New home sales fall to a record low

Sales of new homes plunged to a record low in January, government figures showed Wednesday, as the weak economy and a glut of foreclosed homes continue to weigh on the market.

The seasonally adjusted annual rate of new home sales plummeted 11.2% to 309,000 last month, compared with a revised rate of 348,000 in December, the Census Bureau said. That's a decline 6.1% from January 2009.

It was the lowest rate since the government began keeping records in 1963 and comes after declines in November and December.

The drop surprised many industry analysts. A consensus of economists surveyed by Briefing.com had expected January sales to rise to an annual rate of 354,000.

"Some people were expecting a surge in demand because of the tax credit," said Patrick Newport, an economist at IHS Global Insight. "But that surge isn't materializing."

Congress extended a popular tax credit last year that allows first-time buyers to deduct up to $8,000 from their income taxes and some repeat buyers to get a $6,500 break. Buyers now have until April to apply for the credit, which helped boost new home sales from depressed levels last year.

New home sales fell in all U.S. regions except the Mid-west, where sales edged up 2.1%. The Northeast was the hardest-hit last month, with sales plunging more than 35%.

What's driving the market: The market for new homes remains pressured by a glut of foreclosed properties and high unemployment.

"Distressed inventory continues to hit the market at cut-rate prices, drawing potential buyers away from new product," said Mike Larson, real estate analyst at Weiss Research. "And let's face it, the job market is nothing to write home about, either."

An industry report released earlier this month showed that foreclosures dropped nearly 10% between December and January, while filings rose 15% compared to a year ago.

Meanwhile, the U.S. unemployment rate fell unexpectedly in January to 9.7%. But the nation has lost 8.4 million jobs since late 2007, suggesting an economic recovery will be slow and uneven.

"I still think we're on the long, slow road to an anemic, lackluster recovery in housing," Larson added. "But numbers like these can sure shake your faith."

Inventory and prices: There were an estimated 234,000 new homes for sale at the end of December, according to the report.

At the current sales rate, it would take 9.1 months to sell through that inventory. That's up from December, when there were 8.1 months of inventory on the market. Prior to December, inventory levels had been steadily declining since May 2009.

Adam York, an economist at Wells Fargo, said the inventory of new homes for sale appears to be leveling off near 235,000 units.

"This is well below the level that persisted for most of the 1990s," he said, "suggesting builders have moved most of their excess inventory and will be in a better position when sales do eventually recover."

The median price of new homes sold in January was $203,500, down from $221,300 in the previous month. The average sale price was $254,500.

Outlook: Some economists expect new home sales to improve as the number of foreclosed properties on the market decreases and buyers take advantage of the tax credit.

"The supply of foreclosed homes has tightened," said Celia Chen, a senior director at Moody's Economy.com. "I think by early spring, home sales will pick up because buyers will want to take advantage of the tax credit."

IHS Global Insight's Newport said he also expects sales to pop this spring. However, he may reduce his full year forecast for new home sales in light of Wednesday's report.

"Builders are putting up homes," he said. "But what these numbers are telling us is that those homes aren't selling."

IS NOW THE TIME TO REFINANCE YOUR ARM??

Low mortgage rates over the past year have inspired many Americans to refinance their home loans, but some eligible borrowers haven't made the leap.

Often that reluctance to refinance stems from the fact that interest rates on their adjustable-rate mortgages have fallen below 3% -- a better rate than they'd get by switching to a fixed-rate loan.

For now, anyway.

As the economy strengthens, super-low ARM rates will adjust upward. Meanwhile, rates on fixed-rate mortgages are expected by many in the industry to start rising this year, after the Federal Reserve halts its purchase of mortgage-backed securities.

Many ARM holders are faced with two options: Give up their low rate now and refinance into a fixed-rate mortgage with a higher rate -- but one that's still near all-time lows, or hold on to that cheaper ARM rate as long as possible.

If your rate is indexed to the Libor, it could be at about 3% right now, said Keith Gumbinger, vice president for HSH Associates, publisher of consumer loan information.
The 30-year fixed-rate mortgage averaged 4.93% for the week ending Feb. 18, assuming payment of an average 0.7 point to obtain it, according to the latest Freddie Mac survey of conforming mortgage rates. See Mortgages.

