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Housing Affordability Surges to Highest Level in 18 Years
RISMEDIA, May 20, 2009-Nationwide housing affordability jumped 10 percentage points during the first quarter of 2009 to its highest level since the series began 18 years ago, according to the National Association of Home Builders/Wells Fargo Housing Opportunity Index (HOI). The HOI showed that 72.5% of all new and existing homes sold in the first quarter of 2009 were affordable to families earning the national median income of $64,000, up from 62.4% during the previous quarter and up from 53.8% during the first quarter of 2008.
“Underlying the increase in affordability are lower home prices and record low interest rates. Combined with the $8,000 federal tax credit for first-time home buyers, consumers are beginning to return to the marketplace,” said NAHB Chairman Joe Robson, a home builder from Tulsa, Okla.
Indianapolis was the most affordable major housing market in the country during the first quarter. Almost 95% of all homes sold were affordable to households earning the area’s median family income of $68,100. Indianapolis has now topped the affordability list 15 consecutive quarters.
Also near the top of the list of the most affordable major metro housing markets were Youngstown-Warren-Boardman, Ohio-Pa.; Akron, Ohio; Grand Rapids-Wyoming, Mich.; and Syracuse, N.Y.
Several smaller housing markets posted even higher affordability scores than Indianapolis, with Sandusky, Ohio outscoring all others. There, almost 98% of homes sold during the first quarter of 2009 were affordable to median-income earners. Other small housing markets ahead of Indianapolis on the affordability scale included Monroe in Michigan and Mansfield, Springfield and Canton-Massillon in Ohio.
New York-White Plains-Wayne, N.Y.-N.J., where just over 21% of all homes sold during the period were affordable to those earning the median income of $64,800, was once again the nation’s least affordable major housing market in the first quarter. Though affordability jumped 7 percentage points for the quarter, this was the New York metro area’s fourth consecutive appearance at the bottom of the list. Other major metros near the bottom of the chart included San Francisco; Los Angeles-Long Beach-Glendale, Calif.; Nassau-Suffolk, N.Y.; and Honolulu.
Among smaller metro areas, Ocean City, N.J. was the least affordable market, along with San Luis Obispo-Paso Robles, Calif.; Flagstaff, Ariz.; Hanford-Corcoran, Calif.; and Santa Cruz-Watsonville, Calif., respectively.
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By MADLEN READ and TIM PARADIS, AP Business Writers
Tue Feb 24, 6:37 pm ET
NEW YORK – Federal Reserve Chairman Ben Bernanke gave Wall Street a double dose of reassurance. Now it’s President Barack Obama’s turn.
Bernanke told Congress on Tuesday the recession might end this year, and that regulators aren’t planning to nationalize banks. The news alleviated some of investors’ worries about the economy and the banking industry, and lifted the Dow Jones industrial average and Standard & Poor’s 500 index off their lowest levels since 1997.
And investors are hopeful that Tuesday night, Obama will provide specifics about his plans to stabilize the financial system and further stimulate the economy. Anticipation of his remarks helped drive beaten-down financial shares up sharply.
“There’s growing optimism that Obama can deliver the details that the market is so desperately looking for in his speech,” said Ryan Larson, senior equity trader at Voyageur Asset Management. If it gets those details, Larson added, the market’s upward momentum could continue.
Stocks remain on shaky ground, however. Bernanke may have helped stem the market’s slide Tuesday, but the market also found stability from temporary technical factors: bargain-hunting, the unwinding of short bets, and selling exhaustion after six straight down days for the S&P 500.
And though it appears the government is trying to quash the notion of bank nationalization, the Obama administration still has not demonstrated how exactly it will repair the banking system. The nation’s financial system remains “zombie-like,” said Nick Kalivas, vice president of financial research at the brokerage MF Global.
“We had an up day today, but nothing has really changed on that front,” Kalivas said. “If nothing is articulated on that tonight, we’re moving to the downside again.”
