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Prospective homebuyers hampered by stringent tax laws and the increasing unavailability of precious land at home are becoming enthusiastic about the housing market in America. Who are these people who are helping restore hope in a troubled market on U.S. soil?

            Mr. Peter Oh is a Seattle realtor who is planning on opening a special showroom so he can market twenty-one condo buildings in the Puget Sound area. His business won’t be built in the Seattle area or in the beautiful high rises across the lake in Bellevue. He will open his doors in South Korea – 5,000 miles distant.  He has already sold over twelve homes in The Bravern, a 455-unit luxury tower still in the construction phase in Bellevue and more parties that are interested continue to contact him.  He relates that his competition had sold one-third of a whole building of 334 condo units in Los Angeles called The Residences at Bixel.

            In South Korea, where a piece of land the size of a small lot, has become but a memory, and natives seem to have a penchant for homes in large American cities where condominiums are readily available. South Korea has recently changed the foreign investment laws that enable its citizens to broaden their horizons in America.

            Jason Press, the executive vice president in charge of marketing with a New York marketing company travels not only to South Korea but also to Paris to sell the company’s high-end real estate offerings.  “We recently launched a new office in Dubai, and that’s spurred interest from that region in New York City,” Press says. “We’re associated with luxury international brands, and these are magnets to international buyers.”

            The weak dollar and falling prices are appealing to buyers from overseas. The predicament here at home has also forced realtors to expand their field of buyers. Other countries interested in getting into the U.S. property market come from Mexico, Canada, Britain, India, China, and Dubai.

            Other examples are in Dallas, where a downtown revitalization project that will renew the area and create new arts districts, the developers are building a 120-unit Museum Tower luxury condominium building, are marketing to Mexico’s Monterey and Mexico City’s rich. The units in the tower begin at $1 million dollars. The company is working on a plan to market to Europe’s elite as well.

            Canadians are happily taking advantage of the US exchange rate that gives them more leverage than they’ve seen in many years. While the Canadian dollar was once worth 70 cents in U.S. currency, it is now worth almost $1.01. And real estate companies in Arizona, Hawaii, Washington, and California see the possibilities. Some builders are offering a currency hedge so that Canadians can lock in their purchases at the current exchange rate at the time of the offer.

            Americans will be seeing more and more of the urban real estate going increasingly global as the housing market and the dollar continue to be troubled.

During the 1980’s FHA loans made up almost 70% of loans made across the country. However during the last 20 years that number has dropped significantly as home prices appreciated faster than FHA loan limits. The 2008 government fiscal stimulus plan provided an increase in FHA loan limits from $417,000 to as much as $729,750 in certain areas with high home prices.

The FHA loan limit increase has caused a recent surge in FHA loan applications. The weekly report of mortgage activity prepared by the Mortgage Bankers Association (MBA) showed a 15% increase in FHA loan applications. FHA loans have many advantages that conventional loans do not.

FHA loans have lower interest rates than conventional loans. The interest rate on FHA loans is about 1% lower than regular loans. These loans are more attractive and have a lower rate because they can be resold to Fannie Mae or Freddie Mac, giving the implicit backing of the federal government. This lower rates will make homes much more affordable for borrowers, and offer an attractive solution to refinance out of an adjustable rate mortgage (ARM).

FHA loans also allow you to have much less equity than a conventional loan. Recently because of the credit crises and declining home values lenders have cut back on the percentage of the home value that they will lend on. A few years ago it was easy to find a loan with no down payment or only 5% down. Now many lenders require 20% or even 30% down payment. With an FHA loan it is possible to purchase a house with as little as 3% down. FHA loans also allow cash out with as low as 5% equity for some borrowers.

The low equity required in FHA has created a very attractive refinance option for many people in today’s declining home price market.

The housing bust that put an unprecedented number of homeowners into foreclosure this year is turning out to be a boon for first time homebuyers. Lenders are experiencing an increase in bidding wars that make one think of the market’s American Dream period when almost anyone was approved for a home loan. Some experts are saying that this new trend may be the mark that the housing market crisis is beginning to recede.

California, Florida, Nevada, and Arizona that were four of the worst hit states lead this phenomenon where home prices once skyrocketed leaving the worst foreclosure crisis in decades. Now dominating the markets in vacant new homes, foreclosures, and other calamitous properties, are falling prices that grieve homeowners who are desperate to sell.

