Article in December 29, 2006 Detroit Free Press

HOUSING AND DEVELOPMENT: Area home sales mixed

Like U.S., Detroit rose but Wayne, Oakland didn't

BY MARGARITA BAUZA
FREE PRESS BUSINESS WRITER

December 29, 2006

As U.S. sales of existing homes showed an uptick in figures released Thursday, local sales in October increased in Detroit but fell in Dearborn and western Wayne and Oakland counties when compared to the same period a year ago. Specifically:

• 628 homes sold in Detroit in October compared with 594 in October 2005.

• 175 homes sold in Dearborn in October compared with 190 in October 2005.

• 716 homes sold in western Wayne and Oakland counties in October compared with 877 in October 2005.

National figures for existing home sales released Thursday showed that sales rose unexpectedly in November, as prices fell for the fourth month in a row, adding to evidence that the housing slowdown is ending.

U.S. purchases increased 0.6% last month, to an annual rate of 6.28 million, after they rose 0.5% in October. That marked the first back-to-back gains in monthly sales since March 2005, the National Association of Realtors said Thursday in Washington.

The report, coming on top of a bigger-than-expected jump in new-home sales reported Wednesday, suggests housing might be less of a drag on economic growth in 2007. That's in line with the Federal Reserve's forecast for growth at a moderate pace in the new year.

"It appears we've hit bottom," David Lereah, chief economist of the Realtors' group, said Thursday at a briefing in Washington.

Sales of existing homes, which account for about 85% of the U.S. housing market, are recorded when a contract is closed. New home sales, recorded when a contract is signed, are considered a more timely barometer of the housing market.

The number of previously owned homes for sale decreased 1% last month, to 3.82 million. That represented a 7.3 month supply at the current sales pace, down from 7.4 months in October.

The median price of an existing home in November fell 3.1% from a year ago, to $218,000, the fourth consecutive monthly decline.

State sales decrease

By October of this year -- the latest figures available from the Michigan Association of Realtors -- 16,482 fewer houses had sold in the state compared with October 2005.

In Western Wayne and Oakland counties 10-month sales fell from 9,495 in October of 2005 to 7,582 in October 2006, a drop of 20%. November figures are not available for Detroit-area markets because the statistics are reported quarterly.

Sam Baki, president of the Western Wayne Oakland Association of Realtors, says he expects the local sales numbers for November and December to be up. "There's a lot of activity right now," said Baki, a Realtor at Keller Williams in Northville.

He said buyers appear more comfortable with housing prices than they did a year ago, when both buyers and sellers were adjusting their expectations about pricing and sales.

"After the election especially, it picked up a little," Baki said. "People understand the market a little more, and anecdotally, there's been more activity in November and December. People are looking, making offers and showing houses."

David Elya, president elect of the Metropolitan Consolidated Association of Realtors and an agent with Realty Executives Group in Shelby Township, said he believes the Detroit-area market will see a lot of activity this spring.

"There are plenty of buyers that are waiting for good news," he said. "There's ample supply and good value out there. My Web activity is up, my phone calls have been up."

Article in December 28, 2006 Wall Street Journal

Existing-Home Sales Climb
As Inventories Continue to Fall
Consumer Confidence Improves Markedly

By JEFF BATER
December 28, 2006

WASHINGTON -- Existing-home sales climbed a second straight time and inventories fell during November in another sign the housing market might be stabilizing.

Meanwhile, U.S. consumer confidence improved smartly in December, lifting to its highest level since April, according to a report Thursday by research group the Conference Board.

Home resales rose to a 6.28 million annual rate, a 0.6% increase from October's unrevised 6.24 million annual pace, the National Association of Realtors said Thursday. The median home price was $218,000 in November, down from a revised $219,000 in October and lower than $225,000 in November 2005.

NAR chief economist David Lereah said the twin increase in sales was the first since demand rose in March and in April 2005.

"It appears existing home sales hit bottom in September," Mr. Lereah said. "Price drop is necessary to stir sales. It is working. Sales are up. It appears we hit bottom."

The housing sector is in a slump that has held down economic growth. But a sign the market might be stabilizing emerged Wednesday as the government reported new-home sales rose more than expected in November and inventories fell; analysts, however, cautioned the supply of homes remained high and it was too early to tell whether a sector bottom had been reached. Home construction last month also climbed -- yet building permits kept dropping. (See related article1.)

The home resales level last month was above Wall Street expectations of a 6.18 million sales rate for previously owned real estate.

The average 30-year mortgage rate was 6.24% in November, down from 6.36% in October, according to Freddie Mac. By the end of November, the inventory of homes on the market fell to 7.3 months from an unrevised 7.4 months at the end of October, NAR said. Regionally, existing-home sales were mixed. Sales rose 6.0% in the Northeast and 0.8% in the West but were flat in the Midwest and fell 1.6% in the South.

Article in December 27, 2006 Wall Street Journal

Sales of New Homes Rose 3.4%
In November, Prices Climbed

By JEFF BATER
December 27, 2006 .

WASHINGTON -- New-home sales bounced back in November, rising more than expected, while inventories fell and the median price climbed.

Sales of single-family homes increased by 3.4% to a seasonally adjusted annual rate of 1.047 million, the Commerce Department said Wednesday. October sales fell 3.8% to 1.013 million, revised from a previously estimated 3.2% retreat to 1.004 million.

The sales numbers Wednesday were better than Wall Street was looking for. Economists expected a 1.6% increase to an annual rate of 1.020 million in November. The advance in November was the third in six months; sales were up 3.1% in September, up 4.3% in August, down 9.2% in July and down 2.1% during June.

But year over year, sales were 15.3% lower since November 2005. The housing sector is a big thorn in the side of the economy, which slowed in the third quarter to a 2% pace. The housing component of gross domestic product plummeted by 18.7%, which was the sharpest drop in 15 years and robbed GDP of 1.20 percentage points.

Surging demand in certain markets across the U.S. during the housing boom sent prices skyward and builders breaking ground. Sales peaked in 2005 and began receding, while inventories climbed, resulting in builders slowing down.

New-home inventories fell in November. There were an estimated 545,000 homes for sale at the end of the month, the Commerce data Wednesday showed. That represented a 6.3 months' supply at the current sales rate. An estimated 553,000 homes were for sale at the end of October, a 6.7 months' inventory. However, the months' supply a year earlier, in November 2005, was 4.9.

The average price of a new home decreased to $294,900 in November, down from $304,900 in October but above $294,400 in November 2005, according to Commerce. The median price rose, up to $251,700 last month from $243,800 in October and $237,900 in November 2005.

Financing costs drifted down in November. The average rate on a 30-year mortgage was 6.24%. It was 6.36% a month earlier -- and 6.33% in October 2005.

By region, new-home sales last month rose 22.4% in the Midwest, 22.5% in the Northeast, and 19% in the West. Demand fell in the South, down 9.3%.

Based on figures unadjusted for seasonal factors, an estimated 72,000 homes were actually sold last month in the U.S., down from 78,000 in October.

Article in December 11, 2006 Wall Street Journal

Realtors See Improvement Ahead
For Housing Market, Home Prices

By BENTON IVES-HALPERIN
December 11, 2006

WASHINGTON -- Prospects for existing home sales may improve in the coming year, relative to this year's sluggish pace, while new home sales are expected to continue their slide into 2007, according to the National Association of Realtors Monday.

Nonetheless, NAR said home prices will continue to appreciate this year, even as market activity slows dramatically. The national median existing-home price for all of 2006 is projected to rise 1.4% to $222,600, with another 1.0% gain next year to $224,700, according to NAR. The median new-home price should fall by 0.5% to $239,700 this year, followed by a slight 0.8% increase in 2007 to $241,700.

Based on NAR forecasts, existing-home sales are expected to be 6.47 million for all of 2006, which would be a decline of 8.6% from 2005. In 2007, the pace of sales is expected to rise steadily from the current low and reach an annual total of 6.40 million, which would be 1.0% lower than this year's total.

"By the fourth quarter of 2007, existing-home sales will be 4.6% higher than the current quarter," said David Lereah, NAR's chief economist, in a statement accompanying the forecast.

New home sales, on the other hand, are projected to remain fairly depressed into next year. NAR expects new-home sales in 2006 to fall 17.7% to 1.06 million, before dropping an additional 9.4% in 2007 to 957,000.

NAR attributed much of the contraction in the market for new homes to builders pulling back on construction to support pricing for current inventories, while high construction costs in some areas are eating into profits.

Still, "most of the correction in home prices is behind us, but general gains in value next year will be modest by historical standards," Mr. Lereah said. NAR said total housing starts for 2006 are likely to fall 12.3% to 1.82 million units, followed by another 15.1% plunge in 2007 to 1.54 million.

"This correction is one of the factors drawing buyers into the current market, but most sellers are still seeing very healthy long-term gains," said Mr. Lereah.

Article in December 5, 2006 Wall Street Journal

More Borrowers
With Risky Loans
Are Falling Behind
Subprime Mortgages Surged
As Housing Market Soared;
Now, Delinquencies Mount

By RUTH SIMON and JAMES R. HAGERTY
December 5, 2006

Americans who have stretched themselves financially to buy a home or refinance a mortgage have been falling behind on their loan payments at an unexpectedly rapid pace.

The surge in mortgage delinquencies in the past few months is squeezing lenders and unsettling investors world-wide in the $10 trillion U.S. mortgage market. The pain is most apparent in subprime mortgages, though there are signs it is spreading to other parts of the mortgage market.

Subprime mortgages are loans made to borrowers who are considered to be higher credit risks because of past payment problems, high debt relative to income or other factors. Lenders typically charge them higher interest rates -- as much as four percentage points more than more-credit-worthy borrowers pay -- one reason subprime mortgages are among the most profitable segments of the industry.

They also have been among the fastest-growing segments. Subprime mortgage originations climbed to $625 billion in 2005 from $120 billion in 2001, according to Inside Mortgage Finance, a trade publication. Like other types of mortgages, subprime home loans are often packaged into securities and sold to investors, helping lenders limit their risks.

Until the past year or so, delinquency rates were low by historical standards, thanks to low interest rates and rising home prices, which made it easy for borrowers to refinance or sell their homes if they ran into trouble. But as the housing market peaked and loan volume leveled off, some lenders responded by relaxing their lending standards. Now, the downside of that strategy is becoming more apparent.

