The Warren Report

Bidding Wars Are Emerging on Foreclosures

Prices Are Generally Falling, But a Few Markets Have Shortages of Midpriced Homes

By JAMES R. HAGERTY

Falling home prices are starting to ignite bidding wars in a few parts of the U.S. as first-time buyers compete with investors for the same foreclosed properties.

In most of the nation, the supply of unsold homes continues to swamp demand. Home prices in many markets continue to fall, and foreclosures, which slowed in late 2008 as mortgage companies delayed taking action against delinquent borrowers, are picking up again.

But real-estate brokers say multiple offers on certain homes have recently become more common in parts of California and Arizona and the Washington, D.C., and Minneapolis-St. Paul metropolitan areas.

Where Housing Is Headed

See changes in the housing markets in 28 major metro areas.

Early Signs of a Turnaround?

Some home buyers are bidding against each other on foreclosures:

• The action is confined to certain markets, including parts of California, Arizona and the Washington, D.C., and Minneapolis-St. Paul metro areas.
• Many markets, including South Florida and New York City, remain glutted.
• The supply of bank-owned homes is expected to grow over the next few months.

MORE

• Homeowners Refinance in Droves
• Real Time Econ: Why Some Home Prices Are Up

Tamby Leonard of Santa Ana, Calif., southeast of Los Angeles, says she has been outbid four times since January when trying to buy a home for her family of five. The more appealing bank-owned homes in her price range, around $300,000, tend to be sold quickly to investors who can pay cash. The market for homes in the Santa Ana area in that price range is "blazing hot," says Ed Mixon of Altera Real Estate, Ms. Leonard's agent.

On Wednesday, the Federal Housing Finance Agency reported that home prices nationwide rose a seasonally adjusted 0.7% in February from January, led by gains on the West Coast. When compared with a year earlier, however, home prices were down 6.5%.

Bidding wars -- common during the housing boom -- had all but disappeared soon after the market peaked about three years ago. Even now, they remain the exception rather than the rule.

The Wall Street Journal's quarterly survey of 28 major metro areas shows that there is still a glut of homes available in most markets. But the glut has shrunk, and some areas are running into shortages of moderately priced homes in middle-class neighborhoods.

Many housing economists expect the market to bottom out gradually over the next couple of years, with some parts of the country stabilizing well before others. California and Washington, D.C., for instance, are likely to recover faster than South Florida, which has an immense glut of vacant condominiums, and the New York City area, which has been hurt by Wall Street's collapse, says Kenneth Rosen, chairman of the Fisher Center for Real Estate at the University of California, Berkeley.

Across the nation, there is still a tug of war between bullish and bearish forces. On the bullish side, falling prices and the lowest mortgage rates since the 1950s have made homes far more affordable, luring shoppers like Ms. Leonard, who has been renting for years. Adding to the attraction, the U.S. government is offering tax credits for certain people who buy homes before Dec. 1. The credit -- equal to 10% of the purchase price, up to a maximum of $8,000 -- is available to buyers who haven't owned any other primary residence in the U.S. during the three years before the date of purchase.

On the bearish side, rising unemployment has knocked many people out of the housing market and made those who still have jobs skittish. Even those with secure jobs who want to buy can't always get loans on attractive terms because of today's tightened credit standards.

Associated Press

A foreclosure sign sits outside a home for sale in Phoenix.

In addition, the supply of bank-owned homes is expected to grow over the next few months because many mortgage companies have ended moratoriums during which they refrained from proceeding with foreclosures.

The moratoriums artificially reduced the supply of foreclosed homes listed for sale, says Chad Neel, president of LPS Asset Management Solutions Inc. in Westminster, Colo., which sells such properties for banks. Now "there's a flood about to come on the market," Mr. Neel says. Foreclosures are likely to weigh on the market for years as courts and mortgage companies struggle to catch up with huge backlogs of unresolved cases.