The continued focus on the stability of the financial system comes a day after the government moved closer to dramatically expanding its ownership stakes in the nation’s banks, including Citigroup Inc. The Treasury Department, the Fed and other banking regulators said Monday they could convert the government’s stock in the banks from preferred shares to common shares.
The Dow rose 236.16, or 3.3 percent, to 7,350.94. On Monday, the major indexes tumbled more than 3 percent, including the Dow, which fell 251 points and hit its lowest close since May 7, 1997.
Broader stock indicators also rebounded Tuesday. The S&P 500 index rose 29.81, or 4 percent, to 773.14. On Monday, it logged its lowest finish since April 11, 1997.
The Nasdaq composite index rose 54.11, or 3.9 percent, Tuesday to 1,441.83, while the Russell 2000 index of smaller companies rose 17.90, or 4.5 percent, to 412.48.
Advancing issues outnumbered decliners by about 6 to 1 on the New York Stock Exchange, where consolidated volume came to 7.09 billion shares, compared with Monday’s 6.35 billion.
In his semiannual report to the Senate Banking Committee, Bernanke predicted the economy is likely to keep contracting in the first six months of 2009, but that “there is a reasonable prospect” the recession will end this year.
He warned that a recovery will require getting credit and financial markets to operate normally, and that the government must continue working with ailing banks to bring them back to profitability. To the market’s relief, though, the Fed chief said formally nationalizing the banks “just isn’t necessary.”
Traders were encouraged that the S&P 500 index has so far managed to stayed above its Nov. 21 trading low of 741.02. Investors searching for a recovery look for signs that market can test its lows from the worst of the credit crisis and then bounce higher.
Still, many analysts expect the market to remain volatile for the foreseeable future.
Rich Hughes, co-president of Portfolio Management Consultants in Los Angeles, said the market’s rallies are likely to be based on hope or on rebounds from selloffs. He contends Wall Street still hasn’t seen the wrenching decline that is often needed to scare investors from the market and set the ground for a lasting recovery.
“The underlying fundamentals just aren’t there to support anything that’s sustainable right now,” Hughes said. “We haven’t seen the capitulation that you’d want to see before you’d get thoroughly enthused.”
The market’s slide has been tough on long-term investors. A person who in 1997 put $50,000 in a fund that tracks the S&P 500 would now only have about $46,256.
Bond prices fell Tuesday. The yield on the benchmark 10-year Treasury note, which moves opposite its price, rose to 2.80 percent from 2.76 percent late Monday. The yield on the three-month T-bill, considered one of the safest investments, was unchanged at 0.29 percent.
The dollar was mixed against other major currencies, while gold prices fell.
Light, sweet crude rose $1.52 to $39.96 per barrel on the New York Mercantile Exchange.
Home Depot posted a loss but the nation’s largest home improvement retailer’s results topped expectations when excluding costs for shutting four home-improvement brands. The stock rose $1.96, or 10.5 percent, to $20.67.
Target Corp. and Macy’s Inc. said fiscal fourth-quarter earnings fell sharply as shoppers cut back on purchases. Office Depot Inc. posted a loss for the quarter. Target fell 60 cents to $27.83, while Macy’s rose 89 cents, or 12 percent, to $8.29.
Two big drags on the Dow this year — Citigroup and Bank of America Corp. — regained ground Tuesday. Citigroup rose 46 cents, or 22 percent, to $2.60, and BofA rose 82 cents, or 21 percent, to $4.73.
Another bank in the Dow, JPMorgan Chase & Co., rose $1.51, or 7.74 percent, to $21.02 after announcing late Monday it would slash its quarterly dividend to 5 cents from 38 cents in a move to save $5 billion a year.
The only loser in the Dow Tuesday was Microsoft Corp., which dipped 4 cents to $17.17 after it reiterated its belief that the economic crisis will persist at least into the second half of 2009.
Stocks fell in Asia and Europe following Monday’s drop on Wall Street. Japan’s Nikkei stock average fell 1.5 percent, Britain’s FTSE 100 fell 0.78 percent, Germany’s DAX index fell 0.73 percent, and France’s CAC-40 fell 0.73 percent.