"Some borrowers may opt to roll the dice again," Gumbinger said, and decide to stay in their current ARM to enjoy the lower rates as long as they can.

Trying to time the market, though, can be risky.

"The market can change very fast," said Jack Guttentag, professor of finance emeritus at the Wharton School of the University of Pennsylvania, and operator of "The Mortgage Professor" Web site, at mtgprofessor.com.

Depending on market conditions, it's not impossible for an ARM's rate to jump at least a couple of percentage points when it resets, he said.

"If you're an ARM borrower, you can't just look at your ARM rate and wait for that to change," he added. If you do, you could be headed for some payment shock -- and possibly miss out on securing a low fixed-rate mortgage that will remain low throughout the entire life of the loan.

Pick your moment

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ARMs typically reset after an introductory fixed-rate period, then reset regularly, often on an annual basis. For example, a typical 5/1 ARM will adjust for the first time five years into the loan, then will reset every year afterwards. There are often caps on how high the rate can adjust.

If the difference between someone's current ARM rate and the fixed-rate they'd be able to obtain isn't too large -- say, 1% or less -- there likely isn't a significant difference in monthly payment and it might be wise to refinance now, even if it means forfeiting your current low rate, Guttentag said. That way, you can secure a low fixed rate now and not gamble on when rates will move higher.

But for those with an ARM rate of 3% or less, it's a tougher decision.

Those who don't err on the side of caution and choose not to refinance now should vow to be astutely aware of the market so they can refinance before rates go up substantially, Guttentag said. They need to pay special attention to the index to which their ARM is tied -- the 1-year Treasury or the Libor, for example.

"If someone decided to do watchful waiting, they should establish a rule for themselves. Something like 'if that index increases by more than 1 or 1.5%, I'm going to move, I'm going to refinance,'" he said. "If you're not prepared to exercise this surveillance, you should refinance right now and trade short-term loss for long-term stability."

He also recommends developing a refinance strategy, getting your information ready for when it's time to make a move.

When will that be? It's difficult to tell. The consensus is that mortgage rates will go up, but no one knows exactly when or by how much.

"Rates are not going to go down this year. The question is: How much are they going to go up," said Mark Goldstein, chief executive of Refinance.com, a site that helps people decide whether to refinance and puts them in touch with lenders.

The Mortgage Bankers Association is predicting that average rates on 30-year fixed-rate mortgages will rise to about 6.1% by the end of the year, said Michael Fratantoni, vice president of research for the MBA. HSH Associates predicts the increase won't be quite as severe.

A shrinking pool

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Not all homeowners who haven't refinanced are ARM holders. Some simply can't refinance into a lower rate.

"For a lot of borrowers, they had the incentives before and didn't act -- largely because they don't have equity or don't qualify for income or credit reasons,"
Fratantoni said. For this reason, the MBA predicts a 65% drop in refinance origination this year, compared with 2009.

Probably the biggest reason people aren't able to refinance right now is because their mortgage is underwater -- that is, the homeowner owes more on the home than the home is currently worth, Goldstein said. Personal situations, such as divorce, also can alter people's creditworthiness and keep them from refinancing into a lower-cost loan, he said.

Some struggling borrowers might find relief in the government's Home Affordable Refinance Program, set to expire in June. And if conditions do improve -- meaning home prices stabilize and lending requirements ease somewhat -- the pool of people who can refinance could expand, Gumbinger said. Visit this site to find out more about the government's Home Affordable Refinance Program.

Housing Starts Bounce Back; Building Permits Fall

U.S. housing starts rebounded more strongly than expected to their highest level in six months in January, while permits fell slightly less than forecast, a government report showed on Wednesday.


The Commerce Department said housing starts increased 2.8 percent to a seasonally adjusted annual rate of 591,000 units, reversing the prior month's weather-induced drop.

