Realty Viewpoint: Rising Housing Sales Should Be No Surprise

For the first time in seven months, existing home sales increased, says the National Association of Realtors. February sales rose nearly three percent over January. That’s encouraging says the NAR, but is it enough to spur buyers?

For one thing, the sales pace, even improved, is still nearly 24 percent lower than a year ago, and year-over-year home prices are down over 8 percent.

But that’s exactly why home sales are improving. Home sellers have dropped prices enough to be attractive, and coupled with below six percent interest rates, February was a good time for buyers to lock a rate and put a contract on a home.

Consider that home prices in February 2007 were $213,500 and interest rates for the month averaged nearly 6.5 percent. In 2008, prices are $195,000 and interest rates averaged 5.9 percent.

So it shouldn’t be surprising that housing inventories have dieted down to a 9.6-month supply from over 10-months on hand in January.

Metropolitan areas are showing the most growth in housing sales with roughly half the major markets showing mild increases. For those communities with the density to support multi-family homes like condominiums and coops (up 3.7 percent), the improvement in sales was even greater than single-family (up 2.8 percent.) by 30 percent. Condos and coops also held their prices a little better than single-family homes at $211,700 or five percent below February 2007. That’s despite a 13-month supply on hand.

Market gains were highest in those areas in communities that are helping themselves — like Oklahoma City — which has put millions into the revitalization of its downtown and has plans to extend its scenic historic district water feature, the Bricktown Canal, through the warehouse district around the city.

They’re also improving in areas that were depressed because of overspeculation such as the Western segment dominated by California, Nevada and Arizona. Existing-home sales in the West are down 13.4 percent from a year ago, and the median price is down the most of any region at 29.2 percent. But the good news is that sales slipped only one percent in February, which suggests that the slide could be coming to an end.

One month doesn’t make a spring, things could be improving but only if more homes aren’t dumped on the market, interest rates hold in a reasonable range, and the credit crisis improves.

One ways to see if there’s a positive trend is to watch for the new home sales report from the Commerce Department, due Wednesday.

30-Year Rates Inch Above 6 Percent

Fueled primarily by inflation concerns, interest on long-term mortgage rates moved higher for the week. Freddie Mac reported a rise to 6.04 percent from 5.72 percent last week on 30-year fixed loans, which broke the 6-percent threshold for the first time in seven weeks. 

Rates on 15-year loans, which are popular in refinance deals, bumped up to 5.64 percent from 5.25 percent; while five-year adjustable-rate mortgages settled at 5.37 percent, up from 5.19 percent. 

One-year ARMs, however, resisted the downward trend and slipped to 4.98 percent from 5.03 percent in the week-to-week survey.

I’ll Buy Your House If You Buy Mine

Eager to move closer to their grandchildren in Tennessee, retirees Allen and Wilma Sawtelle put their home in the Southwestern Nevada town of Pahrump up for sale in August. They got nowhere. “The market is just dead,” says Mr. Sawtelle. At their open house, he says, “I think one guy came, and he’d been drinking.”

Poking around the Internet for home-selling tips, Mr. Sawtelle, a 71-year-old former investigator for a law firm, discovered that anxious sellers like him are trying a new tactic: connecting with other sellers who might agree to “swap” — or buy one another’s property. The Sawtelles found a couple who were looking to move to Nevada, and whose house for sale was within driving distance of their grandchildren.

The concept of trading homes temporarily for vacations has long existed, but now it’s being adapted to the slumping real-estate market as people, particularly in the Sunbelt and other slow spots, scout for ways to unshackle themselves from their property. Anecdotal evidence suggests the number of people doing this is still relatively small, but it has popped up from virtually nothing in recent years.

While some form of bartering has been going on since the beginning of time, experts say they aren’t aware of house swapping being done in previous down housing markets. The technology and access to it didn’t exist several decades ago. The current model is based on new technology that enables computerized matching of a large number of properties and owners’ swap criteria.

Fans say swapping is suited to the current down market, where people are extra nervous about buying a new house before selling their old home.

Not everyone is a potential swap candidate, however. Swapping typically requires one party, or both, willing to settle for a new dwelling that is less than their ideal, either in amenities or exact locale. And searching for a swap is much like using a dating service: The odds can be good but the goods can be odd. Before finding his match, Mr. Sawtelle first had to deal with six unsuitable swap propositions, including one involving 450 hectares — more than 1,000 acres — in Costa Rica.

Getting Financing

Experts say it’s probably best not to get involved with someone who owes more money on their house than what it is worth — because they could have a tough time getting financing. And the transaction itself isn’t without challenges. OnlineHouseTrading.com recommends that both clients use one title company that knows not to complete the deal “until everyone signs off.” Daniel Westbrook, the co-founder of the company says, “the scariest thing that could happen is that you buy someone else’s house and they don’t buy yours.”

