Ask A New Jersey Closing Expert

The housing market prices are still falling and the decline is far from over.  The housing prices plunged while the foreclosure rates are still rising.

Home prices plunged by a record 8.4 percent in November, according to a composite index based on 10 U.S. cities tracked by Standard & Poor’s. It was the eleventh straight monthly decline for the so-called Case-Shiller index.

“Nothing in these numbers suggest a bottoming out. The numbers universally are disappointing,” said David Blitzer, S&P’s managing director and chairman of the index committee.

A separate report showed that mortgage foreclosures surged in 2007 as many homeowners found themselves unable to keep up with sharp increases in mortgage payments and unable to refinance because their homes had lost too much value. Some 1.3 million homes were the subject of a foreclosure filing, up about 80 percent from 2006, according to RealtyTrac.

Despite falling interest rates and some $100 billion in cash pumped into the global banking system by the Fed, credit remains tight as lenders worry about the risk of further losses from bad mortgage debts. Unless the tide can be turned to stop a coming wave of mortgage foreclosures, rising loan defaults this year will dump more empty houses on a market already glutted with too many. So far, tumbling mortgage rates have done little to revive the housing market. Coupled with larger and larger number of mortgages resetting this will continue to lead to a larger drop in housing prices.

 With more than 1.8 million mortgages scheduled to reset to higher rates this year and next, the outlook for the housing market remains bleak as more foreclosed homes are put up for sale. A late-year surge in foreclosure filings suggests that many are in the initial stages of the foreclosure process, RealtyTrac said

(http://www.msnbc.msn.com/id/22897832/)

This continued mixture of larger inventory and larger number of properties falling into the foreclosure process; this will lead to a continued decline in the housing market.  There is a slight position of hope as the Fed rate drop coupled with the upcoming Spring/Summer buying market could help level off the decline in housing prices.

Your friend,

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A new study shows exactly how and why that might occur: Home Price to Rent Ratio:

“U.S. house prices “likely would have to fall considerably” to return to a normal relationship with rents, says a study by one former and two current Federal Reserve economists.

The study, which doesn’t necessarily reflect the views of Fed policy makers, suggests prices would have to fall 15% over five years, assuming rents rose 4% a year. House prices would have to fall further if the adjustment took place more quickly.

The study tracks rents and home prices back to 1960 and found annual rents fluctuated at around 5% to 5.25% of home prices until 1995. At the end of that year, the average monthly rent was about $553 (or about $6,600 a year) and the average home price was about $134,000.

But starting in 1996, home prices started to grow much more rapidly than rents. By the end of 2006, they had more than doubled to an average of $282,000, while the average rent had risen 48% to $818. That drove the annual rent/price ratio down to 3.48%.

That means the rent/price ratio is about a third below its long-term average. To return to normal would require some combination of falling prices and rising rents. The paper suggests house prices would need to fall about 3% a year, if rents grew in line with their 4% average annual growth this decade.” (http://bigpicture.typepad.com/comments/real_estate_/index.html)

 This study shows that the housing market has not yet reached its bottom. Espically given the decline in New Home Sale even after the Builders provided tons of incentives; this shines light that the market has yet to reach its bottom.

Your friend,

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Sources:
The Rent-Price Ratio for the Aggregate Stock of Owner-Occupied Housing
Morris A. Davis, Andreas Lehnert, and Robert F. Martin
Department of Real Estate and Urban Land Economics, University of Wisconsin-Madison
Federal Reserve Board of Governors
December, 2007
http://morris.marginalq.com/DLM_fullpaper.pdf

Housing slump and mortgage crisis combined to reshape population flows in 2007, according to demographic estimates released by the U.S. Census Bureau in early 2008

 In particular, the data revealed that:
Nevada’s growth rate fell to 2.9% in 2007 from 3.5% the previous year.

Florida’s growth also hit a low of just above 1%, down from its high of 2.3% in 2005. Arizona, No. 2 in growth, slipped to 2.8% from 3.6%.
Washington this year became the 13th largest state, bumping Massachusetts to No. 14.
Midwestern industrial states, including Michigan and Ohio, continue their population decline. Michigan lost 30,000 people in one year, leaving a total population of 10.07 million (8th largest state), and Ohio grew by only 3,404 people for a total population of 11.47 million [7th largest state).
Reflecting a slowdown in the lure of the Washington, D.C. metro area, Virginia gained a net 3,000 people from other states, down from 10,000 in 2006 and a high of 41,000 in 2003. “Maryland had an increase in out-migration,” Frey says. “In-migration into the greater D.C. area seems to be slowing down.”
Louisiana, still grappling with the effects of 2005’s Hurricanes Katrina and Rita, gained almost 50,000 residents between July 1, 2006, and July 1, 2007, although the state still has 200,000 fewer residents than it did before the storms. New Orleans’ population is about two-thirds of its pre-storm level.  (Data Provided by Brooking Institution)

This housing market is chagning the demographics of New Jersey as individuals are moving away from the high priced areas of Northern Jersey to areas closer to South Jersey and Philadelphia. Just some stats which I found interesting and their coorelation to our everyday lives.