Based on current performance, 2006 is on track to be one of the worst ever for subprime loans, according to UBS AG. "We are a bit surprised by how fast this has unraveled," says Thomas Zimmerman, head of asset-backed securities research at UBS. Roughly 80,000 subprime borrowers who took out mortgages packaged into securities this year are behind on their payments, the bank says.

Though delinquency rates on subprime mortgages originated in the past year have soared to the highest levels in a decade, economists don't expect any significant harm to the nation's economy or financial systems. But if late payments and foreclosures continue to rise at a faster-than-expected pace, the pain could extend beyond homeowners and lenders to the investors who buy mortgage-backed securities.

Several lenders are already feeling the sting. H&R Block Inc., which operates Option One, a major subprime lender, said last week that its mortgage-services unit posted a pretax loss of $39 million in the fiscal second quarter ended Oct. 31, compared with a year-earlier pretax profit of $48.8 million. The Kansas City-based tax-services company said last month it is considering selling Option One, which has been struggling with higher interest rates and defaults, and is closing 12 branch offices.

On Friday, KeyCorp said it reached a deal to sell its subprime Champion Mortgage business. Analysts at Friedman, Billings, Ramsey & Co. put the price for the company's subprime mortgage operation at $130 million, "far below" the $200 million to $250 million they expected. A spokeswoman for KeyCorp declined to comment, except to say that KeyCorp feels it "definitely generated a fair price" for both the unit and its loan portfolio, which was sold separately. She added that KeyCorp was leaving the subprime market because "it no longer fits with our long-term strategic priorities."

Soaring delinquencies are making some lenders more cautious, which is likely to put further pressure on the weak housing market. Yesterday, the National Association of Realtors said that its index for pending home sales for October fell a seasonally adjusted rate of 1.7% from September and was down 13.2% from a year earlier.

Delinquency rates have been rising steadily since the middle of 2005. But the trend has accelerated sharply in the past two to three months, according to an analysis by UBS. The figures don't include loans that lenders were forced to repurchase because the borrower went into default in the first few months; such repurchases also have increased sharply this year.

In October, borrowers were 60 days or more behind in payments on 3.9% of the subprime home loans packaged into mortgage securities this year, UBS says. That's nearly twice the delinquency rate on new subprime loans recorded a year earlier.

Carol Alter, a mail carrier in Aurora, Ohio, says she bought her first home for $99,000 at a sheriff's foreclosure sale in February, but felt pinched right from the start by her nearly $80,000 subprime mortgage. She says closing costs on the loan totaled $6,500, rather than the $2,500 she expected, forcing her to drain her savings and miss payments on her utility bills.

Ms. Alter says she fell behind on her mortgage payments in June after she hurt her leg and missed several weeks of work. She has been able to stave off foreclosure, she says, with the help of a $2,100 interest-free loan from Neighborhood Development Services in Ravenna, which operates a foreclosure rescue fund.

How much higher delinquencies further climb will depend in part on the depth of the current housing slump. Mortgage delinquencies generally rise when the housing market cools because borrowers who are in financial trouble find it harder to sell their homes. In addition, if prices fall, they may not have enough equity in their homes to refinance their mortgage.

The subprime industry's current troubles can be traced back to 2003 and 2004, when defaults were unusually low. Investors who purchased these loans did well and were eager to buy more. That encouraged lenders to lower their standards, making loans to more people with low credit ratings. Lenders also grew less inclined to demand full documentation of income and assets and more willing to offer "piggyback" loans that allowed borrowers to finance 90% or 100% of the purchase price without being required to buy private mortgage insurance.

Many lenders kept introductory "teaser" rates low even after short-term interest rates began rising in June 2005, while increasing the amount the rate could rise on the first adjustment. That meant borrowers would face sharply higher costs when their monthly payments were reset.

Fraud has also increased. Some borrowers who took out no- or low-documentation loans were coached by loan officers or mortgage brokers to inflate their incomes and couldn't afford even their first mortgage payment, says Theresa Ortiz, a foreclosure manager with Neighborhood Housing Services of New York City, a nonprofit that works with homeowners in financial trouble.

Even after the housing market started to cool in late 2005, lenders continued to offer credit on easy terms. Many didn't begin tightening up until a few months ago. Now, they are pulling back. Accredited Home Lenders Holding Co., for example, is doing fewer piggyback and stated-income loans -- or loans that don't require borrowers to fully document their income -- especially for people with lower credit scores. In retrospect, "the tightening process should have started a bit earlier," says James Konrath, Accredited's CEO.

Recent analyses by UBS and by RBS Greenwich Capital show that subprime loans made in 2006 are going into foreclosure at a faster pace than loans made in previous years. In many cases these loans are "so bad right off the bat" and so far beyond the borrower's ability to pay that giving the borrower more time to pay or restructuring the loan wouldn't help, says Michael van Zalingen, director of homeownership services at Neighborhood Housing Services of Chicago, a nonprofit organization that works with financially distressed homeowners.

If delinquencies continue to grow, the pain could also be felt by investors who have flooded into the market for subprime securities. Because of the way mortgage-backed securities are structured, investors who buy investment-grade securities aren't likely to be hurt if losses are close to expectations. But if losses on the underlying mortgages substantially exceed expectations, some investors who buy the riskiest slices of subprime securities are likely to rack up losses. These include hedge funds and investors who buy collateralized debt obligations, pools of debt instruments that are often snapped up by foreign buyers.

Because the underlying loans have gotten riskier, credit-rating agencies are telling issuers of mortgage-backed bonds to set aside more money to cover losses than they did three years ago in order to get an AAA rating for their bonds.

But some recent deals are already coming under review. Standard & Poor's Corp. put one deal backed by loans issued by Fremont General Corp.'s mortgage unit on credit watch for possible downgrade last month and says it could take similar action on deals from several other issuers within the next few months. Fremont declined to comment.

"We are really monitoring very, very closely the portfolios of all the subprime issuers," says Ernestine Warner, head of RMBS Surveillance. "It's an industrywide trend."

Last week, Moody's Investors Service put a third 2006 deal on credit watch for a possible downgrade. Fitch Ratings also has a 2006 deal on credit watch. When mortgage-backed securities are downgraded it is typically during their third or fourth year.

Predicting losses on these securities is a challenge because there's little or no historical evidence to show how subprime loans will perform at a time when home prices are falling, says Thomas Lawler, a housing economist in Vienna, Va. An analysis by Merrill Lynch & Co. found that losses on recent subprime deals could be "in the 6% to 8% range" if home prices are flat next year and could rise to the "double digits" if home prices fall by 5%. Falling home prices could trigger losses not only for investors who bought riskier classes of mortgage-backed securities, but also for some holders of A-rated bonds, according to the report.

Article in November 22, 2006 Detroit News

The incredible deflating housing market

Region's home prices fall most, but is rebound near?

Dorothy Bourdet The Detroit News / The Detroit News

First came the sting of massive job and income cuts, making Metro Detroiters nervous about their futures. Right behind were fear and caution, which kept homebuyers on the sidelines and created an oversupply of homes that can sit months, even years, on the market.

Now, comes home price deflation, the worst in the nation, according to a survey released this week by the National Association of Realtors. The median home price in Metro Detroit sank to $154,100 in the third quarter, down 10.5 percent from $172,100 at the same time last year. It was the largest percentage drop of U.S. cities.

"The overall feeling in Michigan is everybody's knees are knocking a little bit," said Nancy Warson, a Livonia Realtor.

While prices are down, at least one top Realtor predicts the market may be ready to rebound.

"We're ready to turn around," said Pat Vredevoogd Combs, National Association of Realtors president and a Grand Rapids Realtor. "What we're seeing, we think, is that it's bottoming out."

The steep decline in home prices can be blamed on big losses in jobs and income in Metro Detroit, said Dana Johnson, chief economist at Comerica Bank.

"Overlaid on top of that fundamental is the fear and uncertainty that pervades this region," he said

Would-be homeseller Brian Kurtz knows that uncertainty well. The financial planner from Troy has dropped the price on his Sterling Heights colonial by $36,600 to $259,900 and is now paying $4,000 per month for two mortgages.

"It's like trying to sell ice cubes to Eskimos," said Kurtz, whose home has been on the market since August 2005.

Warson, with Real Estate One, said buyers are just not out there. One of Warson's clients in South Lyon, who is selling their house for about $500,000, has had only one potential buyer look at it in seven months.

Those kinds of waits are reflected in the state's slumping home sales, which are down 17.2 percent in the third quarter. Those kinds of waits also can quickly force down home prices, as sellers often drastically cut their asking prices so they can snag a buyer.

In a state where the jobless rate has soared above the national average, buyers are wary of getting into long-term financial commitments, Warson said. Current homeowners, such as empty nesters, are also reluctant to move or downsize, fearing they'll take a loss on their home.

"Some are scared about their job, some are scared (because) they don't know where the market is and they would prefer to buy at the very, very bottom, so they're holding out -- and nobody knows where the bottom is," Warson said.

Sellers have to be patient

Home prices are slipping nationally, too, though not as drastically as in Michigan. The median single-family home price in the U.S. was $224,900 in the third quarter, down 1.2 percent from last year when the median price was $227,600.

While the national decline is seen as an expected correction in housing prices that had soared out of control with five years of double-digit increases, the big drop in the Metro Detroit median home prices over the past six months has been unparalleled since 1989, the furthest back data is available.

"We're kind of an oddity out there," said Combs, the Grand Rapids Realtor.

Economists say home sellers will have to be patient as they wait for the local real estate market get upright again.

"It's going to be a while before that fear and uncertainty goes away. We're at least six months away from the time when jobs and income bottom out here in Michigan," Johnson said.

Falling home prices mean people have fewer options when they hit financial rough spots.

Wayne County had the nation's second-highest metro foreclosure rate in October, with one in every 196 households filing for foreclosure, according to RealtyTrac, an online firm that tracks foreclosures.

"When it (the median house price) drops sharply, it leaves people with no equity and when they get into trouble they have no choice but to walk away," Johnson said.

"It's an example of how the distress in the economy ripples from one sector to another."