Between January and March one of every four home sales was a desperate sale to keep out of foreclosure. And that figure leaps to over fifty percent in the most distressed areas such as Detroit, Las Vegas, Los Angeles suburbs, and in new subdivisions where lax mortgage lending standards and speculation ran like a herd of deer under gunfire.

Bankers are seeing competing offers on homes that once sold for $350,000 three years ago and now going for $175,000.

“It’s not uncommon to have 10 to 20 offers on one house, and for the house to end up selling for more than its market price,” said Erin Attardi, a Sacramento Realtor. The strategy, she said, allows the bank to be selective, picking buyers with solid financing or those able to pay in cash.

In April, more than 660,000 properties were sent back to the lenders, which increased from 254,000 in April of 2007. A record three million homeowners was a month late on their mortgage payments in the first quarter, according to the Mortgage Bankers Association. Another 450,000 homeowners entered the last stage of foreclosure.

Now buyers are finding deep discounts on lender-owned homes, and that means the realization of a wonderful opportunity to buy that first home. But with the new boon in lower prices comes frustration. New buyers are finding that the competition can hamper their ability to making the best offer that the bank will accept.

“It’s actually stimulated the market,” said Janice Ziesig, owner of Z House Realty Group in Orlando, Fla. “Things are moving now — more so than they were.”

The foreclosure crisis continues to worsen amidst predictions from economic gurus in April that the situation would work itself out. The Mortgage Bankers Association reported that 2.5% of mortgage loans being serviced by its members are in foreclosure – a historical record high. The numbers mean that 1.1 million homeowners have or are in the process of losing their homes, which has increased from 2% of loans – or 938,000 homes – at the end of 2007. Also hitting a record high are the 3 million homeowners at least one payment in arrears, and 737,000 mortgage holders are three months behind, though not in foreclosure yet.

There is little hope to expect the housing crisis to slow until 2009 and perhaps not until a couple of years down the road. “It’s the same story we’ve been seeing for a while now - we had too much reckless lending and buyers who got over-extended,” he said. “We’ve had an unprecedented decline in home prices on a nationwide basis, which is public enemy number one for mortgage loans. And now you’ve got an overall economy that has slowed adding to this toxic stew,” said Michael Larson, real estate analyst with Weiss Research.

Subprime loans with adjustable rates that were granted to borrowers with less than perfect credit scores are the biggest problem. Four out of ten (39%) ARM loans have been reported to be at least a month late, or already in foreclosure. But even the less risky prime fixed rate mortgages that were considered the least risky loan suffers at a foreclosure pace of 1.2%, double the rate just a year ago. About 1.2 million prime mortgages are more than a month in arrears.

According to Jay Brinkman, MBA’s vice president for research and economics, the prime loan segment was hurt by so-called Alt-A loans, which didn’t require income verification for buyers with good credit. May is the sixth straight quarter with record home loan foreclosures. The six states experiencing especially hard times are California, Florida, Arizona, and Nevada. Investors who grabbed up real estate using the riskiest mortgages available fueled rising home prices. Ohio comes in at a close second in foreclosures as the unemployment rate climbed to 5.7% due to businesses leaving the state for others with a more healthy economy.

Brinkman said that in markets like these, where home prices have fallen so far from the market’s peak, finding solutions to keep a home out of foreclosure are more difficult.
He also added that, given the large impact California and Florida are having on the national foreclosure numbers, and the fact that historically foreclosures peak about three years into the loan’s life, he expects the number of foreclosures will continue to rise.

There is a glimmer of good news. The rate of homes going into foreclosure in Ohio and Michigan was narrowly lower than it was in the fourth quarter, and 18 other states also saw a decline in that rate. Brinkman said he hoped that means the crisis is at or near a bottom in much of the country, and that foreclosure prevention efforts have started to have an effect. But he added that a slight improvement in one quarter doesn’t necessarily mean the end is near.

Indeed, the rate of homes going into foreclosure continued to climb sharply higher in California and Florida, as has the rate of loans in those states that are 90 days or more past due but not yet in foreclosure. Brinkman said that in markets like these, where home prices have fallen so far from the market’s peak, finding solutions to keep a home out of foreclosure are more difficult.

He also added that, given the large impact California and Florida are having on the national foreclosure numbers, and the fact that historically foreclosures peak about three years into the loan’s life, he expects the number of foreclosures will continue to rise.

