This is probably one of the most informative articles I have read in a long time about the state of the real estate market. It’s dense but well worth the read. The overall tone is optimistic. The bit below in italics is verbatim from the the article. I thought it was interesting that a clear distinction was drawn between our current crisis and The Great Depression.

Today’s housing bust IS unique in U.S. economic history. It began in good, not bad, economic times, and has proven to be national rather than regional in scale, with markets around the country detonating like Chinese firecrackers between early 2006 and mid-2007.

With the benefit of hindsight, one can discern a concatenation of developments that made the latest cycle almost inevitable. In the aftermath of the 2000 stock-market bust and the 2001 terrorist attacks, and amid heightened fears of deflation, the Federal Reserve drove short-term interest rates to near-historic lows and flooded the nation’s financial system with money. Cheap funding spurred a surge in home-buying, and drove the home-ownership rate to a peak of 69% of all U.S. households by 2004, up from 64% a decade earlier.

Prices in many areas began to go parabolic in ‘04, at the time the Fed began to raise rates. Affordability became a problem in some markets, and cash-out refinancings began to slow. On Wall Street, however, where the securitization of mortgages had become a huge profit center, the demand for new mortgage product was unrelenting. Mortgage brokers and other loan originators were also getting rich off the business, and thus were eager to oblige. By 2005 the mortgage industry had began churning out new “affordability” products that featured low “teaser” rates in the early years of a mortgage to keep monthly payments low. Long-sacrosanct down-payment and family debt-to-income requirements were jettisoned. Other products enabled borrowers to repay interest only in the early years of a loan, while so-called option ARMs added the unpaid portion of monthly interest to the principal balance.

Come 2006, many lenders were scraping the bottom of the barrel to find new borrowers, some of whom, by fibbing about their annual income and net worth, often with the connivance of mortgage brokers, secured “liar loans.” As greed gave way to fraud, both borrowers and lenders came to believe that ever-rising home prices would cure any defects in the underwriting process.

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According the article, home prices are expected to steady by year end, with the pace of foreclosures slowing shortly. The feeling is that most of what was destined to foreclose has already done so and the banks have taken their biggest lumps already.

A couple things that I am taking away from the article:

1. If you are looking for a deal make one now.
2. If you are investor or have a desire to be a landlord it is probably a good time to investigate some rental property because lending guideline are going to tighten up and banks are going to become much more strict in their underwriting process. This will mean there a fewer people out there able to buy for themselves and more people out there looking to rent.

On that note, check out 3215 Gravois and 3880 Juniata.
Both are excellent rental properties.

This first one deals with foreclosure buses, a tour arranged outside of Cleveland that takes prospective buyers on tours of foreclosures. Immediately following this is a story of “Foreclosure Behind Las Vegas Gates” on one of the hardest hit cities, and how it effects gated communities.

Appraisals are a common part of most real estate transactions. Anytime a person applies for a loan an appraisal is ordered to help the bank determine whether or not making the loan will be a good risk. There are many other reasons to order an appraisal but in this case (seeking a loan) the appraiser is working for the bank.

Appraisals are not an exact science, but there is a very detailed process that appraisers must go through to determine value. Their intended audience is the underwriter at the bank who will be approving the loan. The appraiser’s job is to be the eyes and ears for the bank and they are required to stick to the facts. However, since no two homes are exactly alike there are many subjective “facts”

A bit about the process

First step is to gather data by researching the tax records and MLS. Apraisers must also study the subject property’s sales history for the past three years, determine the zoning for and around the subject property, acquire the tax information, study the site and select appropriate comps.

Selecting comparable properties is one of the most important factors that helps appraisers determine value.

A comp must be similar in design: a ranch home must be compared with a ranch home.

A comp must be within 1 mile radius (for the city this radius is even smaller)

A good comp must have sold within the last 6 months

A comp must be similar in site and size

Again, since no two homes are ever the same, adjustments must be made for amenities like fireplaces, spa-bathrooms and hardwood floors. The adjustments are made to the comparable properties and if the net of all the adjustments made alter the value by more than 15% either way, the comp is discarded.