Foreclosures, though far above normal levels in most of the country, are heavily concentrated in a few states, including California, Arizona, Nevada, Florida and Michigan. In areas with large numbers of bank-owned homes, buyers are mainly concentrating on those properties. That leaves ordinary homes languishing as owners generally refuse to slash prices enough to compete with banks.

In the Sacramento, Calif., metro area, about two-thirds of all March sales were foreclosures, says Michael Lyon, chief executive of Lyon Real Estate. The supply of foreclosed homes currently listed for sale is enough to last only about a month at the recent sales pace, he calculates. But there are plenty of homes listed for sale that aren't bank-owned, enough to last more than eight months.

In West Sacramento, a buyer represented by Cherie Hunt of Prudential California Realty recently competed against two other bidders for a three-bedroom home built in 2001. Ms. Hunt's buyer won by agreeing to pay about $220,000, or nearly $10,000 above the asking price. But that's still way down from $405,000, the price at which the same home sold in 2005.

"I have 20 buyers looking desperately," says Ms. Hunt.

Frank Borges LLosa, owner of FranklyRealty.com, a real-estate brokerage in Arlington, Va., is advising clients that banks favor all-cash bids or offers from people who seem certain to qualify for financing. Sellers may well choose the offer least likely to fall through rather than the highest bid, he says. He and other brokers say banks appear to be deliberately setting asking prices low in some cases to provoke bidding battles.

"There are a lot of buyers who think they can lowball," says Connie Vaughn, an agent at ZipRealty in the Los Angeles area. But in some cases mortgage companies already have cut asking prices enough to generate multiple bids. One of her clients recently prevailed over more than 30 other bidders by offering about $86,000 -- or $20,000 above the asking price -- for a four-bedroom house in Adelanto, Calif., that had sold for $200,000 in 2004.

A mortgage company recently slashed the asking price on a two-family home in Norwich, Conn., to $73,900 from $144,900. That price cut prompted five offers that the company is now considering, says Linda Davis of Re/Max Realty Group, the listing agent. She says the price cut was unusually steep but adds, "At some point, [banks] just decide to let it go."

That's encouraging, says Ronald Peltier, chief executive of HomeServices of America Inc. in Minneapolis, which owns real-estate brokerages in 19 states. "We do need to flush out the distressed inventory," he says, before the rest of the market can stabilize.

One positive trend is affordability. A family earning the national median pretax income of $52,800 a year needs to spend 25% of that income to buy a median-priced home, down from 44% in mid-2006, according to John Burns, a real-estate consultant in Irvine, Calif. For the Los Angeles metro area, that ratio has dropped to 45% from 102%. In Phoenix, it is down to 19% from 46%.

Among the markets Mr. Burns expects to recover earliest are the metro areas of Washington, D.C.; San Antonio; Raleigh, N.C.; Denver; Sacramento; and San Diego.

Write to James R. Hagerty at bob.hagerty@wsj.com

Printed in The Wall Street Journal, page B9

Hanley Wood Market Intelligence - Housing Market Key Indicator Alert

Renewed Banking Concerns

While overall sentiment and market performance has improved since the beginning of March, further fears about the stability of financial institutions ignited by loan loss provisions at Bank of America sparked a sell-off on Wall St. on Monday.  Surprisingly though, earnings coming out of the banking sector have been noticeably positive given the murky economic climate in the first quarter.  The Treasury Department also released figures last week that showed housing lending in February remained strong by the top 21 banks receiving government aid although demand for consumer and business loans have slowed.  This is evidence that the capital injections from the government are at least helping to free up the credit markets for current and potential homeowners.

Building activity stalled in March as both total building permits and housing starts recorded declines.  The slowdown in building is not necessarily bad since there is still too much new home supply on the market.  It will be more important to see if figures on the demand side continue to improve in March following February’s increases in new and existing home sales.  Builder sentiment perked up significantly in April which leads us to believe that conditions may be improving in the new homes market.  However, slower economic activity will continue to weigh on a housing recovery going forward.  Leading economic indicators continued to decline in March which suggests further slowing in the economy going into the summer months.  Additional foreclosure activity could also weigh heavily on home prices going forward.

