Financing Just Got Tougher For Real Estate Investors

From Realty Times:

Call it the backlash after the boom: Major lenders and mortgage insurers are
turning off the money spigot for investors who want to buy rental houses or
condos with minimal downpayments.

The most dramatic cutback takes effect next week, when giant mortgage insurer United Guaranty -- a subsidiary of AIG International, the world's biggest underwriter -- says it will stop covering loans to investors in any of the thousands of Zip codes from coast to coast that it defines as "declining" real estate markets.

The ban includes all non-owner-occupied rental houses or condos -- including "mom and pop" two-to-four unit properties where the owners occupy one and rent out the rest.

United also is cutting off coverage of all condominiums and cooperatives
- whether owner-occupied or rental -- plus all second home purchases. It's even
refusing to look at loans to investors or owner-occupants that have limited
documentation in any market, whether declining or not.

Other major mortgage insurers are expected to follow some, if not all, of United's tough new restrictions in the coming weeks.

This is hardly surprising. Non-owner-occupied investment properties, in particular those beachfront condos in Florida, saw the greatest amount of price appreciation as the housing bubble inflated, and have crashed the hardest, resulting in multi-billion dollar writedowns at the big mortgage banks.

But it illustrates how interconnected the entire mortgage market is: a change in policy by a company which provides mortgage insurance effects the actual day-to-day business of real estate investors.

Most lenders have characterized Atlanta as a declining market, and as the latest Case/Shiller index numbers show, properties are losing an average of 5.6 percent per year. Anyone looking at purchasing investment property with any type of conventional financing is going to find it increasingly difficult to fund those deals.

The ability and resources to find alternate funding means is crucial for an investor looking to buy in today’s market. Whether it is raising capital for a significant down payment, buying subject-to or on a wrap, or looking at all-cash or hard money, investors are going to need to look beyond conventional non-owner-occupied loan sources when buying.

Photo: Spare Change, originally uploaded by riverwatcher09.

Steep declines in home prices continued in February 2008; Atlanta down 5.6 percent

From CNN:

Home prices have posted another record decline, as most of the nation's largest
markets suffered double-digit drops over last year, a survey released Tuesday
shows.

The S&P Case/Shiller Home Price Index, which tracks 20 of the
largest housing markets, showed prices plummeting by 12.7% in the 12 months
ending February. That's the biggest fall since the index began tracking prices
in 2000.

Of those 20 metro areas, 17 posted their largest year-over-year
declines ever. Ten of the 20 cities posted double-digit dips.

The 10-city Case/Shiller index is down 13.6% year-over-year, the biggest drop since
its launch in 1987.

The latest Case/Shiller price index numbers are not very encouraging and show that, unfortunately, there is no sign of a bottom in the housing market in the immediate future; in fact, the latest numbers seem to indicate that the drop in home prices is accelerating on a nationwide basis.

Moderated by an increase in the city's population, however, home prices in Atlanta are still faring better than most - only shedding 5.6 percent of value from last year. Compared to the almost 23 percent drop in value in Las Vegas, that 5.6 percent decline doesn't seem too bad.

However, there remains the danger of a vicious circle leading to further, and steeper, price depreciation, even with Atlanta's relatively-moderate 5.6 percent drop in value. As price losses continue, houses become less desirable and lenders less willing to extend mortgages. Fewer potential purchasers result in additional downward pressure on prices - and with the numbers of foreclosures and vacant properties already at record highs and expected to increase, the momentum on house prices to continue to move lower could end up accelerating very quickly.

This is not to say that anything relating to real estate investing is a lost cause. There are certainly a tremendous number of individual deals out there – perhaps more than ever before. But the nature of the market is fundamentally different, and the realities of that market have changed drastically over the past year. Strategies that worked two years ago probably are not as effective today, but the good investors continue to adapt to the market at hand and succeed.

Photo: Blue Arrow on Red, originally uploaded by raumoberbayern.

Foreclosures increase for the seventh consecutive quarter

From Forbes:

The number of foreclosures filed by US homeowners increased sharply for the
seventh consecutive quarter, according to a private sector report released
today.

In the three months ending in March, the number of foreclosures
totaled 649,917, up 23 pct from the previous quarter and 112 pct from the first
quarter of 2007, California-based RealtyTrac said.

The report, from RealtyTrac, shows that foreclosures, which were already at record highs, have more than doubled from this time last year. The statistics count of the total number of properties with at least one foreclosure filing reported during the quarter and show that there is no immediate end in sight to the rising numbers of foreclosing properties.

