House-Price Index Readings Can Be Inflated, Built on Shaky Foundations and Far From the Right Neighborhood
The Wall Street Journal Online
By CARL BIALIK
http://online.wsj.com/article/SB122722235538745845.html?mod=djempersonal
The good news is your home may be worth more than the rock-bottom price that your neighbors' houses fetched. The bad news: No one but you might think so.
The one point of widespread agreement in the real-estate industry is that there is no single accurate index of home prices. They are all over the map, cover different sets of homes and may exclude parts of the country or be unduly influenced by the mix of homes sold in a given month.
A sold sign is displayed in the yard of a house in Clarksville, Tenn., in October.
As the home market surged earlier this decade, the two leading indicators of home prices diverged. One didn't count homes sold with exotic or subprime mortgages, which fueled much of the bubble. These same properties are often the ones going on the auction block today at severe discounts, pulling the other home-price index down -- some say to unrealistic lows.
To address these discrepancies, indexes are going increasingly local. Other, less-well-known measures of home prices -- some of them available only to paying customers -- are adjusting to exclude homes sold by banks.
Sales of foreclosures and other distressed properties accounted for 35% to 40% of transactions in the third quarter, the National Association of Realtors said this week. The discount on such properties, often sold by banks that need to clear inventory quickly, can be 30% to 40% compared with similar properties sold by the resident, according to Damien Weldon, a vice president of credit-risk products and analytics at First American CoreLogic. The company's Loan Performance division is producing a new index without these discounted sales, a distinction that was "not important a few years ago, but now it's very important," Mr. Weldon says.
Behind the Home-Price Indexes
The numbers from home-price indexes are widely watched. The Federal Reserve uses them to measure the value of housing stock. Banks use them to determine whether mortgages are underwater and to estimate the value of homes they will have to sell after foreclosure.
But the indexes may be leading everyone astray. Just as respondents to election surveys are meant to stand in for the broader electorate, the homes being sold need to represent all homes. The problem is, producers of these price measures aren't sure that sale prices reflect the values of houses not on the market.
"People put all their eggs in the sales-price basket," says Andrew Leventis, a senior economist with the Federal Housing Finance Agency, which produces a home-price index.
"Whether the transaction pool is reflective of the entire housing stock -- nobody addresses that problem," adds Karl Case, professor of economics at Wellesley College and co-creator of the Case-Shiller Index, a competitor to the federal government's measure.
The Case-Shiller index includes properties that had subprime loans attached.
"That's the stuff that went down most substantially, and that's probably the stuff that went up most substantially," Prof. Case says.
The federal index, though, doesn't include such properties, instead accounting only for properties with financing from mortgage giants Fannie Mae or Freddie Mac. For that reason, many prefer Case-Shiller.
"I believe S&P Case-Shiller for the areas it covers," says Thomas Lawler, a housing economist in Leesburg, Va.
Case-Shiller has shown a steeper decline in markets with many distressed sales. The second-quarter year-over-year declines in San Francisco, Phoenix and Las Vegas ranged from 23% to 28%, according to Case-Shiller. But the federal gauge recorded declines of only 5.8%, 11% and 18%, respectively.
Not everyone thinks the Case-Shiller index is useful. Richard A. Smith, chief executive of real-estate broker Realogy Corp., says the index omits 13 states. "Case-Shiller as a broad index is inaccurate," Mr. Smith says.
David Blitzer, chairman of the index committee at Standard & Poor's, which publishes Case-Shiller, responds that "the sampling and data collection is as good as it can be."
"One's got to be wrong," Mr. Smith said of the dueling Case-Shiller and federal indexes. "Nobody will know until the book is written."
Yet there is no surefire way to know which index got closer to the truth. Each year since 2000, the Census Bureau has asked homeowners to report the value of their home, but "it doesn't necessarily jibe with assessment records or anything like that," says Jeanne Woodward, a Census Bureau statistician.
Another potential check on values is home appraisals. But Dr. Leventis said there are two possible sources of upward bias. One is that people often choose to get their homes appraised when they figure the value has risen sharply and they can convert some of that to cash with a refinancing. Another is that appraisals tend to overstate the value of homes, perhaps because homeowners seek the most-favorable assessment.
