Items of Interest - October 6, 2006

FED CHIEF SAYS THE CORRECTION IS SUBSTANTIAL: Federal Reserve Chairman Ben S. Bernanke said in a speech that the U.S. housing market was in a "substantial correction." It will lop about a percentage point off economic growth in the second half and would restrain the expansion next year, reports Bloomberg News in the New York Times. "How far will the correction go?" Bernanke asked himself, according to the Washington Post. "It's very difficult to tell, is the honest answer," the chairman responded. He added that the decline in residential housing construction is one of the "major drags that is causing the economy to slow." But Bernanke gave several reasons to expect the housing market to level off and eventually bounce back, including low unemployment, rising incomes and low mortgage rates. Although sales of previously owned homes fell in August, some analysts also saw signs that the market might be stabilizing, noting increases that month in both new-home sales and pending sales, in which contracts have been signed but the deals have not yet closed.

WILL AUGUST PROVE TO BE THE LOWEST MONTH: Pending home sales have increased, showing that the housing market continues to stabilize, according to the National Association of Realtors (NAR). NAR's Pending Home Sales Index, based on contracts signed in August, rose 4.3 percent from July, but it is 14.1 percent lower than August 2005. Commented David Lereah, the trade association's chief economist: "Our sense is that home sales may have reached a low in August. The Pending Home Sales Index shows home sales should be fairly stable over the next two months, although a minor decline is possible." He added that fewer listings on the market suggests that "we should be able to draw down the inventory supply early next year to the point where home prices will rise, but at a slower pace than historic norms."

ONE INCENTIVE FOR SELLERS IS TO OFFER A MORTGAGE: As a sales incentive, home sellers with a lot of equity often agree to carry back a first or second mortgage for their buyers, notes the Washington Post. Of course, the buyer should make a reasonable down payment, such as 10 percent of the sales price, and the seller should check the buyer's credit report and credit score. For the seller, security for the buyer's promissory note will be either a first or second mortgage recorded against the title. If the buyer defaults and fails to pay the secured mortgage payments or fails to pay the property taxes or fire insurance premium, then foreclosure can begin. The average foreclosure time is four to six months. At the foreclosure auction, the highest bidder gets the title to the property and the mortgage balance is paid in full. If no bidders show up at the foreclosure auction, the sellers gets back the property title, making it possible to sell the property once again.

SALES SLIDE OF EXISTING HOMES AS INVENTORY SOARS: Total existing-home sales - including single-family, townhomes, condominiums and co-ops - slipped 0.5 percent in August from July. Sales were 12.6 percent lower than in August 2005, which was the second highest on record, according to the National Association of Realtors (NAR). The national median existing-home price for all housing types was $225,000 in August, down 1.7 percent from August 2005, but still considerably higher than in previous years. "After a stronger-than-expected drop in July, the fairly even sales numbers in August tell us the market is at a more sustainable pace," spun NAR Chief Economist David Lereah. "It keeps us on track to see the third highest sales year on record, but we do expect an adjustment in home prices to last several months as we work through a build-up in the inventory of homes on the market." He added that the drop was the "price correction" the NAR has been expecting. "With sales stabilizing, we should go back to positive price growth early next year," Lereah said. Total housing inventory levels rose 1.5 percent at the end of August to 3.92 million existing homes available for sale, representing a 7.5-month supply at the current sales pace - the highest supply since April 1993. Single-family home sales held at a seasonally adjusted annual rate of 5.51 million in August, unchanged from July, but volume was 12.3 percent lower than in the previous August. The median existing single-family home price was $225,700 in August, down 1.7 percent from a year ago. Existing condominium and cooperative housing sales fell 3.5 percent, 14.5 percent below August 2005. The median existing condo price was $223,200 in August, down 2.4 percent from a year earlier.

A SLOWDOWN IS ACKNOWLEDGED, BUT NOT A BUST: In its second quarterly report of 2006, the UCLA Anderson Forecast anticipates a slowdown in real estate across the United States and in California. Forecast Director Edward Leamer does not expect real estate prices to fall significantly. In his view, sales volume is what typically drops, and drops more precipitously than prices, as the price cycle lags behind the volume cycle. The number of homes sold will drop as owners decline to sell in a weak housing market. Prices, however, should hold. The real decline in the housing market, Leamer says, will come in "residential investment," which includes construction of new homes, repair and remodeling, and brokerage commissions on the sale of new and existing homes. The data put recent headlines about home price declines into perspective, said Charles Jolly, president of the San Diego Association of Realtors and a Realtor for more than 30 years. Reports that focus on recent losses are "comparing everything to last year," Jolly maintained. He said he's seen his share of ups and downs in the market; the current state of affairs is just another part of a cycle. He gave an example of a particular San Diego property that sold in 2000 for $345,000 and would have sold for $745,000 in 2005. Today, it would probably sell for less than $700,000, he said.

