Real Estate Information

One of the most confusing part of the home buying process for new homeowners is the concept of seller paid closing costs or seller concessions. Seller paid closing costs allow for less out of pocket expense for the home buyer, but are rarely truly seller paid. Seller paid costs are actually buyer borrowed. Regardless, there is still a great benefit to having them.

Let s examine real quickly how they work. Assuming an asking price of $100,000 with the buyer using an FHA loan that has a maximum of 6% in seller paid closing costs, a buyer could offer $106,000 with $6,000 towards closing costs. The seller is going to net out at the same amount, so they usually don t care and it helps the buyer close easier. The buyer could also offer the asking $100k with $6,000 going towards closing costs netting the seller $94,000. Considering the way the real estate market is, that could easily be accepted or there may be further negotiation.

What can closing costs go towards? Title fees, property taxes, loan costs including lender fees, origination and rate buydown, homeowners insurance, up front mortgage insurance premiums and VA funding fees. They can t go towards a required down payment.

Unused closing costs go back to the seller. Sometimes on lower priced properties the lender maximums can t be used up. A savvy buyer should lower their offer by the unused amount. On purchases, overages of seller paid concessions can never be paid to the buyer as cash back.

Why not just pay the closing costs? Lenders want to know where the money is coming from and in today s marketplace those funds have to be sourced (where did the money come from) and seasoned (how long has the money been there). If you don t have the funds already in place, or need to use your savings for a down payment seller paid closing costs are a great way to get the loan approved.

Lenders limit the maximum amount concessions can be. For VA loans, the number is four percent FHA mortgages are 6%. Conventional loans vary dependent upon the lender. Be sure to check with your lender when you tender the offer. Closing costs must be negotiated at the time of the offer, though it s possible to go back and amend the contract.

Seller concessions are not a right. Remember buying a home is a negotiation and you can succeed more often by presenting an offer that benefits both sides. Don t rake the seller over the coals on price and then add in seller paid concessions. You may get the offer accepted, but if problems develop down the road like you need to extend the closing, you may find the seller to be less than accommodating.

For potential homeowners who want to minimize their out of pocket expenses, negotiating seller paid closing costs is a great way to do it.

In 2006 the world s oil rigs pumped out crude at a rate of nearly 85.5 million bbl. a day. They haven t come close since, even as prices have risen to USD 115 per barrel and are forecasted to reach USD 150 per barrel twelve months from today (source: www.oil-price.net ). All of which raises a question of potentially epochal significance: is it all downhill from here?

It s not as if nobody predicted this. Survivalists, despisers of capitalism, a few billionaire investors and a lot of respectable geologists have long cited the middle to the end of this decade as the likely turning point. Governments and the oil industry have typically dismissed such talk as premature. There have been temporary drops in oil production before, after all. In most official scenarios,

production will soon rise again, peaking at more than 110 million bbl. a day around 2030.

But the official scenario doesn t seem to hold water - oil if you prefer - anymore. Even taking the 2030 deadline as true, the implication is that the optimists think we have less than three decades to go. But the fact of the matter is that the word from producers is getting gloomier by the day, to the point that many of them openly agree that oil production will never top 100 million bbl per day. The International Energy Agency warns that new capacity additions will not keep up with declines at current oil fields and the projected increase in demand, forecasted at 1.5 percent more in 2008 or 1.3 million barrels a day.

This isn t quite the same as saying that oil production has peaked and is about to start declining sharply. The big issues are not so much geological as political, technical, financial and even human-resource related. All these factors delay the arrival of oil on the market, meaning that production would not so much peak as plateau. But with demand rising sharply, especially from China and India, even a plateau could be precarious.

The world is not running out of oil. There are massive reserves available in the Alberta tar sands, Colorado shale, Venezuelan heavy oil and other unconventional deposits. The problem is that most of this oil is difficult and expensive to extract and even harder to refine, and is not likely to account for a significant share of global production anytime soon.

