Recent economic reports and the continued decline of home prices have caused some home buyers to stay on the sidelines and try to time the market so they can purchase a home at an affordable price that will not reduce in value, and will appreciate quickly.  However, many housing advisors recommend that home buyers not try to time the market, but instead purchase a home when they are ready.  

MAKING SENSE OF THE STORY FOR CONSUMERS

·     Despite rising foreclosures, delinquencies, and unemployment rates, and declining home prices,   sales of new and existing homes are improving, which is causing some home buyers to try to “time the market.”  Many housing analysts advise potential home buyers not to base their homebuying decision on economic reports, but rather to take their time finding the right house and to focus on getting their financing in place. 

·     Most economists believe that home prices will continue to decline during 2009.  C.A.R. predicts that the median home price in California will decline an additional 6 percent next year.  Home buyers need to remember that real estate markets are local and prices differ neighborhood to neighborhood. Many REALTORS® advise their clients to visit communities that interest them, and to talk to homeowners, business owners, and financial institutions to become familiar with the area.

·     Credit restrictions and loan underwriting standards tightened during the credit crunch, resulting in mortgage loans taking longer to process and fund.  Most lenders are requiring more information about income, assets, and expenses than in previous years, so home buyers are advised to get preapproved for their mortgage loan instead of applying once they have identified their ideal home. 

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FED CUTS KEY INTEREST RATE TO 1 PERCENT
The Federal Reserve continued to shave points off the federal funds rate, reducing it by 50 basis points to 1 percent today, the lowest rate in half a century. Analysts characterized the move as another effort to stave off a prolonged downturn in the nation's economy.

"The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures," the Fed said in a prepared statement. "Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

"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 in coming quarters to levels consistent with price stability.

"Recent policy actions, including today's rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth," the Fed said. "Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability."

NAR Urges Passage of 4-Point Housing Stimulus Plan and Return of Congress for Lame-Duck Session

By Lawrence Yun, Chief Economist

The U.S. economy has entered a recession and will contract for the next three quarters, and the recovery, from the second half of 2009, will be tepid. The unemployment rate will peak at 6.7 percent by midyear next year before steadily heading down. However, existing home sales will be rising despite challenging economic times.

The most important factor driving home sales is affordability. With home prices falling in many parts of the country and mortgage rates still near historic lows, affordability conditions have markedly improved. Even with rising unemployment, nearly 93 percent of households will have jobs. This 93 percent of working households (rather than 95 percent during good economic times) respond to incentives. Added measures, from the first-time homebuyer tax credit to a larger number of mortgage loans qualifying to be purchased by Fannie and Freddie and through the FHA program, will further bring homebuyers to the marketplace.

Back in the previous recession, the economy shed nearly 2 million net jobs from 2001 to 2003. All the while, existing home sales rose from 5.2 million to 6.2 million just as jobs were being cut. New home sales likewise rose from 900,000 to 1.1 million. Mortgage rates were falling and housing affordability was rising during these years. The 2 million job cuts were painful, but the economy still had 130 million job holders.

An early indication that buyers are responding to incentives was the solid jump in the pending home sales in August to the highest level in over a year. The biggest increases were in areas with rising affordability from sharp reductions in home prices in California, Nevada, and Florida. The expansion will broaden to other markets where home prices have markedly fallen, including Rhode Island, Virginia, and Minnesota. Existing home sales, therefore, will likely breakout from the narrow trading range of 4.8 to 5 million of the past 12 months to 5.2 million by the year end and to 5.4 million in 2009. Even with the improvement, the next year's sales level will still be well below the 7.1 million peak sales achieved with rampant speculative buying in 2005.

New home sales will be a different story. There is an overhang of inventory and homebuilders are being forced to cut back sharply. New housing starts have fallen by about 60 percent from peak activity three years back. Because of the cutback in new home construction, the inventory of vacant new homes on the market has fallen to 408,000 as of August from nearly 600,000 just two years ago. The total inventory - new and existing combined - still remains elevated, so further reduction in building by builders will be welcomed. Because of low housing starts, new home sales will continue to tread at soft levels -under 500,000 in 2009 (far below the 1.2 million peak sales in 2005).