Agents are getting creative

To jump start the housing market, real estate agents have pulled out all the stops. They've developed individual Web sites for each house, increased commissions for the buyer's agent and added other incentives for buyers.

"We've seen plasma TVs, we've seen $5,000 bonuses, we've seen cars, we've seen airline tickets. We're about as creative as we can get at this point," Warson said. "It's still not driving the market up."

In an average year, real estate broker Rob Scalici closes on about 75 to 100 home sales. Right now, he's got 30 listings and no buyers.

"It's kind of amazing. I'm back to doing things that I haven't done in a long time," said Scalici, a broker with RE/MAX Metropolitan in Utica, who is spending more and more Sundays in open houses hoping to snag a buyer.

Scalici hopes 2007 will be a better year for home sellers.

"You've gotta hope that with the New Year comes renewed spirits," he said.

Combs of the National Association of Realtors is optimistic.

Her open houses have been busier -- just this week she sold two homes in the Grand Rapids area.

"Buyers have been sitting on the sidelines watching," she said. "We're seeing them coming back into the market."

Article In November 22, 2006 Detroit Free Press

Upturn seen for region's slumping home sales
Bargain prices may dry up by spring, experts say

BY JOHN GALLAGHER
FREE PRESS BUSINESS WRITER

November 22, 2006

The nation's top realty agent -- amid more bad news for metro Detroit's slumping housing market -- predicted Tuesday that homeowners could see a rebound in the coming months.

If true, an upturn would be good news for frustrated Detroit-area sellers. The market saw the sharpest decline in median prices for existing single-family houses during the July-September quarter of any of 148 metro areas in the nation, according to the National Association of Realtors.

The median price in metro Detroit -- half sold for more, half for less -- was $154,100. That is down 10.5% from the same period in 2005, when median prices in the metro area stood at $172,100.

Pat Vredevoogd Combs, a Grand Rapids Realtor who became president of the National Association of Realtors this month, said the current market transition -- what some call a slump -- is good news for buyers.

"This window of opportunity will continue into the new year, but inventories are starting to decline and sellers will be less willing to negotiate when conditions begin to balance in most areas around early spring," she said.

David Lereah, chief economist for the national Realtors, echoed that Tuesday.

"Last year we had a record sales market and historically tight supplies of homes with buyers bidding over the asking price," he said. "Under these circumstances, it's no surprise that overall home prices are slightly below a year ago. We expect this trend to continue in the months ahead, but we'll see modest appreciation in most of the country in 2007."

Tell that to Ruby and Willie Jennings, who have been unable to sell their northwest Detroit ranch-style house for the past few months. The Jenningses, both in their 80s and thinking of relocating to a group living arrangement, have cut their asking price to $112,000 from an initial $119,000.

"It was sold, we thought, at one time," Willie Jennings said last week. "The purchaser backed out. No one has made an offer since."

Figures from the Michigan Association of Realtors show that the biggest declines in home sales during September occurred in both Monroe County, where sales of existing houses were down nearly 32% compared with the same month a year ago, and in Livingston County, where sales were down 26% during September.

Lesser declines were reported in Oakland County and in suburban Wayne County.

The Detroit Board of Realtors, covering the city, reported sales up 6.6% in September. Statewide, sales in Michigan were off more than 14% in September.

For the nation as a whole, the median price of an existing single-family home in the July-September period was $224,900. The priciest market: the San Francisco-Oakland area, where the median sale price was $749,400. Neighboring San Jose-Santa Clara, Calif., was right behind with a median sale price of $747,400.

The most affordable markets: Decatur, Ill., and Youngstown, Ohio, tied for the lowest median sale price at $86,000.

Article in November 18, 2006 Detroit Free Press

CONSTRUCTION SLOWDOWN: New homes hit a low
In southeast Michigan, permits drop 66.2% in October

November 18, 2006

U.S. housing construction slowed considerably in October, reaching its lowest level in six years, sputtering most in the Midwest and South.

In southeast Michigan, residential-building permits dropped 66.2% to 526 in October, compared with 1,557 in October 2005, according to data from the Southeast Michigan Council of Governments.

Nationally, the slowdown was most severe in the South, which saw a 26.4% decline. The Midwest saw an 11.7% drop. The West dropped 2.1%, and the Northeast saw construction jump by 31%.

Overall, new home construction fell by 27.4% in October, compared with a year before, the Commerce Department reported Friday.

The nation's once-booming housing market has slowed so much that some industry experts say it has reached the bottom, yet others are predicting another 18 months to two years in the down cycle.

Lee Schwartz, executive vice president of government relations for the Michigan Association of Home Builders, said the next upswing in the state home-building market could be two years away because of economic uncertainties.

"Given Michigan's economic doldrums, given the intense problems auto companies are having, that ratchets down to suppliers and firms that supply suppliers," Schwartz said. "People are ... not sure what their situation is going to be two years from now, three years from now."

Michigan has a nine-month supply of existing homes, he said, and the combination of low interest rates and falling home prices has not yet driven a large increase in demand.

Randy Wertheimer, chief executive officer of Hunter Pasteur Homes in Farmington Hills, said builders have had mixed results. For example, a new subdivision of single-family homes the company is building in Novi called Knightsbridge Gate has been moving, with 50 homes in the $280,000 to $344,000 price range selling in eight months.

But two other developments in Van Buren Township have been slow, selling roughly one home a month.

"I do think we have reached the bottom, and I also think it is a phenomenal time to be a buyer. The things we have had to include in these homes to get people to buy them is incredible," he said.

The homes in Novi, which are 2,000 square feet to 2,900 square feet, feature granite countertops, pre-wired alarms and iPort stations where homeowners can plug in their iPods to play throughout the house.

The Commerce Department reported that construction of new single-family homes and apartments dropped to an annual rate of 1.486 million units last month, down a sharp 14.6% from the September level.

The decline, bigger than had been expected, was the largest percentage decline in 19 months and pushed total activity down to the lowest level since July 2000.

Applications for new building permits, seen as a good sign of future plans, fell for a ninth consecutive month, the longest stretch on record. The October drop was 6.3%, pushing permits down to an annual rate of 1.535 million units, the slowest pace in nine years.

David Seiders, chief economist for the National Association of Home Builders, said he believed construction would fall by about 13% this year as builders scramble to deal with plunging sales.

"We had an unsustainable boom in housing in both 2004 and 2005, and now we have a correction on our hands," he said.

The housing weakness trimmed a full percentage point off economic growth in the July-September quarter, when the economy expanded at a tepid 1.6% rate.

Article in November 8, 2006 in Wall Street Journal

Mortgages and New Homes:
What to Do When a Builder
Offers to Find You a Loan

By RUTH SIMON

November 8, 2006

Thinking of buying a new home in this softer market? Chances are your builder is going to try to sell you a mortgage.

Builders have long encouraged their customers to use their mortgage affiliate for financing, and not just to make a little extra money. It also gives them control of the transaction, making it less likely that a mortgage snafu will create problems at closing. Now, as sales slow and cancellations rise, builders are increasingly rolling out special deals that may be tied to using their affiliated lender.

But you may well be able to find a better deal on your own. Builders' mortgage offers "clearly are worse in all the cases I've seen," says Jack Guttentag, professor emeritus at the University of Pennsylvania's Wharton School and founder of the mortgage-advice Web site www.mtgprofessor.com1.

When Randy Gowler, a Olathe, Kan., architect, wanted to buy a new four-bedroom home this year, the builder offered to pick up the first $8,500 in mortgage payments. The catch: Mr. Gowler had to use the builder's affiliated lender and pay the full $287,000 asking price. Mr. Gowler crunched the numbers and turned down the deal. Instead, he went with an outside lender that offered a lower interest rate and paid $274,000.

Unlike Mr. Gowler, most home buyers stick with the builder's lender. Pulte Homes Inc. says Pulte Mortgage provides financing for 90% of its buyers who need a mortgage. Centex Mortgage finances 80% of Centex Corp. customers. Most builders either have a mortgage affiliate or preferred lenders they work with.

Builders say their rates are competitive and that their mortgage affiliates give them more control over the sale. Indeed, getting a loan through your builder can be a plus if construction is delayed, says Greg McBride, a senior financial analyst with Bankrate.com2, because a builder's mortgage unit is more likely to be flexible if there are construction delays.

As the housing market has cooled, many builders have sweetened the pot with special deals. A September survey conducted by the National Association of Home Builders found sharp increases from last year in the number of builders offering to pay closing costs and other fees and in those reducing home prices.

In many cases, home buyers must use the builder's financing arm to qualify for these offers. That's particularly true if the incentive is mortgage-related, such as when the builder pays closing costs or picks up several months of mortgage payments. Buyers may also be required to use the builder's mortgage unit to qualify for a reduced purchase price, builder upgrades or other concessions.

Some competitors say that these requirements put buyers at a disadvantage. "They prevent consumers from shopping to see if there's a better deal out there," says Marc Savitt, vice president of the National Association of Mortgage Brokers. The savings from incentive programs are often illusory, he says, because the home buyer is charged a higher mortgage rate or more in fees and closing costs by the builder's mortgage affiliate.

The builders disagree. "This is really about special interests trying to limit competition -- and increase their profits -- by legislating home builders out of the mortgage business," the National Association of Home Builders said in a statement.

Federal rules prohibit builders from requiring that home buyers use their mortgage affiliates. The rules also require that any discounts offered to buyers who use these affiliates must be true discounts and not made up through higher charges elsewhere.

The Department of Housing and Urban Development says it is getting more complaints not only from mortgage brokers, but also from consumers. One builder canceled a purchase contract and refused to return an $11,845 down payment after the buyer decided to use an outside lender. After HUD intervened, the builder's mortgage company agreed to buy down the rate to make the loan more competitive. Another builder agreed to waive $5,360 in mortgage-origination fees that a buyer was being required to pay in order to qualify for $13,450 in incentives.

To make sure you're getting a good deal, ask the builder not only for the mortgage rate, but also for details on closing costs, points, any fees that will be paid to the lender or third parties, and the terms of the loan. Prof. Guttentag advises comparing that offer to a quote for the same mortgage obtained on the same day from an online lender. He also suggests shopping for financing at the same time you look at houses.

