Top Mortgage and Real Estate News - Week of Jan 6, 2009

Mortgage rates drop to historic lows

As we move into a new year, mortgage interest rates are at record low levels, averaging 5.1 percent for a 30-year fixed-rate loan (as reported by Freddie Mac). That's the lowest rate in decades, and will probably motive many prospective home buyers to take action in finding and purchasing a home before rates swing upward again.

"Since the end of October, mortgage rates have declined by about 1.3 percentage points, or payment savings of about $173 a month for a $200,000 mortgage loan. As a result, the number of refinance applications for conventional mortgages jumped over 500 percent since October 31," said Frank Nothaft, Freddie Mac's chief economist. "Lower rates and falling home prices are also making homeownership more affordable to potential homebuyers."

Lower Fed rates contributes to home affordability

The recent reduction of the federal funds rate to a record low of 0.0 to 0.25 percent have pushed mortgage rates to their current historic low levels. Inflationary pressures have diminished appreciably, justifying the lowered fed rate, according to the Federal Open Market Committee. "In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters." The Committee expects to take more actions in the near future. "Over the next few quarters, the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets."

These actions by the government could be a key element in turning around the real estate market, making homeownership affordable for more families and starting a cycle of increasing home values.

First-time home buyers more active

First-time home buyers comprise a growing share of today's home selling market. That reflects the strong determination of today's young families to own their own home, even when faced by financial difficulties and a tough market. During the past year, first-time buyers accounted for 41 percent of all home sale transactions, according to a study by the National Association of Realtors. That's up from 39 percent during the previous year and 36 percent in 2006.

As affordability improves, it's more difficult for current homeowners to sell their existing homes, it was noted in an NAR report. Unencumbered first-time buyers are therefore a growing share of today's purchasers. "`Although modest, this increased share represents a meaningful gain," said Lawrence Yon, NAR's chief economist. "Recent independent data shows a stronger uptrend in first-time buyers who are helping to reduce excess inventory.

"First-time buyers are much more flexible in entering the market because they aren't concerned about selling a home. Given today's low home prices, a plentiful supply of homes, and very affordable interest rates, it's an optimal time for entry-level buyers with a long-term view to take action. Considering the temporary first-time buyer tax credit and improvements to the FHA loan program, we expect stronger entry-level activity as the flow of credit improves. That, in turn, should free more existing owners to make a trade in 2009," Yon said.

The currently available first-time home buyer's tax credit of up to $7,500 is motivating many former renters to acquire a home of their own. The credit is available through June, 2009. The definition of a first-time buyer is one who has not owned a primary residence for at least the past three years. Ownership of a vacation home or rental property does not disqualify a buyer as a first-time home buyer. It ould be noted that the credit amount is not a gift from the government. It must be paid back interest-free over a 15 year period, or whenever the property is resold. Buyers do not have to begin making repayments on the credit until two years after the credit is claimed.

Small homes are more popular

There is a growing demand for small size homes. Since 1970, the size of the average new home has been steadily increasing, until very recently. Over the past 38 years, the average size has grown by about 50 percent. The average size of new homes is now 2,521 square feet, according to Steve Melman, director of economic services for the National Association of Home Builders.

However, the sluggish economy, coupled with the cost of energy, utilities and home maintenance, has sparked a new demand for small homes. Some buyers are going to the extreme and buying or building tiny homes, as little space as 100 square feet. These buyers often point to the practical side of their selection of a small home. They not only spend less for the purchase price and for subsequent maintenance, a well planned small house is more efficient, they say. It provides space where you really need it, and eliminates unnecessary and often unused space, like large hallways and living rooms.

"The current weakness in the housing market forces households to be more sensitive to housing affordability concerns," said Kermit Baker, chief economist for the American Institute of Architects (AIA). "Coupled with rising home energy costs, this encourages many to rethink their overall space needs. While smaller homes may be a short-term response to economic conditions, there are signs that we may be at the beginning of a longer cycle where house sizes decline."

To address the needs of an aging population there is an emphasis on greater accessibility throughout the home, it was noted in an AIA report. This can often be best achieved in a smaller sized house. Also, homeowners are investing more in outdoor living options with a trend toward low-maintenance landscaping, according to the report. A home that is small but extremely well planned for maximum efficiency and comfort has growing appeal to buyers in today's market.

Introducing paperless transactions

The next high-tech development related to real estate sales will be truly paperless transactions, including the acceptance of digitized and encrypted signatures. Closing of a home sale could be accomplished in less than 15 minutes when the entire processing is handled electronically, according to a report carried on the National Association of Realtors' website.

