Five Things Potential Home Buyers Don’t Know

-Zillow Blog

Zillow Mortgage Marketplace‘s most recent survey indicates that there are many aspects of the home buying process that continue to elude prospective home buyers. Here are some of the more surprising results of the findings, along with five things home buyers don’t know, but should:

Mortgage rates vary daily

A whopping 55 percent of prospective home buyers don’t realize that mortgage rates, which are determined by a slew of factors, can – and do – change daily (and sometimes more than once a day if certain economic reports are released.) To get the best rates, you have to monitor them (watch the movement of the 10-year Treasury bond; that’s your best indicator.) and shop around. After all, a change in a rate of a mere .125% to .25% could mean thousands of dollars in savings each year.

Lender fees are negotiable

When you apply for a mortgage, the bottom line is that you’re going to have to pay lender fees. And these fees — from origination fees to credit report fees to appraisal fees and more — can add up quickly. But the good news — and what 34 percent of prospective home buyers don’t know — is that fees not only vary from one lender to the next, but that they’re negotiable. All the more reason to shop around for different mortgage rates from various lenders.

FHA loans are available to all buyers

More than two in five (42%) prospective home buyers think that only first-time buyers qualify for an FHA loan, a mortgage insured by the Federal House Administration. That’s not the case. In fact, these loans are available to all buyers who meet eligibility requirements. Among the key benefits: minimal down payments, relaxed credit score requirements, low costs, and attractive interest rates.

Interest rates on ARMs don’t always reset higher

While interest rates on 5/1 ARMs do commonly increase after 5 years, rates could decrease. Prospective home buyers may not realize this because so many of us — some 57 percent, in fact – simply don’t know how adjustable rate mortgages work. FYI: the interest rate on this product is made up of two parts — the margin, which is fixed percentage; and the index, which goes both up and down with the general movement of interest rates.

Pre-qualified doesn’t mean much

Just because you’ve been “pre-qualified” for a loan doesn’t mean you’ve secured financing,  yet 37 percent of prospective home buyers think it does. When a lender “pre-qualifies” you, they simply approximate how much you can afford, but don’t run your credit or request any sort of documentation to verify the information you provide. It is not until a lender has approved your loan application without conditions that you’ve got a firm commitment.

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Tight Credit Limits Home Buyer Demand. Cash is King

-Mortgage News Daily

The National Association of Realtors today released Existing Home Sales data for February 2011

Existing Home Sales report on the number of completed real estate sales transactions on single-family homes, townhomes, condominiums and co-ops. The methodology in calculating existing-home sales statistics is really quite simple. Each month the National Association of Realtor® receives data on existing-home sales from local associations/boards and multiple listing services (MLS) nationwide.  The monthly EHS economic indicator is based on a representative sample of 160 Boards/MLSs. NAR captures 30-40% of all existing-home sale transactions with its monthly survey.

Here is the methodology for the data collection

Reuters Quick Recap...

RTRS-US FEB EXISTING HOME SALES 4.88 MLN UNIT ANNUAL RATE (CONS 5.15 MLN) VS JAN 5.40 MLN (PRV 5.36 MLN)-NAR
RTRS-US FEB EXISTING HOME SALES -9.6 PCT (CONS -4.0 PCT) VS JAN +3.4 PCT (PREV +2.7 PCT)-NAR
RTRS-US FEB INVENTORY OF HOMES FOR SALE +3.5 PCT TO 3.488 MLN UNITS, 8.6 MONTHS' SUPPLY-NAR
RTRS-US FEB NATIONAL MEDIAN PRICE FOR EXISTING HOMES $156,100, -5.2 PCT FROM FEB 2010-NAR
RTRS-US NAR SAYS 39 PCT OF U.S. FEB EXISTING HOME SALES WERE DISTRESSED SALES, HIGHEST SINCE APRIL 2009, VERSUS 37 PCT IN JAN
RTRS-US FEB EXISTING HOME SALES MEDIAN PRICE LOWEST SINCE APRIL 2002
RTRS-TABLE-U.S. Feb existing home sales fell 9.6 pct

Excerpts from the Release...

Existing-home sales fell in February following three straight monthly increases, according to the National Association of REALTORS®.
Existing-home sales dropped 9.6 percent to a seasonally adjusted annual rate of 4.88 million in February from an upwardly revised 5.40 million in January, and are 2.8 percent below the 5.02 million pace in February 2010.

Single-family home sales fell 9.6 percent to a seasonally adjusted annual rate of 4.25 million in February from 4.70 million in January, and are 2.7 percent below the 4.37 million pace in February 2010.