Almost everybody agrees that the pumping of conventionally sourced oil outside OPEC has peaked already or will peak soon, a reality that even discoveries like the recent 8 billion-bbl. find off the coast of Brazil cannot alter, because production from so many existing fields is declining.

The big question mark is OPEC, which represents the oil powers of the Middle East and a few other big exporters, and which currently accounts for 41 percent of world oil production. Every optimistic scenario assumes that this share will rise dramatically in the coming years. And of course the implication of this is that if things turn out well, North America and Europe will become substantially even more dependent on middle-eastern oil.

Then there is the gloomy view, postulating that Saudi Arabia - OPEC s top producer - cannot pump much more oil than it does now. In fact, in recent times Saudi out put has dropped from 9.6 million bbl. per day to 8.6 million, despite rising prices.

So far the answer from OPEC leaders has been that high prices are the fault of speculators and the falling dollar, not low production. They cite stats after stats showing that there is more than enough oil for sale right now. The price pressure, they point out, is coming from financial participants in futures markets. All this may be true, but the reality of things, however, is that if OPEC members are not able to boost production in the coming years, it will be impossible to keep blaming the traders as prices rise.

Voices are loud out there that cheap oil is the essential fuel of modern capitalism, which will founder without it. On the other hand, a more hopeful take is that innovation is the essential fuel of capitalism, so that high oil prices will drive rapid advances in conservation and alternative energy. Either way, the beginning of the end of the oil era may be upon us well ahead of schedule.

Luigi Frascati

luigi@dccnet.com

www.luigifrascati.com

Real Estate Chronicle

Labels: ECONOMICS # posted by Luigi Frascati @ Wednesday, April 23, 2008

Over the past two weeks I ve had the opportunity to speak with dozens of potential home buyers around the country. Here are some of the key trends/takeaways I ve noticed.

1. People in formerly bubble markets - California Florida specifically - are excited at the prospect of more affordable housing. The question of prices dropping further is not a consideration, affordable monthly payments are.

2. Most people are unaware of the changes in the credit markets. Some are still looking for stated income, pick-a-payment and subprime loans.

3. It s no longer a matter of how much a borrower can qualify for, it s if they can qualify at all. I m having to turn down loans that could have been approved as little as three months ago because of low credit scores. As far as minimum thresholds go, 620 is the new minimum for a decent rate and 580 is the new minimum to get any type of loan.

4. In general, borrowers are woefully underfunded for reserves and emergencies.

5. The borrowers I m seeing are not overwhelmed with debt. At least 50% of my callers can qualify for the VA or FHA loans I m originating.

6. Some people just have unrealistic expectations like the would be borrowers with unbelievably low scores sub 500. Some sellers have unrealistic expectations like the seller whose home has been on the market for over a year, but refuses to cut price further.

7. The gloom and doom I read about in the media and blogs is not reflected in the interactions I m having with potential homeowners across the country. 80% of the people I talk to are first time home buyers and aren t carrying any baggage.

8. I need Realtors to refer. My company is often the first step for these borrowers and since many of them are first timers they need help with this purchase. If you re a real estate agent that wants purchase leads with pre-approved buyers, please fill in my contact form.

9. Buyers are well aware of the realities of the marketplace and are searching for foreclosed, bank owned and short sale properties. Most however, don t know the pitfalls of such properties.

10. In general, it appears government loans - FHA and VA - are going to ease the way for home purchases in the near term. This is probably a good trend in easing the credit crunch for home loans.

The numbers are in for Northern Utah real estate and they re not pretty. Though prices have remained essentially flat, the number of transactions has decreased significantly. Much of that has to do with the tightening of mortgage loan standards.

In Salt Lake County home prices rose less than 1%, but sales activity dropped 42.2%. Davis County also saw flat prices while activity dropped 26.6%. Tooele County saw prices drop 6.3% with a sizable drop in activity. Utah County saw declines on both fronts.

The Salt Lake Realtor Board President said -

Jillinda Bowers, president of the Salt Lake Board of Realtors, said she remains bullish about the market despite the drop in sales and softening of prices.