Buffett sees economic shambles, still optimistic
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Delicious Digg Facebook Fark Newsvine Reddit StumbleUpon Technorati Yahoo! Bookmarks Print By JOSH FUNK, AP Business Writer Josh Funk, Ap Business Writer – 12 mins ago AP – In this May 21, 2008 file photo, U.S. billionaire investor Warren Buffett speaks during a news conference …
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OMAHA, Neb. – Warren Buffett says the economic turmoil that contributed to a 62 percent profit drop last year at the holding company he controls is certain to continue in 2009, but the revered investor remains optimistic.
Buffett released his annual letter to Berkshire Hathaway Inc. shareholders Saturday morning, and detailed the worst of his 44 years leading the Omaha-based company.
Buffett wrote he’s certain “the economy will be in shambles throughout 2009 — and, for that matter, probably well beyond — but that conclusion does not tell us whether the stock market will rise or fall.”
In between the news of Berkshire’s sharply lower profit and its nearly $7.5 billion investment and derivative losses, Buffett offered a hopeful view of the nation’s future.
He said America has faced bigger economic challenges in the past, including two World Wars and the Great Depression.
“Though the path has not been smooth, our economic system has worked extraordinarily well over time,” Buffett wrote. “It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.”
Within Berkshire, Buffett said the company’s retail businesses, including furniture and jewelry stores, and those tied to residential construction, such as Shaw carpet and Acme Brick, were hit hard last year, and they will likely continue to perform below their potential in 2009.
But he said Berkshire’s utility and insurance businesses, which includes Geico, both delivered outstanding results in 2008 that helped balance out the other businesses.
Berkshire’s 2008 net income of $4.99 billion, or $3,224 per Class A share, was down from last year’s $13.21 billion, or $8,548 per share, in 2007.
The two analysts surveyed by Thomson Reuters on average expected Berkshire to report a 2008 profit of $5,534.50 per share. But the estimates typically exclude one-time items.
Buffett estimates Berkshire’s book value — assets minus liabilities — declined 9.6 percent to $70,530 per share in 2008. Berkshire’s book value declined only one other time under Buffett, and that was a 6.2 percent drop in 2001.
Berkshire’s Class A shares remain the most expensive U.S. stock, but they have declined 48 percent since setting a high of $151,650 in December 2007. That came after an exceptionally profitable quarter that was helped by a $2 billion investment gain.
The S&P 500 fell 37 percent in 2008.
On Friday, Berkshire’s Class A stock gained $250 to close at $78,600 on the eve of the release of Buffett’s letter. But earlier this week, the stock set a new five-year low at $73,500 as investors anticipated bad news in the report.
Buffett devoted nearly five pages of his letter to Berkshire Hathaway shareholders to explaining the role derivatives played in the company’s investment losses last year.
Buffett said he initiated all of Berkshire’s 251 different derivative contracts because he believes they were mispriced in Berkshire’s favor.
“If we lose money on our derivatives, it will be my fault,” Buffett said.
Berkshire has received $8.1 billion in payments for derivatives which can be invested until the contracts expire years from now.
But Berkshire has to estimate the value of its derivatives every quarter. Buffett says he supports that mark-to-market accounting, but the formula used to estimate that value can produce absurd results for long-term contracts.
Buffett said he made at least one major investing mistake last year by buying a large amount of ConocoPhillips stock when oil and gas prices were near their peak.
Berkshire increased its stake in ConocoPhillips from 17.5 million shares in 2007 to 84.9 million shares at the end of 2008.
Buffett said he did not anticipate last year’s dramatic fall in energy prices, so his decision cost Berkshire shareholders several billion dollars.
Buffett says he also spent $244 million on stock in two Irish banks that appeared cheap. But since then, he’s had to write down the value of those purchases to $27 million.
