute most sales, they continue to define the market because all sellers need to compete with those low-priced properties, said Leslie Appleton-Young, chief economist for the California Assn. of Realtors. "They're in the same marketplace, in the same communities," she said of foreclosed homes sold alongside those offered for sale by individuals or home builders.

Appleton-Young said higher-priced homes also have more room to decline in price than the lowest-priced homes.

"Certainly at the upper end, prices could continue to soften a bit as we go forward. Foreclosures at the high end are starting to accelerate with white-collar job losses," she said.

--

peter.hong@latimes.com

Renting A Home A Better Deal Than Buying In Much Of U.S.

Those glamorous people you see in the upscale boutiques of Beverly Hills and Santa Monica may have a secret beyond their romantic lives and surgical histories.

Many of these fashionable glitterati — squeezed out of palatial homes they'd bought on debt — may have just put their rent checks in the mail.

Renting now makes sense in many markets — even for the very prosperous.

Kami Merabi, president of L.A.- based realtor Merabi & Sons, says he personally has 160 to 165 clients who've moved out of pricey homes to rent apartments. "They have $3 million in debt and the house is worth $2 million. They walk away from the mortgage," said Merabi. Actors, actresses, music producers and business owners star in that cast of 160 walk-aways.

It's not just in upscale enclaves like Beverly Hills that renting has become an attractive option. The Washington-based Center for Economic and Policy Research periodically computes the ratio of home prices to annual rental costs. A typical historical ratio is 13 to 14, notes Dean Baker, co-director of CEPR. But in 13 areas of the U.S., home prices are 18 times or more rental costs. These are still "bubble markets."

Among the markets where rentals appear to be a bargain: San Jose; the Bridgeport-Stamford-Norwalk, Conn., area; San Francisco-Oakland; Seattle; and the New York metro area. Using a different ownership-to-rental methodology, Moody's Economy.com cites Oakland, Miami, Boston and Orlando as markets where housing remains overvalued.

Of course, the choice to buy or rent is often dictated by personal factors beyond cost. And every market has unique features that can tilt the equation. In Los Angeles, for example, the costs of property upkeep alone must be weighed, says Merabi. On a high-end property, gardening costs can run to $100 a week. Pool upkeep and maintenance can add another $100 to $125 a week, he says. That's nearly $1,000 a month beyond mortgage and property taxes.

Ownership Has Benefits

Home ownership does offer two major financial benefits: mortgage payments are tax-deductible and homeowners build up equity over time. And, temporarily, the home-buyer tax credit provides a big upfront inducement to buy a home.

But if prices drop after a home is purchased, it will take longer for owners to build equity. Current buyers in 21 markets — including San Jose, L.A., San Francisco and New York — cannot expect to have any positive equity by 2013, according to CEPR.

Housing Tax Credits Extended

Federal Housing Tax Credit

$8,000 Tax Credit for First Time Buyer

$6,500 Tax Credit for Repeat Home Buyer

www.federalhousingtaxcredit.com

Foreclosures California / Monterey October 2009

NOD's: an 7.47 percent decrease from September to October. 35,323 total filings, which is an 103.46 percent increase over October 2008.

Trustee Sales: a 13.02 percent increase from September to October. 37,421 total filings, which represents a 41.74 percent increase over October 2008.

Auction Sales Back to REO: a 22.24 percent increase from September to October. 16,081 total sales. A 20.95 increase year over year.

Cancellations: an increase of 0.94 percent totaling 8,741 previously scheduled sales. This represents a 22.52 percent decrease from October 2008.

Third Party Sales: properties sold to investors at the court steps increase 16.42 percent in October 2009. A total of 3,971 properties sold to investors or junior lien holders.

Monterey County:

Notice of Default / Notice of Trustee Sale / Back to Bank / Sold to Third Party

October 2009: 405 / 459 / 184 / 40
September 2009: 410 / 347 / 186 / 32
October 2008: 199 / 416 / 217 / 4

Souring Prime Loans Compound Mortgage Woes

WSJ 8/21/2009

By NICK TIMIRAOS

A survey found that one in eight U.S. households with mortgages was in foreclosure or behind on its mortgage payments during the second quarter, putting added pressure on programs aimed at preventing foreclosures.

