My Blog

It has been intriguing in recent weeks to hear various pronouncements saying that the current housing downturn is done, finished and history. Forbes, as one example, flatly tells us that "the housing market is about to hit bottom." Not to be outdone, Treasury Secretary Henry Paulson told CNBC that the housing slide is "largely contained."

If we had a federal department of seers and soothsayers then predictions about the future might be somewhat credible, but in the absence of astrologers on the government payroll we are forced to stick with reality.

One reality is that we do not know how much longer, if at all, the current slump will continue. One would prefer that the current slowdown would not continue at all, but what one would prefer and what actually happens may not be the same.

A second reality is that today's trends -- as well as any short-term real estate indicators -- are largely irrelevant to most buyers and sellers. Indicators are necessary to report and interpret, they have an historic value, but they also have less value than many breathless headlines would suggest.

A third reality is that all real estate is a localized commodity. It is only a matter of pure chance when neighborhood trends and national trends track exactly, or when the markets in Seattle and Secaucus or any other two locations share identical profiles in terms of sale activity and prices.

Consider someone who is selling and bought seven or eight years ago, a not-unusual circumstance. In most markets our seller has seen a substantial ramp-up in values and thus now is a dandy time to sell. Maybe not the top of the market, but substantially higher than when the property was bought. For instance, in 2000 the typical home sold for $139,000 while in 1999 the median price for an existing home was $133,300 according to the National Association of Realtors. Today's median price, as of April, is $220,500.

Or, consider buyers. Most buyers are in the market for the long term -- that seven or eight years and perhaps longer. For them, news of slow sales is just dandy, the best time to be a buyer.

Alternatively, opportunities to quickly buy and re-sell are rapidly disappearing, or have already disappeared in many markets. Just ask large numbers of short-term condo investors in Florida.

As to what homes will be worth in a few years, who knows?

What we do know is that current indicators look as follows:

• New home sales in April were 10.6 below the level of a year ago, according to the National Association of Home Builders.

• The National Association of Home Builders/Wells Fargo Housing Market Index (HMI) in May hit the lowest level since September 2006.

• Existing home sales tumbled 10.7 in April when compared with a year ago, according to the National Association of Realtors.

• Pending sales for April -- a good indicator of future closings -- dropped 10.2 percent when compared with a year earlier, says NAR.

• Building permits, which have value in projecting future new home construction, were down 28.1 percent in April from a year earlier, the slowest pace since 1997 according to NAHB.

The last two items are especially important if we're going to play fortune teller. If the good times are about to roll, you would see builders grabbing building permits to meet the onrush of enthusiastic buyers. And if existing home sales in the next few months were on the upswing, then more contracts would be awaiting settlement.

The truth is that several huge problems continue to hang over the marketplace.

First, there are massive numbers of foreclosures, up 62 percent in April when compared to a year ago according to RealtyTrac.com. The homes that cannot be saved from foreclosure are likely to be sold at discount -- and such discounts impact the value of homes which are not in foreclosure.

Second, interest rates are remarkably low, less than 6.5 percent for 30-year, fixed-rate financing according to Freddie Mac. Given the size of our budget deficit and the gross imbalance of payments we have with other countries it is an absolute miracle -- and incredibly fortunate -- that we have not seen higher rates. If rates go up then foreclosure actions are likely to increase as millions of borrowers with ARMs face new and stiffer monthly payments.

If you now have an ARM you might want to seriously look at the opportunities to refinance, especially if you have an interest-only or option-ARM. If not, at least do the math and see what will happen to your monthly payments if rates head higher.

What's got residential real estate consumers so confident about the housing market?

In the first quarter, the rate of home price appreciation slowed in all but five of the 50 largest Metropolitan Statistical Areas and only five saw appreciation in the double digits in the first quarter of 2007, down from 26 in the first quarter of 2006, according to the Office of Federal Housing Enterprise Oversight.

Nine MSAs -- West Palm Beach, FL; Oakland, Sacramento, and San Diego, CA; Boston and Cambridge, MA; Detroit and Warren, MI; and Cleveland, OH-saw slight year-over-year price declines.

Two different reports both say an estimated 2 million people are forecast to lose their homes to the subprime snake and they face a rental market with rising rents.

Trouble with subprime mortgage-backed securities and employment-related fallout from the home building industry is beginning to chip away at the already brittle economy.

Why are most housing consumers so upbeat?

