Steven R. Smith

Not Enough Ado About Real Estate Lately

There are many who try to spin real estate data to make things look good, rather than simply report on what is happening.

The classic example is the Economists from NAR or BIA, or MBAA. Any positive spin they can give data, helps their members do more business.

All who report, only report on Prices, not Values. The low end pricing is being propped up by the Stilts of Concessions.

Low end buyers that have not saved a down payment, can be packed into deals at Prices beyond their Value. The classic example of this is the FHA buyer.

The only party that has any real concern for Market Value in the sales transaction is the Appraiser. And, god forbid they miss the Sales Price. If they do, do you think the other players will tell the Buyer the home is not worth the Sales Price?

Or, will the Appraiser be pressured to inflate the Value to make the deal work?

While Retail Sales Decline, FHA House Sales Soar

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.

While Retail Sales Decline, FHA House Sales Soar

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.

While Retail Sales Decline, FHA House Sales Soar

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.

Pending Home Sales: July 2009

Great that the numbers of sales are up, what about the Prices?

There must be a reason NAR does not like to make a correlation between the good news of sales volumes increasing And price trends or changes.

A Sustainable Housing Rebound Is No Slam Dunk

What many are trying to call the bottom of the Housing Market, may in fact, only be a normal Seasonal Uptick. Yes, July sales volumes in a normal market, are higher than June, or May. August is the peak, then volumes decline until January, when the up cycle repeats.

Separate from the normal annual cycle, much of the up tick is helped by builders packing their deals full of Concessions from Buying Down the interest rates, to paying the closing costs, to giving free upgrades.

I have found $225,000 sales with $30,000 in Concessions that were used to prop up the Sales Price in new homes. In some sub markets in my Inland Empire Region, this is usual and customary.

Sales numbers, when not analyzed as to what they are made up, are giving a false read on recovery. Sales Prices and Market Values are not the same in the current market, there can be more than a 10% variance between the two, but then, that subject deserves a whole article, not just a comment.

What Housing Recovery?

Well said, and about time. In my Region, the Inland Empire area of So. Cal. the bulk of the new sales are to FHA Buyers who do not have a down payment.

I have seen new homes sell for $225,000 this year, that have had Seller paid Concessions that were the key to the transaction, in the amounts of $10,000 in Buy Down Interest Rate costs, $10,000 in Seller Paid Closing costs and $10,000 in Upgrades given to the Buyer by the Seller; for a Net or Cash Equivalent Price of $195,000.

Only the $225,000 gets reported into the statistics. The reality, in terms of Market Value as defined by USPAP, FIRREA, HUD or FNMA; is closer to $195,000 if not lower.

NAR will always publish anything that helps their members sell more homes, helps bring buyers back to the market. None of their members who sell homes for a living ever have to deal with the issue of Market Value, only Sales Price. And to them, it does not matter what is packed into the Sales Prices, which are propped up by the Stilts of Concessions.

Housing's the Key to Economic Recovery

What if another Crash in residential real estate was in the offing, spurred by the huge volume of current sales to buyers who had no down payment except what the government gave them, that purchased with 97% FHA loans, with help from the Sellers that was hidden from the Appraisers?

Seriously, is it possible that the Housing Market has been shored up artificially? And, what role in it has the Appraiser played?

The Diminishing Value of Home Appraisals

Flawed thinking can start with something as simple as a silent assumption that is based on a patently bad notion of real estate transactions and buyers.

It might help if all were to understand that Appraiser Licensing came as a result of the S&L Crisis during which all the bad loans of the banks and S&L's were blamed on the Appraiser.

So, Appraisers were licensed for the Public Good. They were licensed to protect the Public for bad things.

The Public included everything from an individual Buyer to federally insured financial institutions and agencies of the federal government, to investors in the secondary mortgage market.

An erroneous assumption that is also often a silent assumption is that the Buyer is well informed and operating in their own best interest, without abnormal motivations. The same is true of Sellers. We often assume things that the evidience does not actually support.

Pretend, as just one example, that a new home is built and sold by a sales force paid for by the builder. And, that either the builder owns the mortgage company or has a partnership with them. This might apply to every national builder from Centex Home, to KB Homes, to Richman America and Toll Brothers and everyone in between.