MOODY'S ECONOMIST OFFERS GRIM FORECAST: Painting one of the darkest scenarios to date of the future of the U.S. market, Moody's Economy.com said in a new report that home price declines in 2007 would approach 20 percent in some areas, where the word "crash" could replace "soft landing," according to Realty Times. The research firm said the median sales price for an existing home will decline in 2007 by only 3.6 percent, which would be the first full-year decline in home prices since the 1930s' Great Depression era. The report said that more than 100 of the nation's 379 metropolitan areas, accounting for nearly half the nation's single-family housing stock, reveal a significant probability of experiencing price declines by the fall of 2007. "The highest probability of price declines is in metro areas throughout California and in and around New York City," Eoncomy.com said. "Probabilities are nearly as high in the rest of the Northeast Corridor, many Florida metro areas, and in sundry areas in the Midwest and Mountain West," the authors state. Economy.com said the findings are based on measures of housing market imbalances that have historically led changes in house prices - housing affordability (or the lack thereof), non-housing related employment growth, the physical supply and demand balance, and a measure of house price over-valuation/under-valuation. "New and existing home sales and single family housing construction are sliding, inventories of unsold homes are surging to new record highs, and house prices are falling in an increasing number of areas," the report said. "Housing's problems began just over a year ago when activity peaked but have increased substantially in recent months. The bright optimism of home buyers, builders and lenders has abruptly devolved into increasingly dark pessimism."

RETIREES PREFER NOT THE WARMTH OF SUN, BUT OF FAMILY: For years, the search for a new home in retirement has been tied to weather and leisure, observes the Wall Street Journal. States such as Arizona and Florida captured the lion's share of transplants, with good reason: They offer a warm climate, lots of sunshine and plenty of golf, tennis and water sports. But today, while weather and leisure remain important, retirees are telling builders, developers and researchers that they are looking primarily for what a community where they can make friends and connections quickly, whether it's a small town or a walkable neighborhood in a big city. A close second and third on the priority lists: a home that's near grandchildren, and a setting where one can indulge a post-work passion, such as a second career, a newly adopted sport or even, for a growing number of people, farming.

OR NOT: According to a study commissioned by publisher Hanley Wood, more than a third of Baby Boomers say their adult children and their own parents are not a consideration in creating their dream homes. Sixty-three percent said enjoying their home after age 60 is a priority above or equal to spending time with the grandchildren, and just 35 percent said they'd relocate to be closer to family and loved ones. "The generation has always been considered selfish," said Frank Anton, chief executive officer of Hanley Wood, a media and information company for the housing and construction industry. "This survey would indicate maybe they're more selfish than anyone knows." Many respondents have a list of dream amenities: Homes that are cozy and comfortable, yet airy and spacious; homes without stairs, but with room for a Stairmaster; living spaces that are energy efficient, but deluxe. They don't want single-age communities, instead looking for opportunities to stay active. "They're saying 'Look, I did my thing. I raised my kids, I was nice to them, I put them through college, I went to their soccer games. Now I want to do my own thing,'" Anton said. The study included 2,000 homeowners between the ages of 50 and 60 with annual household incomes of $100,000 or more. Only about one in five respondents who participated in the study said they would prefer to stay in their current home as it stands today. Thirty-five percent said they would prefer to buy a different or new home to get what they want, while 17 percent were ready to design or build a new home to meet their needs and desires. Fifteen percent were cost-conscious remodelers who plan on upgrading their current home; 12 percent said they planned to purchase a second home. The study also found that these "leading edge" boomers don't seem to be moving en masse toward urban areas, as some have perceived. Of those surveyed, 81 percent said they would rather live in the suburbs or a rural area. For the occasions that their grandchildren do visit, 58 percent said they want their house to be fun for kids, and 52 percent are interested in design features that make the home safe for children.

