CLR Choice Realty Blog

U.S. stocks took it on the chin tumbling over 4% Monday, February 10th on word of the economic stimulus package and Treasury Secretary Tim Geithner's plan to shore up the financial sector.  The news however was much better received at the National Association of Realtors.  Part of the plan calls for a credit of up to $15,000 for new homebuyers.

“We are pleased with his proposal and are eager to see the Treasury’s final plan. NAR stands ready to work with the administration to reduce foreclosures and make homeownership more attainable for thousands of Americans,” said Charles McMillan, NAR president. NAR believes that many of the actions called for in the Treasury plan should result in lower mortgage rates and fewer foreclosures. About the tax credit, McMillan said, “The credit of up to $15,000 for homebuyers is a critical provision in the Senate bill that will result in approximately 1 million additional home purchases this year,” McMillan said. The provision also eliminates the repayment feature of the earlier tax credit, makes the credit available for all purchases of primary residences and extends the credit for one full year. These are all provisions NAR has continually called for in any federal stimulus plans. “This is a great effort by the Senate and a major step in the right direction, but our work is far from finished. Much more needs to be done in the coming days and weeks to bring stability to the housing market and to begin an economic recovery,” said McMillan. “Today the country took a step forward in helping our economy begin its recovery. It is important for Congress and the administration to strengthen their focus on improving liquidity to both the residential and commercial mortgage market and make mortgage loans and other forms of credit more affordable and available to America’s working families,” said McMillan.                                                    Source: NAR

By the way, no matter where you are on the political spectrum, stimulus numbers as large these should have an impact.  Don't believe me...write the number...one trillion looks like this $1,000,000,000,000.  If you where paid $1,000,000 everyday for the last 2009 years, you still would come up short of that number.  Hopefully, this gives us the boost we need.

McLean, VA – Freddie Mac (NYSE:FRE) today released the results of its Primary Mortgage Market Survey® (PMMS®) in which the 30-year fixed-rate mortgage (FRM) averaged 5.04 percent with an average 0.7 point for the week ending February 19, 2009, down from last week when it averaged 5.16 percent. Last year at this time, the 30-year FRM averaged 6.04 percent.

Summary of Survey Results

Freddie Mac defines its regions as follows:

Northeast: NY, NJ, PA, DE, MD, DC, VA, WV, ME, NH, VT, MA, RI, CT
Southeast: NC, SC, TN, KY, GA, AL, FL, PR, VI, MS
North Central: OH, IN, IL, MI, WI, MN, IA, ND, SD
Southwest: TX, LA, NM, OK, AR, MO, KS, CO, NE, WY
West: CA, AZ, NV, OR, WA, UT, ID, MT, HI, AK, GU

Freddie Mac's Primary Mortgage Market Survey (PMMS) is for informational purposes only and Freddie Mac is not responsible for business decisions made based on the reported results of the PMMS. Freddie Mac may change the methodology used to conduct the PMMS survey at any time and without notice.

DEFINITIONS

Commitment Rate is the interest rate a lender would charge to lend mortgage money to a qualified borrower exclusive of the fees and points required by the lender. This commitment rate applies only to conventional financing on conforming mortgages with loan-to-value rates of 80 percent or less.

ARM Index - is the One-year Treasury

Loan to Value Ratio (LTV) is the ratio of the loan amount of a mortgage loan to the lower of the appraisal value or purchase price of the property securing the loan.

Origination Fees and Discount Points are the total charged by the lender at settlement. One point equals one percent of the loan amount.

Margin is a fixed amount added to the underlying index to establish the fully indexed rate for an ARM.

Weighted Averages for the Primary Mortgage Market Survey have been adjusted as of October 16, 2008. The new weights use the dollar volume of conventional mortgage originations within the 1-unit Freddie Mac loan limit as reported under Home Mortgage Disclosure Act (HMDA) for 2007. The weights are listed in the table below.

The bad news:  the $15,000 first time homebuyer tax credit proposed in the original legislation is now $8,000.

The good news:  the final stimulus bill complete with the first-time homebuyer tax credit to $8,000 and the elimination of the repayment requirement of earlier legislation is on President Obama's desk for signing. Additionally, the credit has been extended until Dec. 1, 2009.