Existing condominium and co-op sales dropped 10.0 percent to a seasonally adjusted annual rate of 630,000 in February from 700,000 in January, and are 3.1 percent lower than the 650,000-unit level one year ago. 
Regionally, existing-home sales in the Northeast fell 7.2 percent to an annual pace of 770,000 in February and are 8.3 percent below February 2010.   Existing-home sales in the Midwest dropped 12.2 percent in February to a level of 1.01 million and are 9.0 percent lower than a year ago.  In the South, existing-home sales fell 10.2 percent to an annual pace of 1.84 million in February but are unchanged from February 2010.  Existing-home sales in the West declined 8.0 percent to an annual level of 1.26 million in February and are 2.4 percent below a year ago.

Lawrence Yun NAR chief economist, expects an uneven recovery.  “Housing affordability conditions have been at record levels and the economy has been improving, but home sales are being constrained by the twin problems of unnecessarily tight credit, and a measurable level of contract cancellations from some appraisals not supporting prices negotiated between buyers and sellers,” he said.  “This tug and pull is causing a gradual but uneven recovery.  Existing-home sales remain 26.4 percent above the cyclical low last July.”

Below is a chart illustrating the month over month volatility in Existing Home Sales.

Total housing inventory at the end of February rose 3.5 percent to 3.49 million existing homes available for sale, which represents an 8.6-month supply at the current sales pace, up from a 7.5-month supply in January.

The national median existing-home price for all housing types was $156,100 in February, which is 5.2 percent below February 2010. The median existing single-family home price was $157,000 in February, which is 4.2 percent below a year ago. The median existing condo price was $150,400 in February, down 11.1 percent from February 2010.

The median price in the Northeast was $230,200, down 9.5 percent from a year ago. The median price in the South was $134,600, down 3.9 percent from a year ago. The median price in the Midwest was $122,000, which is 5.4 percent below February 2010. The median price in the West was $190,000, which is 5.2 percent below January 2010.

This is the lowest Median price since April 2002.

All-cash sales were a record 33 percent in February, up from 32 percent in January; they were 27 percent in February 2010.  Investors accounted for 19 percent of sales activity in February, down from 23 percent in January; they were 19 percent in February 2010.  The balance of sales were to repeat buyers.  A parallel NAR practitioner survey shows first-time buyers purchased 34 percent of homes in February, up from 29 percent in January; they were 42 percent in February 2010.

Distressed homes – sold at discount – accounted for a 39 percent market share in February, up from 37 percent in January and 35 percent in February 2010.  “The decline in price corresponds to the record level of all-cash purchases where buyers – largely investors – are snapping up homes at bargain prices,” Yun explained.  “We’d be seeing greater numbers of traditional home buyers if mortgage credit conditions return to normal.”

Plain and Simple: 33% of existing home sales in February were covered with cold, hard cash. 39% of all sales were distressed inventory. This indicates folks are looking for bargains before the spring/summer buying season gets underway. Adding some optimism to the home buying outlook, we're hearing from loan originators that purchase applications are on the rise with most settlements not scheduled until April and May.  Unfortunately, on the whole, optimism is tempered by tighter underwriting standards and weak consumer credit profiles.  This is old news though. It's not only hurting home buying demand, it's preventing many folks from refinancing into a lower monthly payment as well. There's a lot of borrowers out there who just can't qualify for an agency-backed loan.  Anyone know of a better alternative besides cash? We don't....

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The $100 Million House: What It Really Costs

-Yahoo!

Have you ever wondered what it would be like to live in a $100 million house? Just ask billionaire business investor Yuri Milner. His purchase of the 25,000 square foot Silicon Valley home breaks the record for highest priced sale of a single-family home in America.

Milner made his fortune by investing in some of the biggest names in the online world, including Facebook, Groupon and Zynga. He is also the head of Digital Sky Technologies. Milner is certainly enjoying the billionaire lifestyle. His home sits on 11 acres of land and has a ballroom, home theater, gym, spa, formal dining room, two swimming pools, a tennis court and a wine cellar. For all of you aspiring millionaires (and billionaires) out there who dream of living large, let's look at what kind of financial resources it takes to own a home like Milner's.

The Mortgage

Perhaps some of the world's wealthiest wouldn't need to finance a record-breaking home purchase, but what if they did? Let's say that you put a 20% down payment on a $100 million home. If you get an interest rate of 4.75% on a 30-year fixed rate mortgage, what would the monthly payments look like? After the initial down payment of $20 million, your payments would be $417,317.87 per month. That's about ten times the national average annual salary! This mammoth mortgage also results in over $70 million going toward interest over the duration of the mortgage.

The Insurance

Though the average homeowner in the United States pays $791 per year in home insurance, a home like Yuri Milner's is sure to require a much heftier insurance policy. It's a bit tricky to say exactly how much it would cost. Home insurance costs are assessed on a number of factors, and not just those related to the replacement value of the home itself. Part of the insurance costs are based on the value of the contents of the home, the amount of the insurance deductible and what types of coverage you want (for example, flood or earthquake insurance).

