Housing Market Bottom?

According to a recent Commerce Department report, the US economy shifted into a higher gear in the second quarter of this year. Our gross domestic product (GDP) increased at a 3.3% annual rate. (The GDP measures the value of all goods and services produced within the U.S.) Economists had predicted 1.9% growth in the GDP and were surprised by the additional growth of 2.7%. How does that growth relate to real estate? Existing home sales rose 3.1% in July, the highest level in five months. Lawrence Yun, National Association of Realtors (NAR) Chief Economist, expects home prices in some regions to increase even more in the near future. “Sales have picked up significantly in several Florida and California markets.” NAR President Richard Gaylord attributes this to the recently enacted housing stimulus package and predicts a sustained sales uptrend in the months ahead.

Housing & Economic Recovery Act

H.R. 3221, the “Housing and Economic Recovery Act of 2008,” passed the House on July 23, 2008, by a vote of 272-152. On Saturday, July 26, 2008, the Senate passed the bill by a vote of 72-13. The President signed the bill on July 30, 2008. The bill includes the following provisions:
GSE Reform – including a strong independent regulator, and permanent conforming loan limits up to the greater of $417,000 or 115% local area median home price, capped at $625,500. The effective date for reforms is immediate upon enactment, but the loan limits will not go into effect until the expiration of the Economic Stimulus limits (December 31, 2008).
FHA Reform – including permanent FHA loan limits at the greater of $271,050 or 115% of local area median home price, capped at $625,500; streamlined processing for FHA condos; reforms to the HECM program, and reforms to the FHA manufactured housing program. The downpayment requirement on FHA loans will go up to 3.5% (from 3%). The effective date for reforms is immediate upon enactment, but the loan limits will not go into effect until the expiration of the Economic Stimulus limits (December 31, 2008).
Homebuyer Tax Credit - a $7500 tax credit that would be would be available for any qualified purchase between April 8, 2008 and June 30, 2009. The credit is repayable over 15 years (making it, in effect, an interest free loan).
FHA foreclosure rescue – development of a refinance program for homebuyers with problematic subprime loans. Lenders would write down qualified mortgages to 85% of the current appraised value and qualified borrowers would get a new FHA 30-year fixed mortgage at 90% of appraised value. Borrowers would have to share 50% of all future appreciation with FHA. The loan limit for this program is $550,440 nationwide. Program is effective on October 1, 2008.
Seller-funded downpayment assistance programs – codifies existing FHA proposal to prohibit the use of downpayment assistance programs funded by those who have a financial interest in the sale; does not prohibit other assistance programs provided by nonprofits funded by other sources, churches, employers, or family members. This prohibition does not go into effect until October 1, 2008.
VA loan limits – temporarily increases the VA home loan guarantee loan limits to the same level as the Economic Stimulus limits through December 31, 2008.
Risk-based pricing – puts a moratorium on FHA using risk-based pricing for one year. This provision is effective from October 1, 2008 through September 30, 2009.
GSE Stabilization – includes language proposed by the Treasury Department to authorize Treasury to make loans to and buy stock from the GSEs to make sure that Freddie Mac and Fannie Mae could not fail.
Mortgage Revenue Bond Authority – authorizes $10 billion in mortgage revenue bonds for refinancing subprime mortgages.
National Affordable Housing Trust Fund – Develops a Trust Fund funded by a percentage of profits from the GSEs. In its first years, the Trust Fund would cover costs of any defaulted loans in FHA foreclosure program. In out years, the Trust Fund would be used for the development of affordable housing.
CDBG Funding – Provides $4 billion in neighborhood revitalization funds for communities to purchase foreclosed homes.
LIHTC – Modernizes the Low Income Housing Tax Credit program to make it more efficient.
Loan Originator Requirements – Strengthens the existing state-run nationwide mortgage originator licensing and registration system (and requires a parallel HUD system for states that fail to participate). Federal bank regulators will establish a parallel registration system for FDIC-insured banks. The purpose is to prevent fraud and require minimum licensing and education requirements. The bill exempts those who only perform real estate brokerage activities and are licensed or registered by a state, unless they are compensated by a lender, mortgage broker, or other loan originator.For more information, visit http://www.realtor.org/governmentaffairs.

Consumer Hesitancy

The ongoing theme....consumers are hesitant to buy real estate. There are a lot of buyers with the cash, but are on the fence for fear there may be a significant market correction in pricing. What is interesting is the fact there are a lot of buyers with money. The demand is there, the confidence is not. When these buyers are ready to enter the market, the increased demand will open the doors for the real estate market. To help keep things in perspective, the following is a quote from Lawrence Yun, the chief economist for NAR. "Existing home sales have been trending recently at an annualized pace near 5 million units, about the same as in 1998. Such a performance then was hailed as a milestone but we live in a different world now. A crisis in confidence is what's keeping homes sales from rising. Fortunately, our federal lawmakers have a tool under consideration that will break the vicious cycle of hesitance that grips our markets: a home ownership tax credit for owner-occupying buyers. House and Senate lawmakers are both looking at credits of at least $7,000."

