Are We at the Bottom? A Simplified Guide to the Ups and Downs of Real Estate!

The value of real estate goes through cycles, which can be affected by many factors, including the basic rules of supply and demand. Below is a quick reference guide to some of the influencing factors and advice on how to spot a turning point in the market, brought to you by the Appraisal Institute, an industry association of real estate appraisers headquartered in Chicago.

1. A spike in local sales activity - A spike refers to a significant rise in the number of home sales (or values) in a local market area, but does not necessarily mean continued growth. It could be just a one month phenomenon.

2. Higher asking and selling prices vs. appraisal value opinions for residential properties - Appraisers study the markets, and when the data shows higher sale prices in comparable properties, market value opinions will increase proportionally. Appraisers seek evidence of value but do not create the value. In time periods with low activity, evidence of any kind is difficult to find.

3. More activity at open houses - Five to eight people is considered average, so a dozen or more people attending an open house means buyer interest is picking up. Also, the mood of the attendees is important. Buyers' interest alone does not always translate to effective purchasing power. If the number of buyers in the market increases but they do not have requisite down payments, the sales may still not occur.

4. Shorter marketing times - In some markets, houses have been up for sale for more than a year. In most balanced residential markets, properties that are priced competitively will typically sell in less than six months. If the days-on-market (DOM) is shortening, many practitioners will read an improvement in the market.

5. Reduced number of foreclosures and short sales - A reduction in these transactions commonly signals a more balanced market. However, if lenders are reluctant to foreclose because of an oversupply of inventory, they may choose to wait to repossess the properties, which could allow a spike in the number of foreclosures later despite a better market condition.

6. Stabilized employment - Stable or increasing employment rates provide the necessary confidence for potential buyers to invest in a home, since most buyers rely on borrowed funds to make real estate purchases and borrowing money requires a source of repayment, which usually means a job. An increase in this basic need, will enable more real estate sales.

7. Fewer buyer incentives and seller concessions - Seller-paid incentives or concessions are a sign of seller motivation. If there are fewer builders offering "free" upgrades and fewer sellers sweetening the deal with enticing add-ons, it may be a sign of lessening supply and therefore a better market.

8. New construction starts - Many builders are attune to their markets and will not build new homes without a corresponding contract for sale or a perceived increase in demand. An increase in the number of building permits usually indicates higher demand and higher prices. If residential properties are selling for 25 percent less than they cost to build, only a few new homes will be built.

9. "Move-up" buyers entering the market - More buyers willing to move to a larger or superior quality home indicates a healthy market. The lack of buyers at the lower end of the price range will have a chain reaction throughout the market. If a buyer for a high priced home has a lower priced home to sell first, the sale of the higher priced home may have to occur before the higher priced one can sell.

10. Apartments advertising renter specials - fewer renters in the market may indicate more people are moving into owner-occupied homes, or it could indicate a reduction in population. Lower population will cause an oversupply of housing which will oftentimes permeate throughout several markets.

The Appraisal Institute is a global membership association of professional real estate appraisers, with nearly 25,000 members and 92 chapters throughout the world. Organized in 1932, its mission is to support and advance its members as the choice for real estate solutions and uphold professional credentials, standards of professional practice, and ethics consistent with the public good.

Appraisal Institute Lashes Back at NAR

The National Association of Realtors' (NAR's) chief economist, Lawrence Yun, publicly stated earlier this week that “poor appraisals” are stalling home sales. In announcing NAR's numbers for home resales in May, Yun said, “Pending home sales indicated much stronger activity, but some contracts are falling through from faulty valuations that keep buyers from getting a loan.”

Yun's remarks have drawn the ire of appraisers. The Appraisal Institute immediately issued a statement in response to Yun's commentary on Tuesday, saying, “We take offense with the notion that an appraisal is only good if it happens to come in at the sales price. That mentality helped cause the mortgage meltdown to begin with. The fact that the value reflected in the appraisal does not match the sales price is not the fault of the appraisal but a result of the market today.”