Analysts polled by Reuters had expected housing starts to rise to 580,000 units. December's housing starts were revised upwards to 575,000 units from the previously reported 557,000 units. Compared to January last year, starts surged 21.1 percent, the largest increase since April 2004.



Groundbreaking for single-family homes rose 1.5 percent last month to an annual rate of 484,000 units after declining 3 percent in December. Starts for the volatile multifamily segment increased 9.2 percent to a 107,000 unit annual pace after rising 12.6 percent in December.

Housing, which is at the core of the most painful economic downturn since the Great Depression, is crawling out of a three-year slump, supported by government programs. New home construction contributed to economic growth in the third quarter of 2009 for the first time since 2005.




But activity slowed sharply in the fourth quarter and while homebuilder sentiment edged up this month, it remains at levels consistent with poor conditions.

New building permits, which give a sense of future home construction, fell 4.9 percent to 621,000 units last month after rising to a 14-month high of 653,000 units in December, the Commerce Department said. That compared to analysts' forecasts for 620,000 units.

The inventory of total houses under construction fell 2.3 percent to a record low 503,000 units last month, while the total number of units authorized but not yet started eased 0.9 percent to 94,300 units.

Where's housing headed? Follow rents

It may not be the most widespread measure of housing prices, but if you want to follow a powerful driver, look at rents.

Specifically, it's the rents Americans pay on condos, apartments or houses that are about the same size, and share the same neighborhood as your ranch or colonial, that in the end determine what your house is worth.

But by mid-2006, with the craze in full swing, the figure fell below 60%. At that point, Americans were spending an incredible 66% more to own than to rent. It was far worse in the bubble markets: In Las Vegas, Phoenix and Miami, homeowners were paying twice as much as renters, and in San Francisco and Orange Country, owners' monthly payments were triple those of their neighbors with leases instead of mortgages.

So how did that happen? During the bubble, rents -- the real engine that drives values -- were inching along at more or less their usual pace. From 1999 to 2007, apartment rents increased only 32%. But home prices jumped more than three times as fast, around 105%.

DB reckoned that housing prices are more or less reasonable when the ratio returns to its 1999 level. Why 1999? Because the ratio was relatively stable throughout the 1990s, and it was the year the steep rise in prices began in earnest.. At the end of the third quarter of 2009, the overall number stood at 83%, meaning renting was just a tad more attractive than owning.

But the picture varies widely from city to city. In 15 of those 53 metro areas, including St Louis, Indianapolis, and remarkably, Phoenix and San Diego, it's now higher than in 1999, meaning that homeowners' costs actually dropped versus what renters pay, courtesy of the steep decline in prices. In California's San Bernadino and Riverside Counties, it now costs 10% less to own than to rent; in 2006, owners paid more than twice as much as renters.

In another 14 cities, a list encompassing Boston, San Jose, and Chicago, the cost of owning exceeds that of renting by 6% or less. In the remaining 24 markets, housing is still moderately to extremely overpriced. The biggest problem areas are Baltimore, Long Island, and Seattle, where the ratio is still between 24% and 32% above the 1999 benchmark.

"If you look at the trend in rents to see where housing prices are headed, you're looking at the right measure," says Yale economist Robert Shiller.

In recent reports, Deutsche Bank demonstrates how steady or even falling rents have pulled down housing prices, to the point where in many markets it costs about the same amount to own as to lease. That's a golden mean that America hasn't seen in almost a decade. The DB research also offers convincing evidence that the wrenching adjustment in housing prices is finished for much of the nation, with a bit more pain to come in selected areas.

Housing outlook for 2010
Before we get to the numbers, let's examine why rents exercise a kind of gravitational pull over home prices.

In normal times, people won't pay much less to lease a house than to own it. After all, if you're paying rent instead of a mortgage and taxes, you still get to enjoy the same rec room, chef's kitchen, and casita for visiting grandparents. So the surest sign of a frenzy appears when owning becomes far more expensive than renting. That's precisely what happened during the last bubble.

And the surest sign that prices have fully adjusted arrives when the ratio of what people pay in rent versus what owners spend on the same property returns to its historic average.