Whether the builder's deal is worth taking can also depend on how long you plan to stay put. A slightly higher mortgage rate may not be a problem if you plan to move in a few years, but it could wipe out the benefits of any incentives if you plan to stay in your home longer. You should also check what comparable homes are selling for to determine whether the builder is offering a real discount.

It can pay to negotiate. When Scott Lazaroff, an engineer, bought a new home in Lyons, Colo., in September, the builder offered to knock an extra $15,000 off the price if Mr. Lazaroff used its affiliated lender. He decided to use his own lender, but still convinced the builder to reduce the price by $10,000. Dan Gracey, another Colorado home buyer, said his builder came back with a lower mortgage rate after he "pushed back" on its original offer, which was higher than the competition.

Article in October 26, 2006 Wall Street Journal

Decline in New-Home Prices
May Reflect Regional Factors

October 26, 2006

U.S. new-home sales jumped1 unexpectedly in September by 5.3%, but prices were lower. The average price of a new home decreased to $293,200 in September, from $314,000 in August and $299,600 in September 2005, according to Commerce. The median price fell 9.7% last month, to $217,100 from $240,400 a year earlier, representing the sharpest drop since December 1970. The August 2006 median sales price was $239,300. Meanwhile, new-home inventories receded in September. Economists comment on the drop in price and what it means for the future of the market.

* * *
The newspaper headlines will blare that new-home prices fell by 9.7% year over year, the largest drop since 1970. Admittedly, this is a shocking headline, but do not make too much of it. First, as we have noted many times, the mix changes every month so that these price numbers do not pertain to a comparable mix of homes over time. If people are scaling back their desires, if the regional mix changes, etc., then the numbers get skewed. Moreover, the new-home side of the equation should be the most volatile, because the inventories of new homes all have to get sold quickly (whereas homeowners can simply take their existing homes off the market for a while when market conditions ease). It is easy to imagine a world in which new-home prices fall by 5% or 10% and the average of all home prices are steady or even somewhat higher. We will wait for the Ofheo figures to get a better read on overall home prices. In any case, the faster new-home prices fall, the quicker those inventories are going to get sold and the faster we can get past this housing correction. --Stephen Stanley, RBS Greenwich Capital

The median new home price fell by 1.7% [in the third quarter] across the nation. However, the median sales price rose in each of the major geographic regions (Northeast +19.3%, Midwest +4.0%, South +0.7%, West +1.6%), which suggests that some of the home price decline is due to a shift in the regional pattern of sales toward lower-priced regions. --Bear Stearns Economics

* * *
The really startling number in this report is the 9.7% plunge in median prices compared to a year ago. No doubt a good part of this drop reflects an increase in the number of smaller homes in the sample, which is not adjusted to take account of changes in the mix of homes sold from month-to-month. Still, mean prices also slumped, to -2.1% from +6.4% in August, so we think there probably has been a serious drop in prices per square foot. --Ian Shepherson, High Frequency Economics

* * *
While month-to-month changes in median sales prices can be driven by changes in the regional mix of sales (prices in the Northeast and West are much higher than in the Midwest and South), the underlying trend here is one of lower prices after the sharp gains seen for many years. It should not be surprising to see prices weaker for new homes than for existing homes, as most owners of an existing home are not forced to sell, and many just pull their homes off the market rather than aggressively lower the selling price. Builders, though, do not have this option, and prices of new homes therefore are more reflective of softer demand than are those for existing homes. --Joshua Shapiro, MFR, Inc.

* * *
[The price decline] exaggerates the extent of the weakening price picture. Because sales in the more expensive Northeast fell sharply while sales in the South rose, the mix of homes sold shifted toward those priced at under $200,000, while sales of pricier homes fell as did the relatively small subset of homes prices at under $150,000. Nonetheless, the stronger sales helped builders pare inventories by about 1.9% but the stock of unsold homes remains at an uncomfortably high level that would still require 6.4 months to liquidate at the current selling rate. Summing Up: New home sales rose a "surprising" 5.3% in September BECAUSE builders were more aggressive in cutting prices. --Nomura Economics Research

* * *
The demand for new housing is well pass its peak and is now on a retreating trend despite this month's bounce. Moreover, inventories of unsold new homes remain very high, revealing moderate overbuilding. Finally, home-price momentum has slowed significantly as home builders are using big discounts to motivate new home buyers. Consequently, housing's contribution to economic growth will be a large negative in the third quarter and a somewhat smaller negative in the fourth quarter. --Steven Wood, Insight Economics

Article in October 26, 2006 Wall Street Journal

New-Home Sales Jumped 5.3%
Last Month as Prices Plunged

By JEFF BATER and BENTON IVES-HALPERIN

October 26, 2006

WASHINGTON -- The median price of a new home plunged in September from a year earlier by the largest amount in more than 35 years. But in a sign that the housing market could be nearing bottom, the pace of sales rebounded for a second month.

Orders for durable goods, such as cars and computers, surged 7.8% in September over the previous month, the largest gain since June 2000. Virtually all the strength came from a giant increase in commercial aircraft orders; outside of transportation, orders inched up 0.1%.

Thursday's data suggested that the economy is still growing, albeit at a moderate pace. That is the scenario sought by the U.S. Federal Reserve, which on Wednesday decided to hold short-term interest rates steady for a third straight month.

"Looking forward, there has been a significant improvement in the overall investment climate in the past month and a half -- inflation uncertainty has declined, long-term interest rates have moved down and the Fed has kept interest rates on an even keel," Brian Bethune, an economist at Global Insight, wrote in a research note.

Indeed, the Commerce Department's measures of shipments and orders of "core" capital goods, or those excluding aircraft and defense, suggest business investment is picking up and that the economy may regain some momentum in the fourth quarter after a tepid third quarter.

Shipments of core capital goods plunged 2.1% in September and increased at a slower annualized rate in the third quarter than they did in the second. But orders jumped 1.1% in September and rose at a faster annualized rate in the third quarter than they did the previous quarter. High corporate profits are enabling businesses to make capital investments on equipment and facilities that can lead to future growth.

The Commerce Department Thursday said the median price for a new home sold in September fell 9.7% to $217,100 from a year earlier. That was the sharpest year-to-year drop since December 1970.

At the same time, though, new-home sales rose a second straight month in September, jumping 5.3% to a seasonally adjusted annual rate of 1.075 million homes. It marked the second consecutive increase in sales following three months of declines.

In another hopeful sign, inventories of unsold homes and new homes decreased. According to Commerce data, there were an estimated 557,000 homes for sale at the end of September, representing a 6.4 months' supply at the current sales rate. That represents a 1.9% decline in inventories over August, the sharpest decline since December 2000.

The declines in housing prices underscored the severity of the correction in the once-booming market, which had seen sales of both new and existing homes soar to record levels for five consecutive years, propelled by the lowest mortgage rates in more than four decades. This year, rising mortgage rates have helped cool sales.

A 7.8% surge in durable goods orders last month, to a seasonally adjusted $226.70 billion, meanwhile, was largely due to a jump in transportation orders -- specifically commercial aircraft -- which rose 27.6% in September over the previous month. Durable goods orders fell the two previous months.

A.G. Edwards & Sons economist Gary Thayer said the 0.1% increase in durable goods excluding transportation orders is "more representative of the manufacturing economy right now -- still soft, consistent with moderate economic growth."

In other economic news, the Labor Department Thursday said the number of new applicants for unemployment insurance benefits rose last week, suggesting labor markets remain relatively healthy. Initial jobless claims rose 8,000 to a seasonally adjusted level of 308,000 in the week ended Oct. 21.

"These data still portray a relatively tight labor market, tighter than indicated by the recent growth in payroll employment," Steven Wood, chief economist at Insight Economics, said in a research note.

Article in October 26, 2006 Wall Street Journal

Decline in New-Home Prices
May Reflect Regional Factors

October 26, 2006

U.S. new-home sales jumped unexpectedly in September by 5.3%, but prices were lower. The average price of a new home decreased to $293,200 in September, from $314,000 in August and $299,600 in September 2005, according to Commerce. The median price fell 9.7% last month, to $217,100 from $240,400 a year earlier, representing the sharpest drop since December 1970. The August 2006 median sales price was $239,300. Meanwhile, new-home inventories receded in September. Economists comment on the drop in price and what it means for the future of the market.

* * *
The newspaper headlines will blare that new-home prices fell by 9.7% year over year, the largest drop since 1970. Admittedly, this is a shocking headline, but do not make too much of it. First, as we have noted many times, the mix changes every month so that these price numbers do not pertain to a comparable mix of homes over time. If people are scaling back their desires, if the regional mix changes, etc., then the numbers get skewed. Moreover, the new-home side of the equation should be the most volatile, because the inventories of new homes all have to get sold quickly (whereas homeowners can simply take their existing homes off the market for a while when market conditions ease). It is easy to imagine a world in which new-home prices fall by 5% or 10% and the average of all home prices are steady or even somewhat higher. We will wait for the Ofheo figures to get a better read on overall home prices. In any case, the faster new-home prices fall, the quicker those inventories are going to get sold and the faster we can get past this housing correction. --Stephen Stanley, RBS Greenwich Capital

The median new home price fell by 1.7% [in the third quarter] across the nation. However, the median sales price rose in each of the major geographic regions (Northeast +19.3%, Midwest +4.0%, South +0.7%, West +1.6%), which suggests that some of the home price decline is due to a shift in the regional pattern of sales toward lower-priced regions. --Bear Stearns Economics

* * *
The really startling number in this report is the 9.7% plunge in median prices compared to a year ago. No doubt a good part of this drop reflects an increase in the number of smaller homes in the sample, which is not adjusted to take account of changes in the mix of homes sold from month-to-month. Still, mean prices also slumped, to -2.1% from +6.4% in August, so we think there probably has been a serious drop in prices per square foot. --Ian Shepherson, High Frequency Economics

* * *
While month-to-month changes in median sales prices can be driven by changes in the regional mix of sales (prices in the Northeast and West are much higher than in the Midwest and South), the underlying trend here is one of lower prices after the sharp gains seen for many years. It should not be surprising to see prices weaker for new homes than for existing homes, as most owners of an existing home are not forced to sell, and many just pull their homes off the market rather than aggressively lower the selling price. Builders, though, do not have this option, and prices of new homes therefore are more reflective of softer demand than are those for existing homes. --Joshua Shapiro, MFR, Inc.