In the case of KB Home's they partnered up with Countrywide, where they were able to orchestrate inflated sales prices, packing Buyers into deals, with larger loans; and with the help of those unwitting appraisers ready and willing to rubber stamp the Sales Price.

An example of a Transaction structure could include items such as loan Buy Downs, free Upgrades or Decorator Allowances.

I personally verified a Sale in a tract of homes this spring that was at a price of $235,000. It included over $30,000 in Incentives, which, when deducted made the Cash Equivalent Sales Price $195,000.

The definition of Market Value that USPAP requires is in terms of Cash Equivalency. So, this $235,000 sale would have a CE price of not more than $195,000 and the Licensed Appraiser should be astute enough to figure it out. In my example, I found other sales where there were not give aways at $189,000, which means even the $195,000 after deducting all the sweeteners from the deal, was still a high price.

On the other hand, if the Appraised the home at $189,000 or $195,000 they would likely not get paid and would never be used again.

Consumer protection in a real estate transaction can only happen if the appraisers are honest, skilled, and aware of their fiduciary duty to parties beyond those that hire them.

Whether it is Countrywide or WAMU, Citibank or BofA; appraiser independence has failed. FIRREA was supposed to put a fire wall between appraisal and lending functions. Lenders figured a way around that.

The problem is so pervasive that there are literally tens of thousands of appraisers who have been Classically Conditioned to Anchor on Sales Price and try to help make deals work in order to eat.

God forbid that a lowely Appraiser come in low on a Sale. All the forces of the NAR, BIA, MBA will be brought to bear on them by their respective members.

There is literally no structural support for the honest and skilled Appraiser in real estate or mortgage lending transactions. There never has been and that is the way those with the gold like it.

Imagine setting the entry requirement bar so low that almost anyone could get a license, and then turning the newly licensed Appraisers over to those with vested interests in transactions. Why in the world should we expect then that they would ever tell the truth or seek it for that matter. Yet, that is what our system did.

There is nothing structually in place, including HVCC, that will stop interested parties from being able to pressure Appraisers.

What exists in the market place largely is an industry of Conditioned Appraisers, who shoot for the Sales Price to help make deals work. And, they do so for a living.

Your assumption that somehow the Appraiser is looking out for the Buyer, is naive at best, if not willfully ignorant.

The End (of the Recession) Is Near

The uptick in March Sales Prices might well be caused mostly by increased Concessions being packed into the Price, not an increase in value.

When Concessions {Loan Interest Rate Buy Downs, Closing Costs, Free Upgrades} are deducted from Sales Price, the Cash Equivalent Price is lower.

The End (of the Recession) Is Near

The uptick in March Sales Prices might well be caused mostly by increased Concessions being packed into the Price, not an increase in value.

When Concessions {Loan Interest Rate Buy Downs, Closing Costs, Free Upgrades} are deducted from Sales Price, the Cash Equivalent Price is lower.

The End (of the Recession) Is Near

The uptick in March Sales Prices might well be caused mostly by increased Concessions being packed into the Price, not an increase in value.

When Concessions {Loan Interest Rate Buy Downs, Closing Costs, Free Upgrades} are deducted from Sales Price, the Cash Equivalent Price is lower.

FHFA Housing Price Increases Are Suspect: Better Stick with Case-Shiller

Often times, in market conditions like we are in now, the Sales will include Concessions that prop up the Prices, which are Not deducted or accounted for in their statistics.

When Lower Mortgage Rates Don't Boost House Prices

During the perior of years when loose credit prevailed, while management at the lender were working on getting their bonuses up, and people did not have to qualify for loans: housing prices increased beyond supportable levels.

In those areas that are still over priced, low interest rates will not help. Prices will still need to come down. How much? It depends, it is a local phenom.

Can the Bottom of a Housing Market be measured and predicted? Yes both in terms of the Price Level and the Timing.

Housing on the Slide

It is siimple really, Mortgage Fraud committed at a variety of levels by participants who earned comissions, some licensed, some not, some for profit, some for housing alone.