Berkshire owns a diverse mix of more than 60 companies, including insurance, furniture, carpet, jewelry, restaurants and utility businesses. And it has major investments in such companies as Wells Fargo & Co. and Coca-Cola Co.
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On the Net:
Berkshire Hathaway Inc.: http://www.berkshirehathaway.com
Warren Buffett’s 2008 letter: http://www.berkshirehathaway.com/letters/2008ltr.pdf
Stimulus package may restore higher loan limits
BY MATT CARTER, THURSDAY, FEBRUARY 12, 2009.
A proposal to provide a $15,000 tax credit to homebuyers was stripped from a $789 billion economic stimulus package that appears headed for a vote Friday, but a restoration of higher loan limits for Fannie Mae, Freddie Mac and FHA loan guarantee programs appears to have made the cut.
The $15,000 homebuyer tax credit — included in an $838 billion economic stimulus bill passed by the Senate Tuesday was scaled back to $8,000 and limited to first-time homebuyers as part of a compromise between Democrats and Republicans.
The Congressional Budget Office estimated the larger tax credit would have cost $35.5 billion, a price tag that proved too tough to swallow in conference committee negotiations where differences between House and Senate versions of H.R. 1, The American Recovery and Reinvestment Act of 2009 were ironed out.
Instead, the compromise bill falls back on language approved by the House Jan. 28 which would have eliminated the repayment requirement on an existing $7,500 tax credit that is currently available only to first-time homebuyers through July 1.
According to a summary of the compromise bill released by lawmakers Thursday, the tax credit will still be available only to first-time homebuyers — those who haven’t owned a principal residence in the last three years. But they won’t have to pay it back, as is currently the case, and the credit will be increased to $8,000 and be available through the end of November. The smaller tax break will cost taxpayers closer to $6.6 billion over 10 years, a savings of nearly $30 billion.
The compromise version of H.R. 1 would nevertheless increase the statutory limit on the public debt by $789 billion, raising it from $11.3 trillion to $12.1 trillion.
While not everything that the industry was hoping for, the National Association of Realtors nevertheless welcomed the more limited expansion of the tax credit.
Eliminating the repayment provision on the first-time homebuyer tax credit could drive more than 200,000 additional home sales, NAR President Charles McMillan said in a statement, which will help stabilize home values.
McMillan said the bill will also reinstate the $729,750 loan limit in high-cost areas for Fannie Mae, Freddie Mac and FHA loan guarantee programs that was in place throughout much of 2008, which he said would help reduce inventory and improve liquidity in the overall mortgage market.
In a separate development, investors were cheered Thursday by a report that the Obama administration is planning to launch a program to subsidize mortgage payments for troubled borrowers who can pass a standardized re-appraisal and affordability test. A Reuters report on the Obama administration’s foreclosure prevention plan helped stocks recover much of their losses for the day before Thursday’s closing bell.
The foreclosure prevention plan is presumably part of a comprehensive housing program that Treasury Secretary Timothy Geithner promised Tuesday the administration would roll out in coming weeks as part of a “TARP 2″ financial stability plan for banks.
In announcing the plan, Geithner suggested an expansion of a $600 billion Federal Reserve program to drive down mortgage rates could also be in the works. That program has already driven down mortgage rates to around 5 percent through purchases of mortgage-backed securities and debt issued by Fannie Mae, Freddie Mac and Ginnie Mae.
Reuters reported that the Obama administration has shelved a plan for the government to stand behind low-cost mortgages with rates between 4 percent and 4.5 percent.
Part I: Impact on inventories lags foreclosures
By Matt Carter, Monday, January 26, 2009.
Inventories of unsold homes are likely to swell in coming months as lenders begin to push a growing backlog of repossessed homes up for sale — often in communities already awash in distressed properties.
While builders have cut back drastically on the production of new homes, it’s likely lenders will soon be putting pressure on inventories even if they succeed in efforts to keep more troubled borrowers in their homes rather than foreclosing on them.