From the Atlanta Business Chronicle:

Georgia’s first-quarter foreclosures skyrocketed 80 percent, while metro
Atlanta’s jumped 69 percent, according to RealtyTrac’s Q1 2008 U.S. Foreclosure
Market Report released April 29.

Georgia ranked sixth in first-quarter
foreclosure filings — default notices, auction sale notices and bank
repossessions — with 28,503. This is a 79.9 percent increase over the first
quarter of 2007 and a 22.5 percent rise over the fourth quarter of 2007. One out
of every 136 Georgia households got a foreclosure notice in the first quarter.

Meanwhile, the Atlanta/Sandy Springs/Marietta metro area had 22,554
foreclosures in the first quarter, putting it at 16th among major metros. The
area’s foreclosures were up 68.7 percent over the first quarter of 2007 and 13.7
percent over the fourth quarter of 2007. One out of every 91 metro households
got a foreclosure filing in the first quarter.

Atlanta’s numbers do show a lesser increase in year-over-year foreclosures than the national rates – but the immediate future still remains bleak. Foreclosure rates are indicative of past problems, and each foreclosure filing today represents a borrower who fell behind in mortgage payments months ago.

Foreclosure rates also are forward-looking: while a number of the properties with loans in default will be cured before the actual foreclosure sale, it’s a good bet that the majority will not. More than likely these properties will end up back with the lender, only to be listed and resold as REOs several months in the future.

If we take it that the great bulk of mortgage foreclosures can be attributed to adjustable-rate mortgages, then as more and more of those loans adjust, we can expect foreclosure rates to continue increasing. With the peak of these loans not resetting until later this year, it is more likely than not that the record rates of foreclosures will continue.

Photo: Foreclosure,Wheaton MD, originally uploaded by chip py the photo guy.

Number of vacant homes hits record high

From Reuters:

The share of vacant U.S. homes rose to a record level in the first quarter, the
government reported on Monday, with homeowners finding it increasingly difficult
to find buyers in a collapsed market and more homes in foreclosure.

The percentage of owner-occupied homes now sitting empty rose to 2.9 percent in the January-to-March period, the third quarter in a row in which the vacancy rate
increased, according to data released by the U.S. Census Bureau.

and:

Homeowner vacancy rates were unchanged from the same time a year ago in both the Midwest and the South, at 2.9 percent and 3.2 percent, respectively. But they
shot up to 3.2 percent in the West, the area hardest hit by the crisis in
risky subprime mortgages, from 2.6 percent a year earlier.

According to the report, it’s a total of 18.6 million homes that are vacant, and the primary cause of the increasing number of vacant homes is the rise of foreclosures. And with the number of foreclosures expected to continue increasing for the foreseeable future, it would not be surprising to see the number of vacant home rise as well.

Still, vacant homes make for desperate sellers – especially the longer they stay empty – and investors who are poised to make them will certainly find that good deals abound.

Photo: vacancy, originally uploaded by Supercapacity.

New home sales at 16-year low

From CNN:

New home sales fell in March to the lowest level in more than 16 years,
according to a key government report on the battered housing market released
Wednesday.

March sales came in at a seasonally adjusted annual rate of
526,000, the Census Bureau report showed, down 8.5% from a revised 575,000 in
February and down 36% from a year earlier. It was the lowest annual rate since
October 1991.

and:

The median price of a new home sold in March was $227,600, down 13.3% from a
year earlier. The last time the median home price fell this sharply was July
1970, when it dropped 14.6%.

and:

The seasonally adjusted estimate of new houses for sale at the end of March was
468,000, which was down slightly from February’s 471,000.

However, at the current sales rate, it would take 11 months to sell the supply of homes on the market at the end of March.

The months-of-supply number has not been this high since September 1981.

Still more signs that real estate investors should not be expecting a turnaround in the housing market any time soon.

Photo: No Sale, originally uploaded by Something's Missing.

Despite economy’s rumblings, Atlanta looking up

From Commercial Property News:

Atlanta is on the rise, and now is the time for the commercial real estate
industry to jump on the opportunities that are coming with the city’s growth,
according to real estate experts at CPN’s annual Atlanta Property Opportunities
Conference. Over 150 market executives attended the panel discussions, held this
morning at the Grand Hyatt Atlanta in Buckhead.