Bad Real Estate News In Perspective

Richard F. Gaylord, President of the National Association of Realtors, said it best in the January 2008 issue of Realtor Magazine, "Every foreclosure is a tragedy, but when newspapers talk about foreclosure spikes, they ought to provide context. The problem is predominantly with subprime loans, which are held by less than 10 percent of home owners. Most subprime loans will never go into foreclosure, and not all those that do will be foreclosed on. The foreclosure rate on prime loans is only 0.6% In addition to low interest rates, most areas of the country are experiencing employment gains, inflation is under control, and the gross domestic product is growing. " Maui for the most part is a second home destination and purchase. Hawaii lenders scrutinized local loans differently than mainland lenders thereby resulting in lower Hawaiian foreclosures. The Maui real estate economy is different, and it will not be long before the typical buyer figures this out. The Wailea multi-million dollar condos continue to sell on Maui. Do the people who can afford these condos see the "doom and gloom" touted by the media differently? After all, if there were to be downward pressure on the market of 10% or more, those would amount to big loss numbers for the wealthy. These buyers don't believe Maui will fall victim to large price adjustments. It is different on Maui, as it attracts a different buyer over those buyers found in the mainland suburbs.

Snooze You Lose...

As many buyers continue to sit on "the fence" trying to time the tide of the Maui real estate market, most will end up "missing the boat" in an attempt to try to buy at the bottom of the curve. Real estate is cyclical, and those who try to time the bottom and top always lose. This brings me to interesting news coming out of the financial markets this past week. More money is moving away from treasuries and into corporate notes, bonds and financial stocks. A sign the fear of major financial calamities is fading away. Furthermore, some experts opine the declining dollar may be bottoming out as it is beginning to see a strong improvement against the yen and euro. The Feds justifiably harbor concerns regarding inflation and will not lower interest rates much further, if at all. In fact the consensus on Wall Street is the Feds will soon start raising rates as it continues its balancing act of stimulating the economy with low interest rates, but also trying to control inflation. Canadian buyers trying to take advantage of strong exchange rates better get off "the fence" and act quickly before the exchange rate changes with an improving U.S. dollar. Likewise, interested mainland buyers better get off "the fence" and consider the effects of an inevitable rising interest rate against an erroneous attempt to save money by timing the bottom in the market. If you have been trying to decide when to buy a Maui home or condo, now is the time.

Maui Real Estate Statistics

The Realtor Association of Maui (RAM) recently released new 2008 statistics. First quarter 2008 Single family home sales in Maui County are down from 341 in 2007 to 228 in 2008. The median single home price for the same period is down from $625,000 to $602,783. The median condominium price in Maui County in the first quarter of this year was up from $552,500 in 2007 to $587,000 in 2008. Much of this was attributed to high end sales in Wailea and not necessarily condos in less affluent sections of Maui. The number of days on market for a condo in March 2005 was 104 days, and at the peak of the real estate boom, to March 2008 was 162 days. For a single family home during the same period was 123 days versus 162 days. What this tells us is Maui is feeling the effects of the mainland market crisis in a slow down, but clearly not at levels being experienced in California, Florida and elsewhere. For all intensive purposes, the sales volume is healthy for an island with 140,000 residents. What obviously drives the Maui market is the wealthy vacation home buyers. What has dropped off were those leveraging their mainland properties to buy a Maui property. Now the market has shifted and we are seeing a flood of Canadian buyers snapping up deals with a strong exchange rate in favor of the Canadians. These buyers are not concerned about any major downward price adjustments. They realize as with any investment, prices will fluctuate to some degree and they are not here to buy and flip. They see it as a buying opportunity and will be the real winners in the short run. If you are a mainland buyer interested in a second home on Maui, now is the time to buy. There is a lot of inventory to choose from thereby offering beautiful properties in beautiful ocean front locations.

Hawaii Real Estate Will Not Melt Down

According to a March 12, 2008 article in the Pacific Business News, "Hawaii's low rate of foreclosures and its stable mortgage industry suggest the state won't experience a 'real estate meltdown' like on Mainland, according to the latest report from Prudential Locations. Hawaii is somewhat insulated from housing troubles. The report noted the limited supply of land, universal appeal as a place to own a second home, steady influx of military personnel with housing allowances and tight mortgage lending laws have protected Hawaii from the mortgage crisis. 'Currently, Hawaii has the lowest mortgage delinquency and default frequency in the U.S.,' said Bank of Hawaii chief economist Paul Brewbaker. While home sales in Hawaii have been declining since the end of 2004, home values across the Hawaiian Island have remained more stable than mainland counterparts."