“People shouldn t be fearful. You have motivated sellers, and interest rates are low. It s a great time to buy.”

I am not so bullish right now. I ve personally seen several instances of mortgage fraud evident in Draper and West Jordan that are wiping out entire developments. These homes are becoming REO and will negatively impact their neighborhoods for at least the next two years. Opportunity does exist for qualified buyers because of interest rates. Buyers shouldn t be fearful, but they should be wary.

It s interesting seeing the breakdown by zip code. First quarter in Utah is typically the worst, so I m not placing any merit in determining a trend from these numbers, but some weaknesses are emerging. 84102, downtown, suffered the biggest price drop at 30.6%. I suspect this is due to the rise of commercial vacancies and the reconstruction of the downtown malls. On the other hand, 84123, Murray-Taylorsville, saw the biggest individual gain at 11.5% because of the opening of the IMC Hospital last October.

Clearly the credit crunch is affecting Utah home purchases. Affordable housing will always be competitive as 84104 s gain of 11% can attest to. The bargains in the next couple years are going to be the luxury homes originally priced from $600k-$800k that will now be going for half that particularly those on the edge of town in new developments.

In desperate economic times, everyone wants to know when it s going to end. I ve said before we won t know bottom until long after it s passed. Several national articles this week have suggested we re bottoming now, but many in the real estate business have been calling bottom for quite some time.

While there is still quite some individual pain ahead, perhaps we ve approached or reached bottom now? The experts write:

Oil hit another record high but has since pulled back. The dollar has finally started to show some signs of life. And for the most part, corporate earnings were - as Larry David would say - pretty pretty good.

Long term interest rates have risen sharply in the last two weeks with the 10 year bond gaining over 40 bps in that time frame. Stocks have

followed suit. Overall economic problems like fuel and food costs still exist, but it seems for the moment the markets have found a comfort level with those conditions. Another test will take place this coming week when the Fed again votes on interest rates. The markets are calling for another .25% rate cut, but more and more people are worried about inflation.

Duane LeGate, a foreclosure expert, said his data is showing bottom as well -

This may not be a popular opinion.. but we have hit bottom.. as in now.. every piece of data I have is suggesting something different than conventional wisdom.In 2006, we made the call for specific markets dropping 20%.. we hit them dead on Bottom is where it hurts worst, and we are there..Now, in NO WAY am i suggesting we are in for an upturn.. just stabilization as it relates to housing prices

As I talk to potential homeowners in previously bubble markets, I m hearing optimism about prices. One person in California told me he was looking at houses in the $160-$180k range that had previously been $400k two years ago. That s a 55% decline for those houses.

I calculated a payment for a borrower yesterday that was $300 less than what he was paying in rent. That payment included taxes and insurance. When it s cheaper to buy than to rent, market sentiment will change.

Have we bottomed in Utah? No. We re not even close. We re probably 18 months away from bottom and there will be some pain and a bunch of foreclosures (read opportunities) before we get there.

The credit markets are still unknowns, but they do seem to be stabilizing. FHA is going to be the dominant loan program and down payments are going to become the norm. Except for VA, there are no 100% loan programs any more. If you re going to buy, you ll need a down payment.

I think the next nine months are going to be pivotal in determining the direction of the housing markets. Time will tell of course, but the signs of a bottom are definitely there.

I m just getting back into my regular routine and was checking around the web on all the stories I missed this week while on an Internet free blogcation. One of the stories that hit me was titled Inflation Is Everybody s Problem.

It s true because inflation impacts consumption. Whether you re rich or poor, you have to eat, get shelter and transport yourself. With inflation hitting all three of these aspects of life, everybody feels the pain. The housing bubble was partially a form of housing inflation and increases in food a fuel prices over the past several years is hurting a lot of people, particularly those on fixed incomes.

While I was in New York this week, I stepped into the tail end of a panhandling transaction. I was lining up to buy a Nathan s hot dog in Coney

Island when the gentleman in front of me handed a dollar to an older, homeless man. After the homeless man left, the gentleman declared in a thick New York accent to his companion and the man behind him that he was experiencing a sort of “bum inflation.” It was no longer acceptable to panhandlers to receive a quarter. One has to pay a dollar for them to move on. The old line from the Great Depression was, “Brother, can you spare a dime?” 75 years later that number is now a dollar.