“Atlanta had experienced a big decline beginning in the ‘70s in to 2007, but the city is back,” said Cheryl Strickland, managing director of tax allocation districts for the Atlanta Development Authority, who opened the conference as the keynote speaker. “And there is a lot more growth predicted, so think smart growth and infill.” The city expects a population of 7.3 million by 2030, and will account for over 80 percent of the growth in the state.

and:

Despite the rumblings in the national economy, there are a lot of good things
going for the Atlanta, Strickland concluded. “I hope you can see the
opportunities,” she said.

Indeed.

As other parts of the country experienced hyper-appreciating home prices as the housing bubble inflated, the overall Atlanta market saw, for the most part, slow and steady gains. Now that prices are in free fall elsewhere, the loss in value for Atlanta real estate is mild in comparison. In other words: we didn’t see home prices rise as quickly as did other areas, and prices haven’t fallen as fast, either.

Tempering the loss in home value here has been Atlanta’s increasing population. While there is no denying that prices are falling in Atlanta, prices are falling over three times as fast in Detroit, which has lost more residents over the past few years than any other city except hurricane-battered New Orleans.

Atlanta is, and remains, a desirable place to live. People want to be here. And as more and more people move to the city, there will be a demand for homes.

Photo: Sunny Side Up, originally uploaded by code poet.

Existing home sales slip in March

From the National Association of Realtors:

Existing-home sales – including single-family, townhomes, condominiums and
co-ops – were down 2.0 percent to a seasonally adjusted annual rate (1) of 4.93
million units in March from a level of 5.03 million in February, and remain 19.3
percent below the 6.11 million-unit pace in March 2007. A rise in condo sales in
March was offset by a drop in single-family sales. Regionally, sales rose in the
Northeast and West but fell in the Midwest and South.

and:

The national median existing-home price (2) for all housing types was $200,700
in March, down 7.7 percent from a year ago when the median was $217,400. Because
the slowdown in sales from a year ago is greater in high-cost areas, there is a
downward pull to the national median with relatively higher sales activity in
low-cost markets.

and, more relevantly:

In the South, existing-home sales fell 3.5 percent to an annual rate of 1.92
million in March and are 20.0 percent below March 2007. The median price in the
South was $167,200, down 7.1 percent from a year ago.

Blamed by the NAR for the decline in home sales are restrictive lending practices which have prevented many potential purchasers from being able to buy a home. While lending practices and guidelines such as insisting upon relevant down payments, documentation of income, and higher minimum credit scores required for loan qualification may seem restrictive compared to the wild-west rules of the past few years, to many they represent a return to a more rational lending environment seen before the days of MBSs, CDOs, tranches and hedge funds. Regardless, the truth of the statement is evident, and it is the mortgage lenders, the loan programs they offer, and the limited number of buyers who can obtain financing which continue to drive sales numbers down.

The first question to any potential purchaser is whether they can get a mortgage.

Total housing inventory rose 1.0 percent at the end of March percent to 4.06
million existing homes available for sale, which represents a 9.9-month supply
at the current sales pace, up from a 9.6-month supply in February.

This is not a good thing. Again, this shows that we can probably expect continuing price depreciation for the foreseeable future. As homebuilders, existing home owners, bank REO departments, and other real estate investors fight for that limited pool of qualified buyers, they will compete on the only level they can: price.

As prices decline, lending practices become even more restrictive. As we’ve seen here in Atlanta, most of the lenders and mortgage insurance companies have declared the city a declining market – and the size of the loans they are willing to extend get chopped 5% off the top, meaning that a potential buyer has to bring that much more to the table to close.

It’s a vicious circle, and unfortunately, one that is likely to continue.

Photo: peal of laughter, originally uploaded by camillesau.

Record number of foreclosed properties up for auction

From the AJC:

A record number of metro Atlanta properties are scheduled to be auctioned on the courthouse steps next month, according to numbers released Tuesday by Equity Depot, an Alpharetta company that tallies foreclosures.

The data is further evidence that metro Atlanta is mired in a real estate slump. Homeowners, builders, developers and commercial property owners have stopped making payments on these properties, so lenders are repossessing them.

In the 13-county metro area, 7,335 properties are scheduled for courthouse auctions, Equity Depot said. The previous record was 6,992 properties reported in January.

After a two-month reprieve in foreclosure advertisements, metro Atlanta’s foreclosure numbers have roared back with a vengeance.