"I really don't see a benchmark" against which to check these home-price indexes, says Lawrence Yun, chief economist of the National Association of Realtors.
His group releases its own numbers, most recently showing prices declining by 9% in the third quarter compared with a year earlier. But that measure, unlike the others, doesn't take into account a home's sales record. So instead of comparing each property's sale price to its prior sale price, the realtors group compares the price of homes sold this month with that of homes sold last month -- even if the mix of homes has changed sharply. Mr. Yun defends the measure as "very simple to understand."
Most of the numbers that get headlines are based on metropolitan areas. Yet the housing-market picture can vary dramatically within the same region. Lynn, Mass., a suburb northeast of Boston, saw prices drop 10% in the second quarter compared with a year earlier, according to Wellesley's Prof. Case. Yet in the same period prices in Cambridge, just west of the city, rose 13%.
Integrated Asset Services, or IAS, sells estimates by neighborhood. "We are a lot more granular" than Case-Shiller and the federal index, Chief Executive David McCarthy said.
Within Middlesex County, which includes Cambridge, one neighborhood was up 12% compared with a year earlier in September, while two others were down 1% and 2%, respectively.
Fiserv Inc. uses the Case-Shiller local numbers to sell estimates for a single property.
The risk when going local is that data become sparse and a few anomalous sales may throw things off -- particularly in markets where most of the sales are distressed. IAS makes estimates based on as few as 50 to 75 transactions.
None of this nuance is captured in headlines about the latest home-price-index release, Prof. Case complains. Still, he is hopeful that home-price indexes will improve. "This new criticism that these indexes are showing different things is going to lead to a lot of research," he says.
[This article points out the problem of using national or state or even county index values. In our market area, the SCV Home Team does a much more accurate analysis of home value.]
Friday, November 21, 2008
Tuesday, November 11, 2008
“New” 2009 conforming loan limit unchanged from $417,000; high-cost areas now max out at $625,500
“New” 2009 conforming loan limit unchanged from $417,000; high-cost areas now max out at $625,500
LOS ANGELES (Nov. 7) –The Federal Housing Finance Agency (FHFA) today announced that the “new” conforming loan limit for 2009 will remain at $417,000 for most areas in the U.S., unchanged since 2006. Loan limits for high-cost areas, including California, are capped at $625,500, down from the previous $729,750 limit. Loan limits for many areas of the state do not reach this lower threshold and are dramatically reduced from 2008.
"Although price declines mean that the total number of homes eligible for conforming financing has increased, we’re disappointed that the $729,750 limit stipulated in the Economic Stimulus Act of 2008 signed in February was not made permanent,” said C.A.R. President William E. Brown. “The reduction in the loan limit to $625,500 will negatively impact both the interest rates and the availability of funds for jumbo mortgages.
“We hope Congress will make the $729,750 limit permanent before the end of the year as one of the provisions in an economic stimulus package,” he said.
The conforming loan limit determines the maximum size of a mortgage that Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac can buy or guarantee. Non-conforming or jumbo loans typically carry a higher mortgage interest rate than a conforming loan, increasing the monthly payment and negatively impacting affordability for households in California.
In California, the new conforming loan limits for metropolitan areas range from $474,950 in the Sacramento-Arden-Arcade-Roseville metropolitan area, covering El Dorado, Placer, Sacramento and Yolo counties; to $625,500 in the Los Angeles-Long Beach-Santa Ana metropolitan area.
LOS ANGELES (Nov. 7) –The Federal Housing Finance Agency (FHFA) today announced that the “new” conforming loan limit for 2009 will remain at $417,000 for most areas in the U.S., unchanged since 2006. Loan limits for high-cost areas, including California, are capped at $625,500, down from the previous $729,750 limit. Loan limits for many areas of the state do not reach this lower threshold and are dramatically reduced from 2008.
"Although price declines mean that the total number of homes eligible for conforming financing has increased, we’re disappointed that the $729,750 limit stipulated in the Economic Stimulus Act of 2008 signed in February was not made permanent,” said C.A.R. President William E. Brown. “The reduction in the loan limit to $625,500 will negatively impact both the interest rates and the availability of funds for jumbo mortgages.
“We hope Congress will make the $729,750 limit permanent before the end of the year as one of the provisions in an economic stimulus package,” he said.