Bill Garber, director of government and external relations at the Appraisal Institute, said, “Appraisers provide lenders with objective information and value opinions that help protect them from making questionable loans and investments and help them minimize risk. However, that should not suggest a bias toward lower valuation. Appraisers reflect the market, and sometimes, the markets don't act like we want them to or hope they will. Nonetheless, competent and professional appraisers understand this and develop credible estimates of value that ultimately help ensure that lenders loan the proper amount, buyers don't pay too much, and sellers get a fair price.

According to Yun, though, lenders are using appraisers who may not be familiar with a neighborhood, or who compare traditional homes with distressed and discounted sales. He said, “In the past month, stories of appraisal problems have been snowballing from across the country with many contracts falling through at the last moment. There is danger of a delayed housing market recovery and a further rise in foreclosures if the appraisal problems are not quickly corrected.”

The Appraisal Institute did say in its statement, "In these complex markets, it is particularly important that lenders use only the highest caliber of appraisers,” pointing out that members of its organization who holding an MAI, SPRA, or SRA designation have met extensive experience and education requirements and must comply with the Code of Professional Ethics and Standards of Professional Appraisal Practice.

Mortgage modifications are happening

NEW YORK (CNNMoney.com) -- Two months ago, Ivan Coleman was struggling, his mortgage payment having ballooned to $1,200 - more than half his income. Starting June 1, his monthly payment will fall to $725.

"My mortgage company was helpful, eager to have me stay in my home," said Coleman, who first fell behind on his payments after losing his job.

Coleman, who has owned his Maple Heights, Ohio, home for ten years, is among the first wave of homeowners to have their mortgages modified under President Obama's foreclosure-prevention program. As of last week, for example, Chase Mortgage, the servicing side of JP Morgan Chase (JPM, Fortune 500), had issued more than 15,000 modifications under the plan.

Bank of America (BAC, Fortune 500), which began reaching out to at-risk borrowers in early April, has sent out 100,000 letters to borrowers who could potentially benefit. It has issued some modifications, although it's not releasing data on just how many.

When the plan went into effect on March 4, Obama predicted it could help as many as 4 million people stay in their homes. It did this primarily by encouraging lenders to assist delinquent or at-risk mortgage borrowers by lowering interest rates to the point that total monthly housing payments would not exceed 31% of their gross monthly income.

How to apply
Becoming one of those 4 million takes five simple steps.

Step 1: Visit the Web site
Everything you need to get started is located here MakingHomeAffordable.gov

Step 2: Take the quiz
Click on "Find out if you are eligible" and then select the "Home Affordable Modification" option. (The "Refinancing" option is just for those who are current on their loans.) Take the five-question quiz. Based on your answers the site will tell you if you likely qualify for a modification under the Obama plan.

If you do - meaning you bought your house before Jan. 1, 2009, and owe less than $729,750; it is your primary residence; you are delinquent on your payments; and your payment is more than 31% of your monthly gross income - the site will present an eight-item checklist of paperwork you'll need to submit to your lenders.

Step 3: Compile the paperwork
The site recommends that you have: household-income documentation, such as pay stubs; tax returns; savings account records; mortgage statements; second mortgage info, such as home-equity loans statements; credit card bills; and information on other debt, including student and car loans.

You will also be asked to write a letter describing why you need assistance. Your reasons could include medical expenses, job or income loss, or even divorce.

A well-done hardship letter can make a difference in whether a loan wins modification, according to foreclosure-prevention counselors. These letters can point out factors that led to the delinquency but that may not be evident from your other paperwork.

"Don't say, 'I never could have afforded it in the first place,'" advised Tom Kelly, a spokesman for Chase Mortgage. "That isn't the ideal answer."

Instead, explain that illness prevented you from working for a time, that you've recovered and are back at work and paying bills again. Or a temporary job loss cause the problem, etc. Without that context, lenders may think you were just careless - or worse.