* * *
[The price decline] exaggerates the extent of the weakening price picture. Because sales in the more expensive Northeast fell sharply while sales in the South rose, the mix of homes sold shifted toward those priced at under $200,000, while sales of pricier homes fell as did the relatively small subset of homes prices at under $150,000. Nonetheless, the stronger sales helped builders pare inventories by about 1.9% but the stock of unsold homes remains at an uncomfortably high level that would still require 6.4 months to liquidate at the current selling rate. Summing Up: New home sales rose a "surprising" 5.3% in September BECAUSE builders were more aggressive in cutting prices. --Nomura Economics Research

* * *
The demand for new housing is well pass its peak and is now on a retreating trend despite this month's bounce. Moreover, inventories of unsold new homes remain very high, revealing moderate overbuilding. Finally, home-price momentum has slowed significantly as home builders are using big discounts to motivate new home buyers. Consequently, housing's contribution to economic growth will be a large negative in the third quarter and a somewhat smaller negative in the fourth quarter. --Steven Wood, Insight Economics

Article In October 22, 2006 Detroit Free Press

Incentives prop up home prices
Creative deals might distort market

BY VINNEE TONG
ASSOCIATED PRESS

October 22, 2006

Buyers latched onto mortgages with all kinds of exotic teaser rates to be able to afford the soaring home prices that sellers were demanding during the boom years.

Now that the situation is reversed, buyers are demanding cash payments and other incentives that may be artificially propping up sales prices -- suggesting the market downturn could be even more pronounced than has been reported.

Gonzalo Sotelo, a licensed real estate agent in Salinas, Calif., said that three times in the past few months, buyers' agents approached him about securing cash back at closing without informing the lender.

In the most expensive proposition, an agent from the nearby San Francisco Bay area proposed having a home with a $539,000 asking price reappraised and sold at $600,000, with Sotelo's client paying back $60,000 in cash to the buyer. Sotelo of Prudential California Realty said he turned down the deal and hasn't heard from the agent since.

The type of offer Sotelo received prompted his boss, Jose Palma, to devote a recent staff meeting to a discussion of how to avoid potentially fraudulent deals, since giving cash back without telling the lender creates legal liabilities for the broker and seller.

"Because the market is changing right now, I think people are trying to be a little bit more creative," Palma said. "We tell our agents: 'There's a black area and a gray area.' I tell them to stay away from the gray area."

Offers abound from sellers willing to pay closing costs, several months of mortgage payments and, in some cases, cash. Giving cash back allows a seller to sweeten the offer without having to lower the stated value of the home.

Statistics overlook perks

Buyers are taking the incentives, and economists say the practice could be inflating reported prices and distorting our view of a market already suffering from higher mortgage rates and a sense that the market is enduring a significant correction.

Fears that overextended homeowners would default on mortgages led banking regulators last month to direct banks to explain the risks to borrowers from interest-only and other nontraditional mortgages, which had helped many home buyers buy expensive homes during the boom. The Government Accountability Office told Congress last month that from 2003 to 2005, nontraditional mortgages rose from less than 10% of all mortgages to about 30%.

Inflated prices potentially harm banks, which could take a hit if the mortgage holder defaults and the home turns out to be worth less. It also could affect buyers of neighboring homes, who may be making decisions based on faulty data.

When sellers use incentives to reduce the actual price without cutting the reported price, "then the reported prices are an overstatement of the true net selling price," said Lawrence White, deputy chairman of the economics department at the Stern School of Business at New York University. "So that very likely means that the real drop in home prices is greater than what the standard sources, like the National Association of Realtors, have been reporting."

The Realtors association reported that prices of existing homes fell in August for the first time in a decade. The median price of a home sold in August fell to $225,000. That was down 2.2% from July and down 1.7% from August 2005. That marked the first year-over-year drop in home prices since April 1995.

In calculating the much-watched home price statistics, cash and noncash perks are left out, implying that true prices are even lower than the statistics indicate.

Noncash incentives, such as improvements paid for by the seller, also have an effect since any add-ons change the quality of the houses but aren't reflected in the prices -- or for that matter, the statistics.

"It's simply not reflecting the pace of change in them," said Doug Duncan, chief economist of the Mortgage Bankers Association.

"If you look at the federal statistics on price, it's not adjusted for the quality change," he said. "So if you take the house and list it for $250,000 and you add a finished basement and granite countertops, is it still the same house? Not really."

In the current slowdown, sellers and builders are moving beyond kitchen remodels to offering just plain cash. "An economist would call that a price cut," Duncan said. "That's not captured in the data."

Article in October 22, 2006 Detroit Free Press

Owners fret over property values
Poll: 44% in state concerned

BY JOHN GALLAGHER
FREE PRESS BUSINESS WRITER

October 22, 2006

Nearly half of Michigan homeowners are worried about the price they'd get for their house if they had to sell, according to a recent Detroit Free Press-Local 4 Michigan Poll.

Mark Hand, 45, a builder and remodeler from Grand Rapids, said he has builder friends who can't sell new houses they have built. Other friends trying to sell their own homes are also having a tough time.

"I'm not planning on selling my home, but if I were I'd be very worried," Hand said Thursday. "For people who need to move or sell, I'm glad I'm not in their shoes, I'll put it that way."

In the poll, 44% of Michiganders said they worried a lot or at least a little about their home values. Fifty-four percent said they weren't worried and 2% were not sure. The poll of 670 Michigan homeowners was conducted Oct. 8-11. It has a margin of error of plus or minus 3.9 percentage points.

There's good reason for concern. Sales of existing single-family houses were down 14.35% in Michigan through September of this year, compared to the same period last year, according to the Michigan Association of Realtors. That drop makes 2006 the worst year since at least the 1980s.

Prices are down 1.6% statewide so far this year, but in some markets, such as northern Oakland and Macomb counties, sale prices on existing houses have dropped closer to 10%, the association said.

Clearly Michigan's reliance on the ailing domestic auto industry has created a special worry for state residents. But Michiganders are hardly alone in their distress. Home sales are off nationwide.

The national sales decline is close to 13% so far this year. The inventory of homes for sale nationally has soared from about 2.3 million in 2003 to nearly 4 million today.

David Lereah, chief economist for the National Association of Realtors, blames the declines on inflated housing prices. In a recent analysis, Lereah wrote that housing prices simply got too high, cutting into affordability.

"Sellers need to abandon unreasonable expectations about the value of their homes," he wrote. "But there should be few worries for consumers. Most homeowners today have enjoyed substantial equity gains on their properties during the real estate boom years. Cutting prices by 5 or 10% will not wipe out their home equity gains."

Barbara House, 47, said many people in her northwest Detroit neighborhood are struggling just to afford their mortgage payments.

"People cannot keep their homes because they are losing their jobs, their way of life," she said Thursday. "I know of two people, friends of mine, that got jobs and had the 401(k) plan, the whole works, and went and bought a beautiful brand new home. And within six months time, they had lost their car and eventually they lost their home.

"Until something is done about the economy, people are going to keep losing their cars; they're going to keep losing their homes."

Article In October 19, 2006 Wall Street Journal

U.S. Home Prices May Fall
But Risks Will Be Limited

By BRIAN BLACKSTONE
October 19, 2006

U.S. housing prices may decline "a little" within the next year, but any such drop is likely to be mild and inconsistent with a bursting housing bubble, according to a paper written by a Federal Reserve economist.

Based on an analysis of housing futures and options and derivatives of housing-related company shares, "market participants expect home prices to decelerate sharply or actually decline a little within the next year," wrote J. Benson Durham, an economist with the Fed's monetary affairs division. However, the anticipated drop in prices "is mild compared to some estimates of the purported overvaluation of the housing market," he added. The paper, dated September, was posted on the Fed's Web site Thursday.

Mr. Durham cautioned that deep and liquid markets needed to signal future home-price trends don't fully exist and that housing futures and options have only been trading on the Chicago Mercantile Exchange since May 22. Still, implied volatility on CME housing options are greater than the historical average, "which suggests that investors see more risks to home prices going forward," he wrote. That higher uncertainty, however, is "generally inconsistent with the perception of a "bubble,'" he added.

Mr. Durham also examined options on shares of certain homebuilders to gauge whether investors see upside or downside risks to home prices. Those options "are only marginally negatively skewed at the present time," he wrote. "This suggests that market participants do not, in fact, view the risks to home prices or, perhaps more accurately, to the broader housing sector as especially tilted to the downside," Mr. Durham concluded.

The paper's conclusions seem in line with the thinking of Fed officials that the sector will slow substantially through the rest of 2006 and into 2007 but is unlikely to derail the economic expansion.

In the minutes of the Sept. 20 Federal Open Market Committee meeting, the Fed said housing "seemed to be cooling considerably" but that the overall economy should strengthen next year "as the housing correction abated." Officials also continue to remark that higher inflation poses a greater risk than a slower economy.

Housing data had declined markedly in recent months, raising fears of a housing-induced slowdown severe enough that it would eventually require Fed rate cuts. But there have been tentative signs of stabilization of late. The National Association of Home Builders index rose in October, albeit by only one point, but nevertheless breaking a string of eight straight declines. And housing starts unexpectedly rose in September, breaking a string of three straight declines.

Article in October 19, 2006 Wall Street Journal

More Home Loans Go Sour

Though New Data Show Rising Delinquencies,
Lenders Continue to Loosen Mortgage Standards

By RUTH SIMON
October 19, 2006

Mortgage lenders are making it easier to get loans even as the housing market cools -- and as the number of borrowers struggling to make their payments continues to rise, new studies show.

In the latest sign that a cooling housing market and weaker credit standards are beginning to take their toll on borrowers and lenders, the number of past-due mortgages continued to rise in the three months ended Sept. 30, according to data from Equifax Inc. and Moody's Economy.com Inc.

The increase is particularly notable because bad loans normally climb when the economy weakens and job losses rise, leaving more borrowers unable to make their monthly payments. By contrast, the latest increase appears to be more closely tied to looser lending standards, borrowers tapping their equity and slowing home-price growth.

