Warren Buffett on the Housing Bubble

Warren Buffett’s annual Berkshire Hathaway shareholder letter is out.  As I peruse the letter, his comments on the real estate housing bubble stand out (Page 15):

"As is well-known, the U.S. went off the rails in its home-ownership and mortgage-lending policies, and for these mistakes our economy is now paying a huge price. All of us participated in the destructive behavior – government, lenders, borrowers, the media, rating agencies, you name it. At the core of the folly was the almost universal belief that the value of houses was certain to increase over time and that any dips would be inconsequential. The acceptance of this premise justified almost any price and practice in housing transactions.

Homeowners everywhere felt richer and rushed to “monetize” the increased value of their homes by refinancings. These massive cash infusions fueled a consumption binge throughout our economy. It all seemed great fun while it lasted.

(A largely unnoted fact: Large numbers of people who have “lost” their house through foreclosure have actually realized a profit because they carried out refinancings earlier that gave them cash in excess of their cost. In these cases, the evicted homeowner was the winner, and the victim was the lender.)”

I will not pretend to add anything much to Buffett’s shareholder letter, except to say that there are other situations where the homeowner was the winner and the bank the victim.  Consider the homeowners who stopped paying their mortgage, but continued residing in the house, whether or not they had used the home as a financial “cookie jar”.

I have personal knowledge of two local citizens each of whom lived for more than 2 years in a house that was scheduled to be sold through foreclosure.  One lived in Venice and one in Englewood.  During this time they paid electric and taxes, but not the mortgages.  I submit the lender was the victim in both cases.  But the homeowners were partially innocent too in that the lenders would not negotiate the loans UNLESS the borrower missed at least three monthly payments.  Once you miss three, why start up again?

And further, I know a fellow in Sarasota who lost his house to a foreclosure auction after he had not paid the mortgage for over a year.  At the foreclosure auction he approached the buyer (of his house who was an investor) and asked if he could rent the property—since he was still living there.  A deal was struck, and he didn’t have to move.  He happily rented the home for about a year.

I understand that he has since bought the house back from the landlord, for a premium over what the fellow paid at auction, but now his mortgage is $100,000 lower than it was before the foreclosure.  The lucky homeowner withstood some sleepless nights, but won big, while the lender sucked up the loss.

Of course these lucky homeowners now are saddled with spotty credit and will have some explaining to do when they try to finance a home; these kinds of credit blots will stay on their credit for some time.  In reality, most average borrowers of the 2013’s and beyond will bring these credit blots to the table and lenders looking to make loans will probably have to overlook them, simply as a “sign of earlier times”.

Dane Hahn is a real estate professional practicing in the Englewood, Florida area.  He can be reached at 941-681-0312 or at dane.hahn@gmail.com. See him on the net at http://www.danesellsflorida.com/

Rising Prices Mark The Bottom of The Market

Even in Florida, one of the most debilitating forms of human emotion is apathy.  Meaning when people suffer from the “I don’t care” attitude, their willingness to make a decision simply freezes.  I’ve noticed a certain apathy myself when I look at my lawn—but my wife has a pretty good antidote for that syndrome.  Too bad her “big stick” method of getting me over that malaise can’t be applied to real estate buyers. 

So how apathetic are real estate buyers?  Oddly the true investors are still sitting on their hands, while the everyday run-of-the mill retirees and local residents are back.  They are looking and they are buying.

Southwest Florida’s Gulf Coast has long been a magnet for retirees looking to buy a piece of paradise.  Before the housing crash, they couldn’t buy fast enough in Sarasota and Charlotte Counties.  But as home values kept falling (and falling), retirees or those thinking about it became afraid and pulled back.

For the last couple of years, buyers were very apprehensive prices were going to continue to drop more, and even after showing a potential buyer a dozen homes, I found them saying to me, ‘Perhaps I should wait until next year.’

Well, next year is here.  Only the professional investors (and by that I mean gold and silver investors from New York) disagree with me.  They ask me if prices going to drop more, and I say—probably not.  And then they laugh and say—we’ll see, we’ll see. Apathetic? Yes--even pathethic--but we will see.

But in spite of their pessimistic views, the number of pending sales in the retiree belt from Bradenton to Punta Gorda recently soared over 56%.

Apparently buyers feel the bottom has come—and that’s a good sign.  Especially since home values in Sarasota and Charlotte counties have sunk more than 50% from their peak.  It’s fair to say prices are still falling in some areas, but the velocity of the decline is leveling off.

If you’ve been a regular reader of this column, you know I am pretty optimistic—in general.  I have called the “bottom” of the market to have been almost a year ago.  And I am satisfied that I was maybe 5% off, but if you were shopping then, you had a huge inventory to pick from—today, not so much.

Now many buyers are more fearful of not getting in soon enough, before prices rise, observers say.  Rising prices are a sure marker that the bottom has been passed—and so have the bargains.