 Your Friend,

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The Federal Reserve surprised everyone Tuesday with an emergency intersession rate cut of .75%, the deepest cut in the Fed Funds Rate since 1984. The Fed Governors are acting in direct response to recent reports that the country is on the brink of recession.
If you have credit cards, auto loans, HELOCs, or an Adjustable Rate Mortgage, the Fed’s decision to cut this key interest rate is great news. For long-term mortgage rates however, this could signal the beginning of the end for the lowest 30-year home loan rate borrowers have experienced since 2005.
Let’s look at the impact of a few recent Fed Funds Rate cuts and the corresponding impact to home loan rates to see what this could mean for you:

PeriodFed Funds Rate Cut  Impact to Home Loan Rates
January to June 2001

Down 2.25%Rose 0.10%
October to December 2001

Down 0.75% Rose 0.45%
May to August 2003

Down 0.25%Rose 0.78%
Rates are predicted to be cut again when the Federal Reserve meets at the end of this month. Many believe Tuesday’s action was taken because of a dramatic downturn in the stock market, where the Dow dropped 464 points, the worst single day drop since September 11, 2001. Since the Fed’s announcement, the Dow has recovered much of those losses but volatility is likely to remain a consistent theme throughout the week.
If you are waiting for long-term mortgage rates to fall further from here, don’t count on it. Your best chance to lock in the lowest mortgage rates since 2005 is now. Getting your application in process will allow you to capture a rate near all time lows and, with many experts predicting home values could continue to decline, waiting could kill your chance to capture a great rate if your home doesn’t appraise (Insight provided by Santi Rodriguez, Branch Manager of Gateway Funding, srodriguez@gateway-funding.com)

Hope this help everyone who is confused by what the Fed rate cut means to their mortgage and home buying picture.

Your friend,

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Fed cuts the Fed Funds Rate 3/4 of a point.

“Don’t take today’s move … to mean that the FOMC is through,” said Richard Moody, chief economist at Austin-based Mission Residential, in a note to clients. “We expect another funds rate cut at the scheduled January 29-30 meeting, with possibly more to come in the spring.”  The federal funds futures market now points to a 2% fed funds rate by September, Fed watchers said.  (http://www.marketwatch.com/news/story/fed-isnt-finished-rate-cuts/story.aspx?guid=%7BFE058836%2D414C%2D4CC9%2D8F04%2D866CF0AB29DE%7D)

What does this mean for the mortgage and real estate market

Well this shows us there is one thinking that the “reduction of interest rates” is a magic pill to solve any problem.  This concept is told best by the comments of “Investing Lawyer” who states that 

 unlike /11 where the problem was ONLY confidence after a recent terrorist strike against on of the financial capitols of the world… (and the economy doing so so)… This time cutting rates won’t be the magic bullet ( http://www.marketwatch.com/news/story/fed-isnt-finished-rate-cuts/story.aspx?guid=%7BFE058836%2D414C%2D4CC9%2D8F04%2D866CF0AB29DE%7D)

 This shows me that the market is headed for a deep reduction this year and the reduction of the interest rates is a way to put out a pillow to save the falling ass of homeowners. The market in my opinion will see another correction of 5 to 10% until stabilizing by the last quarter of 2008 and then developing a flat trend and holding steady values for a fixed period of time. This all is a result of our natural greed and our need for instant gratification; this is best put in the quote below:

“Historically, societies that seek high levels of instant gratification and are willing to borrow against future incomes to achieve it have more often than not suffered inflation and stagnation. The economies of such societies tend to run larger government budget deficits financed with fiat money from a printing press. Eventually, the ensuing inflation leads to recession, or worse, often because central banks are forced to clamp down. Then the process starts all over again. Many countries in Latin America have been particularly prone to this “populist” malady, as I discuss in chapter 17. I regret that the United States may not be wholly immune to it.” (Greenspan, The Age of Turbulence on page 255)

Your friend,

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His speech and words moved the market. These are his words to help stimulate our economy:

                   Excerpts provided by nytimes.com (http://www.nytimes.com/2008/01/17/business/17cnd-fed.html?_r=1&hp&oref=slogin)

 “We currently see the economy as continuing to grow, but growing at a relatively slow pace, particularly in the first half of this year,” Mr. Bernanke told the House Budget Committee, acknowledging that conditions are worse this year than in the “reasonably good” second half of 2007.