On the economic front, recession in itself is not a positive for the housing market because there are fewer job holders. But if a recession is accompanied by rising housing affordability, then home sales can trend higher - as is now. A prolonged deep recession, however - certainly a possibility in light of the most severely tested financial market stress since the Great Depression - can dampen consumer confidence and put up barriers to home buying. Fortunately, the economic downturn appears manageable. Let's explore why by reviewing each of the key economic data points and their projections.

Consumer Spending

Consumer spending accounts for nearly 70 percent of economic activity. Normal, healthy growth is about 3 percent (in real terms above the inflation rate). It grew at only one percent in the first half of this year and is expected to record a mild contraction in the upcoming quarters. Aggregate personal income is likely to have fallen because of fewer jobs. In addition, there has been a sizable decline in net wealth from falling stock prices and falling home values. The combined income and wealth effects will be such that consumer spending, at best, will add nothing to economic growth in 2009. Another government stimulus plan may temporarily raise consumer spending but will do nothing for a long term sustained rise unless the overall economy recovers and begin adding jobs.

Business Spending

Business spending for equipment turned negative in the recent quarter, not surprising given that corporate profits have fallen for four straight quarters and weak sentiment regarding consumer spending prospects. Construction activity for commercial real estate, which had been growing solidly, will be weakening in light of the credit crunch and rising vacancy rates. One positive picture is on the current lean business inventory conditions. Unlike many past economic downturns when companies had to hold back production because of bloated inventory, the very thin inventory conditions permit companies to ramp up production at the first sign of economic recovery.

Government Spending

Government spending can create jobs. Upgrading and expanding nation's infrastructure, hiring more teachers, or building jets and tanks can stimulate the economy over the short-term. But spending without additional tax revenue over the long run can result in higher interest rates. For the short-term at least through 2009, government spending is expected to rise 1 to 2 percent.

Net Exports

Net exports have been steadily improving in the past year. The U.S. continues to import more items, but the exports have been booming over the past five years, growing at near double-digit pace. The export growth in the second quarter was very impressive, clocking in at a 12.3 growth rate. The weak U.S. dollar has made U.S. products more competitive. However, the dollar has strengthened of late since the start of the global financial crisis. Foreign countries blame the U.S. for the subprime loans and the credit market turmoil, yet people turn to and trust the dollar in times of the crisis. Foreign countries, initially delighted in seeing the U.S. fall, are now in a panic as their stock markets have started crashing even more sharply than the U.S market. Fair or not, the U.S. economic problem has caused a global economic mess. The strengthening of the U.S. dollar this time around should be viewed positively because there is about a two-year lag time in impacting international trade flows from changes in currency. So the net exports continue to be a positive factor for the economy going into 2009. Also oil prices, which are denominated in dollars, fall when the dollar strengthens. Given that REALTORS® are heavy drivers, lower oil prices are welcome.

The Bottom Line

Put it all together and what do we have? A recovering economy will help consumer and business spending to turn the corner and the economy to move to a self-sustaining pace. But it requires a catalyst to get things started. The tumbling housing market and subprime mortgage defaults have caused financial markets to freeze and have pushed the economy into a recession. However, recent rising home sales and some sustained momentum will bring the economy back into the fold. Rising home sales will also thin out the housing inventory and begin stabilizing home prices. The credit market will start to unfreeze once home prices have passed bottom. Simply, the economy will not recover without a housing market recovery.

Fortunately, policymakers and both Presidential candidates clearly recognize the need to get the housing market moving. The two housing stimulus bills (homebuyer tax credit and higher loan limits), $700 billion Treasury plan and the Federal Reserve's actions are designed to assure steady mortgage flow and help revive the housing sector. With it, the economy will expand and create jobs. America and its exceptional ingenuity always find a way to move past crises and back to economic prosperity.