"We're seeing rises in delinquencies and loan losses that are unrelated to what's going on in the job market," says Mark Zandi, chief economist of Moody's Economy.com. "It's very unusual."

Some 2.33% of mortgages were delinquent at the end of the third quarter, the highest level since 2003, according to Equifax and Moody's Economy.com. Among the areas that saw the biggest jump in the delinquency rate since the end of last year were Stockton and Merced, Calif., and Las Vegas-Paradise, Nev. Delinquency rates were highest in McAllen-Edinburg-Mission, Texas; Brownsville-Harlingen, Texas; and Detroit-Livonia-Dearborn, Mich.

A separate report released yesterday by the federal Office of the Comptroller of the Currency found that lenders continued to ease credit standards over the past year.

To be sure, mortgage delinquencies have been at low levels in recent years, and the recent uptick only brings them closer to historical averages. The seasonally adjusted mortgage-delinquency rate reached its most-recent peak of 2.53% in the first quarter of 2002, according to Equifax and Moody's Economy.com.

The latest news comes amid increasing concerns that lenders have been loosening their standards in an effort to boost loan volume as refinancings and home purchases wane. In a speech to the American Bankers Association this week, Comptroller of the Currency John Dugan noted that bank regulators have seen a "significant easing" of mortgage lending standards this year, even though banks normally tighten standards when the housing market cools. "We don't want to see the lending decisions bankers make today result in excessive foreclosures -- and reduced affordable housing credit -- tomorrow," he said.

The Comptroller's report found that competitive pressures are driving many banks to further loosen their credit standards. More than one-third of the lenders relaxed their standards for home-equity loans in the 12 months ended this March, according to bank examiners, while less than 5% tightened their standards.

Over the same period, 26% eased their mortgage-lending standards, most often by increasing the use of nontraditional mortgage products. These include loans that allow borrowers to pay interest and no principal in the early years or make a minimum payment that can lead to a rising loan balance. Yesterday, regulators released a booklet designed to help consumers understand these exotic mortgage products.

"We have reason to believe that the amount of easing we saw back in March is continuing," says Kathryn Dick, deputy comptroller for credit and market risk at the OCC. Federal bank regulators have been stepping up their scrutiny of residential mortgage lending by large banks, she says, with a particular focus on banks that lend heavily in cooling housing markets.

There are signs that some lenders are beginning to pull back. Last week, New Century Financial Corp. said it would begin tightening lending guidelines for adjustable-rate mortgages sold to "at-risk" borrowers. The company also said it would offer the option of refinancing into a low-fee 30-year or 40-year fixed-rate mortgage to certain borrowers with adjustable-rate or interest-only loans held by the company.

Agencies that counsel homeowners with mortgage problems say that many borrowers are running into problems because of the terms of their loans, not their personal circumstances. "It's mostly people with adjustables" who are having trouble paying their loans, says Pam Canada, executive director of the NeighborWorks HomeOwnership Center in Sacramento, Calif.

David M. Crosby, a Las Vegas bankruptcy attorney, says he has seen a "surge" in borrowers with mortgage problems. "Most of it is [tied to] the end of the housing boom, but I do see a good percentage of clients who got caught by a change in their mortgage rates." In addition, some clients "bought a number of speculative homes," he says. "The market turned on them, and now they are in a real financial mess."

Some homeowners are calling it quits. "A surprising number of people are walking away from their homes rather than trying to save them," says Mr. Crosby, either because the rate on their loan has jumped or because they owe more than the home is worth.

While the number of bad loans remains manageable, higher loan losses could force lenders to cut back on credit, making it more difficult for some borrowers to get a loan. A spike in foreclosures could also help push home prices downward in some markets if lenders were forced to sell significant numbers of homes at a loss.

Absent a recession and job losses, the rise in delinquencies is unlikely to have an impact on the national economy, says Doug Duncan, chief economist of the Mortgage Bankers Association. But an increase in bad loans could hurt some local housing markets, "especially if you see home price declines," he says.

An analysis by Moody's Economy.com found that a weak economy -- as measured by payroll growth -- was the driving factor in less than one-quarter of the metro areas with large increases in delinquencies. Instead, the rise in bad loans was more closely correlated with "mortgage equity withdrawal," a measure of how much cash homeowners have pulled out by refinancing, taking out home-equity loans or selling their homes and pocketing some of the profits, the study found.

Other factors included slowing home-price growth and a high proportion of loans given to borrowers with scuffed credit. The study was based on an analysis of credit records and included late payments on mortgages and home-equity loans and lines of credit.

Article in October 6, 2006 Wall Street Journal

Housing Downturn May Not Crimp
Spending, Treasury Official Says

By BENTON IVES-HALPERIN
October 6, 2006

WASHINGTON -- A Treasury official played down the potential effects of a rapidly cooling housing market on Americans' spending habits, saying U.S. consumers have weathered larger asset corrections in the past.

"It's hard to see how the housing wealth effect is going to really undermine consumption going forward," Treasury Acting Assistant Secretary for Economic Policy Robert Stein said during a briefing with reporters. "Fears of a wealth effect on consumption are overblown."

Mr. Stein pointed to positive consumption growth during the recession of 2001, even as the country lost about $9 trillion in stock market wealth, as evidence that U.S. consumers can soldier on in the face of large corrections to asset value.

He also noted that the reduction in real estate wealth isn't likely to be as large as the previous stock market adjustment. And even if the coming housing correction is as severe as the stock market adjustments earlier in the decade, "there are ways to wring out that overvaluation without a drop in housing wealth," Mr. Stein said. For example, there could be an increase in rents or an increase in incomes, Mr. Stein said.

Earlier this week, Federal Reserve Chairman Ben Bernanke said the rapidly slowing housing market will probably slice about one percentage point off U.S. economic growth in the second half of 2006 and continue to drag on growth next year. Mr. Stein agreed that the Fed's estimates for a significant reduction in economic activity from the cooling housing sector are likely on target.

Article in October 12, 2006 Wall Street Journal

Finally, the Contractor Will Take Your Calls

Housing Slump Frees Up
Builders and Lowers Cost
Of Materials for Remodeling

By SARA SCHAEFER MUÑOZ
October 12, 2006

For homeowners who have been putting off remodeling projects, now may be the time to call the contractor.

While the current housing slump isn't cheering investors, it is making remodeling a kitchen or bathroom or adding an addition easier and cheaper. During the booming real-estate market of the past several years, people wanting to remodel often found themselves waiting months for contractors to take on lower-ticket jobs -- if the contractors would take them on at all. Now, sluggish home-building demand is pushing down the cost of construction materials (prices for lumber are near their lowest level in a decade) and spurring contractors to take on smaller projects -- and sometimes cut fees.

Custom and speculative builders are also starting to take on renovation jobs, picking up work they may have passed over just a year ago. In Tucson, Ariz., Richard Fink, co-owner of Becklin Construction LLC, a custom home builder, used to do a few remodeling jobs as favors to former clients; now remodeling has grown to half his business. Samm Jernigan, a high-end custom home builder in Wilmington, N.C., said earlier this year he started "aggressively pursuing" remodeling projects for the first time, and John Diament, a home builder outside of Philadelphia, says two months ago he started asking architects to send big remodeling jobs his way.

"It's good news for the consumer if you've got a lot more people seeking projects," says Gopal Ahluwalia, staff vice president of research for the National Association of Home Builders.

Meanwhile, prices of framing lumber have fallen dramatically, says Shawn Church, the editor of Random Lengths, an industry newsletter based in Eugene, Ore. The composite price per thousand board feet of framing lumber was $274 this week, compared with $375 a year earlier, according to data from Random Lengths. Ken Simonson, the chief economist for the Associated General Contractors of America, a trade group in Arlington, Va., says he expects to see a roughly 10% drop in prices of gypsum and construction plastics when government price data are released later this month. Economists say the lower material costs could save homeowners an estimated 5% to 10% on additions.

The falloff is largely because of slowing new-home construction, which for several years had driven up the cost of materials. Housing starts dropped 6% in August from a month earlier to a seasonally adjusted annual rate of 1.665 million units, according to the Commerce Department. That was the slowest rate of starts since April 2003.

Growth in spending on remodeling has also slowed recently, a result of rising interest rates and homeowners who have postponed selling, along with presale renovations. According to the most recent data from Harvard University's Joint Center for Housing Studies, spending on home remodeling rose just 2.8% in the 12-month period ending in June, compared with the frenzied 20% increase in 2004. Still, spending on home remodeling, maintenance and repairs totaled $215 billion in 2005, up from $199 billion in 2004, according to the most recent annual data from the Census Bureau.

The new environment means that homeowners are more likely to find contractors willing to take on projects quickly. "Rather than saying 'call me next spring,' they'll be more likely to say 'I'll be over this week to the talk about the project,' " says Kermit Baker, a senior research fellow at the Harvard Joint Center.

That is what Kurt and Susan Askin found this summer when they sought a bid for remodeling a bathroom in their northern Virginia home. About three years earlier, the couple redid their kitchen and had to wait a couple of months to get started. But when they decided to go ahead with the bathroom project this summer, they called the same contractor and the project was under way in two weeks.

"I was certainly pleasantly surprised," says Ms. Askin, a retired accountant.

Their contractor, Don Sever, the owner of Sever Construction, in Oakton, Va., says he sees interest in remodeling starting to ease. He has trimmed prices by about 5% to attract more business. "People are much more cautious about spending that home-equity money," he says.

Economists caution that people should only invest in their home if they are planning to stay awhile and enjoy it. With home prices starting to fall, owners may not see the same, hefty return on their investment that renovations have brought in the past several years.

"It's a riskier proposition to fix it up for a buyer," says Mr. Simonson of the Associated General Contractors of America.

There are also risks in hiring a new-home builder who doesn't have remodeling experience, building experts say. On the surface, the required skills may seem the same, but staffers that work on new homes tend to have specific skills, such as roofing or framing, and managers may not be versed in the challenges and costs associated with reconfiguring an existing kitchen. Remodelers, they say, are better-suited to coordinate all the details of project, from putting up wallboard to installing faucets.

Longtime remodelers also warn that new-home builders may not be accustomed to interacting frequently with clients. While builders may be used to working on their own in an empty house, remodelers must be in a home for weeks at a time while their clients are living there.

