Anna-Lise Troup's Tucson Area Real Estate Update: May 2008

If you want a few clues about the history of a house you're considering buying, ask the seller for a CLUE report.

Article by Emily Green, The Wall Street Journal, May 13, 2008

Following is a clip from Today Show’s real estate expert, Barbara Corcoran. Her take from this morning’s show? “We’re in the bottom and it’s time to buy a home!”

Choose the second video clip, “Expert: Good time to buy”.

Principal Residences and Multiple FHA Loans to One Borrower

A principal residence is a property that will be occupied by the borrower for the majority of the calendar year. At least one borrower must occupy the property and sign the security instrument and the mortgage note for the property to be considered owner-occupied. Our security instruments require a borrower to establish bona fide
occupancy in the home as the borrower's principal residence within 60 days after signing the security instrument with continued occupancy for at least one year.

To prevent circumvention of the restrictions on FHA-insured mortgages to investors, we generally will not insure more than one mortgage for any borrower. Any person individually or jointly owning a home covered by a mortgage insured by FHA in which ownership is maintained may not purchase another principal residence with FHA mortgage insurance except under the situations described below. Properties previously acquired as investment properties are not subject to these restrictions.

We will not insure a mortgage if we conclude that the transaction was designed to use FHA mortgage insurance as a vehicle for obtaining investment properties, even if the property to be encumbered will be the only one owned using FHA mortgage insurance. We do not object to homebuyers using FHA mortgage insurance more than once if compatible with the homebuyer's needs and resources as follows:

Relocations
If the borrower is relocating and reestablishing residency in another area not within reasonable commuting distance from the current principal residence, the borrower may obtain another mortgage using FHA insured financing and is not required to sell the existing property covered by a FHA-insured mortgage. The relocation need not be employer mandated to qualify for this exception. Further, if the borrower returns to an area where he or she owns a property with an FHA-insured mortgage, it is not required that the borrower re-establish primary residency in that property in order to be eligible for another FHA insured mortgage.


Increase in Family Size
The borrower may be permitted to obtain another home with an FHA-insured
mortgage if the number of legal dependents increases to the point that the present house no longer meets the family's needs. The borrower must provide satisfactory evidence of the increase in dependents and the property's failure to meet the family's needs.

o The borrower also must pay down the outstanding mortgage balance on the present property to a 75 percent or lower loan-to-value (LTV) ratio. A current residential appraisal must be used to determine LTV compliance. Tax assessments, market analyses by real estate brokers, etc., are not acceptable as proof of LTV compliance.

Vacating a Jointly Owned Property
If the borrower is vacating a residence that will remain occupied by a
co-borrower, the borrower is permitted to obtain another FHA-insured mortgage. Acceptable situations include instances of divorce, after which the vacating ex-spouse will purchase a new home, or one of the co-borrowers will vacate the existing property.


Nonoccupying Co-Borrower
A nonoccupying co-borrower on property being purchased with an FHAinsured
mortgage as a principal residence by other family members may have a joint interest in that property as well as in a principal residence of their own with a FHA-insured mortgage. Under no circumstances may investors use the exceptions described above to circumvent FHA's ban on loans to private investors and acquire rental properties through purportedly purchasing "principal residences."

Considerations in determining the eligibility of a borrower for one of these exceptions are the length of time the previous property was owned by the borrower and the circumstances that compel the borrower to purchase another residence with an FHA-insured mortgage. In all other cases, the purchasing borrower either must pay off the FHA-insured mortgage on the previous residence or terminate ownership of that property before acquiring another FHA-insured mortgage.

*courtesy of the Mark Taylor Mortgage Team; source used is FHA manual

Following is a summary of residential sales activity in Tucson, Arizona based on information provided by the Tucson Association of Realtors.