While foreclosure starts have slowed on the subprime loans that ignited the mortgage and banking crisis, loans extended to borrowers with good credit are deteriorating at a faster clip as falling home prices and mounting job losses weigh on more households.

The Mortgage Bankers Association said its latest survey, released Thursday, showed that 13.2% of mortgages on homes with one to four units were at least a month overdue or in the foreclosure process in the April-to-June period, up from 12.1% in the first quarter and 9% a year earlier.
As home sales have picked up in recent months, some were expecting foreclosures and delinquencies to ease. But Jay Brinkmann, chief economist at the MBA, said foreclosures weren't expected to peak until later in 2010 when the economy improves.

"Just because we see prices level off doesn't necessarily mean we'll see a big reduction in foreclosures," said Mr. Brinkmann, in part because many homeowners would still owe more than their homes were worth.

Deteriorating prime loans are increasingly behind the steady rise in delinquencies and foreclosures. Among prime loans, 9% were past due or in foreclosure at the end of June, up from 5.35% one year ago. For subprime loans, those for borrowers with weak credit records or high debts relative to income, the rate was 39.5%, compared with 30% last year.

Prime loans, however, accounted for 58% of foreclosure starts, up from 44% last year. Meanwhile, subprime mortgages accounted for 33% of foreclosure starts, down from 49%. Prime fixed-rate mortgages, usually considered among the safest of all loan types, accounted for one in three foreclosure starts, up from one in five.

More than 235,000 borrowers have begun trial mortgage modifications under an Obama administration effort launched in March that focuses on reducing monthly mortgage payments for borrowers who have fallen behind on their payments. An additional 60,000 borrowers with little or no home equity have refinanced to lower rates through a parallel program launched by the administration.

But modification programs may not be able to help the growing number of borrowers who are falling behind on their payments because they are losing their jobs. Most loan-modification programs have been designed to help borrowers with loans that reset to higher payments or with high debt-to-income ratios.

The first wave of foreclosures that began two years ago, when the economy was still relatively healthy, was triggered by a downturn in housing prices that made it harder for subprime borrowers to refinance mortgages that were resetting to higher payments. Now, foreclosures are increasingly being driven by traditional economic problems, including falling home prices, falling incomes and rising joblessness.

Four states -- Florida, Nevada, Arizona and California -- continue to account for a large part of foreclosures in the U.S., but their share of new foreclosures fell to 44% in the second quarter, from 46% in the first quarter. In Florida, nearly 23% of mortgages were past due, including 12% that were in some stage of foreclosure and 5% that were 90 days or more past due at the end of June. Nevada trailed closely behind, with 21% of mortgages that were late or in foreclosure.
More borrowers in areas that have seen a big plunge in home prices now have mortgages that exceed the value of their homes. Two-thirds of borrowers in Nevada and nearly half of borrowers in Arizona and Florida had negative equity at the end of June, according to First American CoreLogic, a real-estate-data firm. Nationally, a third of mortgaged properties were underwater.

Foreclosures also continued to rise on loans backed by the Federal Housing Administration, to 3% from 2.8% in the first quarter and 2.2% one year ago. The collapse of the subprime-mortgage market in 2007 has swelled the volume of loans headed to the FHA, which insures lenders against the risk of defaults on loans. FHA-insured loans are available to borrowers who make down payments as low as 3.5%.

Originations of FHA loans increased by 30% in the second quarter from the previous quarter, according to Inside Mortgage Finance, a trade publication.

Why the ‘Wave’ of Foreclosure Listings Might Never Happen

By Nick Timiraos

For weeks, even months, real-estate professionals have been asking the same question: when will the so-called shadow inventory of homes in the process of foreclosure finally hit the market?
Most mortgage servicers ended a foreclosure moratorium in March, and pre-foreclosure filings have accelerated since then, even as the supply of bank-owned properties in some markets has dwindled.

But what if that wave of foreclosures never hits the market? “For those of you still waiting for a surge of foreclosure sales, the truth is you’ll likely be waiting a long time,” writes Sean O’Toole, the founder of ForeclosureRadar.com, which tracks foreclosure filings in California. He breaks down his argument at his blog in this pithy post here.

For one, the time between a mortgage default and a foreclosure listing has grown longer as more homeowners try to complete loan modifications or short sales. Banks aren’t likely to cancel foreclosures even if they put a borrower into a trial modification. Instead, they’ll simply keep the opportunity to foreclose in case the loan modification fails.

