Archive for February, 2010

The question is always, what are home prices doing? And specifically, what are they doing around me? A report released several days ago by the National Association of Realtors stated that: Strong gains in existing-home sales were the predominant pattern in most states during the fourth quarter of 200. The report does show some gains in CA home prices, but what about specifically Sacramento home prices? As always with raw home price statistics, I had to dig deeper(and besides, the N.A.R.’s advice has seemed, at times, “unbiased”. For one, they were predicting home price increases well into 2007,  ground zero for the subprime meltdown.)

First, a quick refresher. As reported by Dataquick, Sacramento home prices in December posted a minor 0.42% gain, year over year. For all of 2009, according to the Sacramento Bee, Sacramento home prices slipped 18.46% compared to 2008. For the 4th quarter of 2009, Dataquick does not, unfortunately, release quarterly data for Sacramento metro home prices. However, all indications point to a small price increase- for example, the number of new housing starts has been increasing(housing starts are just a counter for new housing developments). Remember that housing data lags about 60-90 days which is why we are only now getting 4th quarter 2009 home price statistics. As more data comes in about Sacramento home prices we will post it here.

**Update- According to Bloomberg.com, Sacramento home prices fell 37% in 4th quarter 2009.

These positive signs of Sacrameno home prices can be attributed to a few things.

1. The bank. Banks are much more willing to work out deals with in-trouble home owners, whether through a short sale or loan modification.
2. The inventory. Every granted loan modification or approved short sale means one less foreclosure that will hit the market in [probably] terrible condition and at a ‘overbid-me’ list price.
3. The money. Dramatic action by the Fed purchasing trillions of dollars worth of mortgage backed securities has put an artificial lid on rates, leaving them at 4-5.5% all last year.
4. The law. Changes were made to California’s foreclosure process last year, doubling the time courts took to issue a foreclosure. Additionally, bankruptcy judges were granted the unprecedented ability to ‘cram-down’ or modify debtor’s mortgages.

So are we in the clear? We are still bullish on Sacramento home prices and the status of the entire west coast. Here’s the issues facing home prices:

1. The iceburg. Data issued years ago shows a potential new wave of ARM resets from Alt-A loans, hitting right now. The potential for additional foreclosures and inventory is troubling.
2. The money. As mentioned, rates are artificially low. What happens when the Fed removes the lid? Analysts predict sharp jumps in mortgage rates if inflation rises. Additionally, credit score requirements for loans have increased and loan programs continue to be cut back. These changes lower qualifying home prices and remove buyers from the market.
3. The law. There are concerns that the first time homebuyer credit simply advanced demand, or pushed people forward that were planning on buying anyway. Economists are concerned home prices could be a false positive.

This is all speculation of course. And what happens to Sacramento home prices in the area that you live will vary. The real factor is the median price range your home is in. As the lower end has already had massive declines from the peak, if further decreases in home prices happen, there will be some protection. For example, some higher priced/exclusive communities in CA have had very small price declines only.

On January 21, 2010 – HUD(Housing and Urban Development) released a letter stating that all FHA loans will have increased mortgage insurance. The new FHA Mortgage insurance requirements are as follows:

• Up front FHA mortgage insurance premium increases from around 1.75% to 2.25%.
• These changes go into effect for Case Numbers created after April 5, 2010 (Though you may have applied for a FHA loan prior to this date, a case number is not always assigned). So at least there is a few months of breathing room.

What does these changes to FHA mean in layman’s terms? As a quick review, FHA loans have two types of mortgage insurance. FHA up front mortgage insurance is calculated as a percentage of the loan amount, and is typically financed a.k.a. added to the loan amount as a one-time event. This is why on FHA loans, though a downpayment was made the total loan amount is higher than the actual loan amount. FHA monthly mortgage insurance is a percentage of the loan amount as well, but it is calculated on an annual basis and collected on a monthly basis with each mortgage payment. The average person may not be aware that FHA mortgage insurance is mandatory on all loans no matter how large the down payment.

Let’s look at an example of the FHA MI changes for 2010.

Prior to April 5, 2010:

Purchase price: $200,000

Down Payment(3.5%):$7,000

New loan $193,000

1.75% FHA up front MI: $3377.50

New total FHA loan: $196377.50

After April 5, 2010:

Purchase price: $200,000

Down Payment(3.5%):$7,000

New loan $193,000

1.75% FHA up front MI: $3377.50

New total FHA loan: $196377.50

Here’s the link to HUD for the Mortgagee letter detailing this new increase in FHA mortgage insurance premiums.

More FHA MIP resources available at FHA.gov (aka HUD.gov)

Our analysis is that these increases in FHA MIP are due to the recent default rate spike in FHA loans- they are scrambling to keep capital up. We’ll cover this in our next post.