Both sides of a swap transaction typically close simultaneously — taking away the risk of being saddled with two mortgages at once, or of having to borrow more after purchasing a new home because your old house didn’t sell for as much as you thought it would. When swap partners meet directly online they also save on brokers’ sales commissions — usually 4% to 7% in most markets. If there are homes of unequal value, one buyer provides the cash or gets a mortgage to make up the difference experts say.

Mr. Sawtelle found his swap via a $19.95 listing on OnlineHouseTrading.com, one of at least six swap sites started in the past year. Four have started in just the past seven months, including OnlineHouseTrading.com, GoSwap.orgDaytonaHomeTrader.com and DomuSwap.com. Together the six sites have roughly 16,000 postings. At Craigslist.org, the popular ad site, the number of “home swap” listings — which includes people trading homes temporarily for vacation — jumped 56%, to 7,392 in the 12 months ending in December, the company says, and much of the growth came from people trying to permanently sell each other their homes.

Developers in the weak market are getting into the act, trying to unload new homes by offering to buy peoples’ older, less expensive ones — essentially taking trade-ins like car dealers. Developers say that they do have to then worry about selling the trade-in home, but it is more important for them to avoid getting stuck with a new subdivision of empty homes, which is bad for their image and their wallet.

Developer Florida Lifestyle Homes in Daytona Beach says it will buy homes of people who will “trade up” to a new home that has a value at least 20% greater than the one they’re in. Patrick Sullivan, the owner of the company, says he has made 21 offers and completed eight trades since early 2007.

Some brokers who don’t want to get cut out of the new trend or lose commissions are introducing their own swap strategies. Mapp Realty & Investment Co. in Sarasota, Fla., has launched a Web site where visitors can view a list of properties available for exchange.

Of the 1,919 houses listed on DomuSwap, 13% — or 250 — were listed by brokers. Some of them see this as a supplement to their other marketing efforts, since it opens up a new market of potential buyers. Others don’t like the intrusion.

David Moskowitz, founder of DomuSwap.com, says “I have been seeing resistance from realtors. …. However, business and technology is moving in this direction.”

Walter Molony, spokesman for the National Association of Realtors, says the industry has long experimented with all kinds of business models, and “embraces all kinds of ideas.”

Within three days of listing their home in October, the Sawtelles were matched with Amy and Roy Farr, a young Georgia couple who needed to relocate to Southwestern Nevada for Ms. Farr’s job with a carpet manufacturer. For a year, the Farrs had been trying to sell their house in Cartersville, Ga. — which, it turned out, is an hour’s drive across the border from the Sawtelles’ grandchildren in Chattanooga.

‘A Little Mansion’

Looking at photos, the Sawtelles liked the Farrs’ house, particularly the pillars out front. “It looked like a little mansion,” says Mr. Sawtelle. The Farrs traveled to Pahrump to see the Sawtelles’ house. “It wasn’t ideal,” Mr. Farr says. It was about half the size of the Georgia house. But it was “cute,” he says, and “we were just very motivated to do something.”

On Nov. 30 in Pahrump, the couples held simultaneous closings, with the Farrs selling their house to the Sawtelles for $285,000, and buying the Sawtelles’ house for $140,000. The Farrs walked away from the Georgia house with cash. The Farrs reckon they saved about $20,000 in brokerage commissions, while the Sawtelles calculate their savings at about 3%, or $4,100.

“We’re tickled pink,” Mr. Sawtelle reports from Georgia. But the Farrs weren’t quite ready for the isolation in Pahrump. “You have to drive 60 miles over the mountain to get to things,” says Mr. Farr. The Farrs now want to trade their new home for one in Las Vegas — closer to their jobs and social activities.

Neighborly Swap

Swaps can also work over shorter distances. Lorry Eible, who owns the Foxy Lady clothes boutique in Sarasota, Fla., had built a 4,000-square-foot Mediterranean-style home as a business venture in 2005, but couldn’t sell it. “For two years, we didn’t really have any legitimate offers,” she says. In December, she added a few words to her “for sale” sign: “Will Consider Exchanges.”

“I immediately started to get phone calls,” she says. She got two offers, and accepted one from a neighbor who wanted to move up to a bigger house. He offered to sell Ms. Eible his smaller house — plus a rental property. In a closing scheduled for tomorrow, Ms. Eible will sell her house for $1.6 million and buy the neighbors’ property for about $1.2 million. She says she’s not getting as much money as she’d hoped, but “what this did do is give us the ability to move on.”