James M. Weichert, president of founder of one of the nation's largest privately-held real estate companies, Weichert Realtors, says it's just a matter of perspective.

"Much of the attention real estate is getting today continues to be based on comparisons to the past thanks to the record-breaking years we had earlier this decade," he said.

"But if you take a more forward-thinking approach, you see real estate is set for an upswing based on indicators such as home supply, interest rates and employment. Not only has it never been easier to find and afford that dream home than right now, but real estate remains one of the best long-term investments options."

Apparently, he's on to something.

Fifty-five percent of Americans say their home would sell for more money now than it would have a year ago. That's down from 59 percent last summer, but still a majority, according to a recently released survey by Michaels Opinion Research, Inc. conducted for the Boston Consulting Group.

The survey said 74 percent of homeowners were confident they could sell their home within the next six months at a price they think it's worth.

But the confidence is not just about selling homes for an asking price.

Consumers are confident because housing generated a great deal of wealth during the last boom market and, for many it's the cushion they need until happy days are here again.

Boston Consulting's survey reports 76 percent of Americans said the current real estate market has no impact on how they're spending now, even as 16 percent say they're cutting back because of a perception of lower residential real estate values.

Also, most homeowners, 69 percent, said they're likely to make renovations or improvements to their home in the next 12 months, a smart equity protection move in a soft market.

Another 27 percent said they're likely to purchase a better home over the next five years.

Americans also exude market confidence because they've come to understand the long-term benefits of homeownership.

Eighty-five percent of Americans believe their house will be worth more five years from now than it is today. A majority, 63 percent, said they believe real estate is a good or excellent investment.

Consumer confidence is not naivet?. Homeowners are aware of the potential economic fallout from a extended housing downturn.

Boston Consulting's survey reveals 49 percent of those surveyed said they believe the decline in housing prices is hurting the national economy "moderately," 15 percent said "severely" and 12 percent said it's not hurting the economy at all.

Fifty-two percent of Americans believe the current residential real estate slump will last two years or less. Only 22 percent believe it will last for five or more years, according to the survey.

"Consumers don't view blips in overall housing prices as a catastrophe. They take a very long-term perspective and don't move very often. Tales of the end of housing as the primary asset for American households are way over-told," says Boston Consulting's senior partner and consumer spending expert Michael J. Silverstein.

Chalk one up for upbeat housing reports.

Fair Isaac to Pull the Plug on FICO Score Boosting Schemes for Mortgages

By Kenneth R. Harney

June 18, 2007

Forget about those online pitches that claim to raise FICO scores by hundreds of points in weeks-opening the door for unscrupulous home buyers to qualify for a lower mortgage rate than they actually deserve.

Fair Isaac Corp., the developer of the FICO score, is preparing to pull the plug on schemes that allow high quality credit card histories to flow into the credit files of people with bad credit, thereby boosting scores. The target: dozens of websites that give cash to credit card holders with excellent payment histories when they allow the websites to "rent" their cards out to people with poor credit for up to 90 days.

Fair Isaac's public affairs manager, Craig Watts, said that beginning in September, the updated FICO scoring model no longer will consider credit card "authorized user" accounts in computing scores. When card holders rent out their cards, they are actually agreeing to add credit-repair clients of the website as authorized users. Authorized users get to share the primary card holder's full payment history on the account, but they do not necessarily have physical access to the card itself. All the on-time positive payments of the primary card holder flows into the credit repair clients' own credit files at Equifax, Experian and Trans Union-the three national credit repositories. That, in turn, raises their credit scores using the traditional FICO model.

As a real-life example, last Thursday a person with a subprime 580 FICO score who applied for a $300,000 30-year fixed rate home loan would have been quoted an average interest rate of 8.9 percent ($2,393 a month in principal and interest.) An applicant with a 700 FICO score, by contrast, would have been quoted around 6.56 percent ($1,912). This is based on a national survey of lenders conducted for Fair Isaac and published on its website, myfico.com.

Just a 120 point score boost, in other words, would get an applicant a much lower mortgage rate and save nearly $500 a month in payments -- nearly $6,000 the first year alone. FICO score-boost websites will rent someone else's card history for a one-time payment of anywhere from $400 to $2,000, with the price tied to the age and the maximum credit limit of the card account. The longer the cardholder's excellent payment history and the higher the limit, the more it costs and the bigger boost it delivers.

