I try to keep up on changes in the lending arena, and was chatting yesterday with a loan officer at one of the local banks yesterday. She mentioned a couple of recent changes that I hadn't been aware of. These changes will likely have a significant impact, particularly on second home buyers who are looking to purchase with less than a 20% down payment. First, Fannie Mae, the large purchaser/underwriter of mortgage loans (I'm never sure quite how to refer to Fannie; maybe I should just say the big gorilla in the room) is increasing the minimum down payment for second/vacation home purchases to 15%. A 15% down payment is still less than the conventional/conforming 20% minimum, so those loans would still carry PMI, private mortgage insurance. And there's the second rub. One of the large PMI insurers is now requesting that 2 of the 3 appraisal comps used to demonstrate have sale dates within 90 days.
The low sales volume over the past 3 months, combined with the skewing over that time frame to very low priced and foreclosure properties, is going to make it very challenging to meet that 2 comp requirement for moderate priced or better properties. It's important to keep in mind that these two factors — higher down payment requirements combined with tighter PMI guidelines — only affect second home buyers looking to make less than a 20% down payment. Primary home buyers have the FHA loan programs available to them, which permit a down payment as low as 3.5%.
While most second home buyers I work with have a 20% or higher down payment and qualify for conventional/conforming loans without PMI, there is still a sizeable group of second home shoppers, particularly younger buyers in their 30's, who are looking to purchase with 10% or 15% down. Some of these buyers may need to downshift their price range to be able to make a 20% down payment. The availability of 90 day comps may also become a key factor in whether a house is purchaseable or not.
We may also start seeing more creative deal terms to help buyers who are, say, in the 15% down payment range get to that magic 20% number to qualify for a conventional loan without PMI. This could possibly take the form of a seller concession towards closing costs, or waiving the buyer reimbursement of seller-paid property taxes to leave a little more cash on the buyer side of the ledger to be applied to the down payment. I don't know what's possible in this arena yet, because it's new territory for me. Lenders have percentage limits for seller concessions, and I don't know how something like a waiver of property tax reimbursement would be treated on a settlement statement.
It's also important to keep in mind that the lending landscape keeps changing. There are a number of PMI insurers, for example, and one of them may be amenable to a wider comp window in a low density rural area. Likewise, Fannie can change it's requirements on a dime, and not all loans go through Fannie. This isn't to say that a second home buyer with great credit but only 10% down won't be able to get financing. But you'll likely have to shop harder for the money.
If mortgage lenders had stayed true to a minimum 20% down payment requirement, I think it would be doubtful the economic mess we're in would have ever gotten to this scale. I guess requiring 20% down was considered old-fashioned and uncreative.
Posted by: DN | January 31, 2009 at 11:06 AM
Very interesting points Dave.
The following are the one month closing sale prices for Sullivan County from January 1 through January 31 2009.
These figures are only for Sullivan - not for Orange, Ulster or Pennsylvania.
==========================================================
CLOSING SALES - HOMES - Sullivan County, NY - January 2009
==========================================================
Median: $115,000
Average: $129,880
==========================================================
That's a lot different than 150k and 171k respectively.
If we compare the one month January 2009 data to Dave's three month figures from 10/1/2008 through 12/31/200,, the current numbers for January 2009 reflect a difference to the downside of (-24%) for the average price and (-23%) for the median price to his three month totals of October through December 2008.
I'm sure when Dave compiles his three month totals for 11/1/2008 through 1/31/2009 - and posts his monthly report, the trend, unfortunately, will again be lower.
B.
Posted by: b. | January 31, 2009 at 12:12 PM
Yes, just what we need: "creative deal terms" to assist marginal buyers to generate real estate commissions. Despite all we've been going through and are facing in the indefinite future, old habits die hard.
Posted by: andy | January 31, 2009 at 02:34 PM
Hi, Dave,
Since we specialize in showing owners how to rent their second homes once they've taken possession, we don't follow mortgage details. Still, there was something in the back of my mind about mortgages for second homes. Here's what I found on HomeAway's Owner Community:
"With a 'second home loan' you must be able to qualify under the second home's terms. Generally it means you have to be able to afford it just as you would your first home. Under this loan, there is no consideration for potential rental income. Typically 'second home loans' have around the same interest rates as a primary home loan.
"An 'investment property loan' is a mortgage where everyone concerned knows you are buying the property strictly as an investment. Accordingly, certain factors come into play. The bank will want to know the rental history of the property, which will be taken into consideration for your affordability factor. Also, these types of loans are considered by the lender to be higher risk. So the risk for the bank translates into higher interest rates and higher fees for you."
Hope this helps.