Another part of the appraiser’s job is to study the terms of the contract. The appraiser is required to review all the terms of the contract, including all offers, counter offers and addendums including any kind of concession in terms of closing costs and prepaids to determine how these conditions will affect value.

The appraisal is performed at the expense of the buyer and the cost of the appraisal will be billed to the buyer at closing in the form of closing costs. While the appraisal is techinically done for the benefit of the lender it is still an important safe guard for the purchaser. According to the SLAR Appraisal Rider, the buyer has three choices if their appraisal does not meet the agreed upon purchase price stated in the contract.

1. The buyer can terminate the contract with earnest money returned to the buyer.

2. The contract can be renegotiated to reflect the value stated in the appraisal.

3. The buyer can continue with the agreed upon purchase price if the buyer can bridge the gap between appraisal and purchase price with the buyer’s own funds.

All of these stats are from the cover story, The Law of Supply and Demand, in last week’s St. Louis Business Journal.

Downtown Projects Still in Development

• The Arcade 134
• The Alexa 85
• The Avenida 48
• Cupples Station 148
• Ballpark Village Condos 250
• City Museum Lofts Phase II 18
• The Concord 135
• The Ford 26
• Jefferson Arms 100
• The Laurel 99
• Leather Trade Lofts 59
• Park Pacific(existing building) 94
• Park Pacific (new construction) 48
• Port St. Louis 49
• Roberts Tower 69
• Sky House 166

That is a total of 1,528 projected to open by 2010. Right now sales are slow, averaging about 39 a month. There is a bright side. According to John Monshausen, Vice President of Development for Jacob Development, “If you go to any major city, 2% (of the population) wants to live downtown.” The population of the whole metropolitan area of St. Louis is approximately 2.7 million, so that 2% would equal about 60,000 residents.

If you want a condo downtown now would be a good time to buy. Developers are offering more incentives and upgrades in order to sell so the circumstances favor the buyer. However, it looks like those circumstances will persist for a while so if you are buying downtown be sure you can commit to at least 18-24 months. With so many new projects planned, it looks like it will be some time before the resale market downtown takes off.

Below is an excerpt from an email sent by one of the Wachovia lenders that I work with. Click here or here to read more about lending issues.

As most of you are aware, the lending industry is going through a major transformation. Many of our partners are closing their sub prime departments (for example Wells Fargo closed their Alt A / Subprime department just last week; they closed their retail store fronts here in St. Louis this year).

Every day it seems that we get notification that loan programs are no longer available—mainly 100 percent loans for borrowers stating their income and/or with FICO scores 640 or below. Chase also removed their Stated Income 80/20 loan.

Washington Mutual’s Long Beach sent notification July 20, 2007 that they were eliminating all of their Stated Income and Limited Doc programs, along with their 2/28 and 3/27 hybrid loans. Their max CLTV is 90 percent now.

Some of our competitors are closing their doors—others are tightening up on their underwriting guidelines.

Wachovia is here to stay. We still have 100 percent loan programs and competitive rates, but please be aware what is happening in the lending industry. As you know, it is important as real estate professionals to know the challenges your buyers may face in the upcoming months.

I searched the MLS this morning (10:30 AM, August 1, 2007) to figure out how many homes in St. Louis City and County are currently listed as ACTIVE. Let me back up and explain something. Each listing in the MLS is given a STATUS.

• ACTIVE: Available to be viewed and purchased
• CONTINGENT: Has a contract but needs to go thru inspections.
• PENDING: Has a contract without contingencies and is waiting to close.
• SOLD: Sold, no longer active, not available.

(There are a few more, but I will keep this simple.)

In St. Louis City and County there are currently (as of 10:30AM) 13,158 homes available for sale. 29 of those were just listed this morning August 1. Between July 1 and August 1, 1635 were sold and 1599 were listed as contingent or pending.