One clue that modifications will work: cancellations of foreclosure auctions. So far, cancellations are up slightly, Mr. O’Toole says, but not enough to explain the yawning gap between mortgage defaults and bank-owned listings.

One possibility: foreclosures will simply stay at an elevated level for the next couple years, he says, but there won’t be a huge wave of inventory added all at once. For now, California is seeing a housing inventory shortage, in part because short sales are still hard to execute. Many homeowners are underwater and can’t sell, and those who can don’t want to put their homes on the market if they’re looking at a big loss.

Mr. O’Toole has done some interesting analysis that shows just how profound government policies may have been in encouraging banks to slow down foreclosures. His argument: When the U.S. last September began purchasing direct obligations of government-sponsored mortgage companies, and later began buying mortgage-backed securities that sent a message to banks that they didn’t need to refill empty cash cushions by foreclosing. Policymakers also changed accounting rules so that banks wouldn’t have to take as severe writedowns. (Scroll down this page to see the accompanying chart).

While the raw data suggests that foreclosures should be increasing, it’s harder to predict because “there’s so much government middling into this process,” Mr. O’Toole told the Developments blog. “When you have this much government intervention going on, things don’t necessarily proceed as they should.” (See our earlier post this week on the topic.)

As for the idea that banks are deliberately holding onto foreclosed homes? Mr. O’Toole shoots that idea down too, with a quick back-of-the-envelope sketch that shows that while the gap between bank repossessions and foreclosure sales stands at around 90,000 in California, the actual shadow inventory is probably closer to 22,500.

Readers, what do you think: is the shadow inventory just a Realtor pipe dream?

The Future of Home Prices

By JAMES R. HAGERTY
Over the past few years, Americans have had a brutal lesson in the risks of real estate. House prices have crashed more than 35% in some parts of the country, millions of people are losing their homes to foreclosure, and banks are failing.

The takeaway? Many Americans still see real estate as their best shot at wealth. In survey after survey, people expect prices to bounce back -- in some cases, as soon as six months from now.

Those hoping for a quick rebound are likely to be disappointed. Economists and other pros generally say home prices won't bottom out before the second half of 2009, and some don't see a bottom until 2011 or 2012. Even when they stop falling, prices may scrape along the bottom of the rut for years.

Down the Road

And longer term? Over the next 10 to 20 years, housing economists expect prices will rise again -- but, on average, probably not nearly as much as they've averaged over the past decade. That isn't to say that some places won't experience booms (and busts). But, the experts say, you should generally expect house prices to rise just a bit more than inflation and roughly in line with household income.

Karl Case, an economics professor at Wellesley College whose name adorns the S&P Case-Shiller home-price indexes, has studied U.S. house prices going back to the 1890s. Over the long run, he says, home prices tend to increase on average at an inflation-adjusted rate of 2.5% to 3% a year, about the same as per capita income. He thinks that long-run pattern is likely to continue, despite the recent choppiness.

Other experts make similarly modest predictions. William Wheaton, a professor of economics and real estate at the Massachusetts Institute of Technology, says he expects house prices to increase at a rate roughly one percentage point higher than inflation over the long term. Celia Chen, director of housing economics at Moody's Economy.com, a research firm, expects house prices to increase an average of around 4% a year over the next couple of decades.

Some experts say it's a bad idea to count on your home rising in value at all. People should think of their own homes mainly as places to live, not as investments, advises Kenneth Rosen, chairman of the Fisher Center for Real Estate at the University of California, Berkeley. Sure, home mortgages provide tax benefits, and most homes appreciate in value over the long run, he says, but there is always risk.

For all of those forecasts, many Americans are undaunted. Consider three surveys, all from October.

In a poll of 2,000 adults, real-estate-data provider Zillow.com found that 61% believed the value of their home would either remain level or rise over the next six months. Another survey of more than 1,000 homeowners, sponsored by real-estate-services firm Realogy Corp., found that 91% thought that owning a home was the best long-term investment they could make. And an online survey of 5,000 people commissioned by Citigroup found that just 32% believed it was a good time to invest in stocks -- but 51% said it was a good time to buy a home.