Because it can take weeks or months for lenders to put repossessed homes on the market, the impact of real estate-owned (REO) properties on inventories lags behind foreclosures. Government efforts to recapitalize banks through the Troubled Asset Relief Program (TARP) and other bailout measures may also have taken some of the heat off of lenders to unload REO properties at fire-sale prices.
But with the emphasis of TARP and other government relief efforts now expected to shift to creating jobs, helping troubled borrowers avoid foreclosure and providing incentives for home buyers, lenders could soon unleash a torrent of real-estate owned, or “REO” properties — even in markets already flooded with an oversupply of homes for sale.
“It’s almost like a tsunami — you can see it coming and you know it’s going to hit but you can’t get out of the way,” said Ann Stickel, vice president of affiliated services with Sarasota, Fla.-based brokerage Michael Saunders.
The value of REO property on the books of FDIC-insured banks at the end of the third quarter surged 21 percent from the previous quarter, to $23 billion. That total — which includes single-family to four-family homes valued at $11.5 billion and another $1.5 billion in property purchased with FHA-backed loans securitized by Ginnie Mae — represents a 134 percent increase from a year ago, according to the latest quarterly report from the Federal Deposit Insurance Corp.
Repossessions by Fannie Mae and Freddie Mac grew by nearly 25 percent from the second quarter to the third quarter of 2008, hitting 15,196 homes, according to a recent foreclosure prevention report by the Federal Housing Finance Agency (FHFA). With Fannie and Freddie repossessing homes faster than they could sell them, the companies were left with 95,553 REO properties to dispose of at the end of September — a 25.5 percent increase in just three months.
Not all of those homes are in areas hard-hit by speculation and subprime lending, either. About six out of 10 homes in Fannie and Freddie’s REO inventory were purchased with prime loans available only to borrowers with good credit.
Fannie and Freddie both stopped foreclosing on loans they own over the holidays (Fannie’s moratorium is in effect throughout the end of January and several states have passed legislation that’s intended to slow down the foreclosure process. Lenders are also stepping up their efforts to do workouts and loan modifications with troubled borrowers, rather than foreclosing on them.
But those measures may only be slowing down the foreclosure process for many borrower, and the downturn in the economy and rising job losses have many convinced that foreclosure filings will continue to rise.
President Obama is promising Congress that $50 billion to $100 billion of the next round of TARP money will be committed to foreclosure-relief programs aimed at reducing mortgage payments for troubled borrowers, and broadening the scope of FHA’s little-used “Hope for Homeowners” refinance program.
With more than half of the loans modified by lenders in the first half of 2008 already in default again, it’s clear that lenders will have to take the more drastic step of reducing the principal balance to make loan mods work, said Sean O’Toole, founder and CEO of ForeclosureRadar, a company that tracks California homes through the foreclosure process.
Forgiving loan principal is something lenders and loan servicers haven’t been very willing to do so far, O’Toole said — in part because of the potential for legal objections by investors who own the securities many mortgages were packaged into.
“We likely have $4 trillion in bad mortgage debt created created during a period of inflated home prices,” O’Toole said. “Any program that doesn’t directly deal with eliminating that debt only delays the inevitable and makes this problem worse. Foreclosure remains the only working mechanism for clearing this bad debt at the moment.”
If lenders aren’t willing to do more meaningful loan modifications, Congress could give bankruptcy judges the power to “cram down” loan principal — a bad idea, lending industry critics say, because that’s likely to raise the cost of borrowing for all home buyers. Another idea is for the government to provide incentives to servicers or guarantee a portion of lender’s losses when they agree to do loan modifications that involve principal write downs.
Some states have also attempted to address foreclosures, with limited success. O’Toole has been monitoring the impact of a California law, SB 1137, like similar statutes in other states including North Carolina, Maryland and New Jersey, is intended to slow down the pace of foreclosures by creating new hoops for lenders to jump through.
California’s law, which requires lenders to reach out to homeowners and extends the waiting period before initiating foreclosure proceedings, put a significant dent in notice of default filings.