This week, President Bush signed into law the Housing and Economic Recovery Act of 2008. This sweeping legislation primarily seeks to protect homeowners from foreclosure, stop declining home prices, and stabilize the mortgage industry. Major provisions of the new law affecting the real estate practice are as follows:

- SELLER NEED NOT REVEAL SSN TO BUYER UNDER FIRPTA: Effective immediately, sellers are no longer required to provide to their buyers the Seller's Affidavit of Nonforeign Status (C.A.R. Form AS), which includes the sellers' social security numbers, under the Foreign Investment in Real Property Tax Act (FIRPTA). Instead, as another option, no federal withholding is required if the seller furnishes the Seller's Affidavit with his or her social security number to escrow or other qualified substitute as defined, who in turn, furnishes a statement to the buyer stating, under penalty of perjury, that it has the Seller's Affidavit in its possession. A "qualified substitute" is a person responsible for closing the transaction, such as an escrow company, title company or the buyer's agent, but not the seller's agent. The federal withholding law is now similar to California's Franchise Tax Board (FTB) policy which allows the escrow officer to remove the seller's tax ID number from the buyer's copy of the California withholding tax statement, but not other copies.

- $300 BILLION IN FHA REFINANCING: Under the HOPE for Homeowners Program, 400,000 distressed homeowners can pay off their troubled mortgages and replace them with more affordable, FHA-insured loans. To qualify, a borrower's monthly payment on existing mortgage loans must be over 31% of his or her income as of March 1, 2008 (hence demonstrating the borrower's inability to afford the original loans). The original loans must have been originated before 2008, and secured by the borrower's principal residence (as well as only residence). Also to qualify, the borrower must satisfy FHA underwriting requirements for the new FHA-insured refinance loan.
     The FHA refinance will be a fixed rate loan up to $550,400 for at least 30 years, and will include charges for FHA insurance premiums. The maximum loan-to-value ratio of the FHA refinance is 90% of the appraised value. If the refinance proceeds are insufficient to pay off the existing liens, the refinance will not go through unless the original lenders voluntarily agree to accept a short payoff as payment in full. Rules will be established to allow, among other things, equity sharing for the original junior lienholders.
     Upon obtaining the FHA refinance, the borrower must share with the FHA at least 50% of any equity realized through a subsequent sale or refinance. The FHA's share in equity will be based on a sliding scale of 100% of any equity realized within the first year of the FHA loan, 90% the second year, and so on, but not less than 50%. The HOPE for Homeowners Program shall be in effect from October 1, 2008 to September 30, 2011.

- $7,500 TAX CREDIT FOR FIRST-TIME HOMEBUYERS: With certain exceptions, a first-time homebuyer will receive a tax credit of 10% of the purchase price up to $7,500 maximum, for the tax year in which the buyer purchases a principal residence. The tax credit, however, must be repaid like an interest-free loan in equal installments over the next 15 years or in full if the homebuyer sells the property for a gain. A buyer qualifies as a "first-time" homebuyer as long as the buyer (and spouse if any) has not owned a principal residence in the U.S. for the last three years. The tax credit phases out for a taxpayer with a modified adjusted gross income over $75,000 (or $150,000 for joint returns). This tax credit is available for qualifying homes purchased from April 9, 2008 through June 30, 2009.

- FANNIE MAE, FREDDIE MAC, AND FHA REFORM: The new law permanently sets the conforming loan limit for FHA and government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac at 115% of an area's median home price, not to exceed $625,500. The new loan limits take effect after the current $729,750 loan limit expires on December 31, 2008.
     The new law also authorizes the Treasury Department to bail out Fannie Mae and Freddie Mac if necessary by increasing their lines or credit or purchasing their stock. A new governmental agency, the Federal Housing Finance Agency, will be created to oversee GSE operations. Other FHA reform includes an increase in the minimum down payment requirement from 3% to 3.5%, and effective October 1, 2008, the elimination of seller-funded down payment assistance programs.

Some of the other provisions of the new Housing Act are, without limitation, $4 billion in assistance to stabilize neighborhoods hurt by the foreclosure crisis, $180 million for pre-foreclosure counseling, Home Equity Conversion Mortgage (HECM) reverse mortgage reform, assistance for veterans, and the creation of a nationwide loan originator licensing and registration system. The appropriate governmental agencies will establish new regulations as needed to carry out and enforce the new Housing Act.

Who's eligible?