"I just believe in real estate," says Jason Schram, a lawyer in Chicago who has bought two rental properties this year at what he considers fire-sale prices. "I've seen over and over people I know build wealth through rental real estate, and that's the path I intend taking, even though it's a bit bumpy at the moment."

Location, Location

So, as homeowners and buyers look ahead, what factors will determine whether their homes are really likely to rise in value, rather than just in their dreams? What are some of the bullish signs -- and some of the bearish ones?

In the long term, house prices are driven by fundamentals that are hard to predict: immigration, birth rates, the size and nature of households, and incomes. The trick is to figure out where job and income growth will be strongest and where immigrants and others will want to live.
William Frey, a demographer and senior fellow at the Brookings Institution, a think tank in Washington, says young people and immigrants are likely to flow to Florida, Georgia, the Carolinas, Tennessee, Virginia, Nevada, Arizona and some of the more affordable interior parts of California.

These areas generally have lower housing costs than the Pacific Coast or Northeast and job growth from modern industries and leisure businesses, he says. Areas with little immigration and low growth or falling populations are likely to include Michigan, Ohio, the Dakotas, Iowa, western Pennsylvania and upstate New York, Mr. Frey says.

Hit Parade

Newland Communities LLC, a San Diego-based planner and developer of neighborhoods, employs a full-time researcher to study long-term housing demand and ranks metro areas in terms of their growth prospects. Among those near the top of Newland's hit parade are Washington, D.C., Raleigh and Charlotte, N.C., Atlanta, Dallas, Houston, Phoenix and Las Vegas, says Robert McLeod, the developer's chief executive.

All of them, Newland believes, will keep growing because they have well-diversified regional economies and other attractions, including mild climates. With the exception of Washington, they all have fairly affordable housing costs. Washington has a highly educated work force, high incomes, a stable source of government-related jobs and rapidly expanding technology firms, Newland says.

"The older industrial cities are going to suffer" from shrinking employment and forbidding weather, says Mr. Rosen of the University of California. Some Sun Belt cities, including Atlanta, also could languish if traffic jams and sprawl ruin their charms, he says.

Among metro areas that Mr. Rosen expects to do well in the long run are Albuquerque, N.M.; Boise, Idaho; Salt Lake City; Seattle; Portland, Ore.; Denver and Colorado Springs, Colo. He says those places generally offer "urban vitality" and "easy access to outdoor activities" combined with affordable housing and good job-growth prospects from modern industries, such as biotechnology.

Still, just looking at population trends isn't enough. Prices in the crowded coastal areas tend to be more volatile, rising and then falling much faster during booms and busts than do inland areas, Mr. Case notes. Shortages of land and building restrictions make it hard for builders to respond quickly when demand for housing rises in coveted neighborhoods near the coasts; further inland, it's usually much easier to find vacant homes or land, and so sudden movements in prices are less likely.

For instance, despite rapid growth, home prices in Texas cities have tended to climb only gradually. Those cities typically have plenty of room to sprawl, and Texas regulates land use less strictly than many other states. Supply swells to meet demand.

The Wonder Years

What's more, no one can assess the outlook for housing without considering the effects of 78 million aging baby boomers. For instance, some housing experts believe the boomers will be much less likely than their parents to settle for sun and golf in their retirement; they may prefer urban settings with lots of cultural life or to live nearer friends and families. That could mean higher demand -- and increased prices -- for housing in urban neighborhoods.

Most of this is just guesswork, though. "A lot of people have theories about the baby boomers," says Mr. Frey, the Brookings demographer, but boomers always have tended to confound expectations.

Dowell Myers, a professor of urban planning and demography at the University of Southern California, warns that the retirement of boomers over the next two decades is likely to depress house prices in many areas. As boomers relocate to retirement homes and cemeteries, there will be a lot more sellers than buyers in parts of the country, he says.

"It's going to really mess up the housing market," says Mr. Myers. He predicts that this "generational correction" will be larger and longer-lasting than the current slump.
To get a sense of the effects of aging boomers, Mr. Myers looks at the number of Americans 65 and over per 1,000 working-age people. He sees that number soaring to 318 in the year 2020 and 411 in 2030 from 238 in 2000.

Many people over 65 buy homes, of course, but as they get older they become more likely to sell than buy. People aged 75 to 79 are more than three times as likely to be sellers than buyers, Mr. Myers says.