Turmoil in the financial markets, rapid increases in oil prices and a badly slumping housing market are part of “a confluence of different events that makes this a difficult combination of circumstances,” Mr. Bernanke conceded.

 Mr. Bernanke rejected the term “recession” for the present conditions and what lies ahead, he said the full effects of the housing slump and the accompanying mortgage mess had yet to be felt.

“Our expectation is that delinquencies will go higher and that there will be ongoing losses in the subprime area,” he said. Asked to put a dollar figure on total losses, he said, “I see so far about $100 billion, but it certainly could be several multiples of that as we go forward and the delinquency rates and foreclosure rates rise.”

My thoughts to his words were that we are yet to see the worse to come in the housing bubble breakdown. But with this year in my opinion will come the resolution of the foreclosure scare and this will lead to stabilizing of housing prices. Coupled with low interest rate as is the result of the Fed’s continued reduction of the Fed Funds Borrowing (which is expected to be cut by upto 50 basis points in the Janurary meeting), will lead to a health stabilization of the housing market by the end of 2008. But this year will bring lot of misfortune to companies heavily vested in the housing market apprecation along with service sectors tied to the housing market growth. There will be increased unemployment and a lot of seller abandoning their homes to go rent. If you have the means, it may not be a bad market to pick up multifamily residences that should cash flow positively with the increased amounts of tenants back in the market. We are back in the early 1990’s market in my opinion, where the foreclosures are going to set the market price.  My two cents on this very important speech. Chime in with your comments.

 Your friend,

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Lenders have made it tougher for borrowers to obtain mortgage financing in serveral weakening housing markets thereby pompting borrowers to seek properties in less affected areas. In New Jersey, areas such as Newark, Elizabeth, East Orangee etc. have been hit hard by high delinquency and foreclosure rates coupled with excess inventory of homes for sales has lead properties to lose value faster than a car after you drive it off the lot.

Lenders such as JP Morgan Chase, Citigroup and Wells Fargo have tightened their lending standards, making it harder for consumers to get mortgages. Many analysts believe that tighter underwriting practices will spread the point that borrowers with good credit and good down payment are the perferred model buyer. These standards are getting tighter as the credit market continues to hit another blow.

 Last Week in the News (summary provided by indymacbank.com)

Fueled by rising oil imports, the U.S. trade deficit in November rose by 9.3% to $63.1 billion, much larger than the $60 billion imbalance expected, the Commerce Department reported January 11. While the United States exported a record $142.3 billion in goods and services, that couldn’t offset the $205.4 billion in imports, including an all-time high of $34.4 billion in imported oil.
With cash-strapped consumers diverting more of their dollars to buy gasoline, same-store sales (open a year or more) increased only 2.2% for the November-December holiday period, well below the 3.6% pace over the same period in 2006, the UBS-International Council of Shopping Centers reported January 10. This was the slowest gain since 2002.
In a speech to a housing and economic forum on January 10, Federal Reserve Chairman Ben Bernanke said that the Fed stood “ready to take substantive additional action” to bolster the nation’s slowing economy. This may indicate further cutting of the Federal Funds rate — the overnight rate at which banks loan one another money — when the Fed meets January 29-30.

The Fed continues to cut rates and this has lead the mortgage rates to be at historical lows comparable to that of early years of the 20th century. But in my opinion the cutting of rates is only part of the equation; the other half invloves the banks lending out more money by slightly decreasing their tigthening of guidelines. The guidelines should be written with more common sense underwriting as I like to call it rather than rigid rule conformity. I would to hear other opinions on this topics, please put in your comments.

Your friend,

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If you credit rating are suffering because of mistakes on your credit report, it is YOUR RIGHT to have them corrected at no cost. This is true for New Jersey homebuyers as it is for buyers and consumers all across the United States.

Credit bureaus are legally required to investigate disputed information by contacting the creditor that originally supplied them with the information. Keep in mind that the three major credit bureaus — Experian, Equifax and Trans Union — usually have the same information for each consumer file, but not always. You need only contact the bureau that actually shows an error.

Contact information for the three major U.S. credit bureaus:
Experian
P.O. Box 2002
Allen, TX 759013
(888) 397-3742
www.experian.com

Trans Union
P.O. Box 1000
Chester, PA 19022
(800) 888-4213
www.transunion.comEquifax
P.O. Box 740241
Atlanta, GA 30374
(800) 685-1111
www.equifax.com

You can use myfico.com or  www.annualcreditreport.com, or you can request a free credit report once every 12 months from each of the credit reporting companies listed above.  Please check your credit semi annually to ensure that your identity and trading activities are secure.