MORTGAGE RATES FLATTEN OUT: The 30-year fixed-rate mortgage (FRM) averaged 6.30 percent for the week, barely down from last week's 6.31 percent, according to Freddie Mac. Last year at this time, it was 5.98 percent. This is the lowest the 30-year FRM has been since the week of last March 2, when it averaged 6.24 percent. The 15-year FRM this week was unchanged at 5.98 percent. A year ago, it averaged 5.54 percent, the lowest the 15-year FRM has been since the week ending March 23, when it was 5.97 percent. Five-year Treasury-indexed hybrid adjustable-rate mortgages (ARMs) were unchanged at 6.00 percent this week. One year earlier, the average was 5.48 percent – again, the lowest the five-year ARM has been since the week ending March 23, when it was 5.96 percent. One-year Treasury-indexed ARMs averaged 5.46 percent, down 5.47 percent last week and up from 4.77 percent last year. The one-year ARM has not been lower since the week ending March 23, when it was 5.41 percent. "Mortgage rates fell to a six-month low this past week, and, not surprisingly, home refinancing rose 18 percent last week, accounting for almost half of all mortgage applications," said Frank Nothaft, Freddie Mac vice president and chief economist. "This is due both to the recent decline in mortgage rates and to homeowners who are refinancing ARMs rather than waiting for them to reset in the future when rates may be higher."

THIS WINTER'S HEATING COSTS ARE HEADING DOWN: The price of natural gas has dropped 47 percent since this time last year, and the wholesale price of home heating oil is down 20 percent, reports the Christian Science Monitor in Realtor magazine. If prices don't rise for some unpredictable reason, and if the winter is not unusually cold, homeowners could save as much as $250 compared with last year, some energy analysts estimate. "This is the equivalent of a major tax cut - almost the same as right after 9/11 when the government sent checks to everybody," says Dennis Jacobe, chief economist for the Gallup Organization in Washington. Still, many variables affect whether consumers see any savings, industry representatives warn. "You can't just take prices today or the past week and assume customers will save 40 or 50 percent," says Paul Wilkinson of the American Gas Association in Washington. "We know for the first six months of the year, prices were actually higher than they were for first six months of last year."

COULD THIS BE THE ANSWER TO YOUR PRAYERS: St. Martin Monastery and most of its 560 acres on the outskirts of Rapid City, S.D., is for sale, according to the Rapid City Journal in Realtor magazine. St. Martin was built in 1962 as a monastery and Catholic boarding school, when St. Martin's Academy outgrew the Sturgis convent, which was founded in 1889 by five Swiss nuns. The Rapid City campus included a student dormitory, classrooms, and the monastery's signature stone-and-wood chapel with its soaring roofline. Proposals are due by Nov. 7, so get thee there ASAP. A new building on grounds not included in the sale will house the 33 remaining nuns, whose average age is 73. The current owners are hoping for a buyer who will continue the Benedictines' 117-year history of service to the area. But Sandra Runde, a Rapid City commercial real estate practitioner, believes finding a buyer to use the property as a school or religious facility will be difficult. "It's just about impossible," she says.

AGASSI AND GRAF ARE IN LOVE WITH REAL ESTATE: A company set up by Andre and his wife Steffi has partnered with privately owned Exclusive Resorts, a time-share company headed by AOL co-founder Steve Case, to develop "luxury resort communities," according to the Washington Post. "As I begin the next chapter of my life, I am looking for ways to pursue a career in business, specifically in real estate," Agassi, 36, said in a statement. He indicated that Agassi Graf Development LLC and Exclusive Resorts would co-develop luxury resort communities in the United States and overseas which would have Agassi/Graf tennis and fitness facilities as their central amenities. He will become a senior advisor to the company. Earlier this month Agassi and Graf unveiled plans to develop a luxury mountain project, Fairmont Tamarack, in Donnelly, Idaho, in conjunction with Miami-based Bayview Financial.

SURVEY FINDS OPTIMISM ABOUT REAL ESTATE APPRECIATION: According to consumer survey by RBC Capital Markets Consumer Survey, nearly half of all homeowners still expect at least 5 percent annual increases in their home values over the next few years - down from almost 60 percent last year. The national survey of 1,003 Americans also revealed that 25 per cent of homeowners have already paid off their mortgage. "While real estate expectations are lower than they were last year, consumers still seem optimistic despite what we are seeing in the marketplace," said Scot Ciccarelli, managing director and equity research analysts for RBC Capital Markets. "Declining real estate values could eventually impact consumer spending as people don't feel as wealthy as they used to and become less likely to borrow against the equity they have built up in their homes."