-- Alfred Glossbrenner, www.fullybookedrentals.com
Posted by: Alfred Glossbrenner | January 31, 2009 at 06:18 PM
Andy, "creative deal terms" are not in the same category as subprime mortgages floated to unqualified borrowers by the lending industry. Back in the early 80's, when mortgage rates skyrocketed into the double digits, hitting, I believe, at over 15% at one point, there was a lot of creativity in how a deal was put together, notably the buydown of the rate with points by the seller or the widespread use of relatively short-term second mortgages held by sellers. In a year or two, the mortgage rates fell back to more manageable levels, buyers refinanced and the seller seconds were paid back. The credit markets are experiencing a similar (but arguably more severe) turmoil that may call for some creative approaches to help buyers get into houses.
The big difference between what I'm talking about, and the often irresponsible lending of the past few years, is that lending standards have tightened, and overall I think that's a good thing. In the scenario I'm describing 1) buyers must have good credit and a high FICO score, 2) buyers must have documented income to repay the loan (no-doc or 'liar' loans are a thing of the past) and 3) the house has to appraise using reasonable standards. I'm also talking about buyers who have saved up reasonably good down payments, but are a little shy of the magic 20%. There's a big difference between a buyer who has saved up a 15% down payment, and the practices of the past few years where buyers could buy a second home with 5%. 3% or even 0% down. Having 15% in the deal is a lot different than having 3% in the deal.
Finally, buyers in New York state (at least downstate, which includes Sullivan) are at a bit of a disadvantage because of the relatively high closing costs here. Here in Sullivan, as in most downstate counties, Realtors are prohibited from writing "fill in contracts" (because the local bar association needs to approve the use of Realtor fill-in contracts), so both the buyer and seller must hire attorneys to handle the contract and closing process. In contrast, in Pennsylvania, most transactions are handled without attorneys. Realtors use a standard fill-in contract form, and the closing is handled "in escrow" by a title company. That is far less costly than an attorney-handled closing. Title insurance rates in New York are also among the highest in the nation. (So where's our crusading attorney general in taking up that one?) Both of those result in New York buyers who've saved up X dollars towards a house to have to put more towards closing costs and less to a down payment.
Posted by: David Knudsen | January 31, 2009 at 07:41 PM
B, in your strident crusade to trumpet that the sky is falling (and the 3 month running average I use is far too stale to adequately document the market's collapse), you seem to have overlooked that a miracle akin to the second coming (or the first coming, if you're Jewish) has occurred! In only 8 days, from your post of Jan. 24th (copied in below) for the period of 12/26/08 through 1/23/09, the median has jumped 31% and the average 17% to the levels you posted for the full month of January 2009. Truly a remarkable recovery!
B's post of 1/24/09
=========================================================
12/26/2008 through 1/23/2009
CLOSED sales - Within Sullivan County, NY - Last four weeks:
============================================================
MEDIAN: $87,450
AVERAGE: $110,710
======================================
Posted by: David Knudsen | January 31, 2009 at 08:36 PM
Dave,
In the last seven days, from looking at the credit reports and other data, there were eight closed sales in Sullivan.
The median for the past week was $150,000.
The average for the past week was $ 175,312.
Congratulations! That is enough to bump the median / average numbers up from where they were. And...no foreclosures!
In any event, January's (31 Day) monthly median is 115k and the average is 129.8k.
Didn't you mention that you really can't use weekly data?
When you have a moment try running the numbers for the whole month of January and you'll see that Sullivan in in the low 100's.
B.
Posted by: b. | January 31, 2009 at 09:03 PM
B, are you serious?? Dave is out of line for comparing your most recent 4-week data dump with your previous 4-week dump? Because the difference hangs on an inconvenient increase in sales prices at the end of January? Your response makes David's point even better than his original comments!
Posted by: B-mused | January 31, 2009 at 09:56 PM
Before you shoot B... his data shows how abnormal the market was several months ago (post Lehman). The only deals that were being done were foreclosures and very inexpensive homes. This was what was selling! Of course, this data is going to bounce around given sample size and when some more expensive homes get sold. It is also going to flow through Dave's three month sample over time, so highlighting the mix issues has value.
It is also worth noting that B was not claiming that home prices in SC are down to this level. He only gives the median/average for closed deals in the last 30 days. This is fact... as long as his data is correct, and I have no reason to doubt it.
Instead of shooting B... I think it is more interesting to consider why only foreclosures and lower end homes were selling. I don't think that much has changed since then... Financing is still difficult to put together. The local economy remains weak, and jobs continue to be lost. People are less wealthy than they were a year ago. Confidence in everything (maybe other than Obama) is down. Lastly, there is a huge gap between seller and buyer expectations. This must close over time... one way or the other.