In the process of acquiring troubled rivals, banks may write down the value of some of the bad loans on their books. Once the loans are written down — often to as little as 20 cents on the dollar, Olshin said — some of the pressure to foreclose on properties and sell them is gone.
“The loans are being carried for what they are worth, and they think there’s upside potential” to hold onto properties and sell them when prices rebound, Olshin said. “We think there’s not an upside potential — that we’re going to be in this problem for awhile.”
Lenders are trying to stretch out some of their losses, and avoid the need for massive new reserve funding when possible, said Norm Miller, a professor at the Burnham-Moores Center for Real Estate at the University of San Diego. At the same time, Miller said lenders are “overwhelmed with the sheer volume of defaults which may turn into foreclosure.”
Auction boom
Regardless of any pullbacks by lenders, Tranzon and other auctioneers had a banner year in 2008, and expect this year will be even better.
“I think we’ll see a lot more properties moving to auction as banks realize they need to sell at the market price,” Olshin said.
Real Estate Disposition LLC (REDC), which claims to be the nation’s largest real estate auction company, held 300 ballroom auctions in 2008 and sold nearly 33,000 foreclosed homes for $3.4 billion — a seven-fold increase in sales volume and nearly triple the proceeds the company generated in 2007.
Company CEO Jeffrey Frieden said he expects to “smash that record” this year as banks and lenders continue to amass a huge inventory of foreclosed homes and are more motivated than ever to sell their inventory.
“I’d say all of the top 10 loan servicers have an auction strategy in place, and that between 5 and 15 percent of the (REO) portfolio is sold through auction,” said Michael Davin, president and co-founder of Hermosa Beach, Calif.-based discount brokerage CataList Homes Inc.
CataList, which provides marketing and transaction management expertise for sellers, is a partner with the Los Angeles Times Media Group and others in Zetabid, an online auction marketplace for bank- and builder-owned properties.
Industry groups like the National Association of Realtors, the Mortgage Bankers Association and the National Association of Home Builders have been pushing for more emphasis on incentives for buyers, such as tax credits, subsidized interest rates, and higher loan limits for Fannie, Freddie and FHA loan guarantee programs.
But O’Toole thinks such subsidies were what “got us into this trouble in the first place. Subsidies may increase demand, and in the case of subsidized interest rates might even increase prices, but for how long?”
Some observers fear that if the massive amount of debt the government is taking on to stimulate a recovery, inflation — and higher interest rates — are inevitable consequences. Inflation can spur home sales because households are looking for an inflation-proof place to park their assets.
But rising interest rates can also reduce consumer’s home-buying power, undermining prices. If interest rates shoot up, buyers who close a deal on a home with a subsidized mortgage could see the value of their homes plummet when subsidies end and interest rates shoot up.
“Unless we want to continue the foreclosure cycle, we need to return to traditional home-buying practices — with qualified buyers, in affordable homes, at market interest rates,” O’Toole said.
Stickel said she is all for programs aimed at preventing foreclosures and keeping troubled borrowers in their homes, because that would help check falling home prices.
“I really think if we can just keep people in their homes, we’re going to do wonders for stabilizing our market,” Stickel said. “I don’t know if that’s what a real estate agent wants to hear — that if I can keep someone in their home, then I can sell a home.”
But Stickel thinks a strategy emphasizing foreclosure prevention would actually produce a healthier environment than a market glutted with REOs, because stemming foreclosures would limit the carnage among lenders and get buyers off the fence.
From his perspective in Oakland, Calif. broker-owner L.J. Jennings said the key to stabilizing neighborhoods hit hard by speculators and foreclosure is to get properties in the hands of homeowners, rather than investors. That means bringing homes up to livable condition, or providing loans that provide the funds for buyers to make repairs on their own.
Jennings, whose Pyramid Real Estate and Investments specializes in REO properties, also wants to see more TARP money channeled directly into foreclosure relief — including government guarantees of loan modifications — rather than used to prop up banks’ bottom lines.
“Let’s hope the next round of TARP reaches consumers,” Jennings said.