That brings us to the Deutsche Bank studies. Its REIT research team first established a benchmark for a "normal" ratio of rents to ownership costs -- what it calls ATMP, or after-tax mortgage payment -- for 53 U.S. cities.

On average, DB found that families across America were spending about 87% as much to rent as to own in 1999. Hence, they were traditionally willing to pay a premium as homeowners, though not a big one
What does that mean for future prices?

Given that analysis, it's likely that prices will fall another 5% or so nationwide. The drop could even be slightly greater. One reason: Rents, the force that govern housing prices, are still falling.

In 2009, apartment rents dropped 2.3%, and the fall continues. And enormous adjustments are needed in still-exorbitant markets such as New York and Baltimore. Thankfully, the improving economy and decline in the rate of job losses means that rents should soon stabilize and could even start increasing by the end of 2010.

But fortunately, for most of the U.S., the sudden, terrifying fall in prices worked its own black magic. The numbers are back in alignment, or close to it. It had to happen. That's what rents, housing's great master, were telling us all along

Home prices fell 12% in 2009

The real estate roller-coaster ride continued last year as the median price of U.S. single-family home plunged 11.9% to $173,200.

The housing situation had been looking up earlier in the year, with prices gaining ground in the first nine months. But the increases weren't enough to push the median home price above 2008's bar of $196,600, according to the National Association of Realtors.

Still, the quarter-over-quarter drop was encouraging to NAR, which tracks home prices and sales.

"This is the smallest price decline in over two years, with the most recent monthly data showing a broad stabilization in home prices," said Lawrence Yun, NAR's chief economist. "Because buyers are taking on long-term fixed rate mortgages, avoiding adjustable-rate products, and trying to stay well within their budgets, the price recovery process appears durable."

Another sign of improvement is the increase in the number of homes sold. More than 6 million homes changed hands between October and December -- a 27.2% increase from the same time period in 2008.

"The surge in home sales was driven by buyers responding strongly to the tax credit combined with record low mortgage interest rates," said Yun. "With inventory levels trending down over the past 18 months, we expect broadly balanced housing market conditions in much of the country by late spring with more areas showing higher prices."

Check home prices in your town
Michelle Meyer, Barclay Capital's economist for new home construction, is predicting continued price declines through early 2010. By the second quarter, however, she expects an upturn.

She thinks that as the homebuyer tax credit expires at the end of April, it will add volatility to the market during the second quarter. People will rush to get in under the wire, boosting volume and shoring up prices.

After that, markets will moderate, with few showing any substantial increases.

On the other hand, David Crowe, chief economist with the National Association of Home Builders, said he expects home prices "will moderate and stay where they are" for a long stretch.

Volume up nearly all across the board
Sales volume increased in all but two states; 32 states recorded double-digit homes sales gains. Foreclosure sales continued to drive these increases; distressed properties, which includes foreclosures and short sales, accounted for 32% of sales during the quarter.

Mike Larson, a real estate analyst for Weiss Research, attributed the pop in volume to low prices. "People are simply finding that houses are cheap again," he said.

Crowe said the increase in sales volume was no surprise even though job losses continued to mount during the quarter.

"It's not unusual for housing to pick up before unemployment does," he said. "That's the normal pattern coming out of a recession. Mortgage rates are low; home prices are low and have stopped dropping. There's three years of pent-up demand and people who are working are buying homes."

More than a third of the 151 metropolitan areas covered in the report recorded year-over-year home price increases for the quarter, led by Saginaw, Mich., where prices grew 53.5% to $67,400.

The Midwest, which boasts the lowest average home prices of any of the four U.S. regions, was the only area that recorded a price rise over the previous quarter -- a mere 1.1%. The Northeast (-5.6%), South (-2.4%) and West (-8.9%) all suffered losses.

The biggest price drop was in Ocala, Fla, where home value plunged 23.4% to $93,200. In Las Vegas, where foreclosure has hit harder than anywhere else, prices dropped 23.3%

When 'Dream House' Becomes Horror Home

It's like a fairy tale: your dream house with a white picket fence surrounded by blooming flowers, shade trees and an almost meditative silence, save for rustling leaves, chirping birds and the distant hum of a lawn mower. What could possibly be wrong with this idyllic picture?