Step 4: Call your lender or servicer
Once your information packet is complete, call your lender or servicer - the company you write your monthly mortgage check to. To see if your lender is participating in this plan - or to get the phone number - click on "Contact Your Mortgage Servicer" on the Making Home Affordable site. After you've talked to one of their modification specialists, you'll be instructed to fill out an application and submit your documents.

There should be no need for face-to-face meetings with servicers, according to Jumana Bauwens, a spokeswoman for Bank of America. She said borrowers will be able to do everything over the phone and through the mail.

Step 5: Wait
During this phase, the lender will decide the approach it wants to take to reducing your debt: lowering your interest rate, extending the life of your loan, or reducing your debt balance.

The lender's first step will be to get your payment down to 38% of your monthly gross income. Once the debt is reduced that far, the government will pay the lender to lower it to 31% of income.

At that point, the loan will be rewritten, you will get the new paperwork to sign and the new payment will go into effect on your next bill.

This process has been taking several weeks to a month, so be patient. Although the banks expect it will get quicker as their personnel become more familiar with the modification plan.

"The 31% is now an industry standard and that's much more easily calculated," said Chase's Kelly.

One thing to remember: These are trial modifications that only become permanent once you make on-time payments for three consecutive months.

Foreclosures Still Climbing in California

Despite the fact that lenders in California are voluntarily postponing the majority of foreclosure sales – 73 percent, to be exact – ForeclosureRadar says its market data reveals a steady increase in the number of foreclosed homes in the state sold at auction.

The company issued its monthly California Foreclosure Report this week, which shows that sales jumped 31.9 percent in May, following a 35 percent increase the prior month. Notices of trustee sale, which set the auction date and time, also rose a significant 42 percent from April, indicating that foreclosure sales are likely to continue to rise in the weeks and months ahead. However, notices of default, which are the first step in the foreclosure process, fell 4.2 percent from April.

In total, Foreclosure Radar reported, there were 17,871 foreclosed homes taken to auction in California last month. Though loan values represented a total of $8.01 billion, the company said 83 percent of the sales opened with a discounted bid that averaged just 58.6 percent of the loan value.

The majority of foreclosures put up for sale continue to be taken back by the lender. According to Foreclosure Radar, 87.9 percent, or 15,599 sales, with a total loan value of $6.98 billion, went back to the lender in May.

Third-party foreclosure auction sales continued to rise, as well, reaching 2,272 last month – that represents a 39 percent jump from the prior month, and a significant 228.3 percent increase from May 2008. Based on Foreclosure Radar's market data, more than half of third-party sales occurred in just five counties: Los Angeles, San Diego, Orange, Riverside, and Sacramento.

Foreclosure Radar tracks every foreclosure auction throughout the Golden State, making it uniquely positioned to see not only how many foreclosures were initiated, but also the current status of those foreclosures and their ultimate outcomes, whether postponed, canceled, or sold. By the end of May, the company said, there were record 111,824 foreclosures scheduled for sale in California, yet just 15.9 percent were actually sold, versus actual sales of 49.2 percent a year earlier.

Of those foreclosures currently scheduled, Foreclosure Radar says 40 percent are being postponed to a future date at the lender's request, and another 33 percent are being postponed based on the mutual agreement of lender and borrower. The company says this clearly demonstrates that lenders are indeed delaying foreclosure in the majority of cases on their own accord. It should also be noted that lenders were under no obligation in May to offer a loan modification program, short sale, or other resolution, as they are now that the statewide foreclosure moratorium went into effect this week.

Sean O’Toole, founder and CEO of Foreclosure Radar, commented, “While many complain that lenders are foreclosing too aggressively, and others claim a wave of foreclosures sales are imminent, the data actually shows that lenders are doing everything possible to delay foreclosure. The reality is that we have very few homeowners being foreclosed on when viewed as a percentage of those scheduled to be foreclosed on, in default, delinquent, or upside down in their mortgage.”