Posted by: henry | February 01, 2009 at 07:30 AM
I should add that I expect (and hope) that the real estate market gets marginally better (from basically dead) over time as we move away from the "shock and awe" of the Lehman days when it appeared that the financial world could collapse tomorrow.
Posted by: henry | February 01, 2009 at 07:43 AM
Thank you Henry.
All I presented was the data.
I would agree that weekly closing data should not be taken on its own since the closing sales in Sullivan is much too small.
However, monthly data (over 28 to 31 days) should be presented and the closing sales data for Sullivan (taking out sales in Orange, Ulster and Pennsylvania)for January 2009 is correct and the differential is close to 23% off Dave's most recent three month figures.
In my view - that's a lot.
Additionally, any closed foreclosures should be included in any data compilation since they are a fact of life in Sullivan for the time being. To turn a blind eye to foreclosures and not compute them into the monthly mix certainly skews any true portrayal of the overall real property market in Sullivan.
B.
Posted by: b. | February 01, 2009 at 07:58 AM
B - The sample for monthly data (let alone weekly) is small and must be taken in context. You can't say that home values in SC are down 20%+ based on a sample of foreclosures and low end homes... which is apparently the only real estate that sold.
Still, it is interesting. It shows a market in shock... which is not all that surprising given the events at the time.
Posted by: henry | February 01, 2009 at 08:33 AM
Sorry, Dave, I'm not buying it. Subprime is not the only reason we're in this fix; Alt-A mortgages made to "almost prime" borrowers have turned out to be a disaster, too. Call it "creative deal terms" or anything else, you are still talking about moving the goal posts to sell a house to someone who can't do it within the reasonable but prudent 20%-down guideline. That is a mistake. If they've got the credit score and the income, let the borrower (and the seller and the real estate broker) wait until they save up the remaining 5%. If they don't have the financial discipline to do that, that tells you something. And come on, while anybody would prefer not to have to pay a lawyer, the cost of a lawyer to close a house in sullivan County is peanuts -- what are we talking about, $1,000 at the most? Probably closer to $750. But even if you assume $2,000, if that's a deal-killer, the borrower is too close to the line. Loan underwriting NEEDS to be tightened; "creative" ways to get around tightened guidelines is the last thing we need now.
Posted by: andy | February 01, 2009 at 10:51 AM
I understand there is nothing magically about a 20% minimum down payment requirement. Perhaps 15% is good enough, or maybe 25% should be the "right" number. My best guess is that 20% seems to be a tried and true figure because it keeps most homeowners' skin in the game even when prices have fallen in past cycles. Eventually, housing prices will fall to a level and steady themselves at a level where a buyer with solid credit and a 20% down payment can comfortably afford to buy a house from their income without having to count on housing price appreciation or funny terms of credit to make the numbers work.
Posted by: DN | February 01, 2009 at 12:07 PM
DN, it's not just the "magic" of 20%, it's the principle (no pun intended) -- I mean, imprudent real estate transactions have literally ruined the world economy, and now, with every reason to think that things will stay this bad or get worse for the indefinite future, the idea of the real estate industry promoting "creative deal terms" to make a sale, well..... And remember, we are talking about "creative" transactions designed to evade lending guidelines for a purely luxury buy -- a second home, not primary shelter. As for, "oh, this is different..." -- yeah, right. If an extra 5% down payment plus $800 for lawyer fees is going to kill a second-home deal, it should be killed. Time for everyone to get used to the New World: fewer people will be able to buy nice extras; yes, the standard of living is going to go down for all of us. If we're lucky, not to an intolerable level. But if we immediately return to "creative" ways to get around rules designed to protect the financial integrity of the system, we will deserve what we get.
Posted by: andy | February 01, 2009 at 01:02 PM
Invest at times of maximum pessimism.
Posted by: Rod | February 01, 2009 at 01:27 PM
Rod,
What pessimism? Most sellers (as evidenced by ask prices) still believe that their home, in contrast to all other assets, has not decreased in value in the last twelve months.
It takes time for illiquid markets to adjust. Give it a year or two of stagnation and inventory build.
Posted by: henry | February 01, 2009 at 04:13 PM
Why are raw land prices not coming down??
I recall seeing a post on this blog a few months ago suggesting $2,000 to $2,500 / acre for large parcels. Granted, I don't have access to the MLS showing actual sales, but listing prices seem so unreasonably high. Even if some of these sellers were willing to negotiate down 30%, the prices still seem unreasonable. I think some land owners simply added $2,500 / acre to their asking price once the gas companies came in and started offering leases at that price, but those companies have packed up and gone home for the foreseeable future.