Nothing ... it seems ... until your research uncovers barely adequate public schools, an authoritarian neighborhood association and a "zoning pending" placard on that vacant corner lot -- a sign you discovered when you leapt onto the curb to escape a fast-moving caravan of vehicles speeding home during subdivision rush hour. You start wondering: Where are the sidewalks? And why did my agent seem so dismissive when I asked about crime? Could this "dream house" be a "house of horror"?

"There was a time in the not-too-distant past when people worried first and foremost about finding their dream house -- and only worried about the location after the fact," says Andrew Schiller, creator of NeighborhoodScout.com, a neighborhood-data system, and founder of its parent firm, Location Inc. The site helps buyers find compatible neighborhoods by enabling them to narrow down hundreds of potential neighborhoods to a select few by finding similar cultures, comp-school ratings, crime stats and more, using over 2,700 data elements.

Today's buyers are becoming increasingly wary of a widening number of neighborhood concerns like walkability, compatible age, background and education levels, as well as sex offenders, Schiller says. But the No. 1 relocation consideration remains schools, he says.
"Being in a good school district is the best insurance policy for an easy exit strategy and to ensure property values," says Realtor Kristal Kraft, a broker associate with Denver-based The Berkshire Group.

Neighborhood culture isn't far behind. "I tell people considering a purchase in a specific neighborhood to come back at random times of day," Kraft says. "This often leads to discovery of conditions that might be objectionable -- or welcome. Poke around, take a walk, talk to neighbors." An overabundance of vehicles in driveways or on streets sometimes indicates a declining neighborhood "or just too many teenagers in residence," Kraft says.

To avoid potential short-term value depression, potential buyers should check local foreclosure rolls for an excess of pending defaulters in a neighborhood, says Jim Klinge, owner of Klinge Realty in San Diego. But foreclosures aren't always a stigma. Whether foreclosure buyers are investors or owner-occupiers, "they're coming in solvent enough to qualify for full mortgages," he says. "They're also fixing up houses in disrepair and are usually smart landlords." One big "must" for every buyer, says Klinge, is to check local sex-offender lists. "It's a bummer when you find out later that the guy across the street is a peeper."


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In years past, you could rely on your real estate agent for information about crime and whether the house you were considering was in a "safe" neighborhood. But that's no longer the case, necessarily. In a recent issue of Realtor magazine, The National Association of Realtors warned agents not to "disclose crime statistics or say a neighborhood is a safe place to live ... or say anything yourself about the quality of the schools." Why? To avoid violating the Fair Housing Act "steering" guidelines. The article, "6 Ways to Avoid Illegal Steering," suggests agents advise clients to contact police for crime and sex-offender data and to set up personal visits to schools for performance data.

Here are a few other neighborhood-research "musts":

Construction: Check with city planning or zoning to determine allowable or forthcoming uses on vacant land. "Planned roads can be a positive or negative depending on the proximity to the home in consideration," Kraft says.
Social activity: Is there too much? Too little? Are there too many or too few kids and teens? Chat with neighbors if you can.
Night visits: Are there frequent parties, barking dogs, informal drag races, band "rehearsals" or too many (or few) sources of illumination around your street?
Noises, smells: Are train whistles audible at bedtime? Is highway or factory noise incessant? Is the city landfill downwind?
More online research: The Web is rife with resources. One of the best is: "50 Tools to Research Your New Home, Neighborhood, and Community."
Klinge cites studies determining that about half of all homebuyers, "make the buying decision before they get into the house based on the neighborhood and curb appeal of the house." Look deeper, he says. Potential buyers should also be prepared to manage expectations, says Kraft. "Some bases can be covered, but seldom do you get to purchase the perfect home. It doesn't matter what price range you are in, you cannot control what your neighbor is going to do. Remember, the Beverly Hillbillies moved in next door to someone."

More Borrowers Pay Credit Cards Before Mortgages

It's exactly the opposite of the norm. Usually cash-strapped Americans during tough economic times will miss credit card payments before they'll miss mortgage payments.

