While Retail Sales Decline, FHA House Sales Soar

While consumers at the retail sales level showed less confidence as August volume failed to meet expectations, FHA House Sales increased.

With all those who write about housing and bubbles or recoveries, major factors are not being covered.

A sale of a home at any price can be good or bad for the economy. Good because there are commissions, and fees paid, lots of them. Bad, if and when the buyer has been packed into the home.

A recent sale that I verified at a price of $225,000 for what had been a $450,000 home 2+ years earlier included $30,000 in concessions paid for by the seller or builder in this case.

Builders train their sales force well. Sales techniques employed by master salesmen in any field, can get buyers to buy at prices that have little to do with market value.

This is true and has been true since the beginning of consumer finance in the late 1800's.

When sales prices of $225,000 get reported into the databases and then analyzed by the economists or others, it might look like things have bottomed.

That is not the case when the costs of sale increased by $30,000 and the net or cash equivalent price is $195,000. The $195,000 does not get reported anywhere, and no one reporting on the national level is aware that is the number that should be reported.

The easiest buyer to sell a product to for more than it is worth is one who has not saved up a down payment, does not have good financial skills or education, and/or, has blemished credit. This type of buyer has been preyed upon at many levels.

Often the FHA buyer fits this category and is often happy as can be to be able to buy anything if they can get approved.

What I see happening is another wave of foreclosures being created as FHA buyers have gone from under 7% in 2000 to over 25% today.

Sales prices that are propped up by the stilts of concessions are populating the databases. The results are what appears to be the bottoming out of the housing market, which is not the case.

As this year rolls on, and we go from summer into fall, sales volumes will decline. Regardless of what has gone on so far this year to bolster sales, the professionals involved in transactions will have to work harder or cooperate more to help keep deals together, in the interest of their fees.

As hard as it might seem, beyond the imagination of most there may be the equivalent of a real estate mafia operation taking place. Not as organized, in fact, disorganized in a sense, as it involves several local players operating together to get deals done. Some are paid participants participating and profiting from the transaction, some are unwitting enablers or accomplices. The number of small groups, as small as three or four in a group; that are working together to pack people into property at prices that are higher than market value, is unknown. The evidence of their activities gets revealed months, if not years after the fact. And, then, it becomes hard to prove.

2009 may prove to be a very interesting year, once we are able to look back on the dynamics of what was happening, right under our noses.

Comments

[Soldalma:]

The FHA itself is the Mafia leader, since it is lending with only 3.5% down. The philosopher Georges Santayana said that those who do not learn from the errors of the past are condemned to repeat them. in the case of the FHA they are not learning from the errors of the present.

Sep 04 11:08 AM

[markg:]

I recently bought a house with 3.5% down because I can easily afford the payments, I have quite a bit more in IRA's, and top credit. If you don't have all of these you will not get a loan. My after tax payment is right at what my house would rent for, even with the low down. And according to zillow, (arguable I know so don't bother) my house has appreciated 8% since I bought it.

I do not expect to flip this house, but live in it for many years. There are lots of people in the same boat that I am that are buying now. Frankly I don't really understand what so many people in SA get from being permanently bearish. The world may not end afterall. Get over it.

Sep 04 11:56 PM

[Steve Owen:]

The author's main point is well taken. Many multiple listing services do not report concessions. And, often those that do have skewed results because real estate agents try to hide things like personal property included in the sale, for various reasons. Depending on the amount of concessions that are typical, the market data is often over reported as to sale price. Whether or not we have reached bottom is debatable from several points, but if the example given in the story is typical in those areas with a lot of excess inventory, then we probably have not. Add to that the shadow inventory of vacant houses not actively on the market and rising unemployment rates. Add to that potential new problems coming from option ARMs and commercial real estate. Add to that the high probability of fraud in some markets. After all is said and done, the bottom for real estate in some hard-hit markets could quite likely be some distance further down.

Sep 05 10:12 AM

[Steven R. S...:]

FHA is a lending program set up and run by the government, to help people who do not have a large down payment, be able to buy a home.

Unfortunately many buyers are preyed upon and packed into properties at prices that are inflated.