NEW-HOME SALES SURPRISE FORECASTERS: Sales of new single-family homes rose 4.1 percent in August to a seasonally adjusted annual rate of 1.050 million units, following substantial downward revisions to the sales rate for the previous three months, according to figures released by the U.S. Commerce Department. The preliminary sales pace was down 17.4 percent from a year ago. "The bounce-back in new home sales certainly is a welcome development, although the reported increase was from a downward-revised July level that was the lowest reading since March 2003," said Chief Economist David Seiders of National Association of Home Builders (NAHB). "Many builders still have large inventories of unsold homes, and we expect to see aggressive use of sales incentives over the balance of the year." But the New York Times quoted Chief Economist Stuart Hoffman of PNC Financial as terming the increase a "dead-cat bounce." The inventory of new homes for sale decreased slightly to 568,000 units at the end of August, a 6.6 months' supply at the current sales pace. The median length of time that completed homes for sale were on the market was 3.6 months, the same as the two previous months and down from 3.7 months a year earlier.

HUGE MORTGAGE FRAUD CASE IS REPORTED: Federal and state authorities are investigating allegations of an elaborate mortgage fraud involving about 100 people living in or near the small factory town of Martinsville, Va., who say they unwittingly took out loans to buy houses at inflated prices in Indiana, the Wall Street Journal reports. The borrowers, who include truck drivers, factory workers, a pastor and a hair stylist, say they were duped by acquaintances into signing stacks of documents and didn't know they were applying for loans. Instead, they thought they were joining a risk-free "investment group." Now, many of the loans are in default, the borrowers' credit ratings are in ruins, and lenders are pursuing the organizers of the purported investment group in court. Companies stuck with the defaulting loans include Countrywide Financial, the nation's largest home lender, and Argent Mortgage, another big lender. A lawsuit filed by Countrywide accuses the organizers of acquiring homes and then fraudulently selling them for a quick profit to the Virginia borrowers. Representatives of the borrowers put the total value of loans involved at about $80 million, making it one of the largest mortgage-fraud cases ever. Mortgage fraud, involving loans obtained by providing false information, has mushroomed in recent years as lenders have pushed for speedier loan approvals in an effort to remain competitive and milk maximum profits from the now-fading housing boom. The Federal Bureau of Investigation reported that mortgage fraud led to losses of $1 billion in 2005, up from $429 million a year earlier. And attracted by the ability to obtain large sums quickly, some criminal gangs involved in drug dealing and other street crimes have branched out into mortgage fraud, says Chip Burrus, assistant director of the FBI's criminal investigative division. "It's more profitable and less risky," he says.

HERE'S ONE SMART IDEA: Structured wiring is becoming the trendiest new feature in apartments and single-family homes, observes Realty Times. Coaxial TV cable (RG-6), Category 5E voice and data lines, distributed radio, remote camera security are wired throughout a home into multi-outlet boxes called in the trade, home network centers. The beauty of the system is that it allows one point of origin for connecting all the computers in a home to DSL. With the addition of a control panel, you can pre-set furnace and air-conditioning, lighting to auto-off/on, deliver audio room-by-room, and raise and lower window shades, all by programming your control center. Some systems also allow you to call your home telephone and enter prompts remotely. Structured wiring can be added to an existing home or specified to a new one. The system costs roughly $1,500 in new construction and double in a retro fit.

HOME CONSTRUCTION, RENOVATION OUTPACE INFLATION: Home building and remodeling costs are accelerating faster than overall consumer and business inflation, according to a report by the Associated General Contractors of America, says Dow Jones Business News in Realtor magazine. Boosted by higher metals, concrete and fuel prices, construction prices overall jumped 8.8 percent in August from the same month a year ago. Home construction gained 8 percent, according to the contractors group. "Contractors have been experiencing significant increases in the costs of construction materials and, in some instances, shortages," says Stephen Sandherr, chief executive of the contractors group. "The trend we're seeing is that the inflation rate for material prices is likely to continue to be greater than the Consumer Price Index or the Producer Price Index." During the next six to 12 months, the group expects diesel, plastics and gypsum costs to decline from year-ago, while prices for materials such as asphalt and copper to remain "elevated but not stratospheric."

