The Skinny

The Future: A Total Crapshoot

Pending sales in the Twin Cities housing market have showed a year-over-year increase for two straight months—a notable and positive achievement that we've pointed out in a few spots before.

The question for today is whether or not this is going to continue through the remainder of 2008. Will sales remain robust, fall a bit, or fall a lot in the next 4 months?

Anyone who purports to have an exact answer to that question is trying to sell you swamp land. There are a ludicrous number of uncertainties swirling in the marketplace, perhaps historically so, which prevent anyone from being able to gauge with a high level of certainty where the housing market is headed in the near-term future.

For good measure, here is a list of all the current questions the housing market must contend with:

• How much impact has the sunsetting of the FHA seller-funded downpayment assistance program had on "last call" buyers? In other words, how much of the recent upswing is due to home buyers trying to take advantage of the waning days of The Last Zero-Down Loan Program Available? We should reasonably expect there to be some level of decline in sales when the program finally disappears on October 1st, but the question is how much.
• Are buyers taking advantage of the new $7,500 homebuyer tax credit? How many? Will the benefits of that program help pull in extra buyers this fall?
• Then there's that small little matter of The Economic Hiccup, and now the impending bailout of Wall Street. Needless to say, this has got consumers and investors a little shook. Consumer psychology will undoubtedly trend towards conservatism in the months ahead, as people look to protect their nest eggs rather than risk them. You better believe this will have some effect on whether or not first-time home buyers take the plunge into home ownership.
• Will the tumbling finance sector cause mortgage standards to tighten even further? There's some who say that's proved to be more myth than truth so far, but who knows what the future may bring if banks continue to pile on heavy losses.

All of this is simply to say that the crystal ball on Twin Cities home sales this fall is decidedly cloudy at the moment. Feel free to share your opinion on whether or not sales will continue their nice little streak in the comments section.

Weekly Market Activity Report 9.15.08

Like The Godfather: Part II, the Twin Cities housing market showed a surprisingly strong sequel to last week's huge upswing in pending sales. For the week ending September 6, there were 749 purchase agreements written—a rise of 49.8 percent from the same week in 2007. This comes on the heels of last week's then-unthinkably large increase of 51.3 percent.

There are factors at work that are exacerbating the appearance of this rebound and slightly tempering this good news. First, the sales slowdown in August and September of last year was historically extreme; current activity seems extraterrestially high, compared to 2007, but is actually only slightly above the pace of 2006. In addition, there is likely a short-term increase in sales activity as home buyers act now to take advantage of sunsetting seller-funded downpayment assistance on FHA mortgages. This program is currently the only zero-down loan option still available and is disappearing as of October 1, subject to a congressional rescue.

Other factors working to boost buyer activity include the newly authorized $7,500 federal tax credit for first-time homebuyers, home prices too good to pass on and downward pressure on interest rates.

Elsewhere in the market, the supply of homes for sale continues to shrink. There are currently 9.0 percent fewer homes on the market than there were a year ago. And we are almost dead even with the number of homes on the market at this time in 2006.

Click here for the full Weekly Market Activity Report.

Weekly Market Activity Report 9.8.08

Like Adam West as Batman, the market for home sales in the Twin Cities went POW! during the week ending August 30. For the week, there were 965 purchase agreements signed—a whopping increase of 51.3 percent from the same week last year. That's the highest year-over-year increase in pending sales since we began tracking that figure on a weekly basis in 2004. Home-buying activity is particularly heavy relative to last year due in all likelihood to a) the historically sluggish showing in August of last year as the credit crunch took hold, b) a bevy of buyers taking advantage of the final days of FHA's seller-funded downpayment assistance program, which sunsets on October 1 of this year and (c) new home buyers getting off the fence and taking advantage of the new home buyer tax credit of up to $7,500.

This week's edition of the MAAR Weekly Market Activity Report features updated figures for several key metrics. Days on Market Until Sale dipped slightly to 143 but remains up from last year by 5.8 percent. The Percent of Original List Price Received at Sale increased slightly to 92.7 but remains down from the healthier levels of the past several years. The Housing Affordability Index increased to 151, thanks to falling prices and interest rates.

The Months Supply of Inventory fell to 9.9 months. This means it will take the current crop of properties for sale approximately 9.9 months to completely sell through, given current sales rates. This is dead-even with this time last year, another indication that the market isn't continuing to shift in the buyer's favor anymore for the time being. A balanced market is thought to have a 5- to 6-month supply rate.

Click here for the full Weekly Market Activity Report, and take a look at the roller coaster ride that is pending sales in the image below.

Weekly Market Activity Report 9.2.08

Once again, the big story in this week's activity report is the huge upswing in pending sales activity relative to one year ago. For the week ending August 23, there were 818 pending sales, an increase of 26.8 percent from the same week in 2007. Over the last three weeks, we have now posted 545 more pending sales than over the same three weeks last year.

Part of this year's increase is due to legitimate increases in demand brought about by attractive prices, still-healthy mortgage rates and a "last call" flurry of consumers utilizing FHA's seller-funded downpayment assistance program before it is discontinued on October 1. The other reason for the year-over-year surge is the Valley Fair-esque downward dive that activity took last year at this time amidst the initial media frenzy surrounding the now-infamous "credit crunch."

The supply of homes for sale continues to decrease, now down 7.7 percent from last year. For September, our Supply-Demand Ratio is 9.29, which means there are 9.29 homes for sale for each buyer in the market. This is a hearty 24.2 percent decline from last September and is due to the falling supply and rising demand.

Click here for the full Weekly Market Activity Report.