Home Sales Volume: Decreased 36.72% from $367,164,710 in April 2007 to $246,878,039 in April 2008

Homes Sales Units: Decreased 26.17% from 1,318 in April 2007 to 973 in April 2008

Average Sales Price (all residential units): Decreased 8.91% from $278,577 in April 2007 to $253,729 in April 2008

Median Sales Price: Decreased 13.30% from $224,921 in April 2007 to $195,000 in April 2008

Pending Contracts (transactions subject to contract but not yet closed escrow): Increased 27.11% from 1217 units in April 2007 to 1547 units in April 2008

Active Listings: Decreased 15.20% from 10,387 in April 2007 to 8,808 in April 2008

New Listings: Decreased 20.87% from 3,085 in April 2007 to 2,441 in April 2008

Published in the Wall Street Journal

By CYRIL MOULLE-BERTEAUX
May 6, 2008; Page A23

The dire headlines coming fast and furious in the financial and popular press suggest that the housing crisis is intensifying. Yet it is very likely that April 2008 will mark the bottom of the U.S. housing market. Yes, the housing market is bottoming right now.

How can this be? For starters, a bottom does not mean that prices are about to return to the heady days of 2005. That probably won't happen for another 15 years. It just means that the trend is no longer getting worse, which is the critical factor.

Most people forget that the current housing bust is nearly three years old. Home sales peaked in July 2005. New home sales are down a staggering 63% from peak levels of 1.4 million. Housing starts have fallen more than 50% and, adjusted for population growth, are back to the trough levels of 1982.

Furthermore, residential construction is close to 15-year lows at 3.8% of GDP; by the fourth quarter of this year, it will probably hit the lowest level ever. So what's going to stop the housing decline? Very simply, the same thing that caused the bust: affordability.

The boom made housing unaffordable for many American families, especially first-time home buyers. During the 1990s and early 2000s, it took 19% of average monthly income to service a conforming mortgage on the average home purchased. By 2005 and 2006, it was absorbing 25% of monthly income. For first time buyers, it went from 29% of income to 37%. That just proved to be too much.

Prices got so high that people who intended to actually live in the houses they purchased (as opposed to speculators) stopped buying. This caused the bubble to burst.

Since then, house prices have fallen 10%-15%, while incomes have kept growing (albeit more slowly recently) and mortgage rates have come down 70 basis points from their highs. As a result, it now takes 19% of monthly income for the average home buyer, and 31% of monthly income for the first-time home buyer, to purchase a house. In other words, homes on average are back to being as affordable as during the best of times in the 1990s. Numerous households that had been priced out of the market can now afford to get in.

The next question is: Even if home sales pick up, how can home prices stop falling with so many houses vacant and unsold? The flip but true answer: because they always do.

In the past five major housing market corrections (and there were some big ones, such as in the early 1980s when home sales also fell by 50%-60% and prices fell 12%-15% in real terms), every time home sales bottomed, the pace of house-price declines halved within one or two months.

The explanation is that by the time home sales stop declining, inventories of unsold homes have usually already started falling in absolute terms and begin to peak out in "months of supply" terms. That's the case right now: New home inventories peaked at 598,000 homes in July 2006, and stand at 482,000 homes as of the end of March. This inventory is equivalent to 11 months of supply, a 25-year high – but it is similar to 1974, 1982 and 1991 levels, which saw a subsequent slowing in home-price declines within the next six months.

Inventories are declining because construction activity has been falling for such a long time that home completions are now just about undershooting new home sales. In a few months, completions of new homes for sale could be undershooting new home sales by 50,000-100,000 annually.

Inventories will drop even faster to 400,000 – or seven months of supply – by the end of 2008. This shift in inventories will have a significant impact on prices, although house prices won't stop falling entirely until inventories reach five months of supply sometime in 2009. A five-month supply has historically signaled tightness in the housing market.