Prices in Florida today are so much more affordable than they were a few years ago.  Seven of the 10 top metro areas where demand is strongest among online house hunters are in Florida, says a recent survey from Trulia.

The top three metro areas on the list, all in Florida, are Palm Bay-Melbourne-Titusville on the Atlantic Coast, Lakeland-Winter Haven in Central Florida and North Port-Bradenton-Sarasota on the Southwest Gulf Coast.

Dane Hahn is an Englewood based  real estate professional, you can reach him at dane.hahn@gmail.com or by phone at 941-681-0312.  See him on the web at http://www.danesellsflorida.com/.

Been Down So Long It Looks Like Up To Me

I’ve always wanted to find a one-handed lawyer.  Not that I want a lawyer with only one-arm.  But whenever I ask my lawyer a question he answers me by saying, “well, Dane…on the one hand you could do this, and then on the other hand you could do that.”  I think if he only had one hand, I might get a straight answer.

And so it is that I find myself mimicking my lawyer, saying that on the one hand, the bad real estate market seems to be over. At least in Englewood and environs, the inventory of resale homes is shrinking and the inventory of new homes is growing. All the while rates are still low (albeit mortgages are hard to qualify for just now). 

While on the other hand prices remain low, lower, lowest.  And so while this is awful news for sellers—with no certain date of a recovery, it could not be better news for investors and new residents in the area, who are picking up nice homes for a song and finding honest to goodness mansions for something less than a symphony.

A great friend who is about to retire called the other day asking me to send her listings of homes for sale on a golf course, with a pool, for under $400,000.  She is a Realtor from Maine, wanting to retire here, and so she honestly understands residence value.  And so you will smile to hear that there are dozens of homes that would fulfill her list of “must-have” needs, but most are closer to $250,000 than to $400,000.  I told her, “on the one hand there are lots of homes you will like, but on the other hand you may not have to go all the way up to $400K.”

A new client of mine wants a house with every bell and whistle.  Saltwaterfront with a dock, plus a pool, plus high ceilings, plus granite, plus multiple garage stalls, plus, plus, plus.  The houses I first found all seemed to lack one or more of his “touchstones”.  Then I found among the expired batch of homes in the “once for sale for almost $2 million” group, one that looks now like it will be perfect for him and his family--and is for sale by a bank for about one fourth of the original asking.  So on the one hand these special houses are out there, but on the other hand, they’re hard to find.

In the good news column, I closed on two houses one day last week.  It seemed like old times again.  I had almost forgotten the excitement of bringing two contracts to the table the same day.  And since that day last week it has occurred to me that Richard Farina’s book title; Been Down So Long it Looks Like Up To Me. Applies to most of us in the real estate business.  To wit: any good news just seems spectacular, while bad news is expected.  Nonetheless, I am hearing more good news than bad right now, and hoping that the marginally good news regarding a general increase in employment will continue to boost the real estate market. 

On a sad note, Richard Farina, the author of Been Down So Long…never lived to experience his own wild literary success;  he fell off the back of a motorcycle on the way home from the publication party for this book, and was killed instantly.  So on the one hand, his life was just getting good, and on the other—well you get it.

Dane Hahn is a real estate professional practicing in Englewood, Florida.  You can reach him at dane.hahn@gmail.com or by phone at 941-681-0312.  See him on the web at http://www.danesellsflorida.com/

The Mother Of All Real Estate Settlements (MOARES)

OK, stop the presses, last week I wrote about our administration’s “most recent” effort to get the real estate mortgage foreclosures straightened out.  It seemed then that the rejiggered HARP program was about as far as the government was going to go and then—OMG--there’s a new program. And if history is to help us name it, I’ll call it MOARES—the Mother Of All Real Estate Settlements.

On Thursday the nation’s five biggest banks, together with state’s attorneys general and federal officials announced the largest housing settlement ever—which will cost more than $26 billion—over shoddy foreclosure practices.  The deal may offer relief to more than one million U.S. homeowners who are having trouble paying their mortgages.  Apparently the banks will chip in $26 billion, and the government will spend the money (sound familiar?)

Of the $26 billion, $17 billion will be spent toward direct relief to borrowers, with 60% going toward principal reductions, or the write-downs of mortgage debt, as well as other kinds of loan modifications or assistance.  $5 billion will go toward a reserve account for state and federal programs and to individual homeowners harmed by bank practices. Negotiators have said that about 750,000 people could receive checks for about $1,500 to $2,000.

About $3 billion will go toward helping borrowers (who are current on their mortgages but have no equity in their homes) refinance into new, lower-cost loans. The program will be similar to an existing Obama administration program (HARP) that seeks to help underwater homeowners refinance their homes.

In a press conference Thursday afternoon, Housing and Urban Development Secretary Shaun Donovan discussed MOARES.  He noted that this historic settlement is the most significant effort we have seen thus far in the financial crisis, and that holding banks accountable whose irresponsible behavior led to the crisis will have a huge impact.  He said this move is critically focused on ensuring homeowners who have been wronged should be able to benefit as well.