Welcome to the new world order.

The percentage of borrowers who are delinquent on their mortgages but paying their credit card bills on time is growing, to 6.6 percent in the third quarter of 2009 from 4.9 percent in the same quarter of 2008, according to a new study by Chicago-based TransUnion. In an interview with Reuters, the author of the study, Sean Reardon, confirmed, "This goes against conventional wisdom and that has always been that, when faced with a financial crisis, consumers will pay their secured obligations first, specifically their mortgages."

Today's consumer is all about cash-flow, and that means keeping the credit cards current. A home is no longer the product it was even five years ago, no longer an emotional investment. For a growing number of borrowers, a home is now a financial investment plain and simple, and more and more often, a lost investment. I read an article a few years ago about how Americans' attitudes toward their homes was changing, how twenty years ago losing your home was as big a social stigma as it was a hit to your credit rating, even more so. Not anymore.

Let's face it: An awful lot of borrowers out there put nothing into their homes and therefore have neither a financial, nor, more profoundly an emotional nor social stake in the structure. Of course they're going to pay off their credit cards first, because that has an immediate impact on what they can and cannot buy and do.

On top of that, most troubled borrowers have already figured out that there are so many forces in motion trying to save homes from foreclosure that they can easily miss one, two, five or six mortgage payments before even getting a call from the bank; then, they've got many more months of negotiations over modifications, short sale options, even the foreclosure process itself, insuring they will have a roof over their heads for a good long time.

I heard an interesting factoid at the American Securitization Forum conference in DC yesterday.

Home building Analyst Ivy Zelman said that in some Florida counties the courts are so backed up with foreclosures that it can take up to three years to get one home through the system.

That's three years of living rent-free, which frees up plenty of cash to pay the Visa bill.

More US Borrowers Than Ever Refi to Shrink Mortgage

A record share of U.S. homeowners cut their loan principal when refinancing in the fourth quarter rather than tap their home's equity for cash, home funding company Freddie Mac said ThursdayRecord low mortgage rates in the fourth quarter and a relative dearth of equity build-up after home prices fell about 30 percent on average from 2006 peaks drove consumers to pare debt.

One-third of those who refinanced shaved their loan balance, saving billions of dollars, Freddie Mac said. At the same time, the share of so-called "cash-out" loans, which increase the mortgage by at least 5 percent, fell to a record low.

Freddie Mac, which started tracking refinance tactics in 1985, said rates on 30-year mortgages sank as low as 4.71 percent in December.

That was the lowest in the 38 years that the company has reported weekly on long-term fixed rates. Thirty-year home loan rates have since risen, averaging just under 5 percent in the latest week.

Half of borrowers who refinanced conventional mortgages -- those that can be purchased by Freddie Mac or Fannie Mae -- last quarter cut their loan rate by at least 0.9 percentage point, Freddie Mac Chief Economist Frank Nothaft said.

"In aggregate, the lower interest rate translates into about $2 billion in payment savings for these homeowners over the first 12 months of the new loan," he said in a statement.

The previous high share of such "cash-in" mortgage refinancing was 16 years ago, when 23 percent of borrowers cut their loans, compared with last quarter's 33 percent.

Those borrowers that did tap their home equity on prime conventional loans in the fourth quarter drew about $11 billion, the smallest amount in any quarter in nine years, said Amy Crews Cutts, Freddie Mac deputy chief economist.

Just under $70 billion of equity was cashed out for all of 2009, the lowest since $26 billion in 2000.
"The main causes of the decline in cash-out refinance are declining home prices in many areas of the country that have eliminated equity that could have been extracted and tighter underwriting standards for loan-to-value ratios," Crews Cutts said in the statement.

A record low 27 percent of borrowers who refinanced last quarter increased their loan balance by at least 5 percent. The prior all-time low was 33 percent in the second quarter of 2003.

Freddie Mac is a government-controlled company that buys home loans to keep as investments or repackage as securities for sale to investors.

Its quarterly refinance reports are based on a sample of properties for which it has funded at least two successive loans. Freddie Mac said it does not track the use of funds gained from these refinances.