"It takes a different kind of person," says Mr. Sever, the Oakton, Va., remodeler. "You need to put up tarps, clean up and not set tools on a customer's dresser."

Scott Sevon is a custom builder and remodeler in the Chicago area who has recently taken on more remodeling projects. He says he has made his staff aware that remodeling "is a lot more time and hand-holding and lot of good communication skills." As one way to demonstrate their responsiveness, he gave all of his staff Blackberry e-mail devices so clients can get in touch at any time.

Despite possible drawbacks, some clients say hiring custom builders for remodeling projects is a plus. When Bruce Ash wanted to do a large-scale renovation at his Tucson home, he wasn't sure if a traditional remodeler would have the attention to detail required to mimic the Arts and Crafts style he and his wife envisioned. They wanted mahogany wainscoting in a specific pattern and custom-made doors that were modeled on an old house in Wisconsin. He found Mr. Fink of Becklin Construction to take on the $700,000 project. It was one of Mr. Fink's first major remodeling projects.

"Guys who are used to commissioning million-dollar houses are going to be attuned to a whole different level of detail," says Mr. Ash, a real-estate manager. "Normally, the market has been such that we could never get custom builders to remodel homes, but now, they are interested."

Article in October 3, 2006 Detroit News

Home values lag ownership costs

Trend is squeezing homeowners in cities across U.S., including Detroit, Livonia, according to census.

Gordon Trowbridge and Christine MacDonald / The Detroit News

Metro Detroit home values are barely keeping pace with the cost of owning a home, according to Census Bureau data released today.

And of 20 cities across the nation where the survey found ownership costs outpaced the growth in home values, two of them -- Livonia and Detroit -- are in southeast Michigan.

Experts say the trend threatens to squeeze families whose home investment may no longer be growing as fast as the expenses of maintaining it. And it highlights the fact that while much of the nation enjoyed a boom in home values in the first half of the decade, Michigan was left behind.

No city demonstrates the trend better than Livonia: Between 2000 and 2005, real estate values there increased about 29 percent, according to the data released today. Over the same period, the monthly cost of home ownership -- mortgage and tax payments, insurance, condo fees where applicable and utilities -- rose 35 percent. It's as if Livonia homeowners have been investing in a mutual fund with fees so high that they erase all the fund's earnings.

"I am afraid. It's a bummer. I don't even want to know," said Kim Naccashian, 44, of Livonia. She fears the value of the home she and her husband bought in 1992 is fast eroding -- a fear fed by what she sees in her job as a real estate appraiser.

While the rise in costs for Metro Detroit communities was at or about national averages, the growth in home values lagged the rest of the country: Monthly homeowner costs in Metro Detroit were up about 28 percent from 2000 to 2005, more than the national increase of 19 percent. But home values were up only 28 percent in Metro Detroit, compared with 50 percent for the nation.

"Appraising two foreclosures a week does nothing for my financial outlook," Naccashian said.

"You've got people in $500,000, $600,000 homes going into foreclosure."

The numbers are from the 2005 American Community Survey, a random-sample survey that is designed to replace a part of the once-a-decade census. The survey includes data on all geographic areas of more than 65,000 people; data released earlier this year covered population and economic characteristics.

Several factors have pushed ownership costs higher, experts said: For some families, higher interest rates mean bigger mortgage payments, and higher energy costs may be pushing utility bills up.

But economist Christopher Cagan said the real problem for Michigan families is the sluggish growth in home values.

"Costs are rising at a fairly modest rate, but the value growth just has not been there," said Cagan, director of research and analytics for First American Real Estate Solutions, a California mortgage company. The auto industry's struggles have kept Michigan from enjoying the same big jumps in home values that have benefited much of the country.

Elsewhere in the country, some economists worry that exotic mortgages -- interest-only loans or adjustable-rate mortgages -- will hammer homeowners who have bought more home than they can afford.

In other Metro Detroit communities -- Dearborn, Southfield and Canton Township -- home-value increases have barely outpaced monthly costs.

Renters in some communities are being squeezed too, according to the data. The increase in monthly rents in Dearborn and Detroit (both up 39 percent since 2005) are in the top 10 percent of the 500 communities included in the Census Bureau data -- far higher than those cities' rankings in home-value increases.

Among other findings:

Michigan remains among the leaders in homeownership rate. About 75 percent of the state's homes were owner-occupied in 2005, a slight increase from 2000. Only Minnesota and West Virginia had higher homeownership rates.

Livonia ranked second among the nearly 500 communities listed in homeownership rate, at 89 percent. Rochester Hills (79 percent) and Shelby Township (78 percent) also were in the nation's top 20.

Article in October 3, 2006 Detroit Free Press

CENSUS 2006: Habits, real estate set Michigan apart

Home values Loans put owners in a dangerous situation

BY MARISOL BELLO and JOHN WISELY
FREE PRESS STAFF WRITERS

October 3, 2006

Census data released for publication today show that while growth in median home values in Michigan lag that in the rest of the nation, homeowners here have kept pace with the national trend toward getting second mortgages and home-equity loans, taking advantage of low interest rates and using their stake in their homes for ready cash.

But that may prove a dangerous strategy at a time when the state's economy continues to falter and job losses have reached record highs. The pressure of additional payments could help fuel a skyrocketing number of home foreclosures and loan defaults.

Economists say such an availability of cash has actually propped up the Michigan economy in recent years by giving residents the means to continue spending. But long-term, it's draining wealth from homeowners.

"There's a widespread trend for people to tap into their equity nationally," said Dana Johnson, chief economist for Comerica. "Obviously, here there's less equity to tap as elsewhere. ... It puts borrowers in a more precarious position."

The census data show that 556,000 Michigan homes -- representing 19% of all the owner-occupied homes in the state -- have some kind of second loan on them.

The data also show that the median value of owner-occupied homes in Michigan has increased 19% in the last five years, when adjusted for inflation -- well below the national average of 32%.

In metro Detroit, 24% of the homes in Oakland County have a second loan on them, while the median property value has increased 16% in the last five years. In Macomb County, 21% of homes have a second loan on them, while the median value has gone up 11%. In Wayne County, 17% of homes have second loans, and the median value has increased 25%.

The information comes from the yearly American Community Survey, which the Census Bureau plans to use to replace the decennial census. The 2005 survey includes municipalities with a population of 65,000 people or more, which in Michigan, included 21 cities and 28 counties.

How the money's being spent

Talking to homeowners, it becomes clear that not all of these loans are being used for traditional purposes, such as home repair. Some are using the loans to pay for everything from college tuition to grocery and utility bills.

The loans typically charge far less interest than credit cards, so using one to pay off the other can help cut costs. And many people have taken out second mortgages to avoid paying expensive mortgage insurance.

During their daughter's first year at Grand Valley State University in 2001, Larry and Diane Janes took out a $7,500 home-equity loan on their Livonia home. Now, with two kids in college, the Janes are up to $40,000 in home-equity loans.

"Unfortunately, we weren't eligible for any other type of assistance," Larry Janes said Friday. "A home-equity loan is tax deductible and has lower interest rates. It was something we started tapping small and use as needed."

Of the 21 Michigan cities and townships included in the census estimates, Rochester Hills (29%), Canton (28%) and Waterford (27%) had the highest percentages of homeowners carrying a second loan.

Between 2000 and 2005, census figures suggest Michiganders increasingly turned to second loans, though they are not an exact comparison. The 2000 data did not include multifamily units, such as condominiums, which are counted in the 2005 estimates.

But comparisons can be made. For instance, in Dearborn, with its predominance of single-family homes, 17% of homes had a second loan, compared with 12% in 2000. But median home values in Dearborn increased only 9% during that time when adjusted for inflation, from $146,571 to $160,200, according to census estimates.

In Rochester Hills, also made up predominantly of residential homes, the number was up from 21% five years ago. Meanwhile, median home values increased 12% during that span, from $243,831 to $272,300.

The slow growth shown by the census numbers is underscored by recent figures that found that home values in metro Detroit dropped by 8% during the second quarter this year, compared with the same period last year. The National Association of Realtors found that metro Detroit's drop was the second highest of 151 metropolitan areas nationwide.

And that puts more homeowners at risk of defaulting on their loans or losing their homes in foreclosures.

In the first eight months of last year, lenders filed for foreclosure on 21,076 homes, according to RealtyTrac, an online market for foreclosed properties. During the same period this year, the number of filings shot up to 50,863.

Meanwhile, 6.7% of mortgages in Michigan were past due by the second quarter of this year, according to a delinquency survey conducted by the Mortgage Bankers Association of America. Only hurricane-ravaged Mississippi and Louisiana had higher delinquency rates.

"The question is, how far down that well do you want to go and how many times can you tap it before it runs dry?" said Diane Swonk, a Livonia native and chief economist at Mesirow Financial in Chicago.

Article in September 28, 2006

Pricing Your Home Gets Trickier

Sellers Test Different Strategies
As Houses Languish on Market;
How to Trigger a Bidding War

By RUTH SIMON
September 28, 2006

As the housing market cools, one of the hardest decisions facing home sellers is how to price their properties.

Traditionally, brokers have set listing prices by reviewing how much comparable homes sold for in a neighborhood. Now, with prices edging lower in many places and the number of homes on the market climbing, checking comparable sales is becoming less useful. At the same time, many would-be buyers are sitting on the sidelines, waiting to see how far prices will fall. Bigger inventories of unsold homes also are making it harder for sellers to figure out how to make their house stand out amid the competition.

What it takes to sell a house varies from market to market. Some brokers are telling customers they need to underprice the competition -- even if they think their home is more attractive. Sharon Baum, a senior vice president with the Corcoran Group in New York, recently listed a two-bedroom, two-bathroom apartment for $3.7 million. That was $100,000 less than the asking price for a similar unit five floors below, even though apartments on higher floors typically carry bigger price tags. "As buyers have more choices, you've got to make your apartment stand out," she says.

Sellers are also being told to cut prices aggressively if their house isn't moving -- or risk chasing the market downward. If a home doesn't get any showings in 21 days or gets 10 showings but no offers, Ned Redpath, president and owner of Coldwell Banker Redpath & Co. in Hanover, N.H., often advises the seller to slice the asking price by 10%. "We don't like to see $2,000 or $5,000 price adjustments," he says. "We want to see a real whack" that attracts attention.