Qualified borrowers must live in their homes and have loans that were issued between January 2005 and June 2007. Additionally, they must be spending at least 40% of their gross monthly income on all household debt to be eligible for the program. They can be up-to-date on their existing mortgage or in default, but either way borrowers must prove that they will not be able to keep paying their existing mortgage - and attest that they are not deliberately defaulting just to obtain lower payments. Before a homeowner can get an FHA-backed mortgage they must first retire any other debt on the home, such as a home equity loan or line of credit. Borrowers are not permitted to take out another home equity loan for at least five years, unless it's to pay for necessary upkeep on the home. To get a new home equity loan, borrowers will need approval from the FHA, and total debt cannot exceed 95% of the home's appraised value at the time.

How can I apply?

Borrowers can contact their current mortgage servicer or go directly to an FHA-approved lender for help. These lenders can be found on the Web site of the Department of Housing and Urban Development. How does the refinancing process work? This is a voluntary program, so lenders holding the original mortgage have to agree to rework a given loan before things can get started. The bill requires lenders to make major concessions, writing down the value of the loan to 90% of the home's current value. In areas where prices have plummented by as much as 20%, that will mean a substantial loss for the lender. But lenders won't sign off on a workout unless they think that they'll lose less money on that than they would by allowing a home to go through the costly foreclosure process. Each loan will have to be underwritten by an FHA lender on a case-by-case basis. That means the banks will do a new appraisal to determine the home's current value, as well as examine and verify income statements, bank accounts, job histories and credit scores. Based on that new appraised home value, the FHA lender determines how much the original lender has to reduce the original mortgage by, so that it will reflect 90% of the home's market value. If the original lender agrees to the write down, the new lender buys the old loan and takes over the reworked mortgage. As part of the deal, the old lender writes off any fees and penalties on the original mortgage, including prepayment penalties, and accepts the proceeds from the new loan on a paid-in-full basis. Additionally it pays the FHA an up-front premium equal to 3% of the mortgage principal.

What does it cost?

There should be little up-front costs for borrowers to bear. Loan origination fees will vary by lender, but these can usually be paid by the borrower over the life of the loan in the form of a slightly higher interest rate. However, the refinanced loans do come with many strings. For one thing, borrowers are responsible for paying an insurance premium to the FHA guaranteeing the loan, which will be 1.5% of the principal annually. Borrowers also agree to share any profits from future home price appreciation with the FHA. To do that, they'll pay a "3% exit fee" of the mortgage principal to the FHA when they resell or refinance. Plus, they'll agree to pay the FHA 100% of any profits they realize from higher home prices if they sell or refinance within a year. So if the original loan principal is $200,000 and the home sells for $250,000, the borrower will owe the FHA $50,000, minus costs. After a year, borrowers will share 90% of the profits with the FHA. The percentage keeps dropping in 10% increments to 50% after the fifth year, where it stays.

What will I save?

Savings depend on what borrowers are paying for their present loan and where they live, but for most people it will be substantial, even factoring in the FHA fees. In areas that have sustained huge price drops, such as Sacramento, where prices have fallen about 30% over the past year, some loans might be reduced by more than 40%. Additionally the FHA loans carry reasonable interest rates which are fixed for the life of the loan, as opposed to a subprime adjustable rate mortgage that can jump higher every six months.

• Dramatically lower home prices and a .56 percent drop in interest rates are behind the improvement in the Association’s First-time Housing Affordability Index.  A year ago, LA County households needed an income of $100,000 to qualify to buy a home costing $496,120, which is 85 percent of the area’s median home price, assuming a 10 percent downpayment at an interest rate of 5.65 percent.  In the first quarter of 2008, entry-level buyers in the county could qualify to buy a home costing $390,450 with an income of $74,320.
• First-time buyers and those seeking homes under $500,000 are behind a 22 percent increase in home sales in the six-county Southern California region between March and April, according to a report issued Monday by DataQuick Information Systems.  The report said two-thirds of homes sold were priced at less than $500,000.

• C.A.R. VP and Chief Economist Leslie Appleton-Young said she expects to see the affordability index continue to improve as additional foreclosures coming on the market keep prices at a level where more families can afford to buy.