Many pundits claim that house prices need to fall another 30% to bring them back in line with where they've been historically. This is usually based on an analysis of house prices adjusted for inflation: Real house prices are 30% above their 40-year, inflation-adjusted average, so they must fall 30%. This simplistic analysis is appealing on the surface, but is flawed for a variety of reasons.

Most importantly, it neglects the fact that a great majority of Americans buy their houses with mortgages. And if one buys a house with a mortgage, the most important factor in deciding what to pay for the house is how much of one's income is required to be able to make the mortgage payments on the house. Today the rate on a 30-year, fixed-rate mortgage is 5.7%. Back in 1981, the rate hit 18.5%. Comparing today's house prices to the 1970s or 1980s, when mortgage rates were stratospheric, is misguided and misleading.

This is all good news for the broader economy. The housing bust has been subtracting a full percentage point from GDP for almost two years now, which is very large for a sector that represents less than 5% of economic activity.

When the rate of house-price declines halves, there will be a wholesale shift in markets' perceptions. All of a sudden, the expected value of the collateral (i.e. houses) for much of the lending that went on for the past decade will change. Right now, when valuing the collateral, market participants including banks are extrapolating the current pace of house price declines for another two to three years; this has a significant impact on the amount of delinquencies, foreclosures and credit losses that lenders are expected to face.

More home sales and smaller price declines means fewer homeowners will be underwater on their mortgages. They will thus have less incentive to walk away and opt for foreclosure.

A milder house-price decline scenario could lead to increases in the market value of a lot of the securitized mortgages that have been responsible for $300 billion of write-downs in the past year. Even if write-backs do not occur, stabilizing collateral values will have a huge impact on the markets' perception of risk related to housing, the financial system, and the economy.

We are of course experiencing a serious housing bust, with serious economic consequences that are still unfolding. The odds are that the reverberations will lead to subtrend growth for a couple of years. Nonetheless, housing led us into this credit crisis and this recession. It is likely to lead us out. And that process is underway, right now.

That home across the street looks just like yours: same model, number of bedrooms, and its lot is about the same size, you guess. So when it sold for the asking price, you figured your home would sell for the same, maybe even more. Unfortunately, it's not always that easy. While your home may seem like others on your street, there are several attributes to consider when determining true comparable properties:


Location. Usually true comps are within a half-mile to one-mile radius of your home, although search parameters may be extended if we cannot find similar properties nearby. Such may be the case, for instance, if your home is much older than other homes in the neighborhood or you live in a rural area. Neighborhood boundaries and features--both natural and man-made--such as water (lakes, rivers, ocean, etc.), golf courses, parks, wooded areas, major thoroughfares, transmission towers and transit systems, and view (or lack thereof) also can come into play.


Features. This includes such factors as rooms, size, condition, quality and age. Other amenities can also make a difference, including garage space (attached or detached) or street parking, if applicable. Lot size (corner lot, cul-de-sac lot, acreage), type of construction (brick, concrete block, stucco), fireplaces, storage, outbuildings, etc. are other features we compare. For condos and co-op floor plans, location in building, views, natural light, convenience getting in and out, access to amenities, parking spaces per unit and other features can determine whether or not a property is truly comparable.


Sales Date. Prices change over time. If a sale is not contemporary within the last three to six months, then market conditions may have changed so radically that a property is no longer a true comparable. In other situations, particularly with upper-tier properties, few recent sales may extend the comparable sale date.


Sale Conditions. For a sold property to qualify as a comparable, the sale must have been transacted to meet a normal market standard. Sometimes short sales, auctions, foreclosures, estate settlements, tax sales, condemnation sales, divorces and other distress sales may rule out a property as a valid "market value" comparable.


Financing. Prices can be influenced by non-market conditions or terms either favorable or unfavorable. For example, if a property sold with below-market financing that enabled a buyer to pay more, professional appraisers might cite "undue stimulus" and discount the property value as not comparable. A fair sale requires a competitive open market, with buyer and seller acting prudently and knowledgeably, to be a true comparable.