The conforming loan limit determines the maximum size of a mortgage that Government Sponsored Enterprises (GSEs) Fannie Mae and Freddie Mac can buy or guarantee. Non-conforming or jumbo loans typically carry a higher mortgage interest rate than a conforming loan, increasing the monthly payment and negatively impacting affordability for households in California.
In California, the new conforming loan limits for metropolitan areas range from $474,950 in the Sacramento-Arden-Arcade-Roseville metropolitan area, covering El Dorado, Placer, Sacramento and Yolo counties; to $625,500 in the Los Angeles-Long Beach-Santa Ana metropolitan area.
Another Big Bank Moves to Assist Homeowners and Itself
Citigroup has joined Morgan Stanley Chase, the Federal Deposit Insurance Corporation (FDIC,) and a few other large banks in initiating an aggressive program to mitigate foreclosures of single family homes.
The bank said on Monday that it is putting a moratorium on both initiating new foreclosures and on completing the legal process against homeowners who are currently moving toward foreclosure.
The moratorium will be available to homeowners if they meet several criteria; they must want to stay in their home, be willing to work in good faith with the bank to resolve their problems, and have the income to afford payments on a restructured mortgage.
The program will be available initially to borrowers whose mortgage loans are owned by Citigroup but the bank said it is working on expanding the program to include loans that it services for other investors.
The bank will also move proactively over the next six months to contact about one-half million homeowners, about one-third of the banks own borrowers, who are current on their mortgage payments now but are at risk of falling behind in the near future.
Citigroup will attempt to restructure mortgage loans by reducing the principal of the loan, extending the amortization period, and/or adjusting interest rates. Some 600 bank employees will be involved in the restructuring effort.
The new program is not based on altruism. The bank has suffered greatly from the subprime crisis, losing a staggering amount of money in each of the last four quarters, much more than any of its principal rivals. Citi's stock is trading only slightly above its 52-week low, closing Monday at $11.05. During the spring of 2006 the stock was trading in the $55 range.
Like FDIC, Wells Fargo, Morgan Stanley Chase and even Wachovia which is soon to be absorbed by Wells Fargo have finally realized that working with borrowers to prevent foreclosures, while expensive in the short term, is ultimately less costly than taking, managing, and marketing the foreclosed homes.
The geographic focus of Citi's efforts will be, at least at first, on those areas where unemployment and foreclosure rates are high. This will include Florida, Arizona, California, Michigan, Indiana, and Ohio.
The Associated Press reported that more than 4 million American homeowners with a mortgage were at least one payment behind on their loans at the end of June, and 500,000 were in some phase of foreclosure.
[posted by Mortgage News Daily on 11/11/08]
The bank said on Monday that it is putting a moratorium on both initiating new foreclosures and on completing the legal process against homeowners who are currently moving toward foreclosure.
The moratorium will be available to homeowners if they meet several criteria; they must want to stay in their home, be willing to work in good faith with the bank to resolve their problems, and have the income to afford payments on a restructured mortgage.
The program will be available initially to borrowers whose mortgage loans are owned by Citigroup but the bank said it is working on expanding the program to include loans that it services for other investors.
The bank will also move proactively over the next six months to contact about one-half million homeowners, about one-third of the banks own borrowers, who are current on their mortgage payments now but are at risk of falling behind in the near future.
Citigroup will attempt to restructure mortgage loans by reducing the principal of the loan, extending the amortization period, and/or adjusting interest rates. Some 600 bank employees will be involved in the restructuring effort.
The new program is not based on altruism. The bank has suffered greatly from the subprime crisis, losing a staggering amount of money in each of the last four quarters, much more than any of its principal rivals. Citi's stock is trading only slightly above its 52-week low, closing Monday at $11.05. During the spring of 2006 the stock was trading in the $55 range.
Like FDIC, Wells Fargo, Morgan Stanley Chase and even Wachovia which is soon to be absorbed by Wells Fargo have finally realized that working with borrowers to prevent foreclosures, while expensive in the short term, is ultimately less costly than taking, managing, and marketing the foreclosed homes.
The geographic focus of Citi's efforts will be, at least at first, on those areas where unemployment and foreclosure rates are high. This will include Florida, Arizona, California, Michigan, Indiana, and Ohio.