The Economy
Leading economic indicators fell again in March and were also revised lower for the previous month.  The leading index has now declined for three straight months and has not recorded a monthly increase since June 2008.  The leading index experienced a 0.30 point decline in March to a reading of 98.10 from a downwardly revised February figure of 98.40.

The consumer price index in March showed that consumer prices fell during the month due to declining energy and transportation prices.  The drop in consumer prices last month along with the precipitous drop in energy prices over the past year has led to a fear of deflation going forward.  The CPI declined 0.1% in March on a seasonally-adjusted basis while the core CPI, which excludes food and energy prices, increased a seasonally-adjusted 0.2% from the previous month.  On an unadjusted basis, headline CPI fell 0.4% from its year ago levels while core CPI increased 1.8% year-over-year in March.  Annual headline consumer prices dropped for the first time last month since 1955.

Total building permits plunged 9.0% in March to a new all-time low while housing starts tanked 10.8% to a seasonally-adjusted annual rate of 510,000 units.  Single-family housing starts remained flat from the previous month while multi-family starts dropped 29% in March.  Both the single and multi-family segment contributed to the drop in building permits last month.  Single-family permits declined 7.4% to a seasonally-adjusted annual rate of 361,000 units while multi-family permits dropped 12.6% to a seasonally-adjusted annual rate of 152,000 units.

Housing Market
In the week ending April 10th, the MBA’s seasonally-adjusted Purchase Index dropped to 264.1 from 297.7 in the previous week.  Purchase activity had increased for the previous five weeks due to falling mortgage rates before last week’s decline.  An increase in mortgage rates last week caused purchase activity to post its largest weekly drop since January.  The latest figure reflects an 11.29% decline from last week and a 30.79% drop from the same period last year.  National average mortgage rates declined from the previous week to 4.82% in the latest Primary Mortgage Market Survey released weekly by Freddie Mac on April 16th.  Average fixed mortgage rates have recorded weekly declines in five out of the past six weeks.  They have also remained under 5.0% for the past five weeks and continue to hover around all-time lows.

Both new and existing home sales rebounded in February due to falling home prices, record-high affordability levels and homebuyer tax incentives.  This was the first time since July 2008 that both new and existing home sales increased in the same month.  It will be particularly important to keep an eye on new home sales in March since they have not posted back-to-back monthly gains since March-April 2007.

New home sales rebounded 4.7% in February to a seasonally adjusted 337,000 homes from an upwardly revised January figure of 322,000.  Seasonally-adjusted annualized new home sales were coming off their lowest levels in January since the data started being tracked in 1963.  Sales for the previous three months were also revised higher by 47,000 units.  In February, new home inventories declined to 325,000 from a January figure of 339,000 on a non-seasonally adjusted basis.  Non-seasonally adjusted units of unsold inventory are now at their lowest levels since April 2002 as builders continue to scale back building activity.  There are now 12.2 months of supply on a seasonally-adjusted basis based on the current sales pace which is down from 12.9 months in January.  In February, median new home prices fell to $200,900 from a revised January figure of $206,800.  Median new home prices in February are the lowest they have been since December 2003. Median new home prices fell 2.9% from last month and are down 18.1% from the same year-ago period.  Falling mortgage rates and home prices pushed new home affordability to a new all-time high in February.

Annualized sales of total existing homes in February increased 5.1% from January levels to 4.720 million units.  Sales of existing homes are still down 4.6% from the 4.950 million units in February 2008.  Median existing home prices in February increased slightly to $165,400 from 164,800 in January.  This is the first monthly increase in median existing home prices since June 2008.  Existing home inventory increased in February following six straight months of monthly declines; inventory had not recorded an increase since July 2008. Inventory of existing homes increased 5.2 percent to a preliminary 3,798,000 units from an upwardly revised 3,611,000 units in January. Existing home inventory is now at its highest levels since November 2008.  At the current sales pace, there are 9.7 months of supply of existing homes on the market.