It is true that there are many related players who operate in the world of selling and lending to FHA borrowers. As well as the fact that there are many legitimate FHA deals.

Unfortunately, the FHA loan with its high ratio, is a favorite of fraudsters doing Flips. During the boom, prices went too high in many metro markets, but now that they have come done, fraudsters are active in FHA again.

As far as learning, Congress has learned that the Mortgage Insurance fund of HUD, for the FHA loans, is a great source of revenue to tap. FHA has actually made money. Who knows what will happen in the next year, they could suffer reverses.


On Sep 04 11:08 AM Soldalma wrote:

> The FHA itself is the Mafia leader, since it is lending with only
> 3.5% down. The philosopher Georges Santayana said that those who
> do not learn from the errors of the past are condemned to repeat
> them. in the case of the FHA they are not learning from the errors
> of the present.

Sep 07 08:54 PM

[Steven R. S...:]

Mark, if you did not over pay for the house you purchased, then the FHA loan program is great. And, your points are well taken. I purchased several homes that way and as you say, kept my cash in the bank for reserves.

It is a great thing to hear that your home went up in value, even if it is coming from Zillow. I have found that by tracking several homes in several markets since Zillow started in 2006; that their Zestimate may not have been what I thought the value was, but the Range that they gave, included the correct value.

On the way up, the correct value was closer to the high end of the range. On the way down, it has been toward the lower. But, then, there are 48 cities in my Region, and within the larger ones, there are areas performing vastly differently.

At the same time, the Graphs of the Price Trends have been pretty accurate, when I compare them with my own primary research in areas that I am active.

Unfortunatly, Zillow is a black box and no one can tell what it is doing to Adjust recent Sales into indicators of value. What I do notice is that they use whatever is a recent Sale, whether or not it is Similar in any major way or not.

We have a four bedroom home with a guest house, pool/spa, basement, attic, elevator, etc. When I look at what they use, from my neighborhood, it is simply anything that sold, whether or not it is similar. Once they had a 1-Bedroom cottage that was less than 25% of the size of ours, on their list of "Comps". Not good in that regard.


On Sep 04 11:56 PM markg wrote:

> I recently bought a house with 3.5% down because I can easily afford
> the payments, I have quite a bit more in IRA's, and top credit. If
> you don't have all of these you will not get a loan. My after tax
> payment is right at what my house would rent for, even with the low
> down. And according to zillow, (arguable I know so don't bother)
> my house has appreciated 8% since I bought it.
>
> I do not expect to flip this house, but live in it for many years.
> There are lots of people in the same boat that I am that are buying
> now. Frankly I don't really understand what so many people in SA
> get from being permanently bearish. The world may not end afterall.
> Get over it.

Sep 07 09:03 PM

[Steven R. S...:]

Steve O, what I have seen, is in the most dynamic downward markets, the prices went right past Supportable Demand in a huge way. Some areas in my Region have seen price declines of 5-10% per month.

Some of this has to do with the increase in Crime Rates, which have not made their way to national databases yet. Nor has the Local Unemployment Rates been reported.

Imagine a city with a 25% Unemployment rate, including those that are collecting benefits and those who have used their up but are still not working; combined with a huge increase in burgularies and other property thefts.

One New Tract that I called on in central Riverside County, was giving away Burglar Alarms to new home buyers. Yikes, not good.


On Sep 05 10:12 AM Steve Owen wrote:

> The author's main point is well taken. Many multiple listing services
> do not report concessions. And, often those that do have skewed results
> because real estate agents try to hide things like personal property
> included in the sale, for various reasons. Depending on the amount
> of concessions that are typical, the market data is often over reported
> as to sale price. Whether or not we have reached bottom is debatable
> from several points, but if the example given in the story is typical
> in those areas with a lot of excess inventory, then we probably have
> not. Add to that the shadow inventory of vacant houses not actively
> on the market and rising unemployment rates. Add to that potential
> new problems coming from option ARMs and commercial real estate.
> Add to that the high probability of fraud in some markets. After
> all is said and done, the bottom for real estate in some hard-hit
> markets could quite likely be some distance further down.

Sep 07 09:08 PM