There are only two things individuals can do about inflation, earn more or spend less. We don t set economic policy and we don t set prices of goods and services. How we do affect prices is deciding whether to buy. If enough people don t buy, the price drops. If enough people do buy, the price remains stable, or even goes up. Unfortunately, much of the highest inflation is coming from necessities - food, heating fuel and gasoline. It s only possible to cut back so far before one has to increase their income.

I m not sure if potential home buyers truly understand the changes in lending standards that have taken place. In the news we keep hearing about people walking away from homes and tarnishing their credit in the process. Some people see no other option, while others are doing it because of drops in home values. Other than not liking making the mortgage on a currently depreciating home, they can otherwise afford the payment. The price? A credit rating.

As the economy has modernized, those three numbers that comprise your credit score have become instrumental in not only determining whether you ll be extended credit, but they impact your insurance rates and even if you ll be extended a job or a promotion. Voluntarily tanking your credit score is simply foolish.

In the past

eight or ten years, lenders loosened lending standards to the point that just about anyone could qualify for a loan. That borrower may have had to pay a higher interest rate and put money down, but they could get a loan. The current credit standards are much different. Potential home buyers are being completely turned down for having credit scores that as little as three months ago could have gotten them a decently priced FHA loan.

They say that cash is king, especially in a recession. When it comes to purchasing power, credit is queen. In today s rising delinquency environment, it s incredibly important to maintain good credit. It s a buyers market for homes, cars and consumer items and having cash or credit can help you take advantage. It is crucial to preserve or improve your credit if you want to buy a home.

MSN Money had a pretty good article this week about protecting your credit in a downturn. Take a look to see the basics.

If you re kind of on the edge and wondering whether it makes sense to pay your mortgage/car payment/credit cards, the answer is yes. Cut down on non-essential spending or take an extra job temporarily to make ends meet. Remember this situation is temporary.

Here are some of the long term consequences of seriously negative credit:

Foreclosure - 3 years minimum to qualify for another house. Bankruptcy - Stays on your record for 7-10 years depending on which type. Needs to be discharged 2 or 3 years depending on the lender. Mortgage lates - Going 120 days late is considered a foreclosure by many lenders. Late payments - Stay on your credit for seven years, but lose most of their impact after three years. Government loans (FHA/VA) require 12 months of clean payment history.

Still want to walk away?

I love New York City. I wouldn t want to live there unless I was rich, but I love it nonetheless. When I found out Yankee Stadium will be demolished after this season, I decided the time was right to see a Major League game at Yankee Stadium.

I ll be gone this week and won t be blogging. I m not even taking my laptop, but I will be taking my cell phone, so it will be almost a technology free vacation.

This blog has gone “dark” before, usually unannounced, due to lack of time in my real life. Please take this time to review some of the over 300 articles written over the past year and a half. If you haven t read it before, it will be new to you.

I ll follow up with all emails and non-cellphone calls when I return to SLC on Thursday.

I received word in my email this afternoon that zero down mortgages were gone. Fannie and Freddie have several high loan to value programs available, but mortgage insurers are simply not writing the policies any more. Even risk based policies are gone.

This means that while the program may exist, no investor will buy them. I checked a few other lenders before writing this post and saw they still had them for now, but I expect the die-off to complete itself before week s end.

A clue of this outcome came last week when Congress made a compromise in the housing bill to raise FHA loan down payments instead of lowering them. This is a pretty big indicator of the fear associated with high LTV loans.

Senate Democrats also yielded ground on a provision to change the

down payment requirements for FHA loans. Democrats have been pushing to reduce them, but the bipartisan agreement actually increases them by half a percentage point. That may not fly in the House, when it considers the package.

If you have an unlocked 100% loan in process, check with your loan officer/broker to see if your program is still available. Lock it in if you still can.