Tips on Improving your credit: (presented by myfico.com)

Payment History Tips

• Pay your bills on time.
  Delinquent payments and collections can have a major negative impact on your FICO^® score.
• If you have missed payments, get current and stay current.
  The longer you pay your bills on time, the better your credit score.
• Be aware that paying off a collection account will not remove it from your credit report.
  It will stay on your report for seven years.
• If you are having trouble making ends meet, contact your creditors or see a legitimate credit counselor.
  This won’t improve your credit score immediately, but if you can begin to manage your credit and pay on time, your score will get better over time.

Amounts Owed Tips

• Keep balances low on credit cards and other “revolving credit”.
  High outstanding debt can affect a credit score.
• Pay off debt rather than moving it around.
  The most effective way to improve your credit score in this area is by paying down your revolving credit. In fact, owing the same amount but having fewer open accounts may lower your score.
• Don’t close unused credit cards as a short-term strategy to raise your score.
• Don’t open a number of new credit cards that you don’t need, just to increase your available credit.
  This approach could backfire and actually lower your credit score.

Length of Credit History Tips

• If you have been managing credit for a short time, don’t open a lot of new accounts too rapidly.
  New accounts will lower your average account age, which will have a larger effect on your score if you don’t have a lot of other credit information. Also, rapid account buildup can look risky if you are a new credit user.

New Credit Tips

• Do your rate shopping for a given loan within a focused period of time.
  FICO^® scores distinguish between a search for a single loan and a search for many new credit lines, in part by the length of time over which inquiries occur.
• Re-establish your credit history if you have had problems.
  Opening new accounts responsibly and paying them off on time will raise your credit score in the long term.
• Note that it’s OK to request and check your own credit report.
  This won’t affect your score, as long as you order your credit report directly from the credit reporting agency or through an organization authorized to provide credit reports to consumers.

Types of Credit Use Tips

• Apply for and open new credit accounts only as needed.
  Don’t open accounts just to have a better credit mix - it probably won’t raise your credit score.
• Have credit cards - but manage them responsibly.
  In general, having credit cards and installment loans (and paying timely payments) will raise your credit score. Someone with no credit cards, for example, tends to be higher risk than someone who has managed credit cards responsibly.
• Note that closing an account doesn’t make it go away.
  A closed account will still show up on your credit report, and may be considered by the score.

Hope this helps all the consumers out there put clarity to your questions.

 Your friend,

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This is a quick FYI to put into your knowledge database.

A type of financing where a seller legally owns a property until the buyer repays the loan

Installment sales contracts are a creative way for buyers to purchase a home without having to qualify for a loan or to pay closing costs. The contract is made between the buyer and seller with the lender’s approval.

Here’s how it works: (1) the seller holds onto the existing mortgage (2) the seller names the property’s selling price (3) the seller offers the buyer a loan at a higher interest rate than the existing mortgage (4) the buyer pays the seller a fixed monthly amount (5) the seller uses part of this money towards the existing loan and then pockets the difference (6) the seller hands over the contract on the home when the buyer is paid up.

A land contract can be compared to renting or leasing with the option to buy. Such options are different in that the agreement is usually filed and is a legal arrangement, giving the renter or lessee the option to buy the property at a prearranged time during the loan. Rent payments then become equity in the property.

While this type of agreement is usually recorded, a land contract may not be, making the legal recourse of the buyer tenuous should the agreement be flawed in some way. For example, if the seller still owes a mortgage on the property, the buyer assumes that the seller will use his monthly payments to pay the mortgage as well as any taxes or other liens, keeping the title free of encumbrances. If this occurs, the buyer owns the property free and clear at the end of the contract. If the seller does not keep up with payments owed, there could be trouble for the buyer.

Hope this gives you another idea on how to put a deal together.

Your friend,

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farmland prices skyrocketed 50% over the past three years, to an average of close to $2,200 an acre through August, according to the U.S. Department of Agriculture.

Mike Duffy, an economics professor at Iowa State University, calculates that the average year-end farm price in the state will be a record $3,908 an acre — $508 higher than the USDA’s August estimate. This phenomon isnt confined to the Midwest. In some Eastern states, where residential development has squeezed farmland supply, prices have doubled over the past five years. (The costliest U.S. farms are in Rhode Island, averaging $12,500 an acre.) And in the West, states like Montana and Wyoming have seen prices of both farm- and pastureland soar.

My thoughts on this are that this kind of growth in farmland and crop-land may not be a bad indication of alternative investment in the real estate market that may make you money. Farm land could be the investment which provides inbuilt income growth that comes with farming activity. In addition, land is not something that can be made easily and holding on to a good piece of land can be a good long term investment growth plan.  Just some food for thought.

Your friend,

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