June 6, 2008

Americans are already suffering from a foreclosure crisis, imposingly high gasoline prices, and rising food costs. May showed a downgrade in the unemployment rate of 5.5% that hasn’t been seen since 1986. Over 49,000 jobs were cut this month. With the grim news came Wall Street sliding down more than 200 points in morning trading. Economists were surprised at the big increase in unemployment after forecasting a one-tenth of a percent drop to 5.1%. The nation’s employers have now cut payrolls for five continuous months.

Washington expressed disappointment at the news this morning, but said that the unemployment rate “is still lower than the average of the last three decades.” Jobs were severely cut last month in manufacturing, construction, professional and business services, and retailing. Gains were found in education, health fields, government, leisure, and hospitality.

The 5.5% unemployment amounts to 861,000 people out of work in May 2008, rising to 8.5 million total. Just a year ago, the jobless rate evened out at 6.9 million for a rate of 4.5 percent. A lot of people have been talking about the question of the nation being in a full-blown recession at least for the average American whose paycheck has only increased 0.3% in the midst of the economic breakdown. Federal Reserve Chairman Ben Bernanke has hinted that the central bank’s rate cut campaign is probably over for now.

The unemployment rate is expected to rise to 6 percent or more early next year. Employers won’t be hiring again any time soon until they see proof that the economy is growing again in the right direction. Much of the reason for the unemployment rate is the influx of students now entering the job market. This year marks the largest increase in teenage joblessness since 1948.

“This is an ugly report on the labor market,” said Allen Sinai, chief economist at Decision Economics Inc. in New York. “Most of the economy looks in recession.”

Federal Reserve cuts interest rates to 2 percent

The Federal Reserve cut the Federal funds rate a quarter-point to 2 percent today, the lowest since 2004.  The Fed indicated that its dramatic monetary easing the last 7 months was coming to an end.  The Federal funds rate was 5.25% last September and has been lowered aggressively to offset the housing and credit crises and the economic downturn.

  The Feds rate cuts and emergency actions have ameliorated the impact of the global credit crunch and helped to restore liquidity and confidence to the financial markets.  The stock market is 9% above the low it established in March as investment bank Bear Stearns stock collapsed.

  The Federal Reserve moved to a neutral outlook shifting to a less aggressive policy.  They indicated there are still continued fears of a recession and the Fed could lower rates in the future.  The low rates have fueled inflation causing record prices in food and energy and weakened the dollar against foreign currencies.

  Prior to the rate announcement the Commerce Department announced that gross domestic product (GDP) grew 0.6% in the first quarter, the same amount that GDP grew in the fourth quarter of 2007.  The last two quarters have shown extremely weak growth but and avoided the technical definition of a recession as two consecutive quarters of negative growth.

  The Fed stated, “Household and business spending has been subdued and labor markets have softened further.  Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters.”  The Fed said it “expects inflation to moderate in coming quarters.”

  The labor department said that employment compensation rose 0.7% in the first quarter, the smallest increase in two years.   A separate report showed that consumer spending was growing at the slowest rate since 2001 as stagnant wages and lower home prices have people feeling less wealthy.

Federal Reserve Ready To Lower Interest Rates

The Federal Reserve began the two day Federal Open Market Committee (FOMC) meeting that will culminate in an interest rate decision tomorrow.    Economic forecasters predict that the Fed will reduce the Fed funds rate by a quarter-point to 2.0%.  The rate was as high as 5.25% last September. 

  It is likely the Fed will pause after this meeting to determine the effects of its prior rate reductions and analyze their impact.  Pressure is building to end the easing in the form of record high commodity prices in food and energy.  The dollar has weakened to record low levels and outside the housing sector the economy is not as weak as expected.  Stock market prices have increased lately and indications are the credit crisis is improving.  Also consider the $152 billion tax rebate stimulus and the lagged effect of 3% of prior easing. 

  Recently weakness in the housing market has been offset by strength in the job market.  The Labor Department reported that claims for unemployment benefits fell by 33,000 to 342,000.  Forecasters had been expecting a rise of 3,000.    The Case-Shiller home price index indicated home prices fell by 12.7 percent in February compared to a year earlier.  The index dropped 10.7 percent in January and 9.1 percent in December.  The cities with the largest annual price declines were Las Vegas 22.8 percent, Miami 21.7 percent  and Phoenix down 19 percent.

  Robert Shiller, the Yale professor who invented the index, said that home prices could fall more than the 30 percent drop of the 1930s depression.  Housing inventory has soared to record levels as home mortgage financing has restricted and foreclosures add to the supply.  Over one million units are still under construction and experts expect the inventory overhang to persist and continue to apply downward pressure on prices.