For market-level data and analysis please visit our website at http://www.hwmarketintelligence.com.  For more detailed information on the indicators discussed in this key indicator alert, please visit the following links:

Employment Growth	(4,872,000)	F
Unemployment Rate	8.5%	F
Real GDP Growth	(6.3%)	F
Consumer Confidence	26.0	F
Purchase Mortgage Applications	264.1	F
Mortgage Rates	4.82%	A+
Median Price Existing Home	$165,400	F
Existing Home Sales	4,720,000	C-
Existing Home Inventory	3,798,000	F
Existing Home Affordability	66.8%	A+
Median Price New Home	$200,900	F
New Home Sales	337,000	F
New Home Inventory	325,000	F
New Home Affordability Ratio	59.1%	A+

Home Builder Confidence Posts Biggest Gain In Five Years

April Data Suggests Market At or Near Bottom

April 15, 2009 - Builder confidence in the market for newly built, single-family homes rose five points in April to the highest level since October 2008, according to the latest National Association of Home Builders/Wells Fargo Housing Market Index (HMI), released today. This gain was the largest one-month increase recorded since May of 2003, and brings the HMI out of single-digit territory for the first time in six months – to 14. Every component of the HMI reflected the boost, with the biggest gain recorded for sales expectations in the next six months.   “If you’re a potential buyer who’s been sitting on the fence waiting for a sign that now is the time to act, this is it,” said NAHB Chairman Joe Robson, a home builder from Tulsa, Okla. “Some of the most favorable buying conditions in a lifetime are now in place, and they are drawing more consumers back to the market.”   “This is a very encouraging sign that we are at or near the bottom of the current housing depression,” said NAHB Chief Economist David Crowe. “With the prime home buying season now underway, builders report that more buyers are responding to the pull of much-improved affordability measures, including low home prices, extremely favorable mortgage rates and the introduction of the $8,000 first-time home buyer tax credit.”   Crowe cautioned, however, that a key issue that still must be addressed is the ongoing lockdown on builder acquisition, development and construction (AD&C) financing. “Restoring health to our nation’s economy will require a substantial housing recovery, and that recovery is contingent on breaking the logjam in AD&C lending that presents an ever-increasing obstacle for home builders,” he said.   Derived from a monthly survey that NAHB has been conducting for more than 20 years, the NAHB/Wells Fargo HMI gauges builder perceptions of current single-family home sales and sales expectations in the next six months as “good,” “fair” or “poor.” The survey also asks builders to rate traffic of prospective buyers as “high to very high,” “average” or “low to very low.” Scores for each component are then used to calculate a seasonally adjusted index where any number over 50 indicates that more builders view conditions as good than poor.   Each of the HMI’s component indexes recorded substantial gains in April. The largest of these gains was a 10-point surge in the component gauging builder sales expectations for the next six months, which brought that index to 25. The component gauging current sales conditions and the component gauging traffic of prospective buyers each rose five points, to 13 and 14, respectively.   The HMI also rose in every region in April, with an eight-point gain to 16 in the Northeast, a six-point gain to 14 in the Midwest, a five-point gain to 17 in the South and a 4-point gain to 9 in the West.   Editor’s Note: The NAHB/Wells Fargo Housing Market Index is strictly the product of NAHB Economics, and is not seen or influenced by any outside party prior to being released to the public. HMI tables can be accessed online at: www.nahb.org/hmi. More information on housing statistics is also available at: www.housingeconomics.com.

Federal Home Loan Bank of Atlanta Announces the Opening of Its 2009 First-time Homebuyer Program Offering

/PRNewswire/ -- Federal Home Loan Bank of Atlanta (FHLBank Atlanta) announced yesterday that it will continue its initiatives to spur home purchases by providing potential homeowners with access to $9.9 million as part of its 2009 First-time Homebuyer Program (FHP). FHLBank Atlanta offers the matching funds through its member financial institutions for the down payment and closing costs of eligible first-time homebuyers in the Bank's district, which includes Alabama, Florida, Georgia, Maryland, North Carolina, South Carolina, Virginia, and the District of Columbia.