The Associated Press reported that more than 4 million American homeowners with a mortgage were at least one payment behind on their loans at the end of June, and 500,000 were in some phase of foreclosure.
[posted by Mortgage News Daily on 11/11/08]
Monday, November 03, 2008
Should You Buy or Lease?
By Mark K. Solheim
To hear the critics wail, you'd think leasing a car is as bad for your finances as smoking cigarettes is for your health. Does that mean you're a closet wastrel if you've ever been tempted by ads that trumpet affordable monthly payments for a new car? Or, worse, that you are hurtling down the highway to financial ruin if you've already given in?
Relax. Leasing is not a mortal sin of money management. For some drivers, in fact, it makes sound fiscal sense. Leasing's not for everyone, but there's no reason to scorn the 15% of our fellow travelers who choose leasing over buying.
A Closer Look
Leasing often gets a bum rap because the lingo can make your head spin. It's difficult to compare one lease with another, not to mention to compare leasing with buying. And it can be tough to get a handle on leasing because the decision to lease or buy often depends on your mindset. "A lot of people are freaked out by having to turn in their car at the end of the lease," says Phil Reed, author of Edmunds.com's Strategies for Smart Car Buyers. "What they fail to realize is that they got the first years of a brand-new car's life."
One of the biggest criticisms of leasing is that in a buck-for-buck comparison of leasing and buying, leasers usually shell out more money. That's because, after the loan payments are done, buyers get to keep the vehicle (pay cash and you come out further ahead). If your modus operandi is to buy a car and run it till it sputters and dies, leasing isn't right for you. But you're a good candidate, Reed says, if you've decided that you're always going to have a car payment ? as many drivers do, now that six- and even seven-year loans are gaining popularity. It's a good bet that you can drive more car for less money if you lease. You'll never actually own the car, but who really owns a car when the bank holds the title until the loan is paid off?
A few other advantages: A lease usually ends about the same time as the warranty, so you probably won't pay for any repairs. You won't have to worry about whether you'll get a fair deal on a trade-in. In most states, you pay sales tax only on the monthly payments rather than on the full value of the car. Plus, many of today's leases include gap insurance to cover the difference between the lease payoff and an insurance settlement if the car is totaled or stolen.
Yes, there are early-termination fees if you change your mind. But if you finance a car and bail out before the loan is paid off, you could easily owe more on the loan than the car is worth. And it's true that you pay extra for exceeding the 10,000- to 15,000-mile yearly limit typically written into a contract. But buyers who rack up high mileage also pay a penalty: lower trade-in value.
Design Your Own Lease
If you choose a manufacturer-subsidized lease, you'll probably be locked in to the terms. But if the car you want isn't being pushed by the carmaker, there's plenty of room for bargaining. Either way, contact several dealers to see who's willing to cut you the best deal. Reed of Edmunds.com recommends a term of three years because that's often the turning point in a car's life (when the warranty expires, for instance, or you may need new tires).
Ask the dealer to compare leasing offers on the car from the manufacturer's financing arm as well as a few banks. That may produce a lower "money factor" (basically the interest rate) or higher residual, either of which translates into lower payments.
Next, target the capitalized cost which is leasing lingo for the price of the car written into the lease. Gross cap cost includes the price of the vehicle, fees, extended service plans, gap-insurance premiums and any other add-ons. Adjusted cap cost is the gross cap cost minus reductions for trade-in, down payment, and rebates. That adjusted cost is the amount you actually finance. Don't pay sticker unless you have to. Both Kelley Blue Book (www.kbb.com) and www.Edmunds.com list actual transaction prices to give you an idea of what others are paying.
If you expect to drive more than the number of miles included in the standard contract, try to negotiate a higher limit. Or you may be able to buy extra miles up front for an extra 10 or 15 cents per mile, versus the usual 15- to 30-cent-per-mile penalty charged at the end of the lease.
You usually have the option of buying the car at the end of the lease instead of turning it in. The purchase amount, typically the residual value, is written into the lease. Buying may not be a good idea, though, if the residual was set artificially high.
Not up for haggling? Kiplinger's has teamed with CarBargains, a buying service from the nonprofit Consumers' Checkbook organization. Its LeaseWise service will negotiate with five local dealers for you. The cost is $335. Visit www.kiplinger.com/links/carbargains or call 800-475-7283.