Many insurance companies would be unwilling to insure a home like Milner's since it's a huge risk for one company to take on. Some specialized insurance companies deal with high-value or celebrity homes, though it certainly wouldn't be as straight-forward as purchasing insurance for a run-of-the-mill neighborhood. The insurance premiums would definitely cost a lot more as well!

The Taxes

Though the average homeowner in the United States pays $791 per year in home insurance, a home like Yuri Milner's is sure to require a much heftier insurance policy. It's a bit tricky to say exactly how much it would cost. Home insurance costs are assessed on a number of factors, and not just those related to the replacement value of the home itself. Part of the insurance costs are based on the value of the contents of the home, the amount of the insurance deductible and what types of coverage you want (for example, flood or earthquake insurance).

Many insurance companies would be unwilling to insure a home like Milner's since it's a huge risk for one company to take on. Some specialized insurance companies deal with high-value or celebrity homes, though it certainly wouldn't be as straight-forward as purchasing insurance for a run-of-the-mill neighborhood. The insurance premiums would definitely cost a lot more as well!

The Upkeep

You can imagine with a house as large as Milner's that keeping everything in good working order is going to cost some serious cash as well. The minimum suggested amount to set aside for home maintenance costs is 1% of the purchase price of your home. On a home that cost $100 million, that's a mere $1 million! If you consider that the house has 25,000 square feet of floor space, there's definitely a lot of space that needs to be maintained. It would be safe to assume that you'd need to hire some full-time help to deal with the upkeep of the yard, landscaping and swimming pools, as well as house cleaning. If you include the annual wages of all these maintenance personnel, the costs certainly add up.

The Bottom Line

Considering the estimated annual costs of owning a home like this, you could be looking at paying about $7 million per year just for mortgage payments, taxes, insurance and upkeep. It may seem like you're living the life, but owning a home like Milner's is far more than just the down payment.

Having the cash to buy the home is just the beginning. Even once the home is paid off, you're still going to be paying insurance, property taxes and home maintenance fees — and with a home of this size and value, that's not just pocket change. And that estimate doesn't even include the fact that you're going to have to buy a huge amount of furniture to fill all that empty space. If these numbers haven't yet scared you off, the residence of the late Aaron Spelling is for sale at the bargain price of $150 million.

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Homes for Sale With Palatial Pools

-Frontdoor.com

As summer quickly approaches, these homes take center stage with their impeccable aquatic assets. Indulge in a five-star retreat just steps from your front door. Thanks to relaxing spas, shady pergolas, warm fireplaces, gourmet outdoor kitchens and more, these homes know how to turn a hot summer day into a cool way to entertain in style. Tour seven aquatic abodes and find the perfect spot to escape the summer heat.

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Fed hasn't decided exit strategy yet: Lockhart

-The Wall Street Journal

The Federal Reserve hasn't decided on an exit strategy from ultra low interest rates and its $600 billion bond buying program, Atlanta Fed President Dennis Lockhart said Sunday, according to a transcript of his remarks. "Some of my colleagues have already begun to weigh in on the details of exit. I will not do so today, but I think it would be a mistake to assume that these public conversations on exit are much more than an open discussion of the options the central bank should consider," he said.

The Fed will communicate an exit strategy once it's clear the economic rebound is secure. "Once the expansion becomes more clearly sustainable, it will be appropriate to begin the process of normalization of interest rate policy and the Fed's balance sheet. The exact timing remains to be determined by the FOMC. I am confident that the committee will provide guidance when we have enough certainty that the guidance will provide more signal than noise to financial markets and the public," he said.

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The Politics of Mortgage Reform

-CNBC

A few months ago the Obama administration put out a "white paper" on potential outcomes for the demise of Fannie Mae and Freddie Mac.

There was much debate about it at the time, but since then there's been something of a calm after the storm.

Republicans made it clear they want government out of the mortgage business, and democrats just the opposite; hence the quiet.

Now comes a bi-partisan bill from a California Republican and a Michigan Democrat, that could be the first to get some real traction.

Rep. John Campbell (R-California) and Rep. Gary Peters (D-Michigan) are looking to keep the government as a backstop to the mortgage market, an a very measured and limited way. Their bill (HR 1859) does away with Fannie and Freddie and replaces them with no fewer than five "government-chartered" entities. These would securitize mortgages, as Fannie and Freddie do, with a government guarantee. To pay for that guarantee, the entities would pay the government a fee, as well as be required to follow certain strict standards of underwriting and loan size. The entities would also have to hold on to far more capital than Fannie and Freddie do.