IN TERMS OF RISING VALUE, THE BIG APPLE IS NOT THE BIGGEST: The real median home value in San Diego jumped from $249,000 to $567,000 between 2000 and 2005, the largest increase in the nation among big cities. Across the country, real median home values soared 32 percent, according to new 2005 American Community Survey data released by the U.S. Census Bureau. Among the nation's largest cities, some of the highest percent increases in real median home values between 2000 and 2005 were found in San Diego (127.2 percent), Los Angeles (110.2) and New York (79.1). Real median selected monthly owner costs for owners with mortgages have increased 5.0 percent nationally between 2000 and 2005. Though not statistically different from each other, some of the highest increases among the largest cities in real median monthly owner costs were found in Detroit (24.1 percent), Chicago (21.7) and San Francisco (19.6). Decreases of about 10 percent in real median homeownership costs were found in some of the smaller cities such as Bryan, Texas, and Greenville, N.C. Additionally, the real median cost of renting a home increased nationally by 6.7 percent from 2000 to 2005. Some of the highest real median rent percentage increases among the large cities were found in San Diego (27.2 percent), Detroit (22.5) and Los Angeles (15.9).

PERHAPS REAL ESTATE BELONGS IN A RETIREMENT PORTFOLIO: According to financial planners and real-estate analysts, most retirement portfolios should include some real estate, the Wall Street Journal reports. That's because land and property are "loosely correlated to the stock market," says Seth Pearson, a certified financial planner in the backwater of Dennis, Mass. In other words, the value of real estate tends to rise when stocks are going down. At the same time, though, real estate should be a relatively small part of most nest eggs, no more than 20 percent of your overall portfolio, Pearson advises. And investors with dreams today of making a killing in residential and commercial property need to lower their expectations - sharply. "You can't figure on returns being what they have been, or you'll be very disappointed," says Christopher Cordaro, a financial planner in Chatham, N.J.

MORTGAGE APPLICATIONS RISE SHARPLY, ESPECIALLY REFIS: For the week ended Sept. 29, loan volume soared 11.9 percent on a seasonally adjusted basis from one week earlier, according to the Mortgage Bankers Association (MBA). On an unadjusted basis, the increase was 11.5 percent compared with the previous week and was down 10.9 percent compared with the same week one year earlier. "Refinance applications continue to increase as mortgage rates have declined to their lowest levels since the beginning of the year," observed Mike Fratantoni, MBA's senior director for single family research and economics. Seasonally-adjusted, refinancings went up by 17.5 percent compared with the previous week, while purchase applications grew by 7.6 percent. The refinance share of mortgage activity increased to 46.7 percent of total applications from 44.3 percent the previous week - the highest that the refinance share has been since February 2005. The adjustable-rate mortgage (ARM) share of activity rose to 27 percent from 26.4 percent.

TENANTS ARE AMONG BIDDERS FOR STUYVESANT TOWN: A group aligned with tenants of Stuyvesant Town and Peter Cooper Village submitted a $4.5 billion bid to buy the 110 apartment buildings overlooking the East River in the hope of retaining the complexes as middle-income housing, reports the New York Times. Their offer was neither the highest nor the lowest in one of the biggest real estate auctions of all time. Metropolitan Life, the company that built Peter Cooper Village and Stuyvesant Town in 1947 for returning veterans, got roughly a dozen offers by its Thursday deadline, ranging from $4.3 billion to slightly more than $5 billion, according to real estate executives. The rare opportunity to own 80 acres of prime property in Manhattan and 12,232 apartments has drawn national attention and bids from some of the biggest developers and residential developers in the country, as well as banks and foreign investors. Bidders include Related Companies, the Lefrak Organization and Apollo Real Estate Advisors.

PAULSON MOVES FROM WALL STREET TO MASS AVENUE HEIGHTS: Treasury Secretary Henry Paulson, whose job may well end in two years, is the buyer of a home offered for $4.5 million and once owned by former Sen. Jon Corzine, now governor of New Jersey, says the Washington Post. The four-bedroom house in the Massachusetts Heights neighborhood not far from the vice presidential residence has been on the market for many months and has frequently changed hands. Nestled on a woody hillside, gorgeously decorated and boasting a heated swimming pool, the house affords privacy, views and an antique stone fountain.