In some areas, younger people will be happy to buy (and probably renovate) those boomer nests. The problem, Mr. Myers says, will be in places where lots of older people are selling and few young people are settling down. He says the effects will be strongest in the "coldest, most congested and most expensive states rather than the high-growth states of the South or West." Among the states where Mr. Myers sees downward pressure on prices within the next decade: Connecticut, Pennsylvania, New York and Massachusetts.

Of course, applying demographic trends to house-price forecasts can be hazardous. Economists N. Gregory Mankiw and David Weil predicted in a paper in 1989 that demographic trends would lead to a "substantial" fall in real, or inflation-adjusted, home prices over the next two decades "if the historical relation between housing demand and housing prices continues." They reasoned that baby boomers were coming to the end of their prime house-buying years and that the smaller baby-bust generation would bring lower demand for housing.

That warning proved, at a minimum, premature. Despite the recent drop, the average U.S. home price is up about 35% in real terms since the end of 1989, according to the Ofheo index. Messrs. Mankiw and Weil both declined to comment.

Few people who invest in housing have time to follow these academic debates. For nearly four decades, Rich Sommer and his wife, Carolyn, have been investing in rental properties in and near Stevens Point, Wis. Mr. Sommer describes real estate as a good way "to get rich slowly." He and his wife, both former schoolteachers, gradually have built their net worth from zero to around $2.5 million through their rental properties. They have dealt with countless plumbing emergencies, evicted deadbeats and even once had to clean up after a suicide in one of their properties.

Still, he hasn't been hit very hard by the real-estate crash, in part because the Midwest is much less vulnerable to booms and busts than coastal areas. When asked what he would do if someone handed him $1 million today, Mr. Sommer doesn't hesitate: He would put it into real estate.—Mr. Hagerty is a staff reporter for The Wall Street Journal in Pittsburgh.

Write to James R. Hagerty at bob.hagerty@wsj.com

Home Prices Rise Across US

Home prices in major U.S. cities registered the first monthly gain in nearly three years, according to a new report that provided fresh evidence that the severe U.S. housing downturn could be easing.

Standard & Poor's Case-Shiller index, which tracks home prices in 20 metropolitan areas, rose 0.5% for the three-month period ending in May, compared with the three months ending in April. It marked the index's first increase after 34 straight months of decline, and came after a variety of housing indicators has shown glimmers of hope for the past several months.

Home prices remained down about 17% from a year earlier, according to the index. According to S&P/Case-Schiller's seasonally adjusted numbers, which it began reporting only earlier this year, prices in May posted a 0.2% decline.

But most Wall Street economists who discussed the survey focused on the April-to-May rise, saying it represents a significant change in direction. Home prices in 15 of the 20 areas in the survey rose or remained stable.

The results were also consistent with other recent housing data, these economists said. Sales of new and existing homes rose for three consecutive months through June. Housing starts were up in June, and an index of builder sentiment rose in July, though both remained at low levels.
May's uptick came in part as home prices in some areas fell enough for investors and first-time buyers to begin competing for bargains, helping to ease the backlog of unsold homes.
Other likely sales spurs included mortgage rates that fell to 50-year lows, an $8,000 federal-tax credit for first-time homebuyers and the ability of buyers to secure mortgages from the Federal Housing Administration with as little as 3.5% down.

The latest readings don't necessarily herald a full-blown recovery for the housing market or broader economy. Consumer confidence remains near record lows. The U.S. unemployment rate, at 9.5% in June, is expected to hit double digits before year end, making swift growth and an expanding labor force unlikely anytime soon.

The home-sale numbers surprised Robert Shiller, the Yale University economist who helped create the Case-Shiller indexes. "The change in momentum here is very significant," he said. Last month, Mr. Shiller forecast sustained home-price declines into the next few years, which he said now looks less plausible. He said he expects home prices to remain near current levels for the next five years.

U.S. home prices have fallen by about one-third since their peak in the second quarter of 2006, according to S&P, and are roughly back at 2003 levels.

Some analysts warn that the home-price uptick could reverse as rising unemployment causes more Americans to fall behind on their mortgage payments and end up in foreclosure.
One factor that apparently drove the March-through-May uptick was a falling share of homes sold at distressed prices, through foreclosure and so-called short sales. Distressed sales accounted for 33% of existing home sales in May and 31% in June, down from a high of nearly 50% earlier this year, according to the National Association of Realtors.