While some of these properties may end up being reinstated, and others may be paid off before foreclosure, it’s a safe bet that the bulk of these houses will go back to the lender at the foreclosure auction – contributing to the huge inventory of homes on the market once they reach the REO stage.

Because the foreclosure rate is a backwards-looking figure (today’s foreclosures were yesterday’s late-pays and defaults), investors can expect that the foreclosure rates will continue to rise as people continue to fall behind in their mortgage payments. With more foreclosures, and more REOs flooding the market, buying opportunities abound, and the smart investor will take advantage.

Photo: onlyonlyonly lomokev remix, originally uploaded by lomokev.

New home construction at 17-year low

From CNN:

Initial construction of U.S. homes fell to a 17-year low in March, a much
steeper-than-expected drop, according to a government report released Wednesday.

Privately owned housing starts fell to a seasonally adjusted 947,000
annual rate in March, according to the Commerce Department. The rate was down
11.9% from February's revised reading of 1.07 million and 36% lower than March
of 2007.

Economists were expecting housing starts to decline to 1.01
million, according to consensus estimates compiled by Briefing.com.

and

New construction of single-family homes, considered the core of the housing
market, were at a rate of 680,000, or 5.7% below last month's number.
Single-family housing starts have not been this low since May 1980.

Applications for building permits, considered a reliable sign of future
construction activity, fell to a seasonally adjusted annual rate of 927,000 in
March. That's 5.8% below the revised 984,000 rate in February. Economists were
expecting permit applications to fall to 970,000.

Because of the overwhelming glut of housing inventory, both new and existing homes, this is a necessary step in eventually finding the housing bottom. Only when the level of new construction, when combined with existing-homes offered for sale and lender-held REOs drops to a point where it is sustainable by new mortgage issuances will there be a hope of recovery.

Until that time, expect there to be a race to the bottom in prices as homebuilders, home sellers, and REO departments all scramble for the few mortgage loans out there.

Photo: Construction Love, originally uploaded by Ramperto.

Builders: Little Confidence

The latest National Association of Homebuilders market index remained unchanged in April, just shy of its record low for the third consecutive month.

The index, which comes from a survey of residential developers across the country, gauges builders’ perceptions of current conditions, interest from potential buyers, and expectations of sales in the next six months.

Driving the homebuilders’ lack of confidence: tighter lending standards, rising defaults, and fear about the market’s future – all of which have kept buyers on the sidelines.

Investors looking for guidance in the days ahead are well to look to the big homebuilders. While most investors generally are more adaptable to specific market conditions, the overall objective of the typical investor and the large homebuilder is the same: to sell houses.

Sand Castle, originally uploaded by crossmage.

Foreclosures Jump

More bad news from RealtyTrac: foreclosure filings increased 57% in March 2008, compared to last year’s levels. Foreclosures also are up 5% from February, showing that the housing market is continuing to slide.

Leading the nation were Nevada and California. It is Nevada’s 15th consecutive month as the state with the most foreclosures.

Year-to-year, the number of properties repossessed by mortgage lenders has increased 129%.

Georgia is still among the states with the most foreclosures, with only Nevada, California, Florida, Arizona and Colorado with higher foreclosure rates. One in every 351 Georgia households received a foreclosure notice. Georgia also totaled 11,047 homes in foreclosure – the fourth-highest in the nation.

Again, as a lawyer for real estate investors, the story remains the same: investors should plan on these levels of foreclosures continuing for the foreseeable future.

one would., originally uploaded by antimethod (cole rise).

All-time Low for Pending Home Sales

The National Association of Realtor’s February index of pending home sales has fallen to an all-time low, falling 1.9% from January levels. The drop was nearly double what was expected by economists.

Overall, pending sales were down 21.4% from last year’s levels.

The index measures contracts signed, and not actual closings. It is therefore considered a forward-looking indicator of the overall housing market.





Photo: maybe, originally uploaded by Tal Bright.

Snapshot: Atlanta

Courtesy of Radar Logic, a real estate data and analytics company, comes another view of home prices in Atlanta. According to their January 2008 report, released on April 3, prices in Atlanta have fallen 9.2 percent from January 2007 levels.

While this decrease is larger than the 4.8 percent decline shown by last case Case-Shiller report, the point is still the same: that home values throughout Atlanta are falling, and as a real estate lawyer in Atlanta, I certainly recommend that all investors need to take the reduction in home value into account when measuring the potential equity in any property.

Photo: Let Go, originally uploaded by rockmenow48.