  For a chart of home prices the last 12 years please follow this Case-Shiller and OFHEO Indices link.

April 28^th, 2008 – The federal government will start to send out tax rebate checks today.

The tax rebates are $600 for an individual, $1200 for a couple and $300 additionally for each dependent child. To find out exactly how much of a rebate you will receive, use your tax return to fill out the Economic Stimulus Payment Calculator. The payments will start to be delivered by direct deposit today, and the checks will be mailed out May 9^th.  Over five million taxpayers will see the rebate directly deposited this week and over 130 million will receive checks over the next eight weeks.

The rebate checks are the primary part of the $152 billion stimulus package that was passed in February.  The government is providing the rebates in hopes of offsetting the slowing economy due to the housing, mortgage, and credit downturn. Most economists expect the impact to be relatively small but will mildly help consumers offset rising oil and food prices.  Some criticisms of the stimulus package are that the benefit will be minor and temporary, and the government is purely borrowing the money and thus increasing the federal deficit.

In an analysis of the 2001 rebate checks only about 25% will be spent on purchases, while the remainder will be used to increase savings or reduce debt. Several retailers have offered up to a 10% added value to gift cards purchased using the rebate checks.  Albertsons, Jewel-Osco, Sears, Kmart, Lands’ End, Walmart, Best Buy, Kroger, Staples and Home Depot all are offering similar incentive programs to encourage people to spend the rebate checks in their stores.

Fannie Mae and Freddie Mac to Increase Lending by $200 Billion

March 19, 2008

In the latest move by the government to fix the mortgage crisis, restrictions on Fannie Mae and Freddie Mac have been eased. The Office of Federal Housing Enterprise and Oversight (OFHEO) reduced the capital requirements from 30 percent to 20 percent. The measure will provide Fannie and Freddie with an extra $200 billion for the mortgage backed securities market. That extra capital will allow the two firms to purchase or guarantee $2 trillion in mortgages this year.

The two companies have a total mortgage loan portfolio and guarantees of $4.5 trillion. The $2 trillion addition is a significant expansion of their role to stabilize the housing market. The measure is expected to help lenders provide loans at a lower rate of interest. Lending and interest rates have risen as many subprime loans have defaulted.

“Fannie Mae and Freddie Mac have played a very important and beneficial role in the mortgage markets over the last year,” said James B. Lockhart, OFHEO director. “We believe they can play an even more positive role in providing the stability and liquidity the markets need right now.”

Just last month the Congress passed a stimulus package that included a temporary increase on the limits that Freddie and Fannie can purchase. The $417,000 cap was raised to $729,000 for the highest cost markets.

The current mortgage crisis has forced many lenders out of business and forced others to reduce the number of loans they will make. Falling home prices and a record number of foreclosures have decreased the value of mortgage securities decreasing the availability of new loans. The combination of factors has created a drastic reduction of liquidity in the mortgage market. The aggressive actions by the government are meant to help restore liquidity and the normal functioning of the mortgage market.

The Federal Reserve cut its key lending rate by ¾ of a percent to 2.25%. The latest slash of the interest rate continues the Fed’s aggressive decrease in the lending rate from 5.25% last October.

The United States economy has been hit by a series of shocks. There has been a profound decrease in housing, a decrease in economic activity and a credit crunch affecting investment banks. The combination of factors has contributed to widespread decrease in retail sales, job hiring and stock market prices. The Fed is decreasing rates in an effort to offset these factors and increase economic growth.

Ben Bernanke, chairman of the Federal Reserve, announced in the Fed policy statement that the outlook for economic activity has weakened and they are on watch for further weakness. The Fed also indicated that inflationary pressures are a concern. Two federal reserve governors dissented from the decision arguing for less aggressive action. It is unusual to find dissent in Federal Reserve decisions.

Some analysts believe the Federal Reserve is near the end of the rate cutting process. Having the Federal Funds rate below the 2% level caused some of the problem excessive credit expansion that is now causing problems with defaults. Such a low Funds rate also can lead to inflation through a weaker dollar. Signs of inflation are evident in many grains, such as corn and wheat, which are at multi year highs. Other commodities which are inflating in price are gold now over $1000 an ounce, and oil over $100 a barrel.

The Federal Reserve is hoping that the low funds rate will encourage lenders to provide lower mortgage rates to homeowners. Lower home mortgage rates can help offset the housing crises by enabling borrowers to refinance their loan making home ownership costs lower.