There are so many important attributes of raw land that go into value (cleared vs. wooded, frontage, shape, grade, water, wetlands, etc), but even when I see a piece of land the fails on all of these, the price still seems to be above $2,500.
Any thoughts?
Posted by: SHO | February 02, 2009 at 03:06 PM
I'll bite.
Seller's are more resisitant to lower their asking prices on vacant 5 to 10 acre lots since their carrying charge is minor compared to carrying a house.
Assesments and taxes on vacant land are less than on a house.
Plus, you don't have to worry about heating, maintaining and insuring vacant land as you do a house.
Additionally, chances are that there is no debt service to carry such as a mortgage on a vacant lot compared to a house. Many sellers paid cash or have since paid off their note.
A wooded six acre lot might have been purchased for $20,000 to $25,000 back in 2002. Taxes are roughly $1000 per year so the owners cost now might be $27,000 to 32,000.
However, many owners still have asking prices of $50,000 to $60,000 for their lots thinking they can pocket an easy profit of 25k to 30K.
Not anymore.
Good luck to them - however it's not working since there is currently plenty of land.
If they want to continue paying annual taxes and wait until the market turns then their current cost keeps creeping up.
And they have to wonder how long will it really take for the market to turn. Could be years.
As far as gas leases, all of the landmen have vanished and in retrospect, those owners of vacant land that signed and received payment back in June and July of 2008 are now considered quite smart as opposed to those that held out for more and more money and consequently when the price of oil and gas plummeted 65% in the last six months got absolutely nothing.
Online at:
http://www.recordonline.com/apps/pbcs.dll/article?AID=/20090201/NEWS/902010326
B.
Posted by: B. | February 02, 2009 at 04:44 PM
B., I think you pulled the trigger too soon for January and may need to revise your numbers a bit. From the Sullivan MLS, I'm showing 27 single family sales in Sullivan County in January, with an average sales price of $191,437 and a median sales price of $125,000. Of course, the average was pulled WAY up by a $1.75M lakefront home at Chapin that closed on 1/30. This illustrates the dramatic impact a single sales, or a couple of sales, can have on these aggregate statistics when the universe of data points is so small.
Posted by: David Knudsen | February 02, 2009 at 04:45 PM
That's funny - a lakefront house at Chapin. Has anyone seen the lake lately? The lake has left the building.
Posted by: Tim | February 02, 2009 at 05:29 PM
Dave,
The median data versus average data is a more realistic barometer for prices for exactly the reason you state.
Sullivan has far less volume than other counties like Rockland, Orange or Ulster and one sale can unfairly give the reader a false impression thus by "averaging" {i.e.; total dollar amount of sales / total amount of sales} versus median figures.
Most people would agree that by calculating the median {i.e; total sales / 2 and then finding out what the median price is} is a better indicator. Not perfect - but better than the average for the reason that one big sale will skew the data.
There was a sale at Chapin for over 1MM which just showed up in early February of 2009 - not January. However, that's really not indicative of the health of the overall market.
For every sale at Chapin, there are about ten to fifteen foreclosure sales in Sullivan. What does that tell you?
I stand by the January 2009 stats.
Hopefully, there will be many more million dollar sales in Sullivan this winter!
B.
Posted by: B. | February 02, 2009 at 05:39 PM
Yes, medians are preferred for non-uniform distributions like property sale prices, but even medians are only as good as the sampling of data. Take another look at these different 4-week samples, all taken from within a continuous 5 week period...
From "B":
Dec 26 - Jan 23 -- Median: $87,450 -- Average: $110,710
Jan 01 - Jan 31 -- Median: $115,000 -- Average: $129,880
From David:
Jan 01 - Jan 31 -- Median: $125,000 -- Average: $191,437
and subsequently David revised his January median calculation to $129,000.
It's not hard to understand how this happens: the full range of house styles/sizes/prices that exist in the Sullivan county market can only be represented by a fairly large number of sales. The handful of sales in any given week can't come close to reflecting the range of properties that will sell in a few months, so we get numbers that bounce around all over the place. Currently this effect is exaggerated by an historically large number of foreclosure sales of very modest homes, which have been distributed somewhat unevenly with sales of much more expensive homes. Any particular weekly, or monthly, sample from this kind of sales activity is useless if it doesn't accurately predict sales in the next sample period.
Right now it's useful to talk about such things as the number of sales, and the kinds of properties that are selling (or not selling), but it is clearly very misleading to give any credence to the actual medians and averages compiled for periods even as long as one month.
Posted by: mal | February 06, 2009 at 09:06 AM