All contents copyright 2007 The Kiplinger Washington Editors, Inc.
To hear the critics wail, you'd think leasing a car is as bad for your finances as smoking cigarettes is for your health. Does that mean you're a closet wastrel if you've ever been tempted by ads that trumpet affordable monthly payments for a new car? Or, worse, that you are hurtling down the highway to financial ruin if you've already given in?
Relax. Leasing is not a mortal sin of money management. For some drivers, in fact, it makes sound fiscal sense. Leasing's not for everyone, but there's no reason to scorn the 15% of our fellow travelers who choose leasing over buying.
A Closer Look
Leasing often gets a bum rap because the lingo can make your head spin. It's difficult to compare one lease with another, not to mention to compare leasing with buying. And it can be tough to get a handle on leasing because the decision to lease or buy often depends on your mindset. "A lot of people are freaked out by having to turn in their car at the end of the lease," says Phil Reed, author of Edmunds.com's Strategies for Smart Car Buyers. "What they fail to realize is that they got the first years of a brand-new car's life."
One of the biggest criticisms of leasing is that in a buck-for-buck comparison of leasing and buying, leasers usually shell out more money. That's because, after the loan payments are done, buyers get to keep the vehicle (pay cash and you come out further ahead). If your modus operandi is to buy a car and run it till it sputters and dies, leasing isn't right for you. But you're a good candidate, Reed says, if you've decided that you're always going to have a car payment ? as many drivers do, now that six- and even seven-year loans are gaining popularity. It's a good bet that you can drive more car for less money if you lease. You'll never actually own the car, but who really owns a car when the bank holds the title until the loan is paid off?
A few other advantages: A lease usually ends about the same time as the warranty, so you probably won't pay for any repairs. You won't have to worry about whether you'll get a fair deal on a trade-in. In most states, you pay sales tax only on the monthly payments rather than on the full value of the car. Plus, many of today's leases include gap insurance to cover the difference between the lease payoff and an insurance settlement if the car is totaled or stolen.
Yes, there are early-termination fees if you change your mind. But if you finance a car and bail out before the loan is paid off, you could easily owe more on the loan than the car is worth. And it's true that you pay extra for exceeding the 10,000- to 15,000-mile yearly limit typically written into a contract. But buyers who rack up high mileage also pay a penalty: lower trade-in value.
Design Your Own Lease
If you choose a manufacturer-subsidized lease, you'll probably be locked in to the terms. But if the car you want isn't being pushed by the carmaker, there's plenty of room for bargaining. Either way, contact several dealers to see who's willing to cut you the best deal. Reed of Edmunds.com recommends a term of three years because that's often the turning point in a car's life (when the warranty expires, for instance, or you may need new tires).
Ask the dealer to compare leasing offers on the car from the manufacturer's financing arm as well as a few banks. That may produce a lower "money factor" (basically the interest rate) or higher residual, either of which translates into lower payments.
Next, target the capitalized cost which is leasing lingo for the price of the car written into the lease. Gross cap cost includes the price of the vehicle, fees, extended service plans, gap-insurance premiums and any other add-ons. Adjusted cap cost is the gross cap cost minus reductions for trade-in, down payment, and rebates. That adjusted cost is the amount you actually finance. Don't pay sticker unless you have to. Both Kelley Blue Book (www.kbb.com) and www.Edmunds.com list actual transaction prices to give you an idea of what others are paying.
If you expect to drive more than the number of miles included in the standard contract, try to negotiate a higher limit. Or you may be able to buy extra miles up front for an extra 10 or 15 cents per mile, versus the usual 15- to 30-cent-per-mile penalty charged at the end of the lease.
You usually have the option of buying the car at the end of the lease instead of turning it in. The purchase amount, typically the residual value, is written into the lease. Buying may not be a good idea, though, if the residual was set artificially high.
Not up for haggling? Kiplinger's has teamed with CarBargains, a buying service from the nonprofit Consumers' Checkbook organization. Its LeaseWise service will negotiate with five local dealers for you. The cost is $335. Visit www.kiplinger.com/links/carbargains or call 800-475-7283.
All contents copyright 2007 The Kiplinger Washington Editors, Inc.
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