Mortgage Standards Continue to Tighten

A phenomenon that consumers, lenders, bankers and Realtors alike are experiencing on the ground gets a 10,000 mile view from the Strib, along with the requisite human interest angle:

...so when they backed away from a complicated deal in which they tried to buy a house from a borrower who owed more than the house was worth, they thought that getting a mortgage on another, less-expensive house would be a breeze, as they had already been approved.

They were wrong. Between canceling that deal and finding a new house in Golden Valley, the mortgage markets continued to unravel, access to credit tightened and the lender who had approved them several months earlier was now asking for a bigger down payment and more detailed documentation, including photocopies of their Social Security cards.

"I was almost on my way to the doctor to get a finger pricked to give blood," Jeff Prottas said.

Obviously, the tightening of lending standards and new restrictions to that "giant pool of money" we all used to so happily wallow in are going to have some significant short-term effects on the housing market. Recent policy changes like FHA's forthcoming removal of seller-funded down-payment assistance on October 1st will have consequences on buyer activity and home sales.

Some argue that at a crucial turning point in the market where prices are falling low enough to finally encourage some buyers to enter the market, this is exactly the type of change we don't need.

Others argue that it's about freakin' time that lenders and consumers once again approach their two-way financial tango with some legitimate fear of risk.

What do you think?

Say Goodbye to Seller-Funded Down Payment Assistance

We've talked about this before.

Seller-funded down payment assistance programs (DAP) in FHA loans are currently the only true "zero-down" mortgage option for home buyers, as the conventional market has shifted to requiring at least 5% skin in the game. Many have pontificated that the FHA would attempt to eliminate this type of financing due to its high default rates, which threaten the solvency of the entire FHA.

Well, the day has come. As part of the forthcoming congressional housing stimulus package, DAP will be gone as of October of this year. Hate it or love it, American consumers now really, truly, honestly, legitimately, must again compile a sizable nest egg to finance the purchase of a home.

Short-term: this is going to cause some more pain in the market and choke off further first-time home buyer activity, as well as potential move-up and move-down buyers who lose their equity on the sale of their existing home and turn to the FHA program for help.

Long-term: this will help keep FHA solvent and help incubate a new consumer psychology that rewards saving instead of spending on credit.

The $10,000 question is whether or not my generation -- the oft-discussed "Gen Y" (can we get a new name, please?) -- will positively respond to this new psychology. Will we be willing or able to scrimp and save several thousand dollars to purchase a home in the years ahead, given the uncertain economic climate and our crippling student loan debts?

The answer to that question will go a long way towards determining the future of the housing market.

Around the web on DAP:

• The Washington Post with the details and the requisite human interest angle.
• Local mortgage blogger and suburban rap apologist Alex Stenback weighs in.
• Marketwatch compiles an interesting list of public comments on the rule change.

Seller-Financed Down Payment Assistance: Friend or Foe?

When zero-down mortgages were all the rage during the boom years, eager buyers with little savings understandably took advantage. In the present day—after two years of huge bank losses brought upon by rising foreclosures, short sales and loan defaults—well, let's just say that lenders aren't exactly looking to give away free money without a little collateral in return.

So zero-down mortgages must be gone, then, right? Well, no, actually.

Zero-down mortgages are effectively gone in the conventional mortgage market, with at least a 5% down payment required on loans in that sector for even those with credit that sparkles like Vanna White's teeth. However, zero-down mortgages are alive and well in the FHA mortgage market, just in a slightly altered state, through the infamous seller-funded down payment assistance programs (DAP).

Most of you are likely familiar with this method, it having been in existence for quite some time, but it bears a re-visit considering its recent revival from the dead and renewed prominence.

Scenario: A buyer wants to buy a property but has no money to put into the loan for collateral. FHA loans "require" a 3 percent down payment for approval. To circumvent this financial hurdle, the buyer asks the seller of the property to "donate" 3 percent of the purchase price to a non-profit like this one or this one who specialize in down-payment assistance. After collecting a small fee for their trouble, usually a few hundred bones, the non-profit then "donates" the 3 percent back to the buyer, who uses it as a down payment on the loan they could previously not be underwritten for.

Some have called it legal money laundering. Others call it the best hope for first-time buyers in this challenging housing market.

Since the traditional credit markets constricted last year, DAP has had its cobwebs dusted off and been pulled from its spot at the back of shelf. From a recent WSJ article:

"The FHA estimates that down payments provided by nonprofit groups account for 34% of all 200,000 loans backed by the FHA so far this year, up from 18% in all of 2003 and less than 2% in 2000. And the agency says that borrowers are two to three times as likely to default on their payments when they receive a down payment from a nonprofit."

And aye, matey, there's the rub. Some claim that the trouble with DAP and it's rebirth in 2008 is that it only leads to the same ailment our market is already trying to recover from: foreclosure. Here's a chart from the very same WSJ article:

Note the 15+% loan default rate on DAP loans, a big difference from the roughly 6% default rate for traditionally borrowed FHA loans.

The FHA has even publicly proclaimed that it wants to eliminate DAP in the months ahead for fears of becoming insolvent, necessitating public taxpayer support to keep their loans serviced:

"The Federal Housing Administration expects to lose $4.6 billion because of unexpectedly high default rates on home loans, officials said Monday.

Brian D. Montgomery, the F.H.A. commissioner, attributed the unanticipated losses primarily to the agency’s seller-financed down payment mortgage program, which has suffered from high delinquency and foreclosure rates in recent years."

Whether or not the FHA is successful in removing DAP from its offerings remains to be seen. As a highly regulated public entity, simply wishing something away isn't that easy.

Regardless, what do you think? With some claiming that lending standards have gotten too tight already and others claiming that they're not tight enough, where does DAP fit in to the discussion? Friend or foe?

For an "uber-nerd" look at how DAP works, check this: DAP for Uber-Nerds.