By participating in FHP, FHLBank Atlanta members can access up to $1 million annually and distribute matching FHP awards of up to $10,000 per household to eligible homebuyers. FHLBank Atlanta member institutions are able to access a wider customer base, originate new mortgages, and attract homebuyers into the market thanks to the available funding. The FHP offering cycle opens April 1, 2009, and continues through Dec. 31, 2009 or until the available funds are disbursed, whichever occurs first. Funds are provided to member institutions on a first-come, first-served basis, and applicants must request the funds from a member institution.

Since the program's inception in 1997, FHLBank Atlanta has contributed more than $50 million to first-time homebuyers, directly resulting in more than 8,000 families and individuals being able to purchase a home. FHLBank Atlanta estimates that for every $1 of FHP funding awarded, $17 is generated in new mortgage business for its members.

"First-time homebuyers are critical to stimulating much needed home sales in local markets. There has never been a better time for member financial institutions to participate in the First-time Homebuyer Program," said Arthur Fleming, first vice president and director of Community Investment Services, FHLBank Atlanta. "FHP funds offer a very attractive incentive for first-time homebuyers to work with FHLBank Atlanta lenders, representing a 'win-win' for both lender and homebuyer."

Individual participants receiving FHP funds must complete a homebuyer counseling program that includes educational training on the home-buying process including courses on budgeting, mortgage financing, lending laws, and home ownership fundamentals.

Senate Unanimously Approves Isakson Amendment to Stimulate Housing Market

WASHINGTON – The U.S. Senate today unanimously approved an amendment to the Fiscal Year 2010 Budget Resolution by U.S. Senator Johnny Isakson, R-Ga., that seeks to stimulate the nation’s declining housing market by providing for a $15,000 tax credit to individuals who purchase a home in the next year.

                                                

“Our economic crisis started with housing, and our economy will continue to suffer unless we do something now to immediately fix the housing problem,” Isakson said. “I’m pleased my colleagues in the Senate understand the importance of creating targeted incentives that will encourage Americans to buy homes again.”

 

Isakson’s amendment to the Budget Resolution would create a deficit-neutral reserve fund for providing a nonrefundable federal income tax credit for the purchase of a principal residence during a one-year period. It would also ensure that there is room available in the Fiscal Year 2010 budget levels for a homebuyer credit to be passed at a later date. Isakson plans to introduce his $15,000 tax credit as a stand-alone bill in the next few weeks.

 

On Feb. 4, 2009, the Senate unanimously approved an amendment by Isakson to the economic stimulus bill would have provided a direct tax credit to any homebuyer who purchases any home. The amount of the tax credit would be $15,000 or 10 percent of the purchase price, whichever is less. During conference negotiations between the House and Senate on the final version of the bill, Isakson’s $15,000 tax credit for all purchasers of any home was removed. Instead, House and Senate negotiators made only small modifications to the first-time homebuyer tax credit that was enacted in 2008 as part of the Housing and Economic Recovery Act of 2008. 

 

Isakson has pushed hard for a non-repayable tax credit for homebuyers because he knows that it will work. In the mid-1970s, America faced a similar housing crisis when a period of easy credit and loose underwriting flooded the market with new construction.  Interest rates rose, the economy slowed and America was left with a three-year supply of vacant homes. Congress responded by passing a $2,000 tax credit for anyone purchasing a new home for their principal residence. Isakson, who was in the real estate industry in Atlanta at the time, says the results were clear and swift as home values stabilized, housing inventory dropped and the market recovered.

Last year, Isakson introduced legislation to specifically target those homes that were causing the unprecedented increase in housing inventory by offering tax credits to individuals purchasing a foreclosed home or a home where foreclosure is pending. In April 2008, the Senate passed legislation to stimulate the nation’s declining housing market that included Isakson’s proposal. However, the final version of the legislation that was signed into law included only a $7,500 tax credit for first-time homebuyers that must be repaid over a 15-year period.