10 Frequently Asked Short Sale Questions

Here are 10 frequently asked short sale questions that are very helpful especially if you are just getting started or considering short sales as a means to acquiring pre-foreclosures.

1. What happens to the seller’s credit rating when they allow an investor to short sell their property?

What typically happens is the loan will show up as “paid” on their credit report; however there will be a notation that says “settled for less than originally owed” or something along these lines. It is more favorable for a homeowner to short sell than to have a foreclosure on their credit report.

2. Where do you find investors for short sales?

Depending on where you live, you may see investors who advertise with bandit signs or in your local newspaper. Call the investors directly and ask them if they are experienced in doing short sales and if they would be interested in working with you. Another good place is your local real estate investors club meeting.

3. Define a short sale?

A short sale is really a form of pre-foreclosure sale and occurs when the mortgagee agrees to accept less than the loan amount to avoid foreclosure. A negotiated short sale results in a discounted purchase price for the buyer. The buyer would finance the acquisition much the same as in any conventional realty acquisition… but without the luxury of time.

4. Can an owner profit from a short sale?

The seller cannot profit (monetarily) from a pre-foreclosure short sale.. But there are always exceptions to the rule.

5. How do bankruptcies affect the possibility of doing a short sale?

Most mortgagees won’t consider a short sale if the homeowner is in bankruptcy…why? Because negotiating a short sale payoff is considered a collection activity. Collection activities are prohibited in bankruptcy.

6. Can somebody tell me what documents do I have to include in a short sale package?

Documents depend on the lender. Each lender has different requirements. It is typical to require hardship letter, purchase and sales contract, ECOR, settlement statement (HUD 1), net sheet, pay stubs, bank statements, personal financial sheet (monthly budget), amongst other things.

7. What percentage of mortgage companies send someone out for an appraisal on a possible short sale?

All lenders order a BPO or full appraisal of the property before making their decision to accept or reject the short sale offer. This is there only way of assessing the value of the property.

8. How late in the pre-foreclosure process can you start a short sale?

Try to allow a window of at least 90 days to effectuate a mortgagee approved, pre-foreclosure Short Sale.

9. What is a Due on Sale clause?

“Due on Sale” Clause (DOS) Provision in a mortgage or deed of trust calling for the total payoff of the loan balance in the event of a sale or transfer of title to the secured real property. A contract provision which authorizes the lender, at its option, to declare immediately due and payable sums secured by the lender’s security instrument upon a sale of all or any part of the real property securing the loan without the lender’s prior written consent.

For purposes of this definition, a sale or transfer means the conveyance of real property of any right, title or interest therein, whether legal or equitable, whether voluntary or involuntary, by for deed, leasehold interest with a term greater than three years, lease-option contract or any other method of conveyance of real property interests. Standard language which states that the loan must be paid when a house is sold.

10. Will banks allow a short sale when the owner has some or a good amount of equity?

If a property has what the lender would consider a substantial amount of equity, chances are they would consider allowing the property to foreclose and then reselling it closer to the retail value. Focus on homes that do not have much equity. Your job will be to create the equity in the home by negotiating a successful short sale.

IRS is Eyeing Real Estate Practitioners

The Internal Revenue Service is paying close attention to the definition of “Real Estate Professional” when it reviews tax returns. Under the IRS Code and Regulations, real estate professionals are defined as those who spend 750 hours or more annually handling real estate-related activities. 

Real estate professionals with property investments cannot record more than $25,000 in losses against their real estate income if they earn less than $100,000 and no losses at all are permitted if they earn more than $150,000. However, there are no limits to taking real estate losses against other forms of income. 

Given that the IRS definition of real estate activity requires “brokering” property sales, purchases, or leases, two cases in California reveal auditors declaring that real estate agents are not real estate professionals.

Don’t Fear Falling Prices

Yale Professor Robert Shiller, whose Case-Shiller 20-city home price index has become an industry standard, says people shouldn’t fear gradually falling home prices.

“There’s nothing troubling about a gradual correction of home prices. If we keep our incomes at the current level and home prices go down we are richer, we can buy more housing,” Shiller says.

But if home prices fall suddenly, Shiller says that could undermine housing as well as consumer confidence and the economy.

There has been a misperception that houses will constantly appreciate, Shiller says. “Sometimes people will try to imagine that we can have both high home prices and affordable housing. But I can tell you that doesn’t add up,” he says.

“You either have high home prices or lower home prices. And lower home prices are what we want, and people shouldn’t be afraid of that,” Shiller says. “Most of us care about our children and grandchildren, and these people have to buy houses so why would we want high home prices? We want economic growth, we don’t want high home prices.”

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