So how does this affect the market? Let’s look at the Absorption Rate.

Absorption Rate: The rate at which properties in a given area able to be sold.

I am not going to count the contingent/pending properties in this calculation. Even though they are spoken for, it doesn’t necessarily mean they will make it to closing. If not one more house was listed and we were working with static numbers, given the stats above it would take approximately 8 months for this market to absorb all the available housing.

If your house is currently listed and you want to sell in 4 months, you need to price your house in the lower 50% of the range for similar properties. If you want to sell in 2 months, you need to be in the lower 25% of the range.

If you are buying, you are in a good position. You will have a lot to choose from. Be careful not become over confident. There are other people out there searching (evidently about 1600 a month) for a great place in a great spot. If the house is priced well and you want to live there be careful about throwing out a lot of low ball offers and playing games. There are other people who know a good opportunity when they see it.

Lenders use your creditor score to help determine what kind of risk you are. But did you know that insurance companies look at your score to determine your home and auto premiums?

Check out this article in MONEY for the full story. Read the gist below.

Here’s how to qualify for the lowest rates on your home owner’s insurance.

• Pay your bills on time.
• Keep revolving balances low
• Keep your oldest credit cards open
• Don’t apply for lots of credit at once
• Get rid of miscellaneous cards you don’t use.
• Shop around.

How you’ll know when home prices are finally recovering.
Interesting article from CNNMoney.

I always take these national articles about the state of real estate with a grain of salt. Typically the tone of these articles relates more to those markets that are on the extreme ends of fluctuation. Now as for St. Louis it definitely seems to be a strong buyer’s market, but to summarize the article here a few signs to look for when things start changing.

Inventory is declining
Houses are selling faster than they used to
Realtors are feeling better
Sellers are acting less desperate

Click here to read the article

Continued…

What if you are selling in this market where a likely buyer who limits his search to the most basic criteria: price, space, location and garage can find 87 possibilities? The most important issue is to price it right. You will need an objective professional to help you do this. If you are not inclined to take that Realtor’s advice at face value ask that person to show you the other houses that will likely be on the tour when they see your house. For instance if you have a 2 bedroom 1.5 bath brick gingerbread in South City, look at 3-5 other houses like yours that are for sale. When you are looking, be honest with yourself. How does your house compare? If you have a linoleum kitchen floor that is tearing at the seams and the house on the next block has ceramic tile, then your price needs to reflect that difference or you need to update your kitchen floor.

Ask yourself, “If I were buying my house today, what would I find unacceptable?” That’s where you start. Buyers have so many choices now that they are not willing to settle. Either the price of your home needs to reflect its condition or you need to get to work on that “Honey Do” List. If you want to sell in a reasonable amount of time you need to get to work on all the projects that you have been putting off.

David Lereah, NAR’s chief economist said “We now have the most favorable market for home buyers in several years, and most sellers–who’ve been in their home for a normal period of homeownership–are still seeing very healthy returns on their investment. Conditions for buyers have improved because sellers are flexible now and mortgage interest rates are near historic lows. The market promises to be more balanced between buyers and sellers by early spring, supporting future price growth”

Right now in the areas that I serve, those who are looking to buy seem to be benefiting the most from market conditions. For instance, today I was searching for a first time home buyer. I intentionally selected a broad search criteria. I do this in the beginning because I don’t like to prematurely limit a person’s options–at least not until I really understand what they are looking for. I found 87 listings that matched the most basic criteria: price, space and location.

In this case I narrowed it just a little more by specifying that the property had to have a garage. So on my first search I found 87 possible listings that we might view. It would be absolutely overwhelming to show someone 87 homes so I narrowed a bit more. He only wants brick and ideally he’d like to be within 10 minutes of a major highway. That left 52. Of the remaining 52 I can tell by reading the marketing remarks and looking at the photos and the days on market which ones I can shake to the bottom and which ones are likely to be over priced. By the end of my searching I felt that there were 27 that might be “the one.”

Good news for the buyer–but what about the seller? Check the next post