Lending Down at Bailed-Out Banks

Federal regulators completed unprecedented stress tests of the largest banks' balance sheets last month, and found that 10 of the 19 institutions screened had enough capital on hand to not only sustain lending in the current environment, but could continue lending even if economic conditions worsen. Based largely on these conclusions and investors' seemingly renewed confidence in the nation's banking system, regulatory supervisors have given 10 major lenders the go-ahead to repay the capital injections they received from the government, which were intended to improve market liquidity and loosen the banks' tight grip on credit.

However, according to a report released last week by the Treasury Department, lending has actually declined at 500 of the 600-plus banks that have received federal bailout money. The report shows that outstanding loans for these banks totaled $5.23 trillion in March, down 0.8 percent from $5.28 trillion in at the end of February.

The drop in loans outstanding was a bit more pronounced at the 21 largest banks to receive taxpayer dollars. The Treasury said the aggregate loan balances at these leading institutions slipped one percent to an average of $4.38 trillion for March, down from $4.42 trillion in February. The Treasury said, though, that this decline was largely due to borrowers paying down outstanding debt.

In spite of the declines in loans held on these banks’ balance sheets, originations of new loans accelerated, the report said. The nation's top 21 banks reported an increase in total new lending of 27 percent from February to March (about $63 billion). However, the Treasury Department noted that increases in first lien mortgages and other consumer loans was smaller than in February.

Gary Koster, head of the Real Estate Fund Services Practice at Ernst & Young LLP, said, "It seems that, despite the widespread infusions of capital into various lending institutions through economic stimulus programs, it appears there is still very little, if any, lending taking place in the real estate industry right now."

Survey: Refinances Continue to Decline

The Mortgage Bankers Association (MBA) released its Mortgage Applications Survey on Wednesday, for the week ending June 5, 2009. The association's study shows that refinances, typically an effective tool for lowering distressed homeowners' monthly payments, continued to fall last week – a trend that has prevailed for several weeks now. Applications for new purchases, however, held steady.

Based on MBA's market data, the total volume of mortgage loan applications has dropped by 7.2 percent on a weekly basis. But compared to the same time last year, the number of home loan requests is up 7.6 percent.

MBA's Refinance Index decreased 11.8 percent from the previous week. The refinance share of mortgage activity plummeted to 59.4 percent of total applications, down from 62.4 percent the previous week. This is the lowest the refinance share has been since November 2008.

The association said its Purchase Index, on the other hand, increased 1.1 percent from one week earlier. The four week average is up 0.5 percent for this measurement of home buys.

MBA also reported on average mortgage interest rates for the home loan petitions submitted last week. Rates for all types of mortgage products in the survey proceeded to follow the ascensions we saw the week prior.

According to MBA's study, the average interest rate for 30-year fixed-rate mortgages (FRM) increased to 5.57 percent, up more than a quarter of a percentage point from 5.25 percent the week before.

The average rate for 15-year FRMs rose to 5.10 percent last week, also an increase of more than a quarter point, from 4.80 percent the week prior.

MBA said the average contract interest rate for one-year adjustable-rate mortgages (ARMs), also increased. Last week, the 1-year ARM rate was 6.75 percent, compared to 6.61 percent one week earlier. The ARM share of activity increased to 3.4 percent of total applications.

MBA's survey covers more than 50 percent of all U.S. retail residential mortgage applications. Respondents include mortgage bankers, commercial banks, and thrifts

One fourth of sellers reduce asking price

Sellers dropped their asking price on nearly one in four homes listed for sale on Trulia.com during the last year by an average of 10.6 percent, the company said today in a report identifying the markets experiencing the most and biggest price reductions.

Although Trulia's analysis did not include foreclosure properties, it showed that asking prices are being slashed more severely in areas hardest hit by foreclosures.

Price reductions averaged 23 percent in Detroit, 16 percent in Las Vegas, 15 percent in Miami, and 13 percent in Phoenix and Mesa, Ariz., Trulia said.

