Home Prices Continue to Decline

Data through March 2009, released Tuesday by Standard & Poor's, show the U.S. National Home Price Index continues to set record declines, a trend that began in late 2007 and prevailed throughout 2008. The company said residential real estate depreciation continued at a steady pace into March, with the overall index dropping 7.5 percent between the fourth quarter of 2008 and the first quarter of 2009. Nationally, home prices are down 19.1 percent compared to a year ago.

The S&P/Case Shiller 10-city composite dropped 2.1 percent from February to March, a pace equal to the decline between January and February. On an annual basis, the 10-city index is down 18.6 percent. The 20-city composite also fell at the same rate it did the month prior. In March, the 20-city figure recorded a decline of 2.2 percent, and a year-over-year depreciation of 18.7 percent.

David M. Blitzer, chairman of the index committee at Standard & Poor's, elaborated on the results, saying, "All 20 metro areas are still showing negative annual rates of change in average home prices, with nine of the metro areas having record annual declines. Seventeen metro areas recorded a monthly decline in March.”

But Blitzer added, “On a positive note, nine of MSAs are reporting a relative improvement in year-over-year returns and nine of the 20 metro areas saw an improvement in their monthly returns compared to February. Furthermore, this is the second month since October 2007 where the 10- and 20-city composites did not post a record annual decline.”

Still, Blitzer said, the March data shows no evidence that a recovery in home prices has begun.
According to S&P's study, Minneapolis, Detroit, and New York had the worst showing in March. Minneapolis' home values saw a record decline of 6.1 percent – representing the largest monthly decline of any metro area in the history of S&P's indices. For March, Detroit and New York also reported their largest monthly declines, returning -4.9 percent and -2.5 percent, respectively.
The cities that fared the best, based on S&P's market data, were Charlotte, where prices actually increased by 0.3 percent; Denver, which had a gain of 0.1 percent; and Dallas, where property values remained flat from February to March.

In terms of annual declines, the three worst performing metros in S&P's analysis continue to be the same three from the Sunbelt, each reporting negative returns in excess of 30 percent. Phoenix was down 36 percent, Las Vegas declined 31.2 percent, and San Francisco fell 30.1 percent. S&P reports that Denver, Dallas, and Boston continue to fare the best in terms of annual declines, down only 5.5 percent, 5.6 percent, and 8 percent, respectively.

The Federal Housing Finance Agency (FHFA) released a similar home price study on Wednesday, which confirmed continued declines in property values, but at a more modest pace.
FHFA's purchase-only Home Price Index (HPI) showed that in the first quarter of 2009, U.S. home prices fell 0.5 percent compared to the fourth quarter of last year. The agency reported that nationally, property values actually increased in January and February, but were offset by a decline in March. The first quarter depreciation of only half a percentage point is a much slower pace than the 3.3 percent decline reported for the prior quarterly period, FHFA said. Over the past year, the agency says prices have fallen 7.1 percent.

FHFA’s all-transactions HPI, which includes data from both home purchases and refinancings, showed more strength over the latest quarter than the purchase-only index. The all-transactions figure rose 0.4 percent from the fourth quarter of last year and is down only 3.3 percent for the year.

FHFA Director James B. Lockhart, commented, “Our latest data are consistent with growing evidence that housing market conditions may be stabilizing in some parts of the country, especially areas not covered by the other major repeat sales price index. I am hopeful that this first quarter data combined with recent market stimulus programs, such as the first-time homebuyer tax credit and President Obama’s Making Home Affordable program may mean that home price depreciation may be easing.”