Federal law permits authorized user accounts, but does not prescribe limitations on how many authorized users can be attached to a single card, and does not specifically prohibit rentals of tradeline accounts for limited periods of time by profit-making entities. Some websites claim card holders can earn "$10,000 a month or more" by renting out their cards to large numbers of authorized users-99 in one extreme case.

However, federal and state regulators have warned mortgage lenders and brokers to be on guard against such schemes. Though the websites may be exploiting a loophole in the law, regulators say, home buyers and loan officers who submit mortgage applications with artificially inflated FICO scores are violating multiple statutes-bank fraud is tops on the list-and could be prosecuted.

The Federal Trade Commission has been studying the situation for months, but has not moved against promoters of FICO boosting. The National Association of Mortgage Brokers has asked Congress to change federal law to remove what one association official called "an open door to fraud."

In the meantime, however, Fair Isaac itself, by tweaking its latest model to ignore all authorized user accounts, believes it can solve "most of the problem," according to spokesman Watts.

It's a painful position -- mounting credit card debt with increasing interest rates and no real vision of how to crawl out from underneath all that financing.

According to the Consumer Credit Counseling Service of Santa Clara and Ventura County, California, (CCCS) what got most people in financial troubles are: overspending (25 percent), reduced income or unemployment (31 percent), medical reasons (11 percent), divorce or separation (8 percent).

The non-profit agency helps people alleviate their financial burdens and provides financial education and counseling on preparing to buy a home. Last year 7,043 households were counseled and received financial education which included developing a budget, a debt payout plan, analysis of assets and liabilities, and an action plan to solve their financial concerns. An additional 1,604 households received pre-discharge education and another 1,014 received reverse mortgage counseling.

Those figures are from just one non-profit of the many agencies throughout the country that aim to help consumers with their finances. It's no wonder many wannabe homeowners are finding themselves locked out of the housing market. But there is hope.

"We help anybody who has a debt with as little as $3,000 up to $100,000. We've seen it all," says Sonie May, Counseling and Education Manager, of CCCS.

May says the average consumer that the agency sees has approximately $30,000 of debt. She says what tends to happen is the credit card companies rapidly increase consumers' interest rates when they miss a payment and that causes the downward financial spiral of paying out more money and not being able to save to buy a home.

"It's hard to get out of that cycle because the minimum payments are so high; it's hard to get out of that hole that they're in," says May.

The most important advice if you are considering purchasing a home is to find out exactly how much money you bring in, how much money is spent each month, and how much money you can pay out for a monthly mortgage.

The CCCS helps you understand and assess your financial position and what can be done if you have credit card debt.

"We have relationships with most of the creditors," says May. When clients come in, "we develop a repayment plan to get [the consumer] debt-free within a five-year period with low interest rates and low payments."

May says most of the interest rates negotiated for clients are between seven and 18 percent, but she says some are as low as zero percent. "From 30 percent that's a big, big difference -- we save them thousands of dollars not only on a monthly basis but also over the long run we will save them thousands of dollars of interest that they would have paid if they hadn't come to see us," says May.

The CCCS collects the payment from the client and then disburses it to each of the creditors. A monthly fee is charged by CCCS for participation in the payment program.

Of course, while working with the CCCS, clients are strongly urged to not use credit cards or incur any more debt. Once the program is completed, clients are free to borrow again including taking out a mortgage.

"We have heard success stories from many of our clients who were able to purchase homes after they have completed the program," says May.

The CCCS can help with planning to purchase a home. The agency has its clients evaluate and analyze what their future expenses will be once they own the home. They remind clients that homeownership expenses include more than just the mortgage, property taxes, and homeowner's insurance. The agency promotes savings for the unexpected expenses: needing a new roof or the loss of a job.

Always be sure that when you calculate your expenses, you set a portion aside to pay yourself in addition to paying for your new home and other necessities. The other very important advice the CCCS gives is to completely understand the type of mortgage you are getting. May says it's important for homebuyers to know if the monthly mortgage payment will increase.

"If it's a variable rate loan, when will the interest rate go up -- after six months or a year? -- and would they be ready if that mortgage payment were to increase," says May.

Too often, as we're seeing now, in the housing industry, consumers either weren't informed or didn't consider the result of an increase in their mortgages' interest rate and thus are forced to financially buckle down or, in worst case scenarios, foreclose. Another CCCS company in the San Francisco area says help is available for homeowners who are facing foreclosure.