The drop in foreclosure sales was likely the product of U.S. banks' moratorium on home foreclosures, which they undertook as the government launched a round of programs to modify and refinance loans for at-risk borrowers. Most banks ended their foreclosure moratoria in March.

Interest rates also hovered at or below 5% for most of the March-May period, before rising in June.

"Were it not for those rate reductions and the moratorium, you'd see prices down right now," says Ronald Temple, co-Director of Research at Lazard Asset Management. He expects the index to stabilize or increase in the short-term, but forecasts another 12-15% decline in prices thereafter.

Regardless, a combination of still-low interest rates and eager sellers continues to fuel competition for heavily discounted properties. Some buyers are finding that investors with all-cash offers are consistently beating them in bidding wars.

Stacy Watson, a 39-year-old human-resources manager in the Riverside, Calif., area, says she has made losing bids on at least eight homes since mid-June. On Tuesday, she says, she decided to increase her offer for a five-bedroom home in Perris, Calif., to $198,000, nearly $20,000 more than the asking price.

Ms. Watson and her real-estate agent say the bank-owned home has drawn more than 10 offers in less than a week on the market. "Everyone says it's such a great housing market for buyers," she says. "No. This is hard."

Would-be homeowners have benefited from government programs, including one that allows buyers of properties owned by Fannie Mae to receive mortgages from the government-controlled mortgage-finance company with down payments as low as 3%.

When Nelly Whiteman and her husband recently bought a house out of foreclosure from Fannie Mae, she figures they competed against at least two other buyers. The 27-year-old administrative assistant says they snagged their three-bedroom home in Orangevale, Calif., for $176,000, or about $5,000 more than the asking price. They now pay about $1,080 a month in mortgage payments, insurance and taxes.

"It's an extra bedroom for around what we were paying for rent," she says.
The budding housing recovery isn't being felt across the country. Prices increased in 13 of 20 surveyed markets, with the strongest gains coming in Cleveland, up 4.1% from April; Dallas, up 1.9%; and Boston, up 1.6%.

Home prices were flat in the New York and Tampa, Fla., areas. The survey doesn't track condominium or cooperative apartment sales, so it doesn't take into account the majority of housing stock in New York City.

Prices continue to fall in some markets, particularly overbuilt Sunbelt cities. Prices in Las Vegas declined 2.6% in May from April and were down 32% from a year ago, according to S&P/Case-Shiller. Phoenix prices declined 0.9% from April and were down 34% from May 2008. San Francisco, Miami and Detroit also continued to see year-on-year declines of about 25%.

"Is this just a spring bounce that was partly related to the drop in distressed sales?" asks Thomas Lawler, an independent housing economist based in Leesburg, Va. One key question, he says, is whether another wave of foreclosures could come along to offset the home-inventory decline that has boosted many markets.

In many of the hardest-hit cities, banks appear to be slow to put foreclosed homes on the market. In Las Vegas, for example, banks had taken title to 13,200 homes as of June. That surpassed the total number of homes listed for sale in Las Vegas last month, according to SalesTraq, which monitors inventory in Las Vegas. "Are the banks are intentionally holding back inventory? That's a question a lot of us have," says Larry Murphy, president of SalesTraq.

Some housing analysts say they expect falling prices on mid-to high-end homes to weigh on the Case-Shiller index. The supply of these homes has swelled in recent months as borrowers struggle to obtain financing.

Borrowers of "jumbo" mortgages, which are too big for government backing, face higher rates. Banks are also requiring bigger down-payments at a time when traditional "trade-up" buyers are finding that the equity in their homes has fallen.

"We think [the sales index] will look like a 'W,' where prices go up until the foreclosures at the higher end translate into another leg lower," says Ivy Zelman, chief executive of Zelman & Associates, a housing-research firm.

The improvement in housing likely gave a small boost to U.S. gross domestic product in the second quarter, economists said. After data showed construction of new homes was stronger than expected in June and was revised higher in April and May, Macroeconomic Advisers, a St. Louis-based forecasting group, ratcheted up its estimate of second-quarter economic growth. It now sees output shrinking at just a 0.5% annual rate in the second quarter, compared with declines of 6.3% and 5.5% in the previous two quarters.

The government will report its official estimate of second-quarter growth on Friday.