Builders of new homes also are tinkering with their pricing formulas to generate sales. Mid-Atlantic Builders in Rockville, Md. is offering to adjust the sales price downward up to 45 days before closing if the price on one of its similar homes declines. Waterford Development Corp. will have homes in its Woodland Pond at Manchester development in New Hampshire reappraised two years after closing. If the price drops, the company says it will write the buyer a check for up to 15% of the original sales price, not including the value of any optional upgrades.

Even in relatively strong markets, brokers are paying closer attention to price trends. Wallace Perry, president of Coldwell Banker United, Realtors, Carolinas region, says he has begun checking multiple-listing service data every week or two instead of once a quarter to see how recent sales compare with deals that closed three and six months ago. "Things can change...very quickly," he says.

The renewed emphasis on pricing represents a dramatic turnabout from the heady days of the housing boom, which peaked in the middle of last year. Bidding wars were common and, in many markets, homeowners simply looked at the last sale and asked for more.

That's all changed. The National Association of Realtors said this week that the median sales price of existing, or previously owned, homes fell 1.7% to $225,000 in August from a year earlier, the first such drop in 11 years. There's now a 7.5-month supply of existing homes on the market, the most since April 1993.

With so many properties vying for attention, sellers are also looking for creative ways to catch the eye of would-be buyers and their brokers. Some sellers are offering to pay closing costs or provide other incentives. When their 3,500-square-foot carriage house in Exton, Pa., failed to sell this spring, the owners dropped the asking price twice, to $449,000 from $479,000, says Beth Koser, an agent with Prudential Fox & Roach, Realtors. When that didn't do the trick, the couple agreed to offer $10,000 toward closing costs to any buyer or agent who attended an open house within a two-day period. The home sold a few weeks later for $430,000. "The incentive created a sense of urgency," says Ms. Koser. Buyers "saw that the seller was willing to negotiate."

Other brokers are using incentives to counter competition from new home builders. In Tampa Bay, Fla., Craig Beggins, president of Century 21 Beggins Enterprises, recently put together a list of 16 incentives homeowners can offer, from paying the mortgage for several months, to outfitting a media room with a big-screen TV, to picking up the cost of day care for some period.

Another approach is a personal plea. Traci Smith, president of Century 21 Smith & Associates in San Antonio, encourages clients to court prospective buyers with a letter explaining the intangibles that make their home and neighborhood so appealing, such as the fact that the kids on the block trick-or-treat at Halloween together. During the height of the housing boom, some brokers were encouraging the same type of personal notes -- but from buyers eager to get their bid accepted.

Some brokers are trying to trigger bidding wars by setting an asking price sure to attract attention. Romeo Aurelio Jr., sales manager for Century 21 Hartford Properties, recently listed a small one-bedroom, one-bath fixer-upper in San Francisco's fashionable Noe Valley neighborhood for $650,000, even though he figured the home would sell for $100,000 above that. "If we priced it at $750,000, it was going to sit," Mr. Aurelio explains. "We marketed it aggressively at $650,000 and it generated 20 offers." The house sold this week for $845,000.

And with more buyers hunting houses online, selling strategies are adapting to the new technology. Michael Gallagher, a financial-services executive, initially listed his four-bedroom house in Shawnee, Kan., at $274,500. When the listing expired, Mr. Gallagher's new broker suggested that he boost the price to $275,000. Within weeks, the home sold for $271,000, $36,000 more than the best previous offer.

The explanation? Buyers who use the Internet typically search in increments of $5,000 or $25,000, says Kerwin Holloway, a managing broker with Reece & Nichols, a unit of Berkshire Hathaway Inc., which handled the sale. At the higher price, Mr. Gallagher's home was likely to turn up in more searches. It also looked like a bargain to someone whose search started at $275,000. At the lower price, it was one of the most expensive homes priced between $250,000 and $275,000. Until recently, brokers had taken their cues from retailers, pricing a home at $199,500 because it seemed like a better deal than one priced at $200,000.

A property that's not priced properly can languish on the market and get shopworn, says Dan Elsea, president of brokerage services at Real Estate One in the Detroit area. A four-bedroom house in Troy, Mich., has been sitting on the market for 10 months, even though the price has been cut to $349,900 from $394,900, Mr. Elsea says. By contrast, a similar home in the same market sold this month for $360,000, just 23 days after it came to market priced more appropriately at $369,000, he says.

Article in September 28, 2006

Pricing Your Home Gets Trickier

Sellers Test Different Strategies
As Houses Languish on Market;
How to Trigger a Bidding War

By RUTH SIMON
September 28, 2006

As the housing market cools, one of the hardest decisions facing home sellers is how to price their properties.

Traditionally, brokers have set listing prices by reviewing how much comparable homes sold for in a neighborhood. Now, with prices edging lower in many places and the number of homes on the market climbing, checking comparable sales is becoming less useful. At the same time, many would-be buyers are sitting on the sidelines, waiting to see how far prices will fall. Bigger inventories of unsold homes also are making it harder for sellers to figure out how to make their house stand out amid the competition.

What it takes to sell a house varies from market to market. Some brokers are telling customers they need to underprice the competition -- even if they think their home is more attractive. Sharon Baum, a senior vice president with the Corcoran Group in New York, recently listed a two-bedroom, two-bathroom apartment for $3.7 million. That was $100,000 less than the asking price for a similar unit five floors below, even though apartments on higher floors typically carry bigger price tags. "As buyers have more choices, you've got to make your apartment stand out," she says.

Sellers are also being told to cut prices aggressively if their house isn't moving -- or risk chasing the market downward. If a home doesn't get any showings in 21 days or gets 10 showings but no offers, Ned Redpath, president and owner of Coldwell Banker Redpath & Co. in Hanover, N.H., often advises the seller to slice the asking price by 10%. "We don't like to see $2,000 or $5,000 price adjustments," he says. "We want to see a real whack" that attracts attention.

Builders of new homes also are tinkering with their pricing formulas to generate sales. Mid-Atlantic Builders in Rockville, Md. is offering to adjust the sales price downward up to 45 days before closing if the price on one of its similar homes declines. Waterford Development Corp. will have homes in its Woodland Pond at Manchester development in New Hampshire reappraised two years after closing. If the price drops, the company says it will write the buyer a check for up to 15% of the original sales price, not including the value of any optional upgrades.

Even in relatively strong markets, brokers are paying closer attention to price trends. Wallace Perry, president of Coldwell Banker United, Realtors, Carolinas region, says he has begun checking multiple-listing service data every week or two instead of once a quarter to see how recent sales compare with deals that closed three and six months ago. "Things can change...very quickly," he says.

The renewed emphasis on pricing represents a dramatic turnabout from the heady days of the housing boom, which peaked in the middle of last year. Bidding wars were common and, in many markets, homeowners simply looked at the last sale and asked for more.

That's all changed. The National Association of Realtors said this week that the median sales price of existing, or previously owned, homes fell 1.7% to $225,000 in August from a year earlier, the first such drop in 11 years. There's now a 7.5-month supply of existing homes on the market, the most since April 1993.

With so many properties vying for attention, sellers are also looking for creative ways to catch the eye of would-be buyers and their brokers. Some sellers are offering to pay closing costs or provide other incentives. When their 3,500-square-foot carriage house in Exton, Pa., failed to sell this spring, the owners dropped the asking price twice, to $449,000 from $479,000, says Beth Koser, an agent with Prudential Fox & Roach, Realtors. When that didn't do the trick, the couple agreed to offer $10,000 toward closing costs to any buyer or agent who attended an open house within a two-day period. The home sold a few weeks later for $430,000. "The incentive created a sense of urgency," says Ms. Koser. Buyers "saw that the seller was willing to negotiate."

Other brokers are using incentives to counter competition from new home builders. In Tampa Bay, Fla., Craig Beggins, president of Century 21 Beggins Enterprises, recently put together a list of 16 incentives homeowners can offer, from paying the mortgage for several months, to outfitting a media room with a big-screen TV, to picking up the cost of day care for some period.

Another approach is a personal plea. Traci Smith, president of Century 21 Smith & Associates in San Antonio, encourages clients to court prospective buyers with a letter explaining the intangibles that make their home and neighborhood so appealing, such as the fact that the kids on the block trick-or-treat at Halloween together. During the height of the housing boom, some brokers were encouraging the same type of personal notes -- but from buyers eager to get their bid accepted.

Some brokers are trying to trigger bidding wars by setting an asking price sure to attract attention. Romeo Aurelio Jr., sales manager for Century 21 Hartford Properties, recently listed a small one-bedroom, one-bath fixer-upper in San Francisco's fashionable Noe Valley neighborhood for $650,000, even though he figured the home would sell for $100,000 above that. "If we priced it at $750,000, it was going to sit," Mr. Aurelio explains. "We marketed it aggressively at $650,000 and it generated 20 offers." The house sold this week for $845,000.

And with more buyers hunting houses online, selling strategies are adapting to the new technology. Michael Gallagher, a financial-services executive, initially listed his four-bedroom house in Shawnee, Kan., at $274,500. When the listing expired, Mr. Gallagher's new broker suggested that he boost the price to $275,000. Within weeks, the home sold for $271,000, $36,000 more than the best previous offer.

The explanation? Buyers who use the Internet typically search in increments of $5,000 or $25,000, says Kerwin Holloway, a managing broker with Reece & Nichols, a unit of Berkshire Hathaway Inc., which handled the sale. At the higher price, Mr. Gallagher's home was likely to turn up in more searches. It also looked like a bargain to someone whose search started at $275,000. At the lower price, it was one of the most expensive homes priced between $250,000 and $275,000. Until recently, brokers had taken their cues from retailers, pricing a home at $199,500 because it seemed like a better deal than one priced at $200,000.

A property that's not priced properly can languish on the market and get shopworn, says Dan Elsea, president of brokerage services at Real Estate One in the Detroit area. A four-bedroom house in Troy, Mich., has been sitting on the market for 10 months, even though the price has been cut to $349,900 from $394,900, Mr. Elsea says. By contrast, a similar home in the same market sold this month for $360,000, just 23 days after it came to market priced more appropriately at $369,000, he says.