The idea is to get private capital back into the mortgage market.Currently about 90 percent of all loans are backed by the government through Fannie, Freddie and the FHA. This as Fannie and Freddie continue to build a tab with taxpayers that now stands at $138 billion.

The first reaction from the mortgage bankers was, dare I say, safe: "The bipartisan legislation introduced by Congressmen Campbell and Peters to reform our secondary markets closely mirrors the proposal of MBA's Council on Ensuring Mortgage Liquidity, which was the first to put forward a comprehensive blueprint for the future of our housing finance system," wrote Michael Berman, Chairman of the Mortgage Bankers Association.

But let us not forget that reforming the mortgage market is as political as it is financial, and so I found the reaction from Washington policy analyst Jaret Seiberg of MF Global particularly pertinent. He argues that this type of legislation is exactly what could eventually emerge from Congress because it appeases the industry and the general home buying public. It produces revenue for the government in the form of the fees the entities would pay, preserves the 30-year fixed mortgage, helps the Realtors, the home builders and the mid-sized banks and even gives mortgage insurers a role for borrowers with less than 20 percent to put down.

But…

For us, the problem here is that the bill is too early in the political fight.

In effect, this legislation preserves Fannie and Freddie as we will have government-sponsored enterprises issuing MBS with government backing.

We do not believe the political environment is favorable for such a vote. Put another way, it will be hard for many Republicans to support this approach. That is why it may be several years before this type of legislation can garner sufficient support. In addition, we do not believe that House GOP leaders are willing to support this type of legislation. That means there is little chance of it getting a vote on the House floor.

In other words, you can discuss it all you want…and I hope you will here on the blog…but until the housing market stabilizes and consumers and politicians alike feel confident that home ownership will rise again, nobody is going to make a move, or at least a move that will result in substantive change.

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In these troubled times, more Americans come current on mortgages

-Housingwire

Even in an environment of declining home values, the number of Americans making good on their mortgage continues to grow.

The first-quarter national mortgage delinquency rate decreased to 6.19%, according to credit-reporting agency TransUnion. The numbers are down 3.4% from 6.41% in the fourth quarter and down 8.6% compared to 6.77% a year earlier.

The rate encompasses borrowers delinquent 60 days or more.

According to Standard & Poor's, U.S. consumers also reduced their revolving credit card debt by 18% since mid-2008 through default, borrowing less or paying down debt outstanding. This is the longest and fastest credit card deleveraging since record keeping began in January 1968.

Americans remain unlikely to take on more debt, despite the news that there are growing less risky.

"Currently, 28% of homeowners are 'underwater,' meaning that they owe more than the value of their houses," said S&P analyst Erkan Erturk. "Economic factors such as these, as well as high oil prices and weak consumer confidence, will likely continue to pressure U.S. consumers and constrain consumer debt growth."

Tim Martin, vice president of TransUnion's U.S. Housing Market group, said the recent trend seems counterintuitive. For example, as prices fall he said, the mortgage delinquency rate should rise as more and more homeowners find themselves in negative equity.

"While many homeowners still face pressure to make ends meet, they have lived in their homes for a long time and have diligently been paying their mortgage each month," Martin commented. "The fact that mortgage delinquency continues to decline despite this situation demonstrates that today’s borrowers are less risky."

The average borrower held about $190,115 in mortgage debt during the first quarter, according to TransUnion. While that is up 0.6% from the fourth quarter, average mortgage debt per borrower is down 1.4% compared to the first quarter of 2010.

The area with the highest average mortgage debt per borrower was Washington D.C. at $375,579, followed by California at $338,792 and Hawaii at $313,770. Borrowers in West Virginia have the lowest amount of mortgage debt at $99,640.

TransUnion predicts delinquency rates will fall further throughout 2011, as improving economic conditions and tighter lending standards offset the impact of home prices declines.

Earlier in May, TransUnion said its credit risk index fell for the fifth straight month in the first quarter, "indicating consumers are increasingly likely to repay their debt obligations and are managing new credit more responsibly."

The company said its index decreased about 5% from the fourth quarter and was down 1.6% from a year earlier. The quarterly decline was the largest since the third quarter of 2008, TransUnion said.

Consumer demand for credit also fell during the first quarter and "remains historically low."

"The broad and steady decline in the Credit Risk Index, coupled with a moderate decrease in the demand for credit over the previous year suggests that consumers continue to live within their means, tending to acquire new credit only for larger, specific purchases," said Chet Wiermanski, global chief scientist at TransUnion.

Still, S&P reports that it expects the rate of household deleveraging to slow.

"The long downward trend in credit card debt may soon bottom as the household debt service and financial obligation ratios are near their historical averages," said the S&P report. "Also, declining consumer default and charge-off rates and increased willingness to lend at large banks signal that revolving debt deleveraging is slowing down."

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