"Paperless transactions are growing in number and popularity with brokers and consumers," said Realtor and real estate educator Saul Klein. "They are particularly popular with younger brokers and consumers, those under age 40. However, considering the problems we now face with the economy, it will probably be five to 10 years before these systems will be universally used." Klein is a past president of NAR.

The most critical element in making a paperless online transaction is the close cooperation and coordination of all closing system participants. This, of course, includes the lender and title company representatives who store legally binding documents, including all title, deed and loan instruments in digital form. Also, the system must allow all parties to the transaction to review and approve the documents through a secure password-protected website in advance of the closing.

A digital transaction management system should allow the buyer and seller to affix a signature, or its equivalent, electronically. It's important to structure the system so documents and signatures are automatically encrypted so they can't be altered. Most of the e-closing electronic procedures are already in place and are being used by a growing number of brokers. Several website platforms are now available to facilitate these procedures. The computer continues to play an increasingly important role in the real estate buying and selling process.

Importance of pricing a home realistically

Home sellers are having a tough time these days, particularly those who insist on asking for an unrealistically high price. They often find themselves caught in a spiral of reduced prices over a period of several months, or even years. The key problem is that initial high price. The home is quickly identified by brokers and prospective buyers in the area as being over-priced. And even with a succession of reduced prices it's difficult to remove that stigma.

The best solution to the problem is to list the property at a price that's consistent with today's lower prices in your market, making it in-line with recent sales prices of comparable homes in your area. Your broker can provide this information for you. Also, if your home does not sell within a reasonable time period, reduce the price significantly, not bit by bit. Marketing a home that's over-priced, or reduced in price only slightly, can be a very lonely and agonizing process. The over-priced stigma becomes more firmly entrenched with every passing week.

In today's market, home buyers are extremely price conscious. In fact, many brokers won't even accept property listings that are obviously over-priced. It just doesn't make business sense for them, considering the costs involved in professionally marketing the property.

More help needed for home buyers

Real estate industry leaders are pushing for a federal mortgage interest buy-down program as a means of stimulating the home buying market. The National Association of Realtors is proposing a program that would allow homebuyers to benefit from 30-year, fixed-rate loans with interest as low as 4.5 percent - a program to be financed through the Treasury Department's Troubled Asset Relief Program (TARP).

In a recent letter from NAR to the Federal Housing Finance Agency it was suggested that funds be generated for the program by selling below-market-rate bonds to the Treasury Department, making the 4.5 percent mortgages available to home buyers. Those loans could be purchased by Fannie Mae and Freddie Mac at the 4.5 percent rate, but lenders would receive the market rate.

"The buy-down program would complement other initiatives and help stabilize, stimulate and revitalize the housing market," said NAR president Charles McMillan. "We must address the foreclosure crisis and increase housing demand." NAR calculated that a 1 percentage-point decrease in mortgage rates would result in an additional 500,000 home sales. Such actions could help many families and singles finally to be in a position to purchase a home of their own.

Investment value in homeownership still strong

Home warranty contracts are growing in popularity with buyers. Even though they are an added expense when closing a sale transaction, they alleviate much of the risk of incurring a much greater expense during the buyer's first year of ownership. The older the home, the greater the risk of failure in one of the operating systems or appliances in the home, thus the more viable the purchase of warranty protection. This particularly applies to the purchase of foreclosed homes.

A bit of basic information: A home warranty contract, like insurance, covers certain elements in the home that are normally not covered by homeowner insurance policies. Most commonly, warranties cover the home's major operating systems and appliances for one year. Typically, items covered include plumbing, heating and electrical systems, most appliances and water heaters. The one-time fee for a year's coverage is paid up-front. Additional one year terms can be subsequently purchased if desired by the owners.

Home warranties are available nationwide, but are most frequently purchased in California where about 90 percent of resale home transactions include warranty coverage, according to the president of the Home Warranty Association of California. During the past year more than 266,430 warranty contracts were sold in that state alone.

When shopping for a home warranty plan, check with several companies that serve your local area. As mentioned, fees and coverage vary significantly. And be sure to read the fine print in the contract. There may be notable exclusions that make the contract less valuable.

If you are interested in purchasing real estate NOW is the time. You can browse properties at www.SCRealEstatePartners.com  or call Jake Lee 843-240-0431 directly to start the home buying or selling process today!