But luxury markets like New York City also saw price reductions exceeding the national average. Homes with a selling price above $2 million were reduced by 14.3 percent on average, compared with 9.7 percent for homes under $2 million.

While 23.6 percent of homes listed for sale nationwide on Trulia between June 1, 2008 and June 1, 2009, saw at least one price reduction, the percentage was considerably higher in some markets. Among the 50 largest U.S. cities by population, the 12 with the greatest percentage of listings with price reductions were scattered around the nation, Trulia said. They were:

· Jacksonville, Fla. – 36 percent
· Tucson, Ariz. – 32 percent
· Boston, Mass. – 32 percent
· Los Angeles, Calif. – 32 percent
· Columbus, Ohio – 31 percent
· Dallas, Texas – 31 percent
· Honolulu, Hawaii – 31 percent
· Minneapolis, Minn. – 31 percent
· Austin, Texas – 30 percent
· Washington, D.C. – 30 percent
· Baltimore, Md. – 30 percent
· Las Vegas, Nev. – 30 percent

Anti-Predatory Lending Bill Passes California Assembly

As federal lawmakers continue to pour over proposals that would tighten anti-predatory lending statutes throughout the nation, California may become one of the first states to enact its own mortgage reform legislation.

Earlier this week, the California Assembly passed AB 260, and it has headed to the state Senate for review. The bill was sponsored by Assembly member Ted Lieu (D-Torrance), who says the measure will “ban the worst predatory lending practices.”

The bill would create a stronger fiduciary standard for mortgage brokers in the state, across all loan products. It eliminates compensation incentives, namely yield-spread premiums, that lenders pay to brokers for contracting higher- or adjustable-rate loans, such as those which prevailed in the subprime era.

AB 260 directly prohibits steering borrowers toward inferior mortgages and explicitly bars brokers and lenders from making false or deceptive statements regarding subprime loans. The bill also limits prepayment penalties, bans negative amortization loans, and establishes strong enforcement and punishment for abusive subprime lending. The measure would give the state Attorney General the power to revoke state licenses and impose a $10,000 fine per violation.

“Enough is enough,” said Lieu, who is presently in the running for the California Attorney General seat. “We must act to preserve homeownership opportunities and prevent the next crisis in the subprime lending market.”

Lieu points out that homeowners in California continue to experience record foreclosures as a direct result of irresponsible lending. According to RealtyTrac, one in every 138 homes in the state received a foreclosure filing in April – the highest state foreclosure rate in the nation. Total foreclosure activity in California is up 42 percent from April of last year.

Assembly Speaker Karen Bass (D-Los Angeles) commented,“So many Californians bought homes to provide a foundation for their families only to have it undermined by irresponsible lenders and faulty lending practices. Assemblymember Lieu’s AB 260 is real reform of the mortgage industry that will give homebuyers the piece of mind they need to invest in and stabilize our economy.”

A similar mortgage reform bill authored by Lieu, AB 1890, was vetoed by Gov. Arnold Schwarzenegger as soon as it hit his desk last year. The governor said that while the legislation was “well intentioned,” it was unbalanced and would stifle competition within the marketplace because the new statutes did not apply to federally regulated entities.

But since that time, Gov. Schwarzenegger has issued a pointed call to lawmakers to do something about the spiraling housing crisis in California and publicly commented that mortgage reform is now a top priority. Lawmakers hope AB 260 will see Gov. Schwarzenegger's signature.

A spokesperson from Assemblymember Lieu's office told DS News they feel the new legislation has been altered enough from last year's AB 1890 version to address the governor's previous concerns and will be better received.

Lieu was also the author of the California Foreclosure Prevention Act, which did find favor with the governor. He signed it into law in February to help stem the state's foreclosures. Effective June 15, the act will impose a 90-day foreclosure moratorium unless a lender offers a comprehensive loan modification program designed to keep people in their homes.