Approximately 1 million homeowners should benefit from principal reductions of their loans, and from refinancing--should they qualify.  Donovan stated that the $5 billion going to the various states could be used to aid neighborhoods, as homes that have been left vacant may be purchased and renovated, so property values will increase.  He concluded by suggesting the president believes this settlement is a perfect example of how we can still get things done in this country.

According to RIS Media reports, there are nine other financial institutions in discussions with states and federal regulators, and if they are included, the final settlement could increase by billions of dollars. If these other servicers participate, the total settlement could rise to between $30 billion and $45 billion in penalties—some of which may be used in housing relief.

The next step is for the settlement to be filed as a judgment in federal court. Once the court approves the judgment, servicers will be obligated to ante up their share and the federal courts will then distribute funds into an escrow trust that will distribute cash to the federal government and states.

My opinion on MOARES—it’s not a great plan, the people who have been stung the hardest will never see a penny.  Those who have been holding on and can withstand a delay of another 2 or 3 years may see some relief.  Broken down neighborhoods may get some assistance, and get cleaned up—that’s probably the part of the program that helps all of us the most.  For the banks, it's an expensive solution but closes the door on further fines and issues related to the real estate debacle.  Oddly this solution comes as the election nears--just in time to get the bank's financial support. A latter day quid pro quo.

Dane Hahn is a Realtor practicing in Englewood.  He can be reached at dane.hahn@gmail.com or by phone at 941-681-0312.  See him on the web at http://www.danesellsflorida.com/

Playing the HARP

On Wednesday the president unveiled his controversial plan to help homeowners who are current on their mortgage payments refinance their mortgages into federally insured loans at today's extremely low rates. This isn't really a new program, but instead attempts to turbo-charge an existing federal initiative called the Home Affordable Refinance Program. (HARP)

The plan seeks to help homeowners who are unable to take advantage of low lending rates because they owe more than their home is now worth, a predicament known as being "underwater" on their mortgage.

If you're ineligible for refinancing just because you're underwater on your mortgage, through no fault of your own, this plan can be a help. On his Wednesday speech the president said borrowers will be able to refinance at a lower rate, thereby saving hundreds of dollars that can become “disposable income” and will trickle down into the economy. The administration figures the plan will save borrowers as much as $3,000 annually, and believes this money will find it's way into the economy instead of into the banks coffers.

Obama went to great pains to stress that the new program is designed to help responsible homeowners who are hurt by falling home prices--not those buyers who overreached and bought more than they could afford. Millions of homeowners across the country are trapped in homes worth less than the mortgage they carry, and thus are unable to refinance to improve their cash flow. The program will not address the issue of investment. Homeowners will still own a home worth less than its mortgage and taxpayers would be at risk if these homeowners eventually walked away from their new loans.

The program's cost is estimated at between $5 billion and $10 billion. To pay for it, Obama proposed a tax on the nation's biggest banks. Opponents suggest that numerous administration efforts to assist homeowners have failed and that the housing market instead needs to be allowed to bottom on its own.

Naturally the banks are not anxious to lower the rates they are now charging, and so the financial sector didn't expect the president's proposals to advance.

"We all agree that getting any legislation through will clearly be an uphill battle," said David Stevens, president of the influential Mortgage Bankers Association.

Consumer advocacy groups applauded the proposal and the bank tax that would pay for it. The plan would let the Federal Housing Administration, Freddie Mac and Fannie Mae insure underwater mortgages up to 140 percent of current appraised value. A home could be worth 40 percent less than its appraised value and still qualify for insurance on a refinanced mortgage. The bank tax would be used to bolster the reserves of the Federal Housing Administration.

The program—which is now a proposal--was rolled out to borrowers whose loans were backed by Fannie Mae and Freddie Mac and who were current on their payments. The idea was simple: If you were making your payments on time but didn't have enough equity to refinance, you would be able to lower your rate without having to pay down your mortgage balance.

Initially, the program was limited to borrowers who owed between 80% and 105% the value of their homes. In mid 2009, the program was opened to borrowers who owed up to 125% the value of their homes.

But a series of unforeseen "frictions" have led fewer borrowers to take up on the offer of lower rates. Fewer than 900,000 homeowners have refinanced under HARP over the past 2½ years. The requirements are as follows:

• You must live in the home being refinanced.
• The program only applies to Fannie Mae or Freddie Mac mortgages.
• The homeowner must be able to afford the new lower payment.
• Your current mortgage must be up to date with no late payments in the past twelve months.
• Payments on the new loan must be more affordable or more stable than on the existing loan.
• The new mortgage balance may not exceed 125% of your home’s current value.
• The maximum Loan to Value (LTV) cap has been removed for fixed rate mortgages.
• Homeowners looking for an adjustable rate mortgage the maximum LTV is set at 105%.

Dane Hahn is a real estate professional practicing in Englewood. He can be reached at 941-681-0312 or by email at dane.hahn@gmail.com. See him on the web at http://www.danesellsflorida.com/