The industry is certainly not short on home price reports and analysis, and sometimes the differing numbers that are tossed around can lead to confusion, particularly when it comes to housing data that varies significantly from market to market. Both the S&P and FHFA indexes employ the same fundamental repeat-valuations approach, but there are a number of data and methodology differences. FHFA explained the dissimilarities in the two property value reports:
a. The S&P/Case-Shiller indexes only use purchase prices in index calibration, while the all-transactions HPI also includes refinance appraisals. FHFA’s purchase only series is restricted to purchase prices, as are the S&P/Case-Shiller indexes.

b. FHFA’s valuation data are derived from conforming, conventional mortgages provided by Fannie Mae and Freddie Mac. The S&P/Case-Shiller indexes use information obtained from county assessor and recorder offices.

c. The S&P/Case-Shiller indexes are value-weighted, meaning that price trends for more expensive homes have greater influence on estimated price changes than other homes. FHFA’s index weights price trends equally for all properties.

d. The geographic coverage of the indexes differs. The S&P/Case-Shiller National Home Price Index, for example, does not have valuation data from 13 states. FHFA’s U.S. index is calculated using data from all states.

Converting Primary Residences to Rental Properties More Difficult

The housing market has been as uncertain as the next monthly unemployment figures. Families have put home purchases and remodeling projects on hold, waiting for a positive sign in consumer confidence -- or an upward, consistent move in the stock market -- to make a big-ticket decision.

A friend of mine, whose two daughters are grown and gone, would like to remodel a home in the neighborhood, sell his present residence, and then move in to the remodel. Given the present conditions, he doesn't feel he can do either. He's uncomfortable with investing a ton of dollars on the remodel that he may otherwise need for day-to-day expenses, and he's afraid there's already too much inventory now on the market to list his home for sale.

"The remodel may be closer," he said. "There are a lot of people out there now willing to work for a lot less than they were two years ago. If the drop in labor costs reaches a point that it equals what some of my investments have lost, it's close to a wash. I might as well do it."
Borrowers who currently own their home typically have three options when they decide to purchase a new principal residence. They can sell the current residence and pay off the outstanding mortgage, make the property into a second home, or convert the property to an investment property. In the past two years, more and more people have been unable to sell and have been forced to consider the two other options.

However, unless you have a lot of cash, those two options are not as easy to execute as they were two years ago. In order to ensure that borrowers have sufficient equity and/or reserves to support both the existing financing and the new mortgage being originated, Fannie Mae is updating the policies for qualifying borrowers who are purchasing a new principal residence and converting their existing principal residence to a second home or investment property.

Perhaps the most stringent new rule requires borrowers to have a reserve amount set aside equal to six months of principal, interest, taxes and insurance (PITI) payments on both homes when converting the primary residence to a rental or a second home. Previous guidelines did not include reserves on both homes.

Lenders do have some leeway in the case of a second-home conversion. Lenders may consider reducing reserves of no fewer than two months for both properties if there is documented equity of at least 30 percent in the existing property. The value can be derived from an appraisal, automated valuation model (AVM), or broker price opinion (BPO), minus outstanding liens. The previous guidelines did not include a required equity percentage.

If the owner wishes to convert the primary residence to a second home, the current and the proposed mortgage payments must be used to qualify the borrower for the new transaction.
If the current residence is converted to an investment property, Fannie Mae will continue to permit up to 75 percent of the rental income to be used to offset the mortgage payment. Again, the new twist is the needed documented equity of at least 30 percent in the existing property. The rental income must be documented with a copy of the fully executed lease agreement, and the receipt of a security deposit from the tenant and deposit into the borrower's account. If the 30 percent equity in the property cannot be documented, rental income may not be used to offset the mortgage payment.

If the current principal residence is a pending sale, but the transaction will not be closed (with title transfer to a new owner) prior to the new transaction, both the current and the proposed mortgage payments must be used to qualify the borrower for the new transaction. This sometimes occurs unexpectedly when an escrow is delayed or when an employee is transferred to a new location and buys a new home before the previous home sells.

Who can afford to pay cash for an additional home without first selling their primary residence? Surprisingly, more than four out of 10 investment buyers and more than three in 10 vacation-home buyers paid cash for their properties, with large percentages indicating that portfolio diversification was a factor in their purchase decision, according to recent study by the National Association of Realtors.

All cash for real estate -- proof that somebody thinks it's a good idea.