Isakson spent more than three decades in the real estate business, beginning his business career in 1967 when he opened the first Cobb County, Ga., office of a small, family-owned real estate business, Northside Realty. Isakson later served as president of Northside for 20 years, presiding over the company’s growth into the largest independent residential real estate brokerage company in the Southeast and one of the largest in America.

Gain Seen In Pending Home Sales, Housing Affordability Sets New Record

WASHINGTON, April 01, 2009

Pending home sales have edged up, hinting at a possible pickup of sales activity in coming months, according to the National Association of Realtors^®.

The Pending Home Sales Index,¹ a forward-looking indicator based on contracts signed in February, rose 2.1 percent to 82.1 from a reading of 80.4 in January, but is 1.4 percent below February 2008 when it was 83.3.

Lawrence Yun, NAR chief economist, said the market is continuing to underperform. “Pending home sales have a way to go for there to be a meaningful increase, but recent increases in shopping activity are hopeful indicators that we’ll see additional sales gains,” he said. “More buyers are getting into the market to take advantage of stimulus incentives and much improved housing affordability conditions, but it will take a few months before we could see this turn up in measurable sales contract activity.”

Also in February, NAR’s Housing Affordability Index² rose to a new high.

The PHSI in the Northeast rose 10.6 percent to 63.9 in February but is 11.2 percent below a year ago. In the Midwest the index jumped 14.5 percent to 83.1 and is 3.4 percent higher than February 2008. The index in the South rose 4.4 percent to 85.8 in February but is 0.1 percent below a year ago. In the West the index fell 13.5 percent to 89.6 and is 1.7 percent below February 2008.

NAR President Charles McMillan, a broker with Coldwell Banker Residential Brokerage in Dallas-Fort Worth, said home buyers are in an excellent position. “The drop in mortgage interest rates and home prices mean the buying power of a typical family has never been better,” he said. “If you have a good job and long-term plans, it’s unlikely that you’ll find a much better time to buy a home. This is especially true for first-time buyers who can qualify for an $8,000 tax credit this year, have a great selection of homes to choose from, and are in a favorable negotiating position.”

NAR’s Housing Affordability Index rose 0.9 percentage points to a record high of 173.5 in February from an upwardly revised index of 172.6 in January, and is 36.3 percentage points higher than a year ago. The HAI, a broad measure of housing affordability using consistent values and assumptions over time, shows that the relationship between home prices, mortgage interest rates and family income is the most favorable since tracking began in 1970.

A median-income family, earning $59,700, could afford a home costing $285,600 in February with a 20 percent downpayment, assuming 25 percent of gross income is devoted to mortgage principal and interest. Affordability conditions for first-time buyers with the same income and small downpayments are roughly 80 percent of that amount. The affordable price is considerably higher the median existing single-family home price in February, which was only $164,600.

“Obviously, potential home buyers need to be managing their existing debt effectively,” McMillan said. “A Realtor^® can counsel you on what you may be able to afford given your personal financial situation. In some cases, buyers who want to build their future through homeownership may need to start reducing their debt and improving their credit score before entering the housing market.”

Last year at this time, the typical family could afford a home costing $265,600, which is $20,000 less than the current affordable price. “Homes in many areas are now selling for less than replacement construction costs – clearly this is an abnormal situation which will change once inventory is drawn down and supply and demand come closer into balance,” McMillan said.

Yun said he expects housing inventories to rise through early summer from a normal seasonal pattern of more sellers appearing in the spring. “But with the positive housing stimulus incentives now in place, we expect home sales to gain momentum in the second half of the year with first-time buyers absorbing a lot of the excess inventory,” he said. “Under these conditions, we should see price stabilization in most markets by the end of the year.”

For more information, contact:
Walt Molony 202/383-1177 wmolony@realtors.org