As Americans we seem to have the unique ability to turn a good thing into a great thing and great thing into an unsustainable thing. Inevitably the bubble bursts and we find ourselves picking up the pieces. I have a personal story about two such bubbles. In the late 90’s as the internet sector was soaring and technology hardware companies were pumping out products at record levels, I was working for a company that contracted to manufacture these products. Things were booming into the millennium, the tech heavy NASDAQ was at record levels and then it happened. Orders for the switches, hubs, routers and computer that drove the internet craze fell off a cliff. This caused the sky high valuations of the tech giants to contract on fears that their customer’s business models were flawed. In short the bubble popped. As I searched for a less volatile industry to make a living in, the opportunity to continue my family’s tradition of building homes arose. Here’s where the story gets relevant to the turmoil we are experiencing in the real estate market. My father had some former associates in a sparsely populated area in northeast Florida who were encouraging him to start a building business in their area. Being a data driven analytical being, I started researching the attributes of Palm Coast, FL, a newly incorporated town in Flagler County Florida. The story was intriguing. Palm Coast is in the eastern portion of Flagler County, which is located on the Atlantic Ocean, in the heart of Northeast Florida. Flagler County had one of the highest population growth rates in the United States since 1990, according to the U.S. Bureau of the Census. Developed by ITT Corporation, in 1969, the original development plan encompasses 48,000 home sites on approximately 42,000 acres (65.62 square miles) of the 68,000 acres owned by ITT. Paved streets as well as central water and sewer served all lots developed within the plan which encompassed 46 miles of freshwater canals and 23 miles of saltwater canals. The weather was also a pleasant surprise. The proximity to the ocean provided an almost constant breeze during the hot Florida summers and was located far enough north to avoid the majority of tropical disturbances. We began buying lots for our inventory in late 2001. We were buying standard Palm Coast building lots with all utilities in place for $7,500. By 2002, the prices had jumped to between $10,000 and $22,000 and the building boom was on. Midway through 2003 demand was so great for lots that we began to sell some of our inventory for $65,000 each. By 2005, a 1,000% return on a lot purchased in 2001 was not uncommon, but I’m getting ahead of myself. What was the catalyst for this sudden price rise? At what point did this sudden interest in Flagler County and Palm Coast become an issue?  To answer these questions we need to dig a bit deeper. From April 1, 2000 to July 1, 2005 the population of Flagler County grew faster than anywhere in the nation according to the U. S. Census Bureau. During the period the population grew by a staggering 26,578 people or 53.3%. So, we obviously have demand for housing. There were builder incentives, where for as little as $1,000 down, you could start building your dream home. Couple that with the easy credit available and you can understand the housing demand pictured in Chart 1 “Flagler County Building Permits April 2000 to July 2005.”

Plenty of people require plenty of houses….so far no problem, right? Now comes the fun part. How many houses do 26,578 people require? For this answer I pulled the average size household from a summary of Palm Coast, FL Demographics, the largest city in Flagler County, and calculate the number of homes required. 26,578 new people (the change in population) divided by 2.35 (average household size) equal 11,310 homes needed. That’s 11,310 new homes that Flagler County needed to build to meet the demands of their growing population. If we calculate the number of building permits issued during this same period, we built 16,730 units…that’s a whopping 47.92% more homes created than needed by the families moving to the area. Some of these homes may have been consumed as second or vacation homes, but it’s clear that we were creating excess inventory. What was fueling this excess? The answer can be summed up in one word, greed. The returns on “flipping” a speculative home were staggering. Remember those $1,000 down payment incentives to start a home? In the year to eighteen months from the time you signed the contract to the closing date, appreciation in value of $100,000 was not uncommon. As more and more investors leveraged cheap and easy credit to speculate on the housing boom the basic economic law of supply and demand began to catch up. Pop!!  As in the correction of other bubbles, the decline in home values and new home starts has been steep. The number of properties in the foreclosure process in Palm Coast stood at 725 on January 28, 2009 according to RealtyTrac (for current numbers see Palm Coast Foreclosures). Chart 2 shows the devastation as Palm Coast building permits fell dramatically. With an economy that was essentially created to support the growth in housing, Flagler County had the state's highest unemployment rate in December, 2008 at 11.7 percent.

The scary part of the story is that the speculative excesses in Flagler County were far lower than in many other areas in Florida. Given the continued growth of the area and the huge drop off in new construction, the excess inventory should correct itself. Other areas may be in for a long and painful reality.