One program that continues to offer 100% financing is the V.A. (Veterans Administration) loan program for enlisted and retired military members. Home buyers eligible to receive this program can benefit from no out of pocket costs with a properly structured purchase contract.

Other than V.A. mortgages, 100% financing will very soon be going the way of the dinosaur and dodo bird. Extinct.

Putting a human face on an otherwise abstract concept like financial responsibility is something that tends to create interest. CNNMoney and numerous volunteers have created a personal profile to the “credit crunch.”

Mass media has only two modes: great success or great failure. If it bleeds, it leads. During the boom, it was the success stories. Now, we re watching the blood in the streets. Whether it s roses or thorns, the nation s attention is captured. Media dictates the mood. The average are ignored.

When it comes to finances, sometimes it s good to be average. It s good to be consistent and it s good to avoid extreme downs. One way to do that is to plan in advance for the inevitable bad times. The best way to do that is to establish an “oh crap” fund. This isn t an emergency fund, it s for small crises that can wind up being big drains if borrowed funds have to be used.

It kind of mirrors Dave Ramsey s baby steps of a $1000 emergency fund, but it s a little different. For what it s worth, I agree with a lot of what Dave teaches, but I do disagree with him when it comes to mortgages. To me, real estate financing is the exception to the “rule.”

If you ve followed CNN s profile on Americans with money troubles, you ll recognize that many of these financial catastrophes could have been avoided sometimes with only an “oh crap” fund.

A few posts ago, I mentioned Patricia Guerrero who got blindsided by a divorce and a job loss at the same time. Her “oh crap” fund was small and only a tax refund prevented a major financial catastrophe for one month. She was two months worth of income away from being homeless with a $70k annual salary. When we last heard from her, she was hiding her Coach purse while visiting the Food Bank.

Some stories are heart wrenching, while others inspire contempt I had to trade in my Corvette for a Suburban wahhhh! What a difference an “oh crap” fund would make. The great thing about life is it can always change. The bad thing about life is it can always change. Being prepared can minimize the negative fluctuations of change.

Dave Ramsey argues for a basic emergency fund of $1000. I suggest that fund is contingent upon your liabilities. A college student for instance could probably get away with a $250-$500 fund for car repairs, while people like the Copes could have used at least $10,000 in short term savings for home repairs or other unpredicted emergencies.

The “oh crap” fund is not a replacement for a true emergency fund which is 3-6 months of total monthly expenses. In a downturn, this fund should be larger. In an upturn, one can get away with less. In today s environment, more savings is better.

Much has been made of the low savings rate of Americans in the past couple of years. A 1993 survey assessed whether Americans of a certain age could obtain $3000 in a few days without borrowing. For baby boomers, the number was 50%. For younger people, the ratio was even less.

When a group of 35- to 49-year-olds were asked if they could come up with three thousand dollars in a few days without borrowing or using a credit card, 49 percent said they could and 49 percent said they couldn t. Not surprisingly a smaller percentage (only 29 percent) of the 18- to 24-year-olds had the three thousand dollars.

Fifteen years later, the answer to this question is even sadder, though I don t have a readily available source to document it. Readers, how do you answer this question? What if the amount is $5000? If you can t answer positively to either amount, you have no business buying a house especially in today s market.

Money in such a fund should be liquid, but not susceptible to loss like a stock or other investment account. For smaller funded accounts, I suggest the EmigrantDirect high yield savings account which has no minimum deposit for maximum payout. If you re investing funds over $10,000, I recommend shopping around as other funds can beat the Prime rate with larger deposits.

No amount of preparation can fully insulate any individual from truly catastrophic events, but having the minimum safeguards in place can certainly stave off a lot of fairly common economic downturns. Downturn doesn t equate devastation if you re prepared.

As I assess loans on a day to day basis, the existence of an “oh crap” and emergency fund enter my evaluations of individual borrowers. Lack of either contingency fund indicates to me a level of financial exposure that is simply intolerable, especially in today s markets.

Dave Ramsey calls it baby steps for a reason.